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Case digest · Piercing the corporate veil
Francisco Motors Corporation vs. Court of Appeals
A lawyer’s fees for a family’s estate case were charged to the corporation the family members ran. The Court said the doctrine had been turned upside down.
Facts
January 23, 1985
Francisco Motors Corporation sued Spouses Gregorio and Librada Manuel to collect ₱3,412.06, the balance on a jeep body; ₱20,454.80, the unpaid cost of repairing the vehicle; and ₱6,000.00 for cost of suit and attorney’s fees.
The counterclaim
In their answer, the spouses counterclaimed ₱50,000 for unpaid legal services. Gregorio Manuel alleged that, while he was the company’s Assistant Legal Officer, he represented members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad, and that those family members were also incorporators, directors and officers of the company.
June 26, 1985
The company did not answer the counterclaim and was declared in default on it. The Regional Trial Court of Makati ruled for the company on its collection claim, but also allowed the counterclaim and ordered the company to pay Manuel ₱50,000.00.
April 15, 1991
The Court of Appeals affirmed. It pierced the company’s veil because the company was composed of the heirs of Benita Trinidad, for whom Manuel had rendered legal services.
Issue
Can a corporation be made to pay, by piercing its corporate veil, legal fees that its incorporators, directors and officers owed in their personal capacity?
Ruling
No. The veil was not pierced. The Court reversed the Court of Appeals insofar only as it held Francisco Motors liable for the legal fees, without prejudice to a proper suit against the family members in their personal capacity.
Piercing exists to hold the persons behind a corporation liable when they use the corporate personality as a shield for fraudulent or illegal schemes. Here the situation was reversed: the corporation was being ordered to answer for the personal liability of some of its directors, officers and incorporators. The estate proceedings did not involve any business of the corporation, so whatever obligation the family members incurred, they incurred in their personal capacity, and their failure to pay it did not mean that the corporation was perpetuating fraud or promoting injustice. Making the corporation pay could prejudice the corporation, its own creditors and even other stockholders. The claim also had to be directed at the real parties in interest, the family members. On the procedural issue, the Court agreed with the Court of Appeals: no new summons was needed for the counterclaim, because the company, as plaintiff, had already submitted to the court’s jurisdiction.
“However, in the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.”
Doctrine
Piercing is meant to reach the persons who use a corporation as a shield. A personal debt of its officers, with no misuse of the corporation, is no ground to make the corporation pay. In the Court’s words: “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.”
Compare: pierced in reverse
In International Academy of Management and Economics (I/AME) vs. Litton and Company, Inc., G.R. No. 191525, December 13, 2017, the debtor had used the corporation he controlled to keep a property beyond his judgment creditor’s reach, and the Court applied reverse piercing: “Santos formed I/AME, using the non-stock corporation, to evade paying his judgment creditor, Litton.”
Bar tip
Ask whose debt it is and how the corporation was used. A personal debt of stockholders or officers, unrelated to the corporation’s business and with no use of the corporation to evade it, is no ground to pierce. The creditor’s remedy is a suit against the individuals in their personal capacity.
Hear it explained
Reverse Piercing, Podcast Ep. 2, at 5:44
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.