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Case digest · Reverse piercing of the corporate veil
International Academy of Management and Economics (I/AME) vs. Litton and Company, Inc.
A Makati property was bought in 1979 for a school that did not exist until 1985. Its title moved to the school while a judgment against the man who bought it was on appeal.
Facts
August 31, 1979
A Deed of Absolute Sale for a Makati property showed Atty. Emmanuel T. Santos, as President, representing I/AME as the buyer. I/AME was organized as a juridical entity only in 1985.
The lease case
Santos leased two buildings from Litton and Company, Inc. and owed rental arrears and his share of the realty taxes. In Litton’s unlawful detainer case, the MeTC of Manila, in a decision dated March 2, 1983, ordered him to vacate and to pay the arrears, realty taxes, penalty and attorney’s fees. The judgment was not executed.
September 13, 1989
Litton won an action for revival of the judgment in the RTC. Santos appealed to the Court of Appeals.
November 17, 1993
While that appeal was pending, the Makati property was transferred to I/AME. The Register of Deeds issued TCT No. 187565 in I/AME’s name, 14 years after the deed of sale.
March 22, 1994
The Court of Appeals’ decision of February 21, 1994, affirming the revival of the judgment, became final and executory.
November 11, 1996
The MeTC sheriff levied on the property to execute the judgment against Santos. The annotation on the title said the levy was “only up to the extent of the share of Emmanuel T. Santos.”
2004 to 2010
I/AME moved to lift the annotation, claiming a personality separate from Santos. The MeTC denied the motion on October 29, 2004, then reversed itself on reconsideration. On Litton’s petition, the RTC reinstated the October 29, 2004 Order, and the Court of Appeals affirmed (Decision, October 30, 2009; Resolution, March 12, 2010).
Issue
Can a judgment creditor of Santos levy on real property titled to I/AME, a corporation that was not a party to the case, by piercing its corporate veil in reverse?
Ruling
Yes. The Court applied outsider reverse piercing, denied I/AME’s petition, and reinstated the MeTC Order of October 29, 2004, directing its execution against Santos.
Whether grounds to pierce exist is a question of fact, and the MeTC, the RTC and the Court of Appeals agreed on the facts. A corporation that was not impleaded generally cannot be bound by a writ meant for another, but there is an exception when clear and convincing proof shows that its separate personality was purposefully used to evade a legitimate and binding commitment (a standard taken from Kukan International Corporation vs. Reyes), and “a party whose corporation is vulnerable to piercing of its corporate veil cannot argue violation of due process.” The Court agreed that Santos used I/AME to evade his obligation to Litton. He was its conceptualizer and implementor, he contributed ₱1,200,000.00 of its ₱1,500,000.00, and the building it occupies is named after his nickname. In its own Answer before the RTC, I/AME also admitted Litton’s allegation that it is “the corporate entity used by Respondent Santos as his alter ego for the purpose of shielding his assets from the reach of his creditors”. Being a non-stock corporation did not exempt I/AME. The Court cautioned that ordinary collection remedies under Rule 39 are preferred, but held that sending Litton after Santos’s other properties would frustrate a valid judgment decades old and condone his years of hiding behind the corporate form.
“Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor, seeks the Court's intervention to pierce the corporate veil of I/AME in order to make its Makati real property answer for a judgment against Santos, who formerly owned and still substantially controls I/AME.”
Doctrine
Reverse piercing makes a corporation’s assets answer for the debt of an insider who controls it. The Court borrowed the doctrine from American law, quoting a New York appellate case, Sweeney, Cohn, Stahl & Vaccaro v. Kane: “Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and makes the corporation liable for the debt of the shareholders.” In outsider reverse piercing, a creditor of the insider seeks to be paid from the corporation’s assets. In insider reverse piercing, the controlling members themselves ask the court to disregard the corporate fiction to claim a benefit that belongs to the corporation.
Compare: not pierced
In Francisco Motors Corporation vs. Court of Appeals, G.R. No. 100812, June 25, 1999, the lower courts made a corporation pay legal fees that its incorporators, directors and officers owed in their personal capacity. The Court reversed: “Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.”
Bar tip
Start with the rule: the corporation’s property is its own, so a stockholder’s creditor normally cannot reach it. Then show what made I/AME the exception: a 1979 deed naming as buyer a corporation organized only in 1985, a title transferred while the appeal was pending, Santos’s control, and I/AME’s own admission that it was his alter ego. Mention the Court’s caution too: ordinary collection remedies under Rule 39 are preferred.
Hear it explained
Reverse Piercing, Podcast Ep. 2, at 2:39
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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.