RAMIREZ TELEPHONE CORPORATION, PETITIONER, VS. BANK OF AMERICA, E.F. HERBOSA, THE SHERIFF OF MANILA AND THE COURT OF APPEALS, RESPONDENTS.

Ramirez Telephone versus Bank of America

The Case

This is a petition for review on certiorari brought by Ramirez Telephone Corporation against the Bank of America, E. F. Herbosa, the Sheriff of Manila, and the Court of Appeals. The petitioner sued the bank for damages after the bank dishonored its check, insisting that the bank had no right to freeze the corporation's deposit to answer the personal debt of Ruben R. Ramirez, its president and principal stockholder. The case matters because it is a leading illustration of when the separate personality of a corporation may be disregarded and its funds reached to satisfy the obligation of the person who controls it.

Procedural History

Ramirez Telephone Corporation filed its complaint for damages in the Court of First Instance of Manila against the Bank of America. The bank, in turn, filed a third-party complaint against E. F. Herbosa and against the Sheriff of Manila, and Herbosa filed a counterclaim. After trial, the Court of First Instance rendered judgment in favor of the corporation, ordering the bank to pay actual damages of 3,000 pesos, and sentencing Herbosa to reimburse the bank whatever it might pay. The bank's counterclaim and the third-party complaint against the Sheriff were dismissed.

The bank appealed to the Court of Appeals. That court reversed the judgment of the lower court and entered a new one dismissing the corporation's complaint. It ordered the corporation to pay the bank 500 pesos and Herbosa another 500 pesos, both as attorney's fees, with costs against the corporation. The corporation then came to the Supreme Court by petition for review on certiorari.

Facts

E. F. Herbosa owned a building on Santa Mesa which he leased to Ruben R. Ramirez. Because Ramirez was president of Ramirez Telephone Corporation, the corporation's shop was transferred to the leased premises, although its central office remained in the Escolta. When the rentals went unpaid, Herbosa filed an action for ejectment against Ramirez in the Municipal Court of Manila, and the case was elevated to the Court of First Instance, where Herbosa obtained a favorable judgment.

Even before that judgment was promulgated, Herbosa had already secured a writ of preliminary attachment against Ramirez. On October 13, 1950, the Sheriff of Manila served a garnishment on the Bank of America, levying upon all debts owing by the bank to Ruben R. Ramirez to cover the amount of 2,400 pesos. The bank replied that it held no funds in the name of Ruben R. Ramirez. On October 17, 1950, the Sheriff reiterated the levy, notifying the bank that there was attached the interest or participation which Ruben R. Ramirez might have in the deposit of Ramirez Telephone Incorporated with the bank, sufficient to cover 2,400 pesos. The bank answered the same day that it was holding 2,400 pesos in the name of Ramirez Telephone Incorporated, subject to the Sheriff's further orders.

At that time the corporation had on deposit 4,789 pesos and 53 centavos, so the garnishment reduced its free funds to 2,389 pesos and 53 centavos. The next day the corporation withdrew 1,500 pesos, leaving a balance of about 889 pesos. On October 19, 1950, the corporation issued a check for 2,320 pesos in favor of Ray Electronics in payment for equipment. When presented, the bank dishonored the check. The corporation's lawyer wrote a demand letter, and the bank replied that it was acting only in accordance with the garnishment and suggested that a release be obtained from the court. Four days after the demand, the corporation filed this action.

Issues

• Whether or not the Court of Appeals erred in disregarding the principle that a corporation has a personality separate and distinct from that of its stockholders, so that corporate funds may not be reached to satisfy the debt of a stockholder.
• Whether or not the Court of Appeals erred in failing to consider that the same lawyer represented both the Bank of America and E. F. Herbosa.
• Whether or not the Court of Appeals erred in denying the corporation damages and in ordering it instead to pay attorney's fees to the respondents.

Applicable Provisions

The decision does not quote a specific codal provision. It rests on the settled principle that a corporation has a personality separate and distinct from that of its stockholders, which the petitioner invoked and which the Court recognized as the general rule subject to exceptions.

Ruling

On the first issue, the Court held that while respect for the corporate personality is the general rule, there are exceptions, and in appropriate cases the veil of corporate fiction may be pierced. From the facts as found, which must remain undisturbed, this was such a case. The Court quoted its own prior resolution:

Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice.

The Court found that the corporation's funds were in truth funds that its president, Ruben R. Ramirez, could dispose of for the rentals owed to Herbosa. It noted that the shop of the company was established downstairs in the leased premises, that Ramirez paid the rentals with checks of the corporation, that seventy-five percent of the shares belonged to Ramirez and his wife, and that the levy reached only the interest or participation which Ramirez might have in the deposit. The first assigned error therefore had no merit.

On the second issue, the Court declined to consider the matter because it was essentially factual, a question for the Court of Appeals and not for the Supreme Court to determine.

On the third issue, the Court held that since the decision of the Court of Appeals was in accordance with law on the facts as found, the claim for a restatement of damages was likewise without merit.

Doctrine

A corporation has a personality separate and distinct from that of its stockholders, and as a general rule its funds cannot be reached to satisfy the personal debt of a stockholder. This rule, however, is not absolute. The veil of corporate fiction may be pierced to administer the ends of justice where the corporation is so controlled and its affairs so conducted that it is merely an instrumentality of the stockholder, or where the corporate form is used to defeat a creditor. Where the facts show that the corporation's funds were in truth funds the controlling stockholder could dispose of for his own obligations, a levy against his interest in those funds is valid, and the bank that honors the garnishment acts in accordance with law.

Disposition

The Supreme Court affirmed the judgment of the Court of Appeals, with costs against petitioner Ramirez Telephone Corporation.

Remember This

Memorize the line that even with regard to corporations duly organized and existing under the law, the veil of corporate fiction may be pierced to administer the ends of justice. Examiners use this case to test the exceptions to the separate personality doctrine, especially where a controlling stockholder uses corporate funds to answer his own debts.