SPOUSES JORGE CHIONG AND TERESITA D. CHIONG, PETITIONERS, VS. INOPACAN INSTITUTE, INC., AND/OR NARCISA C. SOLIMAN, ANITA B. VILLARUBIN, ROSEFIELA S. CANON, EDUARDO CHIONG, ATTY.…

Spouses Chiong versus Inopacan Institute

The Case

This is the case of Spouses Chiong versus Inopacan Institute. The spouses Jorge and Teresita Chiong supplied building materials and labor for the repair and renovation of a school building operated by Inopacan Institute, and when a balance remained unpaid, they sued the school for collection of a sum of money. When the school was later dissolved and its remaining land sold, the spouses sought to hold the members of the school's Board of Trustees personally and solidarily liable for the debt. The case matters because it is the Supreme Court's clean statement of when the separate personality of a corporation may be disregarded and when directors or trustees may be made to answer personally for corporate obligations — the doctrine of piercing the corporate veil, tied to Section 31 of the Corporation Code.

Procedural History

The spouses filed their complaint for collection of a sum of money before the Municipal Circuit Trial Court of Hindang-Inopacan, Leyte. In the course of trial they filed a supplemental complaint impleading a newly formed corporation, Inopacan Institute of Learning, and later an amended complaint impleading the members of the Board of Trustees and the spouses who bought the school's land, praying also for rescission of that sale. The Municipal Circuit Trial Court rendered judgment ordering Inopacan Institute to pay the remaining balance with interest, but dismissed the case against the Board of Trustees, against the new corporation, and the counterclaims.

The spouses appealed to the Regional Trial Court, Branch 18, Hilongos, Leyte, which affirmed the decision of the Municipal Circuit Trial Court in all respects. The spouses moved for reconsideration, and the Regional Trial Court denied the motion. The spouses then filed a petition for review under Rule 42 of the Rules of Court before the Supreme Court, raising a single assignment of error: that the Regional Trial Court erred in holding that they failed to prove bad faith on the part of the members of the Board of Trustees.

Facts

During the school year 2002 to 2003, the spouses Chiong supplied building materials, electrical supplies, and labor to Inopacan Institute, through its then School Director, Joriz Chiong, for the repair and renovation of the school building. The total cost was 301,712 pesos. The school made partial payments of 20,000 pesos in March 2003 and 129,750 pesos in April 2003, leaving an unpaid balance.

In its answer, Inopacan Institute denied liability, claiming that its former School Director acted without authority or in excess of his authority when he undertook major repairs without the prior consent of the Board of Trustees. The School Director, for his part, claimed he acted within the scope of his authority and that the school knowingly permitted him to order the materials and make partial payments.

While the case was pending, the Board of Trustees sold the school's last remaining parcel of land to the spouses Bisnar. The spouses Chiong then impleaded the members of the Board, alleging bad faith and fraud in the sale, and praying for rescission. The Municipal Circuit Trial Court found that the repairs were openly undertaken and that the school had impliedly ratified the acts of its School Director, but it excluded certain unsigned delivery receipts and fixed the remaining balance at 136,812.50 pesos. It also found no bad faith on the part of the Board members, noting that the sale proceeds were used for unpaid salaries, unpaid social security premiums, and the renewal of the corporation's registration, and that no attachment had been sought by the spouses.

Issues

• Whether or not the members of the Board of Trustees of Inopacan Institute may be held personally and solidarily liable for the unpaid obligation of the corporation under Section 31 of the Corporation Code.
• Whether or not the separate personality of the corporation may be pierced on the ground that the sale of its remaining land during the pendency of the case amounted to bad faith or fraud against the spouses Chiong.

Applicable Provisions

Section 31 of the Corporation Code provides:

Section 31. Liability of directors, trustees or officers. – Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

This is the provision the spouses invoke to make the Board members solidarily liable, and it is the provision the Court construes to require bad faith or gross negligence proved by clear and convincing evidence.

Ruling

On the first issue, the Court held that the petition lacks merit. A corporation is a juridical entity vested with a legal personality separate and distinct from those acting for and in its behalf. Obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities, and a director, officer, or employee is generally not held personally liable for them. The Court laid down the requisites before personal liability may attach: first, the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or was guilty of gross negligence or bad faith; and second, the complainant must clearly and convincingly prove such unlawful acts, negligence, or bad faith. The spouses failed on the second requisite.

On the second issue, the Court refused to pierce the corporate veil. Bad faith or fraud cannot be presumed; he who alleges it must prove it. The sale of the remaining land during the pendency of the case, without notice to the spouses and without permission from the court, did not by itself amount to bad faith, because at the time of the sale the liability of the school was not yet determined and no order of attachment had been issued. The Court stressed that piercing the corporate veil is frowned upon and may be done only where it is clearly established that the separate personality was used to justify a wrong, protect fraud, or perpetrate a deception. Gross negligence, the Court explained, is characterized by the lack of the slightest care, acting or failing to act where there is a duty to act, willfully and intentionally, with conscious indifference to the consequences. The wrongdoing must be clearly and convincingly established; it cannot be presumed.

Doctrine

A corporation has a personality separate and distinct from its directors, officers, and stockholders, and obligations incurred by the corporation through them are its sole liabilities. A director or trustee may be held solidarily liable under Section 31 of the Corporation Code only when the complainant alleges, and clearly and convincingly proves, that the director or trustee willfully and knowingly voted for or assented to patently unlawful acts, or was guilty of gross negligence or bad faith in directing corporate affairs, or acquired a personal or pecuniary interest in conflict with duty. Piercing the corporate veil is the exception, not the rule; it is applied with caution and only where the corporate fiction was misused to justify a wrong, protect fraud, or perpetrate a deception. Bad faith and fraud are never presumed; they must be proved by clear and convincing evidence.

Disposition

The Supreme Court dismissed the petition for lack of merit and affirmed in toto the decision and order of the Regional Trial Court, so the spouses Chiong did not recover from the members of the Board of Trustees.

Remember This

Memorize this line: a director or trustee is personally liable only upon clear and convincing proof of bad faith, gross negligence, or assent to patently unlawful acts, because the corporate veil is pierced with caution and fraud is never presumed. Examiners use this case in corporation law questions on the personal liability of directors and trustees under Section 31 and on the requisites for piercing the corporate veil.