FRANCISCO MOTORS CORPORATION, PETITIONER, VS. COURT OF APPEALS AND SPOUSES GREGORIO AND LIBRADA MANUEL, RESPONDENTS.

Francisco Motors Corporation versus Court of Appeals and Spouses Manuel

The Case

This is a petition for review on certiorari brought by Francisco Motors Corporation against the Court of Appeals and Spouses Gregorio and Librada Manuel. The corporation sued the Manuels to collect the unpaid balance on a jeep body and the cost of its repair, and the Manuels countered with a claim for unpaid attorney's fees that Gregorio Manuel had earned in the intestate estate proceedings of the late Benita Trinidad. The case matters because the Supreme Court clarifies two things every bar candidate must hold apart: when the veil of corporate fiction may be pierced, and when a counterclaim may be answered without a fresh summons. Here the Court refuses to pierce the veil, and it holds that no new summons is needed.

Procedural History

Francisco Motors Corporation filed a complaint for a sum of money against the Manuels before Branch 135 of the Regional Trial Court of Makati. The Manuels answered and set up a permissive counterclaim for unpaid attorney's fees. Because the corporation failed to answer that counterclaim, the trial court declared it in default on that score, received evidence ex parte, and rendered judgment in favor of the corporation on its money claim while also granting the Manuels their counterclaim, ordering the corporation to pay fifty thousand pesos. Both sides appealed.

The Court of Appeals affirmed the trial court, holding that a counterclaim must be answered within ten days under Section 4, Rule 11 of the Rules of Court, that no new summons was required, and that the corporation was estopped from questioning jurisdiction because it had sought relief from the order of default. The appellate court likewise sustained the piercing of the corporate veil, reasoning that the corporation was composed of the very heirs for whom Gregorio Manuel had rendered legal services. Reconsideration was denied, so the corporation came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Gregorio Manuel served as Assistant Legal Officer of Francisco Motors Corporation. While so employed, he was engaged by members of the Francisco family to represent them in the intestate estate proceedings of the late Benita Trinidad. Those proceedings concerned the settlement of a family estate; they did not involve any business of the corporation. After the proceedings terminated, Manuel's services remained unpaid despite repeated demands.

Meanwhile, the Manuels had purchased a jeep body from Francisco Motors Corporation and had it repaired. A balance remained on the price of the jeep body, and another balance remained on the cost of repair. On January 23, 1985, the corporation sued the Manuels to recover these amounts, together with the cost of suit and attorney's fees.

In their answer, the Manuels interposed a permissive counterclaim for fifty thousand pesos in unpaid legal services, asserting that the incorporators, directors, and officers of the corporation were the same family members who had benefited from Manuel's work. The corporation never answered the counterclaim. The trial court declared it in default, received evidence ex parte, and ordered it to pay the fifty thousand pesos. The Court of Appeals affirmed, and the corporation elevated the matter to the Supreme Court.

Issues

• Whether or not the Court of Appeals erred in applying the doctrine of piercing the veil of corporate entity so as to hold Francisco Motors Corporation liable for the personal obligation of its incorporators, directors, and officers.
• Whether or not the trial court acquired jurisdiction over the corporation with respect to the permissive counterclaim even though no summons was served anew upon it.

Applicable Provisions

Section 4, Rule 11 of the Rules of Court governs the time to plead to a counterclaim, and the Court quotes it as follows:

A counterclaim or cross-claim must be answered within ten days from service.

This provision fixes the period within which the corporation had to answer the counterclaim, and its expiration is what justified the order of default.

Section 3, Rule 9 of the 1997 Rules of Civil Procedure governs the consequence of failing to answer, and the Court cites it as follows:

If a defendant fails to answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in default.

This provision supplies the procedural basis for the default declared against the corporation on the counterclaim.

Section 2, Rule 3 of the Rules of Court governs who may sue or be sued, and the Court invokes it in this wise:

Every action must be prosecuted or defended in the name of the real party in interest.

This provision is decisive on the substantive question, because the real party in interest on the claim for legal fees is the individual family member who incurred the obligation, not the corporation.

Ruling

On the first issue, the Court ruled in favor of the corporation. The doctrine of piercing the veil of corporate fiction applies when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when the corporation is a mere alter ego, business conduit, instrumentality, agency, or adjunct of another. Here the doctrine was turned upside down. Instead of holding individuals responsible for a corporate act, the trial court and the Court of Appeals held the corporation liable for the personal obligation of certain individual directors, officers, and incorporators. The legal services were solicited by family members for themselves in an estate proceeding that involved no corporate business. Whatever obligation was incurred was incurred in their personal capacity. When directors and officers cannot compensate a party for a personal obligation, it is far-fetched to say the corporation is perpetuating fraud or promoting injustice. The Court stressed that every action, including a counterclaim, must be prosecuted or defended in the name of the real party in interest, and it was plainly error to lay the claim for legal fees at the door of the corporation rather than the individual members of the Francisco family.

On the second issue, the Court ruled in favor of the Manuels and against the corporation. Nothing in the Rules of Court requires that summons be served on a defendant before an answer to a counterclaim must be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person of the defendant, and the defendant in a counterclaim, being the plaintiff in the original complaint, has already submitted to the jurisdiction of the court. Since the corporation failed to answer within the ten-day period, it was correctly declared in default. The Court added that when the corporation filed a motion for reconsideration seeking relief from the order of default, it in effect submitted itself to the jurisdiction of the court, and a party is estopped from assailing jurisdiction after voluntarily submitting to it.

Doctrine

The separate juridical personality of a corporation is a legal fiction that may be disregarded only in the recognized instances: when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when the corporation is a mere alter ego, business conduit, instrumentality, agency, or adjunct of another. The doctrine cannot be used in reverse, to make the corporation answer for the purely personal obligation of its incorporators, directors, and officers. Every action, including a counterclaim, must be prosecuted or defended in the name of the real party in interest, so a claim for legal fees earned in a family estate proceeding lies against the individual family members who hired the lawyer, not against the corporation they happen to control.

On procedure, a counterclaim must be answered within ten days from service, and no new summons is required. The defendant in a counterclaim is the plaintiff in the original complaint and has already submitted to the court's jurisdiction. Failure to answer the counterclaim, upon motion, results in a declaration of default, and a party who seeks relief from that order of default is estopped from later assailing the court's jurisdiction.

Disposition

The petition was granted, and the decision of the Court of Appeals was reversed insofar only as it held Francisco Motors Corporation liable for the legal obligation owing to Gregorio Manuel, without prejudice to his filing the proper suit against the concerned members of the Francisco family in their personal capacity, and with no pronouncement as to costs.

Remember This

Memorize this line: the veil of corporate fiction may be pierced to hold individuals liable for corporate acts, but never to make the corporation answer for the personal obligations of its stockholders, directors, and officers. Examiners use this case to test the real party in interest rule and the rule that a counterclaim needs no fresh summons because the plaintiff has already submitted to the court's jurisdiction.