CHINA BANKING CORPORATION, PETITIONER, VS. DYNE-SEM ELECTRONICS CORPORATION, RESPONDENT.

China Banking Corporation versus Dyne-Sem Electronics Corporation

The Case

This is a petition for review brought by China Banking Corporation against Dyne-Sem Electronics Corporation. The bank had lent money to Dynetics, Incorporated and to Elpidio Lim, and when the loans went unpaid it sued not only the borrowers but also Dyne-Sem, insisting that Dyne-Sem was merely the alter ego of Dynetics and should therefore answer for Dynetics' debts. The case matters because it is the Supreme Court's clean statement of the rule that piercing the corporate veil is a factual question that must be proven clearly and convincingly, and that a sale of assets, a shared line of business, a shared plant site, or the hiring of former officers will not by themselves make one corporation liable for another's obligations.

Procedural History

The bank filed a complaint for sum of money against Dynetics and Elpidio Lim before the Regional Trial Court of Manila. Summons could not be served on Dynetics because it had already closed down, and the case against it was archived. The bank then filed an amended complaint impleading Dyne-Sem and its stockholders Vicente Chuidian, Antonio Garcia and Jacob Ratinoff, but summons remained unserved on the three stockholders and the case was archived as to them. After hearing, the trial court ruled that Dyne-Sem was not the alter ego of Dynetics and was not liable on the promissory notes. It ordered Dynetics and Lim to pay the bank jointly and severally, and dismissed the complaint against Dyne-Sem as well as its counterclaim.

The bank appealed to the Court of Appeals, which dismissed the appeal and affirmed the trial court, finding that no merger or absorption had taken place and that what transpired was a mere sale of assets. The appellate court denied the bank's motion for reconsideration. The bank then came to the Supreme Court by petition for review, assigning as errors the question of the quantum of evidence needed to pierce the corporate veil and whether the lower courts had correctly held that the doctrine of piercing the veil did not apply.

Facts

On June 19 and June 26, 1985, Dynetics, Incorporated and Elpidio Lim borrowed a total of 8,939,000 pesos from China Banking Corporation, evidenced by six promissory notes. The borrowers failed to pay when the obligations fell due, and on June 25, 1987 the bank sued for the unpaid notes plus interest and penalties. Lim denied that he had promised to pay jointly and severally, and the case against Dynetics was archived because it had closed down.

On September 23, 1988, the bank filed an amended complaint impleading Dyne-Sem and its stockholders, claiming that Dyne-Sem had been organized as Dynetics' alter ego. The bank pointed to several circumstances: both corporations were in the same line of business of manufacturing and testing integrated circuits and semiconductor devices; Dyne-Sem used Dynetics' former principal office and factory site at the FTI Complex in Taguig; Dyne-Sem acquired some of Dynetics' machineries and equipment from the banks that had obtained them through foreclosure; and Dyne-Sem retained some of Dynetics' officers.

Dyne-Sem answered that its incorporators and stockholders were entirely different from those of Dynetics, that none of its directors had ever been a director, officer or stockholder of Dynetics, that it had acquired its machineries and equipment at arm's length from corporations that were then their absolute owners, that its plant site was leased from Food Terminal, Incorporated, and that it operated its own customs bonded warehouse. The trial court found that Dyne-Sem was not an alter ego of Dynetics, and both the Court of Appeals and the Supreme Court agreed.

Issues

• Whether or not the question of whether one corporation is merely the alter ego of another, and the question of the quantum of evidence needed to pierce the corporate veil, are questions of fact that the Supreme Court will not review in a petition for review.
• Whether or not the Court of Appeals correctly held that the doctrine of piercing the veil of corporate fiction does not apply to make Dyne-Sem liable for the obligations of Dynetics to the bank.

Applicable Provisions

The decision does not quote a statutory text; it applies the settled doctrine on the separate personality of corporations and the piercing of the corporate veil, which the Court restates through its own ruling in Martinez versus Court of Appeals:

The veil of separate corporate personality may be lifted when such personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation; or when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or for the protection of the creditors. In such cases, the corporation will be considered as a mere association of persons. The liability will directly attach to the stockholders or to the other corporation.

This is the very doctrine the bank invoked, and the Court measured the evidence against it and found the bank wanting.

Ruling

On the first issue, the Court held that there was no merit in the petition. Whether one corporation is merely the alter ego of another is purely a question of fact, as is the question of whether a corporation is a paper company, a sham or a subterfuge, and as is the question of whether the petitioner adduced the requisite quantum of evidence to warrant piercing the veil. The Court is not a trier of facts, and the findings of the Court of Appeals affirming those of the trial court are final and conclusive, subject only to the recognized exceptions, none of which was shown. The Court reviewed the records and found the factual findings supported by the evidence.

On the second issue, the Court began with the general rule that a corporation has a personality separate and distinct from that of its stockholders and of other corporations to which it may be connected, a fiction created by law for convenience and to prevent injustice. Being a mere fiction, however, peculiar situations or valid grounds may warrant disregarding its independent being and piercing the veil. But to disregard the separate juridical personality, the wrongdoing must be proven clearly and convincingly, and the bank failed to meet that standard.

The Court rejected each circumstance the bank relied upon. The similarity of business did not warrant the conclusion that Dyne-Sem was a conduit of Dynetics, for the mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities absent a sufficient showing that the corporate entity was purposely used as a shield to defraud creditors. The acquisition of some of Dynetics' machineries was not proof of fraud, because no merger took place; what took place was a sale of assets, and merger is legally distinct from a sale of assets. Thus, where one corporation sells or otherwise transfers all its assets to another for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. The bank itself admitted that Dyne-Sem acquired the equipment not directly from Dynetics but from the various corporations that had successfully bid for them at auction, and the contracts showed the assets were sold for considerable amounts, so they were not diverted to an alter ego. Finally, the hiring of Dynetics' former vice president and assistant corporate counsel did not make Dyne-Sem an alter ego, for even the overlapping of incorporators and stockholders of two or more corporations will not necessarily lead to such an inference; much more has to be proven.

Doctrine

A corporation has a personality separate and distinct from its stockholders and from other corporations to which it may be connected, and this fiction exists for convenience and to prevent injustice. The veil of separate corporate personality may be lifted when the corporation is used to defeat public convenience, justify wrong, protect fraud or defend crime, as a shield to confuse legitimate issues, or when it is so organized and controlled and its affairs so conducted as to make it a mere instrumentality, agency, conduit or adjunct of another corporation, or a cloak for fraud or illegality or to work injustice, or where necessary to achieve equity or protect creditors. To disregard the separate personality, the wrongdoing must be proven clearly and convincingly, and the question of alter ego is one of fact. A sale of assets is distinct from a merger, and a purchaser of assets for value does not, by that fact alone, assume the debts of the seller. Similarity of business, a shared plant site, the purchase of the seller's equipment at auction, and the hiring of the seller's former officers do not, singly or together, establish alter ego.

Disposition

The petition was denied and the decision and resolution of the Court of Appeals were affirmed, with costs against China Banking Corporation; Dyne-Sem was held not liable for Dynetics' obligations.

Remember This

Memorize the line that to disregard the separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly. Examiners use this case to test the quantum of evidence for piercing the veil and to distinguish a merger from a sale of assets, so keep the rule that a purchaser of assets for value does not thereby inherit the seller's debts.