NATIONAL MARKETING CORPORATION (NAMARCO), PLAINTIFF AND APPELLANT, VS. ASSOCIATED FINANCE COMPANY, INC., AND FRANCISCO SYCIP, DEFENDANTS, FRANCISCO SYCIP, DEFENDANT AND APPELLEE.

National Marketing Corporation versus Associated Finance Company

The Case

This is an appeal by the National Marketing Corporation, which the Court calls NAMARCO, from a judgment of the Court of First Instance of Manila that ordered the Associated Finance Company, Incorporated, which the Court calls Associated, to pay NAMARCO money damages, but dismissed the complaint against Francisco Sycip, the corporation's president and controlling stockholder. NAMARCO asks the Supreme Court to hold Sycip personally liable for the corporate debt. The case matters because it is a leading illustration of when a court will disregard the separate personality of a corporation and hold a stockholder or officer personally bound for a corporate obligation.

Procedural History

NAMARCO sued Associated and Francisco Sycip in the Court of First Instance of Manila. After trial, that court rendered judgment ordering Associated to pay NAMARCO 403,514 pesos and 28 centavos, with legal interest from the filing of the action until fully paid, 80,702 pesos and 26 centavos as liquidated damages, 5,000 pesos as attorney's fees, plus costs. The same judgment dismissed the complaint as against Francisco Sycip, and also dismissed his counterclaim. NAMARCO appealed only from the portion dismissing the case against Sycip. The appeal was taken to the Court of Appeals, but that court certified the case to the Supreme Court for final adjudication, the amount involved being more than 200,000 pesos, exclusive of interest and costs. The Supreme Court thus resolved the case directly.

Facts

On March 25, 1958, Associated, a domestic corporation, through its president Francisco Sycip, entered into an agreement to exchange sugar with NAMARCO, represented by its then general manager, Benjamin Estrella. Under the agreement, Associated would deliver to NAMARCO 22,516 bags, each weighing 100 pounds, of Victorias or National refined sugar, in exchange for 7,732.71 bags of Busilak and 17,285.08 piculs of Pasumil raw sugar belonging to NAMARCO. Both parties agreed to pay liquidated damages equivalent to 20 percent of the contractual value of the sugar should either fail to comply with the terms and conditions stipulated.

On May 19, 1958, NAMARCO delivered to Associated the 7,732.71 bags of Busilak and the 17,285.08 piculs of Pasumil raw sugar. Associated, however, failed to deliver the 22,516 bags of refined sugar. On January 12, 1959, NAMARCO demanded in writing either immediate delivery before January 20, or payment of the equivalent cash value of 372,639 pesos and 80 centavos. On January 19, 1959, Associated, through Sycip, offered to pay the value of the refined sugar at 15 pesos and 30 centavos per bag, but NAMARCO rejected the offer. Instead, NAMARCO demanded payment for the raw sugar it had delivered, based on sugar quotations as of March 20, 1958, the date of the exchange agreement, amounting to a total of 403,514 pesos and 28 centavos.

Because Associated refused to deliver the refined sugar or pay for it despite repeated demands, NAMARCO sued to recover the value of the raw sugar, liquidated damages, attorney's fees, expenses of litigation, and exemplary damages. In their amended answer, the defendants alleged that the correct value of the sugar delivered was 259,451 pesos and 9 centavos, or 13 pesos and 30 centavos per bag, and counterclaimed for moral damages, exemplary damages, and attorney's fees. The evidence showed that of the capital stock of Associated, Sycip owned 60,000 pesos worth of shares, while his wife, the second biggest stockholder, owned 20,000 pesos worth; that the par value of the subscribed capital stock was only 105,000 pesos; that the negotiations leading to the exchange agreement were conducted exclusively by Sycip on behalf of Associated; that Sycip referred to himself as the one who contracted the business in his personal capacity and asserted that the exchange agreement was his personal contract; that Sycip made personal representations and gave assurances that Associated was in actual possession of the refined sugar and that it was ready for delivery; that Associated was at that time already insolvent; and that when NAMARCO demanded delivery, Associated and Sycip offered to pay the value of the sugar instead, a clear indication that they did not have the sugar contracted for.

Issues

• Whether or not Francisco Sycip may be held liable, jointly and severally with Associated, for the sums of money adjudged in favor of NAMARCO.

Applicable Provisions

The decision does not quote a specific statutory provision. It applies the settled doctrine on the separate personality of corporations and the remedy of piercing the veil of corporate fiction, which the Court states as follows:

It is settled law in this and other jurisdictions that when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another.

This doctrine bears on the case because it is the legal basis for disregarding the separate corporate personality of Associated and holding Sycip personally bound for the corporate debt.

Ruling

The Court resolved the sole issue in favor of NAMARCO and held Sycip personally liable. The Court found that Sycip was guilty of fraud because, through false representations, he succeeded in inducing NAMARCO to enter into the exchange agreement, with full knowledge on his part that Associated, whom he represented and over whose business and affairs he had absolute control, was in no position to comply with the obligation it had assumed. Because of this fraud, Sycip could not seek refuge behind the general principle that a corporation has a personality distinct and separate from that of its stockholders and that the latter are not personally liable for corporate obligations. The Court held that, upon the proven facts, it was fully justified in piercing the veil of corporate fiction and in holding Sycip personally liable, jointly and severally with his co-defendant, for the sums of money adjudged in favor of NAMARCO. The Court relied on the rule that when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded, and the same is true when the corporation is controlled and its affairs are so conducted as to make it merely an instrumentality, agency, or conduit of another.

Doctrine

A corporation has a personality distinct and separate from that of its stockholders, and stockholders are not personally liable for corporate obligations. This separate personality, however, is not absolute. When the corporation is the mere alter ego of a person, or when it is controlled and its affairs are so conducted as to make it merely an instrumentality, agency, or conduit of another, the corporate fiction may be disregarded and the person held personally liable. Fraud is a ground for piercing the veil of corporate fiction: where a stockholder or officer, through false representations, induces another to enter into a contract with an insolvent corporation over which he has absolute control, knowing that the corporation cannot comply, he may be held personally liable, jointly and severally with the corporation, for the resulting obligation.

Disposition

The decision appealed from was modified by sentencing Francisco Sycip to pay, jointly and severally with Associated Finance Company, Incorporated, the sums of money the trial court had ordered the corporation to pay to NAMARCO, namely 403,514 pesos and 28 centavos with legal interest from the filing of the action until fully paid, plus 80,702 pesos and 86 centavos as liquidated damages, 5,000 pesos as attorney's fees, and the costs.

Remember This

The single line worth memorizing is that the corporate fiction may be pierced when the corporation is the mere alter ego of a person, or is controlled and used as a mere instrumentality, agency, or conduit of another, and fraud is a classic ground for piercing. Examiners like to use this case in corporation law questions on the separate personality doctrine, the alter ego rule, and the personal liability of controlling stockholders and officers for corporate obligations.