DELPHER TRADES CORPORATION, AND DELFIN PACHECO, PETITIONERS, VS. INTERMEDIATE APPELLATE COURT AND HYDRO PIPES PHILIPPINES, INC., RESPONDENTS.

Delfin Pacheco versus Hydro Pipes Philippines

The Case

This is a petition brought by Delfin Pacheco and the Delpher Trades Corporation against Hydro Pipes Philippines, Incorporated, decided by the Supreme Court in January 1988. The private respondent, Hydro Pipes, held a lease over a parcel of land in Malinta Estate, Valenzuela, and claimed a right of first refusal under that lease. When the Pachecos conveyed the land to their own family corporation in exchange for shares of stock, Hydro Pipes cried sale and demanded reconveyance. The case matters because it draws the line between a genuine sale to a third party, which triggers a right of first refusal, and a mere change in the form of ownership, which does not. It is a staple on the right of first refusal, on the separate personality of the corporation, and on the difference between sale and exchange.

Procedural History

Hydro Pipes sued for reconveyance in the Court of First Instance of Bulacan. After trial, the trial court ruled for Hydro Pipes. It declared that the preferential right to acquire the property validly existed, and it ordered the defendants and all persons deriving rights from them to convey the land to Hydro Pipes, which could offer to acquire it at the rate of 14 pesos per square meter for the 27,169 square meters. The defendants appealed. The Intermediate Appellate Court affirmed the trial court. The defendants then filed a petition for certiorari to review the appellate decision. The Supreme Court initially denied the petition, but upon motion for reconsideration it set aside the denial and gave the petition due course. The case thus reached the Court by petition for certiorari against the Intermediate Appellate Court.

Facts

In 1974, Delfin Pacheco and his sister Pelagia Pacheco owned 27,169 square meters of land in Malinta Estate, then in Polo, Bulacan, now Valenzuela, Metro Manila, covered by a transfer certificate of title. On April 3, 1974, the co-owners leased the property to Construction Components International, Incorporated. The lease provided that during its existence or after its term, should the lessor decide to sell the property, the lessor shall first offer the same to the lessee, who has the priority to buy under similar conditions. On August 3, 1974, the lessee assigned its rights and obligations under the lease to Hydro Pipes Philippines, Incorporated, with the signed conformity and consent of the Pachecos. The lease and the assignment were annotated at the back of the title.

On January 3, 1976, the Pachecos executed a deed of exchange with the Delpher Trades Corporation. Under it, they conveyed the leased property, together with another parcel also in Malinta Estate, to the corporation in exchange for 2,500 shares of stock with a total value of 1,500,000 pesos. Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco, testified that Delpher was a family corporation organized by the children of the two Pacheco spouses, who owned the lands in common. The purpose was to perpetuate their control over the property through the corporation and to avoid taxes. The 2,500 no par value shares gave the Pachecos a 55 percent majority, against 2,000 shares held by the other owners. Neria called the scheme estate planning.

Hydro Pipes then filed an amended complaint for reconveyance, insisting that the deed of exchange was really a sale that violated its right of first refusal. The petitioners answered that there was no sale at all, because the Pachecos merely exchanged land for shares in their own corporation, and that the corporation was a mere alter ego or conduit of the family.

Issues

• Whether or not the deed of exchange between the Pachecos and the Delpher Trades Corporation was in truth a contract of sale that prejudiced Hydro Pipes' right of first refusal.
• Whether or not there was a transfer of actual ownership to a third party that could trigger the right of first refusal under the lease.

Applicable Provisions

The Court contrasts sale and exchange under the Civil Code. On sale, the provision reads:

A contract of sale is one where one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

This defines the sale that Hydro Pipes claims took place, and which the Court finds did not occur.

On exchange, the provision reads:

By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of another.

This is the contract the Court finds the parties actually entered into, since land was given in consideration of shares of stock.

Ruling

On the first issue, the Court ruled for the petitioners. The deed of exchange cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another, and the ownership remained in the same hands. In exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares, and so became stockholders by subscription. The Court stressed that no attempt was made to state the true market value of the land: land valued at 300 pesos per square meter was turned over to the family corporation for only 14 pesos per square meter. By their 2,500 no par shares, the Pachecos held control, with 55 percent equity against 45 percent held by the other family stockholders.

On the second issue, the Court held that in effect the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form, to take control of their properties and at the same time save on inheritance taxes. The Court found nothing wrong or objectionable in this estate planning scheme, quoting the rule that the legal right of a taxpayer to decrease what otherwise could be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. Because ownership never left the same hands, Hydro Pipes has no basis for its claim of a right of first refusal under the lease contract.

Doctrine

A right of first refusal is triggered only by a sale or transfer of the property to a third party. Where the owners merely convey the property to their own family corporation in exchange for shares of stock, there is no sale but an exchange, and no transfer of actual ownership to another. The ownership remains in the same hands, merely changing from unincorporated to incorporated form. The corporation in such a case is a business conduit of the owners. The contract is one of exchange, not sale, because one thing, the land, is given in consideration of another thing, the shares of stock. A taxpayer may lawfully arrange his affairs to reduce or avoid taxes by means the law permits.

Disposition

The petition was granted. The decision and resolution of the Intermediate Appellate Court were reversed and set aside, and the amended complaint of Hydro Pipes was dismissed, with no costs.

Remember This

Memorize this line: a conveyance of land to one's own family corporation in exchange for shares is not a sale but an exchange, and it does not trigger a right of first refusal because ownership stays in the same hands. Examiners use this case to test the sale versus exchange distinction, the separate personality and conduit theory of corporations, and the limits of a lessee's right of first refusal.