BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA AND SANTIAGO M. RIVERA, PETITIONERS, VS. COURT …

This is a petition to
review the decision of respondent Court of Appeals, dated August 3, 1989, in
CA-GR CV No. 15412, entitled “Buenaflor
M. Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co.,
Inc., et al.,”^[1] the dispositive
portion whereof provides:

“WHEREFORE, viewed in the
light of the entire record, the judgment appealed from must be, as it is hereby REVERSED.

In lieu thereof, a judgment is hereby rendered –

1)      Dismissing the
complaint, with costs against plaintiffs;

2)      Ordering plaintiffs-appellees to vacate the subject properties; and

3)      Ordering
plaintiffs-appellees to pay upon defendants’
counterclaims:

a) To defendant-appellant
PM Parts:  (i)
damages consisting of the value of the fruits in the subject parcels of land of
which they were deprived in the sum of P26,000.00
and (ii) attorney’s fees of P15,000.00

b) To defendant
-appellant Bormaheco: (i)
expenses of litigation in the amount of P5,000.00 and (ii) attorney’s fees of
P15,000,00.

SO ORDERED.”

The original complaint
for annulment of title filed in the court a quo by herein petitioners included as party
defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the
Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera).  A Second Amended Complaint was filed, this time impleading
Santiago M. Rivera as party plaintiff.

During the pre-trial
conference, the parties entered into the following stipulation of facts:

“As between all
parties:

a) Plaintiff Buenaflor M. Castillo is the judicial administratrix
of the estate of Felipe Castillo in Special Proceeding No. 4053, pending before
Branch IX, CFI of Quezon (per Exhibit A) which
intestate proceedings was instituted by Mauricia Meer Vda. de Castillo, the
previous administratrix of the said proceedings prior
to 1970 (per Exhibits A-1 and A-2) which case was filed in Court way back in
1964;

b) The four (4)
parcels of land described in paragraph 3 of the Complaint were originally
covered by TCT No. T-42104 and Tax Dec. No. 14134 with assessed value of
P3,100.00; TCT No. T-32227 and Tax Dec. No. 14132, with assessed value of
P5,130.00; TCT No. T-31752 and Tax Dec. No. 14135, with assessed value of
P6,150,00; and TCT No. T-42103 with Tax Dec. No. 14133, with assessed value of
P3,580.00 (per Exhibits A-2 and B, B-1 to B-3, C, C-1 to C-3);

c) That the
above-enumerated four (4) parcels of land were the subject of the Deed of
Extra-Judicial Partition executed by the heirs of Felipe Castillo (per Exhibit
D) and by virtue thereof the titles thereto has (sic) been cancelled and in
lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of her
children, namely: Buenaflor, Bertilla, Victoria,
Marietta and Leovina,
all surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit
E); TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G); and TCT No.
T-13117 (Exhibit H);

d) That mentioned
parcels of land were submitted as guaranty in the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage executed on 24 October 1970 between Insurance
Corporation of the Philippines and Slobec Realty
Corporation represented by Santiago Rivera (Exhibit I);

e) That based on the
Certificate of Sale issued by the Sheriff of the Province
of Quezon
in favor of Insurance Corporation of the Philippines
it was able to transfer to itself the titles over the lots in question, namely:
TCT No. T-23705 (Exhibit M), TCT No. T-23706 (Exhibit N), TCT No. T-23707
(Exhibit O) and TCT No. T-23708 (Exhibit P);

f)
That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM
Parts the immovables in question (per Exhibit 6 for
PM Parts) and by reason thereof, succeeded in transfering
unto itself the titles over the lots in dispute, namely: per TCT No. T-24846
(Exhibit Q), per TCT No. T-24847 (Exhibit R), TCT No. T-24848 (Exhibit S), TCT
No. T-24849 (Exhibit T);

g) On
26 August 1976, Mauricia Meer Vda.
de Castillo sent her letter to Modesto N. Cervantes stating that she and her
children refused to comply with his demands (Exhibit V-2);

h)
That from at least the months of October, November and December 1970 and
January 1971, Modesto N. Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and also he is one
of the Board of Directors of PM Parts; on the other hand, Atty. Martin M. de
Guzman was the legal counsel of Bormaheco, Inc.,
later Executive Vice-President thereof, and who also is the legal counsel of
Insurance Corporation of the Philippines and PM Parts; that Modesto N.
Cervantes served later on as President of PM Parts, and that Atty. de Guzman
was retained by Insurance Corporation of the Philippines specifically for
foreclosure purposes only;

i)
Defendant Bormaheco, Inc. on November 25, 1970 sold
to Slobec Realty and Development, Inc., represented
by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial
No. 281114 evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.;

j) That the Surety
Bond No. 14010 issued by co-defendant ICP was likewise secured by an Agreement
with Counter-Guaranty, with Real Estate Mortgage executed by Slobec Realty & Development, Inc., Mauricia
Castillo Meer, Buenaflor
Castillo, Bertilla Castillo, Victoria Castillo,
Marietta Castillo and Leovina Castillo, as mortgagors
in favor of ICP which document was executed and ratified before notary public
Alberto R. Navoa of the City of Manila on October 24,
1970;

k) That the property
mortgaged consisted of four (4) parcels of land situated in Lucena City
and covered by TCT Nos. T-13114, T-13115, T-13116 and T-13117 of the Register
of Deeds of Lucena
City;

l) That the tractor
sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was delivered to Bormaheco, Inc. on or about October 2, 1973, by Mr. Menandro
Umali for purposes of repair;

m) That in August
1976, PM Parts notified Mrs. Mauricia Meer about its ownership
and the assignment of Mr. Petronilo Roque as caretaker of the subject property;

n) That plaintiff and
other heirs are harvesting fruits
of the property (daranghita) which is worth no less
than P1,000.00 per harvest.

“As between
plaintiffs and defendant Bormaheco, Inc.:

o) That on 25 November 1970, at Makati, Rizal,
Santiago Rivera, in representation of the Slobec
Realty & Development Corporation executed in favor of Bormaheco,
Inc.,. represented by its Vice?President Modesto N. Cervantes a Chattel
Mortgage concerning one unit model CAT D-7 Caterpillar Crawler Tractor as
described therein as security for the payment in favor of the mortgagee of the
amount of P180,000.00 (per Exhibit K); that said document was superseded by
another chattel mortgage dated January 23, 1971 (Exhibit 15);

p) On 18 December
1970, at Makati, Rizal, the
Bormaheco, Inc., represented by its Vice-President
Modesto Cervantes and Slobec Realty Corporation
represented by Santiago Rivera executed the sales agreement concerning the sale
of one (1) unit Model CAT D-7 Caterpillar Crawler Tractor as described therein
for the amount of P230,000.00 (per Exhibit J) which document was superseded by
the Sales Agreement dated January 23, 1971 (Exhibit 16);

q) Although it
appears on the document entitled Chattel Mortgage (per Exhibit K) that it was
executed on 25 November 1970, and in the document entitled Sales Agreement (per
Exhibit J) that it was executed on 18 December 1970, it appears in the notarial register of the notary public who notarized them
that those two documents were executed on 11 December 1970.  The certified xerox
copy of the notarial register of Notary Public
Guillermo Aragones issued by the Bureau of Records
Management is hereto submitted as Exhibit BB. That said chattel mortgage was
superseded by another document dated January
23, 1971;

 r) That on 23 January 1971, Slobec Realty Development Corporation, represented by
Santiago Rivera, received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7
pursuant to Invoice No. 33234 (Exhibits 9 and 9-A, Bormaheco,
Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for Bormaheco, Inc.);

s) That on 28
September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation
of the Philippines purchased at public auction for said corporation the four
(4) parcels of land subject of this case (per Exhibit L), and which document
was presented to the Register of Deeds on 1 October 1973;

t) Although it
appears that the realties in issue has (sic) been sold by Insurance Corporation
of the Philippines in favor of PM Parts on 10 April 1975, Modesto N. Cervantes,
formerly Vice-President and now President of Bormaheco,
Inc., sent his letter dated 9 August 1976 to Mauricia
Meer Vda. de Castillo
(Exhibit V), demanding that she and her children should vacate the premises;

u) That the
Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty Development Corporation was actually
reconditioned and repainted.” ^[2]

We cull the following antecedents from the decision of respondent
Court of Appeals:

“Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda.
de Castillo.  The Castillo family are the
owners of a parcel of land located in Lucena City
which was given as security for a loan from the Development Bank of the Philippines.  For their failure to pay the amortization,
foreclosure of the said property was about to be initiated.  This problem was made known to Santiago
Rivera, who proposed to them the conversion into a subdivision of the four (4)
parcels of land adjacent to the mortgaged property to raise the necessary
fund.  The idea was accepted by the
Castillo family and to carry out the project, a Memorandum of Agreement (Exh. U, p. 127, Record) was executed by and between Slobec Realty and Development, Inc., represented by its
President Santiago Rivera and the Castillo family.  In this agreement, Santiago Rivera obliged
himself to pay the Castillo family the sum of P70,000.00 immediately after the
execution of the agreement and to pay the additional amount of P400,000.00
after the property has been converted into a subdivision.  Rivera, armed with the agreement, Exhibit U,
approached Mr. Modesto Cervantes, President of defendant Bormaheco,
and proposed to purchase from Bormaheco two (2)
tractors Model D-7 and D-8.  Subsequently,
a Sales Agreement was executed on December
28, 1970 (Exh. J, p. 22, Record).

“On January 23, 1971, Bormaheco,
Inc. and Slobec Realty and Development, Inc.,
represented by its President, Santiago Rivera, executed a Sales Agreement over
one unit of Caterpillar Tractor D-7 with Serial No. 281114, as evidenced by the
contract marked Exhibit ’16’.  As shown
by the contract, the price was P230,000.00 of which P50,000.00 was to
constitute a down payment, and the balance of P180,000.00 payable in eighteen
monthly installments.  On the same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh.
K, p. 29, Record) over the said equipment as security for the payment of the
aforesaid balance of P180,000.00.  As
further security of the aforementioned unpaid balance, Slobec
obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP
(Insurance Corporation of the Phil.) as surety and Slobec
as principal, in favor of Bormaheco, as borne out by
Exhibit ‘8’ (p. 111, Record).  The
aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty
with Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as
president of Slobec and Mauricia
Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria
Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the
Philippines (ICP) as mortgagee.  In this
agreement, ICP guaranteed the obligation of Slobec
with Bormaheco in the amount of P180,000.00.  In giving the bond, ICP required that the Castillos mortgage to them the properties in question,
namely, four parcels of land covered by TCTs in the
name of the aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and
13117 all of the Register of Deeds for Lucena City.

“On the occasion of the execution on January 23, 1971, of the Sales
Agreement Exhibit ‘16’’, Slobec, represented by
Rivera received from Bormaheco the subject matter of
the said Sales Agreement, namely, the aforementioned tractor Caterpillar Model
D-7, as evidenced by Invoice No. 33234 (Exhs. 9 and
9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs.
10 and 10-A, p. 113).  This tractor was known by Rivera to be a
reconditioned and repainted one [Stipulation of Facts, Pre-trial Order, par.
(u)].

“Meanwhile, for violation of the terms and conditions of the
Counter-Guaranty Agreement (Exh. I), the properties
of the Castillos were foreclosed by ICP.  As the highest bidder with a bid of
P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City
and Transfer Certificates of Title over the subject parcels of land were issued
by the Register of Deeds of Lucena City in favor of
ICP, namely, TCT Nos. T-23705, T­-23706, T-23707 and T-23708 (Exhs. M to P, pp. 38-45).  The mortgagors had one
(1) year from the date of the registration of the certificate of sale, that is,
until October 1, 1974, to
redeem the property, but they failed to do
so.  Consequently, ICP
consolidated its ownership over the subject parcels of land through the
requisite affidavit of consolidation of ownership dated October 29, 1974, as shown in Exh. ’22’ (p. 138, Rec.). 
Pursuant thereto, a Deed of Sale of Real Estate covering the subject
properties was issued in favor of ICP (Exh. 23, p. 139,
Rec.).

“On April 10, 1975,
Insurance Corporation of the Phil. (ICP) sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said
conveyance, PM Parts transferred unto itself the titles over the lots in
dispute so that said parcels of land are now covered by TCT Nos. T-24846,
T-24847, T-24848 and T-24849 (Exhs. Q – T, pp. 46-49,
Rec.).

“Thereafter, PM Parts, through its President, Mr. Modesto
Cervantes, sent a letter dated August 9, 1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting
her and her children to vacate the subject property, who (Mrs. Castillo) in
turn sent her reply expressing her refusal to comply with his demands.

“On September 29, 1976, the heirs of the late Felipe Castillo,
particularly plaintiff Buenaflor M. Castillo Umali as the appointed administratrix
of the properties in question filed an action for annulment of title before the
then Court of First Instance of Quezon and docketed
thereat as Civil Case No. 8085. 
Thereafter, they filed an Amended Complaint on January 10, 1980
(p. 444, Record).  On July
20, 1983, plaintiffs filed their Second Amended Complaint, impleading
Santiago M. Rivera as a party plaintiff (p. 706, Record).  They contended that all the aforementioned
transactions starting with the Agreement of Counter-Guaranty with Real Estate
Mortgage (Exh. I), Certificate of Sale
(Exh. L) and the Deeds of Authority to Sell, Sale and
the Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the
Deed of Sale (Annexes J, K, L and M) are void for being entered into in fraud
and without the consent and approval of the Court of First Instance of Quezon,
(Branch IX) before whom the administration proceedings has been pending.  Plaintiffs pray that the four (4) parcels of
land subject hereof be declared as owned by the estate of the late Felipe
Castillo and that all Transfer Certificates of Title Nos. 13114, 13115, 13116,
13117, 23705, 23706, 23707, 23708, 24846, 24847, 24848 and 24849 as well as
those appearing as encumbrances at the back of the certificates of title
mentioned be decIared as a nullity and defendants to
pay damages and attorney’s fees (pp. 710-711, Record).

“In their amended answer, the defendants controverted
the complaint and alleged, by way of affirmative and special defenses that the
complaint did not state facts sufficient to state a cause of action against
defendants; that plaintiffs are
not entitled to the reliefs demanded; that plaintiffs are estopped or precluded
from asserting the matters set forth in the Complaint; that plaintiffs are
guilty of laches in not asserting their alleged right
in due time; that defendant PM Parts is an innocent purchaser for value and
relied on the face of the title before it bought the subject property (p. 744,
Record).”^[3]

After trial, the court a
quo rendered judgment,
with the following decretal portion:

“WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and against the defendants, declaring the following documents:

Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage
dated October 24, 1970
(Exhibit I);

Sales Agreement dated December
28, 1970 (Exhibit J);

Chattel Mortgage dated November
25, 1970 (Exhibit K);

Sales Agreement dated January
23, 1971 (Exhibit 16);

Chattel Mortgage dated January
23, 1971 (Exhibit 17);           

Certificate of Sale
dated September 28, 1973
executed by the Provincial Sheriff of Quezon in favor
of Insurance Corporation of the Philippines
(Exhibit L);

null and void for being fictitious, spurious
and without consideration. Consequently, Transfer Certificates of Title Nos.
T-23705, T-23706, T-23707 and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance Corporation of the Philippines,
are likewise null and void.

The sale by Insurance Corporation of the Philippines
in favor of defendant Philippine Machinery Parts Manufacturing Co., Inc., over
said four (4) parcels of land and Transfer Certificates of Title Nos. T-24846,
T-24847, T-24848 and T-24849 subsequently issued by virtue of said sale in the
name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly
declared null and void, and the Register of Deeds of Lucena
City is hereby directed to issue, in lieu thereof, transfer certificates of
title in the names of the plaintiffs, except Santiago Rivera.

Orders the defendants jointly and severally to pay the plaintiffs
moral damages in the sum of P10,000.00, exemplary damages in the amount of
P5,000.00, and actual litigation expenses in the sum of P6,500.00.

Defendants are likewise ordered to pay the plaintiffs, jointly and
severally, the sum of P10,000.00 for and as attorney’s fees.

With costs against the defendants.

SO ORDERED.” ^[4]

As earlier stated,
respondent court reversed the aforequoted decision of
the trial court and rendered the judgment subject of this petition.

 Petitioners
contend that respondent Court of Appeals erred:

1.  In holding and finding that the transactions
entered into between petitioner Rivera with Cervantes are all fair and regular
and therefore binding between the parties thereto;

2.  In reversing the decision of the lower court,
not only based on erroneous conclusions of facts, erroneous presumptions not
supported by the evidence on record, but also, holding valid and binding the
supposed payment by ICP of its obligation to Bormaheco,
despite the fact that the surety bond it issued had already expired when it
opted to foreclose extrajudicially the mortgage
executed by the petitioners;

3.  In setting aside the finding of the lower
court that there was necessity to pierce the veil of corporate existence; and

4.  In reversing the decision of the lower court
instead of affirming the same. ^[5]

I.   Petitioners aver that
the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development Company (Slobec)
and Modesto Cervantes, as Vice-President of Bormaheco,
such as the Sales Agreement,^[6]
Chattel Mortgage^[7]
and the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,^[8]
are all fraudulent and simulated and should, therefore, be declared null and
void.  Such allegation is premised
primarily on the fact that contrary to the stipulations agreed upon in the
Sales Agreement (Exhibit J), Rivera never made any advance payment, in the
alleged amount of P50,000.00 to Bormaheco; that the
tractor was received by Rivera only on January 23, 1971 and not in 1970 as
stated in the Chattel Mortgage (Exhibit K); and that when the Agreement of
Counter-Guaranty with Chattel/Real Estate Mortgage was executed on October 24,
1970, to secure the obligation of ICP under its surety bond, the Sales
Agreement and Chattel Mortgage had not as yet been executed, aside from the fact that it was Bormaheco, and not Rivera, which paid the premium for the
surety bond issued by ICP.

At the outset, it will be
noted that petitioners’ submission under the first assigned error hinges purely
on questions of fact. Respondent Court of Appeals made several findings to
the effect that the questioned documents are valid and binding-upon the
parties, that there was no fraud employed by private respondents in the
execution thereof, and that, contrary to petitioners’ allegation, the evidence
on record reveals that petitioners had every intention to be bound by their
undertakings in the various transactions had with private respondents.  It is a general rule in this jurisdiction
that findings of fact of said appellate court are final and conclusive and,
thus, binding on this Court in the absence of sufficient and convincing proof, inter alia, that the former acted
with grave abuse of discretion.  Under
the circumstances, we find no compelling reason to deviate from this
long-standing jurisprudential pronouncement.

In addition, the alleged
failure of Rivera to pay the consideration agreed upon in the Sales Agreement,
which clearly constitutes a breach of the contract, cannot be availed of by the guilty party to justify and support an action for the declaration
of nullity of the contract.  Equity and
fair play dictates that one who commits a breach of his contract may not seek
refuge under the protective mantle of the law.

The evidence of record,
on an overall calibration, does not convince us of the validity of
petitioners’ contention that the contracts entered into by the parties are
either absolutely simulated or downright fraudulent.

There is absolute
simulation, which renders the contract null and void, when the parties do not
intend to be bound at all by the same.^[9] The basic characteristic of this type of
simulation of contract is the fact that the apparent contract is not really
desired or intended to either produce legal effects or in any way alter the
juridical situation of the parties.  The
subsequent act of Rivera in receiving and making use of the tractor subject
matter of the Sales Agreement and Chattel Mortgage, and the simultaneous
issuance of a surety bond in favor of Bormaheco,
concomitant with the execution of the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had
every intention to be bound by these contracts. 
The occurrence of these series of transactions between petitioners and
private respondents is a strong indication that the parties actually intended,
or at least expected, to exact fulfillment of their respective obligations from
one another.

Neither will an
allegation of fraud prosper in this case where petitioners
failed to show that they were induced to enter into a contract through the insidious words and
machinations of private respondents without which the former would not have
executed such contract.  To set aside a document solemnly executed and
voluntarily delivered, the proof of fraud must be clear and convincing.^[10] We are not persuaded that such quantum of
proof exists in the case at bar.

The fact that it was Bormaheco which paid the premium for the surety bond issued
by ICP does not per se affect the
validity of the bond.  Petitioners themselves admit in their present
petition that Rivera executed a Deed of Sale with Right of Repurchase of his
car in favor of Bormaheco and agreed that a part of
the proceeds thereof shall be used to pay the premium for the bond.^[11] In effect, Bormaheco
accepted the payment of the premium as an agent of ICP.  The execution of the deed of sale with a
right of repurchase in favor of Bormaheco under such
circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an
agent of ICP.  Such payment to the agent of ICP is, therefore,
binding on Rivera.  He is now estopped from questioning the validity of the suretyship contract.

II.  Under the doctrine of
piercing the veil of corporate entity, when valid grounds therefor
exist, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded.  In such cases, the corporation
will be considered as a mere association of persons.  The members or stockholders of the corporation will be considered as the
corporation, that is, liability will attach directly to the officers and
stockholders.^[12]
The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime,^[13]
or when it is made as a shield to confuse the legitimate issues,^[14]
or where a corporation is the mere alter ego or business conduit
of a person, 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.^[15]

In the case at bar, petitioners
seek to pierce the veil of, corporate entity of Bormaheco,
ICP and PM Parts, alleging that these corporations employed fraud in causing
the foreclosure and subsequent sale of the real properties belonging to
petitioners.  While we do not discount
the possibility of the existence of fraud in the foreclosure proceedings,
neither are we inclined to apply the doctrine invoked by petitioners
in granting the relief sought.  It
is our considered opinion that piercing the veil of corporate entity is not the
proper remedy in order that the foreclosure proceeding may be declared a
nullity under the circumstances obtaining in the case at bar.

In the first place, the legal corporate entity is disregarded
only if it is sought to hold the officers and stockholders directly liable for
a corporate debt or obligation.  In the
instant case, petitioners do not seek to
impose a claim against the individual members of the three corporations
involved; on the contrary, it is these corporations which desire to enforce an
alleged right against petitioners. 
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure
of mortgaged properties, this fact alone is not, under the circumstances,
sufficient to justify the piercing of the corporate fiction, since petitioners
do not intend to hold the officers and/or members of respondent corporations
personally liable therefor.  Petitioners are merely seeking the
declaration of the nullity of the foreclosure sale, which relief may be
obtained without having to disregard the aforesaid corporate fiction attaching
to respondent corporations.  Secondly,
petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with petitioners,
with the sole intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more
corporations are interrelated is not a justification for disregarding their
separate personalities,^[16]
absent sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights.

III.  The main issue for
resolution is whether there was a valid foreclosure of the mortgaged properties
by ICP.  Petitioners argue that the
foreclosure proceedings should be declared null and void for two reasons,
viz.:  (1) no written notice was
furnished by Bormaheco to ICP anent the failure of Slobec in paying its
obligation with the former, plus the fact that no receipt was presented
to show the amount allegedly paid by ICP to Bormaheco;
and (b) at the time of the foreclosure of the mortgage, the liability of ICP
under the surety bond had already expired.

Respondent court, in
finding for the validity of the foreclosure sale, declared:

“Now to the question of whether or not the foreclosure by the
ICP of the real estate mortgage was in the exercise of a legal right, We agree
with the appellants that the foreclosure proceedings instituted by the ICP was in the exercise of a legal
right.  First, ICP has in its favor the
legal presumption that it had indemnified Bormaheco
by reason of Slobec’s default in the payment of its obligation under the Sales Agreement,
especially because Bormaheco consented to ICP’s foreclosure of the mortgage.  This presumption is in consonance with pars. R and Q, Section 5, Rule 5,* New Rules of
Court which provides that it is disputably presumed that private transactions
have been fair and regular.  Likewise, it
is disputably presumed that the ordinary course of business has been
followed.  Second, ICP had the right to
proceed at once to the foreclosure of the mortgage as mandated by the
provisions of Art. 2071 Civil Code for these further reasons: Slobec, the principal debtor, was admittedly insolvent; Slobec’s obligation becomes demandable by reason of the expiration of the period of payment;
and its authorization to foreclose the mortgage upon Slobec’s
default, which resulted in the accrual of ICP’s
liability to Bormaheco.  Third, the Agreement of Counter Guaranty with
Real Estate Mortgage (Exh. I) expressly grants to ICP
the right to foreclose the real estate mortgage in the event of ‘non-payment or non-liquidation of the entire
indebtedness or fraction thereof upon maturity as stipulated in the contract’.  This is a valid
and binding stipulation in the
absence of showing that it is contrary to law, morals, good customs, public
order or public policy.  (Art. 1306, New
Civil Code).” ^[17]

1. Petitioners asseverate that there was no notice of default
issued by Bormaheco to ICP, which would have entitled
Bormaheco to demand payment from ICP under the suretyship contract.

Surety Bond No. B-14010
which was issued by ICP in favor of Bormaheco,
wherein ICP and Slobec undertook to guarantee the payment
of the balance of P180,000.00 payable in eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides in part as follows:

“1. The liability of INSURANCE
CORPORATION OF THE PHILIPPINES, under this BOND will expire Twelve (12) months from date hereof.  Furthermore, it is hereby agreed and understood that the INSURANCE CORPORATION OF
THE PHILIPPINES will not be liable for
any claim not presented in writing to the Corporation within THIRTY (30)
DAYS from the expiration of this BOND, and that the obligee
hereby waives his right to bring claim or file any action against Surety and
after the termination of one (1) year from the time his cause of action
accrues.”’^[18]

The
surety bond was dated October 24, 1970. 
However, an annotation on the upper part thereof states:  “NOTE: EFFECTIVITY DATE OF THIS BOND
SHALL BE ON JANUARY 22, 1971.”^[19]

On the other hand, the
Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00
shall be payable in eighteen (18) monthly installments.^[20] The Promissory Note executed by Slobec on even date in favor of Bormaheco
further provides that the obligation shall be payable on or before February
23, 1971 up to July 23,
1972, and that
non-payment of any of the installments when due shall make the entire obligation
immediately due and demandable.^[21]

It is basic that
liability on a bond is contractual in nature and is ordinarily restricted to the obligation
expressly assumed therein.  We have
repeatedly held that the extent of a surety’s liability is determined only by the clause of the
contract of suretyship as well as the conditions stated in the bond.  It cannot be extended by implication beyond
the terms of the contract.^[22]

Fundamental likewise is
the rule that, except where required by the provisions of the contract, a
demand or notice of default is not required to fix the surety’s liability.^[23] Hence, where the contract of suretyship stipulates that notice of the principal’s
default be given to the surety, generally the failure to comply with the condition
will prevent recovery from the surety. 
There are certain instances, however, when failure to comply with the
condition will not extinguish the surety’s liability, such as a failure to give notice of slight defaults, which are waived
by the obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the suretyship contract exempting the surety for liability therefor, or where the surety already has knowledge or is
chargeable with knowledge of the default.^[24]

In the case at bar, the suretyship contract expressly provides that ICP shall not be liable for any claim not filed
in writing within thirty (30) days
from the expiration of the bond.  In its
decision dated May 25, 1987, the court a quo categorically stated that “(n)o
evidence was presented to show that Bormaheco
demanded payment from ICP nor was there any action taken by Bormaheco
on the bond posted by ICP to guarantee
the payment of plaintiffs’ obligation. 
There is nothing in the records of the proceedings to show that ICP
indemnified Bormaheco for the failure of the
plaintiffs to pay their
obligation.”^[25] The failure, therefore, of Bormaheco to notify ICP in writing about Slobec’s supposed default released ICP from liability under
its surety bond.  Consequently, ICP could
not validly foreclose the real estate mortgage executed by petitioners in its
favor since it never incurred any liability under the surety bond.  It cannot claim exemption from the required
written notice since its case does not fall under any of the exceptions
hereinbefore enumerated.

Furthermore, the
allegation of ICP that it has paid Bormaheco is not
supported by any documentary evidence. 
Section 1, Rule 131 of the Rules of Court provides that the burden of
evidence lies with the party who asserts an affirmative allegation.  Since ICP failed to duly prove the fact of payment, the disputable presumption
that private transactions have been fair and regular, as erroneously relied
upon by respondent Court of Appeals, finds no application to the case at bar.

2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full
extent thereof, such liability is strictly limited to that assumed by its
terms.^[26]
While ordinarily the termination of a surety’s liability is governed by the provisions of the contract of suretyship, where the obligation of a surety is, under the
terms of the bond, to terminate at a specified time, his obligation cannot be
enlarged by an unauthorized extension thereof.^[27]
This is an exception to the general rule that the obligation of the surety
continues for the same period as that of the principal debtor.^[28]

It is possible that the
period of suretyship may be shorter than that of the
principal obligation, as where the principal debtor is required to make payment by installments.^[29] In the case at bar, the surety bond issued by
ICP was to expire on January 22, 1972, twelve (12) months from its effectivity
date, whereas Slobec’s installment payment was to
end on July 23, 1972. 
Therefore, while ICP guaranteed the payment by Slobec
of the balance of P180,000.00, such guaranty was valid only for and within
twelve (12) months from the date of effectivity of
the surety bond, or until January 22, 1972. 
Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec
became an unsecured obligation.  The
default of Slobec during this period cannot be a
valid basis for the exercise of the right to foreclose by ICP since its surety
contract had already been terminated. 
Besides, the liability of ICP was extinguished when Bormaheco
failed to file a written claim against it within thirty (30) days from the
expiration of the surety bond. 
Consequently, the foreclosure of the mortgage, after the expiration of
the surety bond under which ICP as surety has not incurred any liability,
should be declared null and
void.

3. Lastly, it has been held that where the guarantor holds
property of the principal as collateral surety for his personal indemnity, to
which he may resort only after payment by himself, until he has paid something
as such guarantor neither he nor the creditor can resort to such collaterals.^[30]

The Agreement of
Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being
issued for and in consideration
of the obligations assumed by the Mortgagee?Surety Company under the
terms and conditions of ICP Bond No. 14010 in behalf of Slobec
Realty Development Corporation and in favor of Bormaheco,
Inc.^[31] There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP.  Considering that the fact of payment by ICP
has never been established, it follows, pursuant to the doctrine above adverted
to, that ICP cannot foreclose on the subject properties.

IV. Private respondent PM Parts posits that it is a buyer in good
faith and, therefore, it acquired a valid title over the subject
properties.  The submission is without
merit and the conclusion is specious.

We have stated earlier
that the doctrine of piercing the veil
of corporate fiction is not applicable in this case. 
However, its inapplicability has no bearing on the good faith or bad
faith of private respondent PM Parts.  It
must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President of PM Parts.  On this fact alone, it cannot be said that PM
Parts had no knowledge of the aforesaid several transactions executed between Bormaheco and petitioners. 
In addition, Atty. Martin de Guzman, who is the Executive Vice-President
of Bormaheco, was also the legal counsel of ICP and
PM Parts:  These facts were admitted
without qualification in the stipulation of facts submitted by the parties
before the trial court.  Hence, the
defense of good faith may not be resorted to by private respondent PM Parts
which is charged with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners.  Accordingly, the transfer certificates of
title issued in its name, as well as the certificate of sale, must be declared
null and void since they cannot be considered altogether free of the taint of
bad faith.

WHEREFORE, the
decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and judgment is hereby rendered declaring the
following as null and void:  (1) Certificate of Sale, dated September
28, 1973, executed
by the Provincial Sheriff of Quezon in favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of the
Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation
of the Philippines in favor of Philippine Machinery Parts Manufacturing Co.,
Inc. of the four (4) parcels of land covered by the aforesaid certificates of
title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847,
T-24848 and T-24849 subsequently issued by virtue of said sale in the name of
the latter corporation.

The Register of Deeds of Lucena City is hereby directed to cancel Transfer
Certificates of Title Nos. T-24846, T-24847, T-24848 and T-24849 in the name of
Philippine Machinery Parts Manufacturing Co., Inc. and to issue in
lieu thereof the corresponding transfer certificates of title in the name of
herein petitioners, except Santiago Rivera.

The foregoing dispositions are without prejudice to such other
and proper legal remedies as may be available to respondent Bormaheco,
Inc. against herein petitioners.

SO ORDERED.

Melencio-Herrera, (Chairman), Paras, and Padilla,
JJ., concur.

Sarmiento, J., on leave.

---

^[1]
Associate Justice Bienvenido C. Ejercito,
ponente; Associate Justices Felipe B. Kalalo and Luis L.
Victor, concurring; Petition, Annex B; Rollo, 60-74.

^[2]
Rollo, 45-49.

^[3]
Ibid., 61-64.

^[4]
Ibid., 58-59.

^[5]
Ibid., 14.

^[6]
Exh. 15-Bormaheco; Original Record, 481.

^[7]
Exh. 16-Bormaheco; ibid., 482.

^[8]
Exh. I; Folder of Exhibits, 24.

^[9]
Arts. 1345 and 1346, Civil Code.

^[10]
Arroyo, etc. vs. Granada, et al., 18 Phil. 484 (1911).

^[11]
Rollo, 17.

^[12]
Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988 Ed.,18.

^[13] Koppel (Philippines), Inc. vs. Yatco, etc., 77
Phil. 496 (1946).

^[14]
Telephone Engineering & Service Co., Inc. vs. Workmen’s Compensation
Commission, et al.; 104 SCRA 354 (1981).

^[15]
Koppel (Philippines), Inc. vs. Yatco,
etc., ante.

^[16]
Diatagon Labor Federation vs. Ople, et al., 101 SCRA 534 (1980).

* This should be Pars. (p)
and (q), Sec. 5 (now Sec. 3), Rule 131.

^[17]
Rollo, 72-73.  

^[18]
Exh. 8-Bormaheco; Folder of
Exhibits, 111.

^[19]
Id., ibid

^[20]
Exh. 16-Bormaheco; ibid., 482.

^[21]
Id., Ibid., 484.

^[22]
Philippine Commercial & Industrial Bank vs. The Hon. Court of
Appeals, et al., 159 SCRA 24 (1988).

^[23]
72 C.J.S. 577.

^[24]
72 C.J.S. 636.

^[25]
Original Record, 1016.

^[26]
72 C.J.S. 569.

^[27]
Op. cit., 597.

^[28]
Op. cit., 588.

^[29]
Tolentino, Civil Code of the Philippines,
Vol. V, 1959 Ed., 436.

^[30]
Osborn vs. Noble, 46 Miss. 449, cited in 38 C.J.S. 1263.

^[31]
Exh. I; Folder of Exhibits, 24-25.