G.R. No. 126200, 16 August 2001

FACTS:

Marinduque Mining-Industrial Corporation (Marinduque Mining), obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed on a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. A second Mortgage Trust Agreement was also executed.

Marinduque Mining also executed an Amendment to Mortgage Trust Agreement in favor of PNB and DBP by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other real rights subsequently acquired by Marinduque Mining.

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted extrajudicial foreclosure proceedings over the mortgaged properties.

In the meantime, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington). The purchases remained unpaid when Remington filed a complaint for a sum of money and damages against Marinduque Mining.

Remington’s original complaint was amended to include PNB , DBP, Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants.

Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically owned wholly by defendants PNB and DBP, and managed by their officers

2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that . . . practically there has only been a change of name for all legal purpose and intents

In short, private respondent Remington submits that the transfer of the properties was made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil.

ISSUE:

Whether petitioner is guilty of fraud in transferring the properties warranting the piercing of the corporate veil.

RULING:

No.

The court does not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil.

It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure).

PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject properties. The banks had no choice but to obey the statutory command.

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business.

The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended.

Convenience and practicality dictated that the corporations so created must also occupy the premises where these assets were found instead of relocating them. No doubt, many of these assets are heavy equipment and it may have been impossible to move them. The same reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining, Maricalum and Island Cement of Marinduque Mining’s personnel to manage and operate the properties and to maintain the continuity of the mining operations.

Failing to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties the application of the doctrine of piercing of the corporate veil is not justified.

*Case Digest by Paul C. Gandola, Refresher, Andres Bonifacio Law School, SY 2019-2020