Magaling v.

Ong

FACTS:

Before this Court is a Petition for Review on Certiorari filed under Rule 45 of the Rules of Court,
as amended, seeking the reversal of the Decision and Amended Decision both of the Court of
Appeals, dated 31 August 2005 and 28 June 2006, respectively, in CA-G.R. CV No. 70954,
entitled, "Peter Ong v. Spouses Reynaldo Magaling and Lucia Magaling, and Thermo Loans
and Credit Corporation." The assailed rulings reversed and set aside the Decision of the
Regional Trial Court (RTC), Branch 13, Lipa City, Batangas, which made petitioner Lucia
Magaling, together with her spouse, Reynaldo Magaling, and Termo Loans & Credit
Corporation, jointly and severally liable to respondent Peter Ong for the corporate obligation of
the aforenamed corporation as adjudged in the RTC Decision dated 23 June 1999.

Defendants Reynaldo Magaling and Lucila Magaling are the controlling stockholders/owners of
Thermo Loans and Credit Corp. On or about December 1994, defendant Reynaldo Magaling,
approached plaintiff in his store at Lipa City and induced him to lend him money and/or his
company Thermo Loans and Credit Corp. with undertaking to pay interest at the rate of two and
a half (2 ½%) percent per month. Defendant gave assurance that he and his company Thermo
(sic) Loans and Credit Corp. will be able to pay the loan. Without the assurance plaintiff would
not have lent the money;

Based on the assurance and representation of Reynaldo Magaling, Peter Ong extended loan to
defendants. As of September 1997, the principal loan extended to defendants stands
at P350,000.00. The interest thereon computed at 2 ½ % per month is P8,750.00 per month.

In acknowledgment of the loan, defendants issued and tendered to plaintiff series of postdated
checks. However, only two checks were cleared by the bank.

Despite demands, oral and written, defendants spouses Reynaldo and Lucila Magaling and/or
Thermo Loans and Credit Corp. unjustifiably and illegally failed, refused and neglected to pay to
the prejudice and damage of plaintiff.

It was alleged further that Reynaldo Magaling, as President of Termo Loans, together with the
corporation’s treasurer, a certain Mrs. L. Rosita, signed a Promissory Note in favor of Ong for
the amount of P300,000.00 plus a monthly interest of 2.5%.

Because of the failure of Termo Loans to pay its outstanding obligation despite demand, Ong
filed a complaint for the collection of the sum of P389,000.00, with interest, attorney’s fees and
costs of suit, with prayer for issuance of a writ of preliminary attachment against the spouses
Magaling.

ISSUE: Whether or not Spouses Magaling and Termo Loans are jointly and severally liable to
Ong for the obligation incurred by the corporation.

Ruling:The petition is not meritorious.

It is basic that a corporation is a juridical entity with legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people comprising it.

There are times, however, when solidary liabilities may be incurred and the veil of corporate
fiction may be pierced

Exceptional circumstances warranting such disregard of a separate personality are summarized

When directors and trustees or, in appropriate case, the officers of a corporation:

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate affairs;

(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;

When a director or officer has consented to the issuance of watered down stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection
thereto;

When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation; or

When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.

In making the Spouses Magaling co-defendants of Termo Loans, Ong alleged in his Complaint
for Sum of Money filed with the RTC that the spouses Reynaldo Magaling and Lucia Magaling
were the controlling stockholders and/or owners of Termo Loans, and that they had used the
corporation to evade the payment of a valid obligation. The appellate court eventually found the
Spouses Magaling equally liable with Termo Loans for the sum of money sought to be collected
by Ong.
As explained above, to hold a director, a trustee or an officer personally liable for the debts of
the corporation and, thus, pierce the veil of corporate fiction, bad faith or gross negligence by
the director, trustee or officer in directing the corporate affairs must be established clearly and
convincingly. Bad faith is a question of fact and is evidentiary. Bad faith does not connote bad
judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious
wrongdoing. It means breach of a known duty through some ill motive or interest. It partakes of
the nature of fraud

In the present case, there is nothing substantial on record to show that Reynaldo Magaling, as
President of Termo Loans, has, indeed, acted in bad faith in inviting Ong to invest in Termo
Loans and/or in obtaining a loan from Ong for said corporation in order to warrant his personal
liability. From all indications, the proceeds of the investment and/or loan were indeed utilized by
Termo Loans. Likewise, bad faith does not arise just because a corporation fails to pay its
obligations, because the inability to pay one's obligation is not synonymous with fraudulent
intent not to honor the obligations.

The foregoing discussion notwithstanding, this Court still cannot totally absolve Reynaldo
Magaling from any liability considering his gross negligence in directing the affairs of Termo
Loans; thus, he must be made personally liable for the debt of Termo Loans to Ong.

In order to pierce the veil of corporate fiction, for reasons of negligence by the director, trustee
or officer in the conduct of the transactions of the corporation, such negligence must be gross.
Gross negligence is one that is characterized by the want of even slight care, acting or omitting
to act in a situation where there is a duty to act, not inadvertently but willfully and intentionally
with a conscious indifference to consequences insofar as other persons may be affected; and
must be established by clear and convincing evidence. Parenthetically, gross or willful
negligence could amount to bad faith.

In the case at bar, in their Memorandum filed before the RTC, the Spouses Magaling argued
that "the Amended Complaint did not allege that Reynaldo Magaling was guilty of gross
negligence or bad faith in directing the affairs of the corporation"; and that respondent Ong was
not able to adduce evidence to offset the effect of the particular allegation. Hence, they insist
that it was unfair for the appellate court to conclude that Reynaldo Magaling failed to exercise
the necessary diligence in running Termo Loans.

We disagree.

Reynaldo Magaling's gross negligence became apparent, undeniable and proven during the
course of the proceedings in the trial court. Reynaldo Magaling was the lone witness presented
in court to belie the claim of Ong. On cross-examination, he (Reynaldo Magaling) clearly and
plainly shed light on how Termo Loans was run under his aegis businessman engaged in similar
lines of lending company and being the President.

Reynaldo Magaling's very own testimony gave reason for the appellate court's finding of gross
negligence on his part. Instead of the intended effect of refuting the supposition that Termo
Loans was assiduously managed, Reynaldo Magaling's foregoing testimony only convincingly...
displayed his gross negligence in the conduct of the affairs of Termo Loans. From our
standpoint, his casual manner, insouciance and nonchalance, nay, indifference, to the
predicament of the distressed corporation glaringly exhibited a lackadaisical attitude from a
topoffice of a corporation, a conduct totally abhorrent in the corporate world.

WHEREFORE, premises considered, the instant petition is DENIED.

Accordingly, the assailed 31 August 2005 Decision and 28 June 2006 Amended Decision, both
of the Court of Appeals in CA-G.R. CV No. 70954, are hereby AFFIRMED.