Pacific Red House Corporation v. Ca, 719 Scra 665

PACIFIC RED HOUSE CORPORATION V.
CA, 719 SCRA 665
FACTS:
A complaint was instituted before the RTC against EIB Securities Inc. (E–Securities) for unauthorized sale
of DMCI shares of private respondents Pacific Rehouse Corporation, Pacific Concorde Corporation,
Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc.
The RTC rendered judgment on the pleadings, directing the defendant [E–Securities] to return the
plaintiffs’ [private respondents herein] DMCI shares, as of judicial demand. On the other hand, plaintiffs
are directed to reimburse the defendant for the buy back price of KPP shares of stocks.
When the Writ of Execution was returned unsatisfied, private respondents moved for the issuance of an
alias writ of execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as E–
Securities is “a wholly–owned controlled and dominated subsidiary of Export and Industry Bank, Inc.,
and is[,] thus[,] a mere alter ego and business conduit of the latter. E–Securities opposed the motion[,]
arguing that it has a corporate personality that is separate and distinct from petitioner.
The RTC concluded that E–Securities is a mere business conduit or alter ego of petitioner, the dominant
parent corporation, which justifies piercing of the veil of corporate fiction, and issued an alias writ of
summons directing defendant EIB Securities, Inc., and/or Export and Industry Bank, Inc., to fully comply
therewith.
Export and Industry Bank, Inc. (Export Bank) filed before the Court of Appeals a petition for certiorari
with prayer for the issuance of a temporary restraining order (TRO) seeking the nullification of the RTC
Order. The CA reversed the RTC Order and explained that the alter ego theory cannot be sustained
because ownership of a subsidiary by the parent company is not enough justification to pierce the veil of
corporate fiction. The records also do not show that Export Bank has complete control over the business
policies, affairs and/or transactions of E–Securities. It was solely E–Securities that contracted the
obligation in furtherance of its legitimate corporate purpose; thus, any fall out must be confined within
its limited liability.
Hence, this petition.
ISSUE:
Whether E-Securities is merely an alter ego of Export Bank, that will make the latter liable.
RULING:
NO, E-Securities and Export Bank are two separate and distinct corporations. The Alter Ego Doctrine is
not applicable.
“Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact,
a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
“instrumentality” may be disregarded. The control necessary to invoke the rule is not majority or even
complete stock control but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must proximately cause the
injury or unjust loss for which the complaint is made.”
The Court has laid down a three–pronged control test to establish when the alter ego doctrine should be
operative:
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss
complained of.
The absence of any one of these elements prevents ‘piercing the corporate veil’ in applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how
the corporation operated and the individual defendant’s relationship to that operation. Hence, all three
elements should concur for the alter ego doctrine to be applicable.
In this case, all the foregoing circumstances, that would indicate that E-securities is just an alter ego of
Export Bank, were however not properly pleaded and proved in accordance with the Rules of Court.
Albeit the RTC bore emphasis on the alleged control exercised by Export Bank upon its subsidiary E–
Securities, “[c]ontrol, by itself, does not mean that the controlled corporation is a mere instrumentality
or a business conduit of the mother company. Even control over the financial and operational concerns
of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a
perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in
order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case.”
Moreover, there was nothing on record demonstrative of Export Bank’s wrongful intent in setting up a
subsidiary, E–Securities. If used to perform legitimate functions, a subsidiary’s separate existence shall
be respected, and the liability of the parent corporation as well as the subsidiary will be confined to
those arising in their respective business. To justify treating the sole stockholder or holding company as
responsible, it is not enough that the subsidiary is so organized and controlled as to make it “merely an
instrumentality, conduit or adjunct” of its stockholders. It must further appear that to recognize their
separate entities would aid in the consummation of a wrong.
Furthermore, ownership by Export Bank of a great majority or all of stocks of E–Securities and the
existence of interlocking directorates may serve as badges of control, but ownership of another
corporation, per se, without proof of actuality of the other conditions are insufficient to establish an
alter ego relationship or connection between the two corporations, which will justify the setting aside of
the cover of corporate fiction.
The Court has declared that “mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality.” The Court has likewise ruled that the “existence of interlocking
directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate
fiction in the absence of fraud or other public policy considerations.”
Thus, E-Securities is not merely an adjunct, a business conduit or an alter ego of Export Bank. These are
two separate and distinct corporation. Export Bank cannot be held liable in behalf of E-Securities.

Pacific Red House Corporation v. Ca, 719 Scra 665

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PACIFIC RED HOUSE CORPORATION V.

CA, 719 SCRA 665

Hence, this petition.

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