Tan Boon Bee & Co., Inc. v. Jarencio
REITERATIONFacts
The Antecedents: Petitioner Tan Boon Bee & Co., Inc. (petitioner) sold paper products on credit to Graphic Publishing, Inc. (GRAPHIC). GRAPHIC made partial payment and executed a promissory note for the balance, stipulating monthly installments and 12% annual interest upon failure to pay. GRAPHIC failed to pay installments, prompting petitioner to file a civil case for a sum of money. Procedural History: The trial court declared GRAPHIC in default and, after petitioner presented evidence ex parte, ordered GRAPHIC to pay the balance with interest and costs. A writ of execution was issued, but expired without levy. An alias writ of execution was issued, and the sheriff levied upon a printing machine identified as 'Original Heidelberg Cylinder Press' found in GRAPHIC's premises. In a letter, respondent Philippine American Drug Company (PADCO) informed the sheriff that the printing machine was its property and not GRAPHIC's, requesting cessation of the auction sale. Notwithstanding this, the sheriff proceeded with the auction sale, selling the property to petitioner as the highest bidder and issuing a Certificate of Sale. More than five hours after the sale, PADCO filed an 'Affidavit of Third Party Claim' and subsequently filed a Motion to Nullify Sale on Execution (With Injunction) with the trial court. The respondent judge ruled in favor of PADCO, setting aside the sale and levy, and ordering the return of the machinery to PADCO. Petitioner's motion for reconsideration was denied. The Petition: Petitioner filed a petition for certiorari, with prayer for preliminary injunction, to annul and set aside the order of the respondent judge.
Issue(s)
Whether the respondent judge gravely exceeded, if not acted without jurisdiction, when he acted upon the motion of PADCO, considering that Section 17, Rule 39 of the Rules of Court was not complied with and that PADCO's claim, not being a party to the case, could not be ventilated in the same case but in an independent proceeding. Whether the respondent judge gravely abused his discretion when he refused to pierce the corporate identity of PADCO despite evidence showing it was shielding under the theory of corporate fiction.
Ruling
The Supreme Court annulled and set aside the March 26, 1975 Order of the then Court of First Instance of Manila, and made permanent the Temporary Restraining Order issued. The Court ruled that the respondent judge erred in ruling on the third-party claim within the execution proceedings and should have ordered PADCO to file a separate action. However, the Court found that the respondent judge should have pierced the veil of corporate fiction of PADCO.
Ratio Decidendi
On Issue 1 (Jurisdiction over Third-Party Claim): The Court held that the respondent judge gravely exceeded, if not acted without jurisdiction, in nullifying the sheriff's sale. Citing Bayer Philippines, Inc. vs. Agana, the Court reiterated that Section 17 of Rule 39 of the Rules of Court mandates that the rights of third-party claimants over properties levied upon should not be decided in the action where the claims are presented, but in a separate action instituted by the claimants. The court issuing a writ of execution is supposed to enforce its authority only over properties of the judgment debtor. A third-party claim should be the subject of a separate and independent action to avoid injecting confusion into the issues between the original parties. The Court noted that while petitioner questioned jurisdiction initially, its active participation in the trial barred it from later questioning the court's jurisdiction on that ground. On Issue 2 (Piercing the Veil of Corporate Fiction): The Court found that the respondent judge should have pierced PADCO's veil of corporate identity. While acknowledging the distinct juridical personality of corporations, the Court emphasized that this is a legal fiction created for convenience and to promote justice, which may be disregarded when used as a cloak for fraud or illegality, to work injustice, or when necessary for equity or protection of creditors. The Court pointed to evidence showing that PADCO was not engaged in the printing business, that the controlling stockholders and officers of PADCO and GRAPHIC were the same, and that PADCO held a significant share in GRAPHIC. Furthermore, the circumstances surrounding PADCO's alleged ownership and lease of the printing machine, including the timing of its acquisition and lease relative to its purchase, rendered its claim of ownership a farce and sham. The Court considered the argument that the error was one of judgment, not jurisdiction, but deemed it a mere technicality, stating that litigations should be decided on their merits.
Main Doctrine
A court issuing a writ of execution is supposed to enforce its authority only over properties of the judgment debtor. If a third party claims the property levied upon by the sheriff, such claim should be the subject of a separate and independent action, not decided in the action where the third-party claim is presented. However, the separate juridical personality of a corporation may be disregarded or the veil of corporate fiction pierced when it is used as a cloak for fraud or illegality, or to work an injustice, or when necessary to achieve equity or protect creditors.