Bustos vs. Millians Shoe, Inc. (824 SCRA 67 [2017]) CASE DIGEST

 Bustos vs. Millians Shoe, Inc. (824 SCRA 67 [2017])

Case Digest by: Arlou June D. Gomez [CorpLaw]

FACTS

Spouses Fernando and Amelia Cruz owned a 464-square-meter lot. The City Government of Marikina levied the property for nonpayment of real estate taxes. On auction, the petitioner Joselito Hernand M. Bustos won.

Petitioner then applied for the cancellation of TCT No. N-126668; the RTC Marikina, ordered the cancellation of the previous title and the issuance of a new one under the name of petitioner.

Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February 2005 which indicated that SEC Corp. Case No. 036-04 filed before the RTC and involved the rehabilitation proceedings for MSI, covered the subject property and included it in the Stay Order issued by the RTC dated 25 October 2004.

On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay Order claiming that the lot belonged to Spouses Cruz who were mere stockholders and officers of MSL and that since he had won the bidding of the property before the annotation of the title on 9 February 2005, the auctioned property could no longer be part of the Stay Order.

The RTC denied the entreaty of petitioner and the motion for reconsideration

On appeal, CA brushed aside the claim that the suspension orders undermined the power to tax. 

Petitioner unsuccessfully moved for reconsideration. 

ISSUE: 

Whether the CA correctly considered the properties of Spouses Cruz answerable for the obligations of MSI.

RULING:

NO. 

The Court set aside rulings of the CA for lack of basis.

In finding the subject property answerable for the obligations of MSI, the CA characterized respondent spouses as stockholders of a close corporation who, as such, are liable for its debts. This conclusion is baseless.

To be considered a close corporation, an entity must abide by the requirements laid out in Section 96 of the Corporation Code, which reads:

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. x x x. (Emphasis supplied)

In San Juan Structural and Steel Fabricators. Inc. v. Court of Appeals, the Court held that a narrow distribution of ownership does not, by itself, make a close corporation. Courts must look into the articles of incorporation to find provisions expressly stating that

1. the number of stockholders shall not exceed 20; or

2. a preemption of shares is restricted in favor of any stockholder or of the corporation; or 

3. the listing of the corporate stocks in any stock exchange or making a public offering of those stocks is prohibited.

Here, neither the CA nor the RTC showed its basis for finding that MSI is a close corporation. The courts a quo did not at all refer to the Articles of Incorporation of MSI. The Petition submitted by respondent in the rehabilitation proceedings before the RTC did not even include those Articles of Incorporation among its attachments.

In effect, the CA and the RTC deemed MSI a close corporation based on the allegation of Spouses Cruz that it was so. However, mere allegation is not evidence and is not equivalent to proof. For this reason alone, the CA rulings should be set aside.

Furthermore, the Court found that the CA seriously erred in portraying the import of Section 97 of the Corporation Code. 

Section 97 of the Corporation Code only specifies that "the stockholders of the corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find any inference that stockholders of a close corporation are automatically liable for corporate debts and obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for personal liability of stockholders of close corporation.

The Court applied the general doctrine of separate juridical personality, which provides that a corporation has a legal personality separate and distinct from that of people comprising it. By virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a corporation does not make one's property the property also of the corporation.

Given that the true owner the subject property is not the corporation, petitioner cannot be considered a creditor of MSI but a holder of a claim against respondent spouses.

Petition for review on certiorari is GRANTED. The Decision of the CA are REVERSED and SET ASIDE.