Ruling:

INTERNATIONAL ACADEMY OF MANAGEMENT v. LITTON

The piercing of the corporate veil is premised on the fact that the corporation
Facts: concerned must have been properly served with summons or properly subjected to
the jurisdiction of the court a quo. Corollary thereto, it cannot be subjected to a writ
Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton... of execution meant for another in violation of its right to due process.
owed the latter rental arrears as well as his share of the payment of realty taxes.
There exists, however, an exception to this rule: if it is shown "by clear and
Litton filed a complaint for unlawful detainer against Santos before the MeTC of convincing proof that the separate and distinct personality of the corporation was
Manila. The MeTC ruled in Litton's favor and ordered Santos to vacate A.I.D. purposefully employed to evade a legitimate and binding commitment and perpetuate
Building and Litton Apartments and to pay various sums of money representing a fraud or like wrongdoings."
unpaid arrears, realty taxes, penalty, and attorney's fees.
The resistance of the Court to offend the right to due process of a corporation that is
The judgment was not executed. a nonparty in a main case, may disintegrate not only when its director, officer,
On 11 November 1996, the sheriff of the MeTC of Manila levied on a piece of real shareholder, trustee or member is a party to the main case, but when it finds facts
property covered by Transfer Certificate of Title (TCT) No. 187565 and registered in which show that piercing of the corporate veil is merited.
the name of International Academy of Management and Economics Incorporated In determining the propriety of applicability of piercing the veil of corporate fiction,
(I/AME), in order to execute the judgment against Santos. this Court, in a number of cases, did not put in issue whether a corporation is a stock
indicated that such was "only up to the extent of the share of Emmanuel T. Santos." or non-stock corporation.

I/AME claimed that it has a separate and distinct personality from Santos; hence, its In the United States, from which we have adopted our law on corporations, non-
properties should not be made to answer for the latter's liabilities. profit corporations are not immune from the doctrine of piercing the corporate veil.
Their courts view piercing of the corporation as an equitable remedy, which justifies
Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and said courts to scrutinize any organization however organized and in whatever manner
ordered the cancellation of the annotations of levy as well as the writ of execution. it operates. Moreover, control of ownership does not hinge on stock ownership.

Petitioner avers that its right to due process was violated when it was dragged into As held in Barineau v. Barineau:[36] [t]he mere fact that the corporation involved is
the case and its real property made an object of a writ of execution in a judgment a nonprofit corporation does not by itself preclude a court from applying the
against Santos. equitable remedy of piercing the corporate veil. The equitable character of the
remedy permits a court to look to the substance of the organization, and its decision
It argues that since it was not impleaded in the main case, the court a quo never is not controlled by the statutory framework under which the corporation was formed
acquired jurisdiction over it. and operated. While it may appear to be impossible for a person to exercise
Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only ownership control over a nonstock, not-for-profit corporation, a person can be held
to stock corporations, and not to non-stock, nonprofit corporations such as I/AME personally liable under the alter ego theory if the evidence shows that the person
since there are no stockholders to hold liable in such a situation but instead only controlling the corporation did in fact exercise control, even though there was no
members. Hence, they do not have investments or shares of stock or assets to answer stock ownership.
for possible liabilities. Thus, no one in a non-stock corporation can be held liable in The concept of equitable ownership, for stock or non-stock corporations, in piercing
case the corporate veil is disregarded or pierced. of the corporate veil scenarios, may also be considered. An equitable owner is an
The petitioner also insists that the piercing of the corporate veil cannot be applied to individual who is a non-shareholder defendant, who exercises sufficient control or
a natural person - in this case, Santos - simply because as a human being, he has no considerable authority over the corporation to the point of completely disregarding
corporate veil shrouding or covering his person. the corporate form and acting as though its assets are his or her alone to manage and
distribute.
Issues:
The piercing of the corporate veil may apply to corporations as well as natural
The issues boil down to the alleged denial of due process when the court pierced the persons involved with corporations. This Court has held that the "corporate mask
corporate veil of I/AME and its property was made to answer for the liability of may be lifted and the corporate veil may be pierced when a corporation is just but the
Santos. alter ego of a person or of another corporation.”
Like Arcilla, Santos: (1) was adjudged liable to pay on a judgment against him; (2) stockholders or voluntary creditors) with unprotected interests in the assets of the
he became President of a corporation; (3) he formed a corporation to conceal assets beleaguered corporation.[57] Thus, this Court would recommend the application of
which were supposed to pay for the judgment against his favor; (4) the corporation the current 1997 Rules on Civil Procedure on Enforcement of Judgments. Under the
which has Santos as its President, is being asked by the court to pay on the judgment; current Rules of Court on Civil Procedure, when it comes to satisfaction by levy, a
and (5) he may not use as a defense that he is no longer President of I/AME judgment obligor is given the option to immediately choose which property or part
(although a visit to the website of the school shows he is the current President). thereof may be levied upon to satisfy the judgment. If the judgment obligor does not
exercise the option, personal properties, if any, shall be first levied and then on real
This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the properties if the personal properties are deemed insufficient to answer for the
natural person - is the alter ego of I/AME. Santos falsely represented himself as judgment.[58] In the instant case, it may be possible for this Court to recommend
President of I/AME in the Deed of Absolute Sale when he bought the Makati real that Litton run after the other properties of Santos that could satisfy the money
property, at a time when I/AME had not yet existed. judgment - first personal, then other real properties other than that of the school.
We borrow from American parlance what is called reverse piercing or reverse However, if we allow this, we frustrate the decades-old yet valid MeTC judgment
corporate piercing or piercing the corporate veil "in reverse." which levied on the real property now titled under the name of the school. Moreover,
this Court will unwittingly condone the action of Santos in hiding all these years
"in a traditional veil-piercing action, a court disregards the existence of the corporate behind the corporate form to evade paying his obligation under the judgment in the
entity so a claimant can reach the assets of a corporate insider. In a reverse piercing court a quo. This we cannot countenance without being a party to the injustice. Thus,
action, however, the plaintiff seeks to reach the assets of a corporation to satisfy the reverse piercing of the corporate veil of I/AME to enforce the levy on execution
claims against a corporate insider." of the Makati real property where the school now stands is applied.

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-

piercing) and makes the corporation liable for the debt of the shareholders."
It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider
reverse piercing occurs when a party with a claim against an individual or
corporation attempts to be repaid with assets of a corporation owned or substantially
controlled by the defendant.[52] In contrast, in insider reverse piercing, the
controlling members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an interest in a lawsuit or
protection of personal assets.
Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment
creditor, seeks the Court's intervention to pierce the corporate veil of I/AME in order
to make its Makati real property answer for a judgment against Santos, who formerly
owned and still substantially controls I/AME.
In the U.S. case Acree v. McMahan,[54] the American court held that "[o]utsider
reverse veil-piercing extends the traditional veil-piercing doctrine to permit a third-
party creditor to pierce the veil to satisfy the debts of an individual out of the
corporation's assets."
This notwithstanding, the equitable remedy of reverse corporate piercing or reverse
piercing was not meant to encourage a creditor's failure to undertake such remedies
that could have otherwise been available, to the detriment of other creditors.
Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may
lead to disastrous consequences for both stock and non-stock corporations. We are
aware that ordinary judgment collection procedures or other legal remedies are
preferred over that which would risk damage to third parties (for instance, innocent