Piercing corporate veil to avoid denial of legitime

It is well-settled that corporations, whether stock or non-stock, are treated as separate and distinct legal entities from the natural persons composing them. As a consequence thereof, the obligations incurred by the corporation, acting through its directors, officers and employees are its sole liabilities in the same way that its assets are treated separately from the assets of the people comprising it. This is true even if the people comprising the corporation have familial ties with each other.

However, this separate and distinct personality is merely a fiction created by law for convenience and to promote the ends of justice. As such, the courts are empowered under the law to pierce the corporate veil in cases where the same is being utilized to (1) defeat public convenience as the corporate fiction is being used as vehicle for the evasion of an existing obligation, (2) perpetuate fraud or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime, and lastly (3) in alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Aside from the doctrine of separate juridical personality of corporations, another concept that is deeply rooted under Philippine laws is the concept of legitime — also known as the part of a testator’s property which he cannot dispose because the law has already reserved the same for certain compulsory heirs including but not limited to the legitimate children and descendants, with respect to their legitimate parents and ascendants as well as the widow or the widower.

Simply put, a certain portion of the estate of a deceased is reserved for his or her spouse, their children, as well as the other compulsory heirs listed under and subject to the rules provided under the Civil Code. Considering this, what happens if a child who is considered a compulsory heir is deprived of legitime from his or her parent but the latter’s properties were already transferred in the name of a corporation whose incorporators include the remaining compulsory heirs? Can the excluded heir pursue an action against the corporation? Moreover, can the corporation, whose shareholders have not been impleaded, resist and claim denial of due process?

In the case of Cali Realty Corporation v. Paz M. Enriquez, G.R. No. 257454, 26 July 2023, the Supreme Court emphasized that the privilege of corporations being considered a distinct and separate entity from the people comprising it is confined to legitimate uses and is subject to equitable limitations to prevent it being exercised for fraudulent, unfair or illegal purposes. As such, a party whose corporation is vulnerable to piercing of its corporate veil cannot argue violation of due process, such as in this case where the Court found company was used to perpetuate fraud and injustice and violate the laws on succession.

Here, A and B got married and they had five children during their union. Aside from this, they also acquired several properties covered by several transfer certificate of titles (TCTs) which were then registered under the name of A, married to B. Unfortunately, B died and was survived by A, and their five children. Months after the death of B, a company under the name of CRC was organized with A, together with the four other children as its named incorporators. Shortly after this, A executed a Deed of Assignment in favor of CRC which effectively conveyed to the latter certain parcels of land and caused the transfer of the TCTs to the latter. Aggrieved, C, the only child who was not an incorporator of CRC, challenged the said conveyance and argued that the properties are, in fact, conjugal in nature and that she is entitled over the same in so far as her 1/6 share in the estate of her mother. Both the Regional Trial Court and Court of Appeals ruled in C’s favor. On appeal, CRC argued that the lands transferred to the corporation were exclusive properties of A and that the other shareholders (the other heirs of A) were not impleaded resulting into a deprivation of property without due process.

In resolving the issue as to whether there was violation of due process, the Supreme Court took into consideration the fact that A transferred the subject properties to CRC in exchange for shares of stock and that these shares were later transferred to the other children, and other third persons to the exclusion of C. Upon the death of A, C’s siblings did not take any measures to rectify the situation. This, to the mind of the Supreme Court, evidence the clear fact that CRC was merely used as a subterfuge by A and C’s siblings to perpetuate fraud and injustice against C and exclude her from enjoying her share as a compulsory heir, in violation of the laws on succession. As such, the piercing of the corporate veil is merited and CRC’s claim for violation of due process must necessarily fail.

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