Avelina G. Ramoso, et al. vs. General Credit Corporation, et al.

[SEC-SICD * CASE NO. 2581. February 23, 1990.] AVELINA G. RAMOSO, ET AL. , petitioners , vs . GENERAL CREDIT CORPORATION, ET AL. , respondents . D E C I S I O N This is a petition filed by the individual investors and corporate petitioners, alleging that respondent General Credit Corporation (GCC), or Commercial Credit Corporation, as it was formerly known, with intent to defraud individual petitioners, presented to the latter a proposal whereby corporations will be organized and set up in the individual petitioners' respective localities, such as North Manila, Cagayan Valley, Olongapo City and Quezon City, with individual petitioners and GCC investing in the equity of such corporations (which were later referred to as the franchised companies) at the ratio of 60-40, generally; that each of the franchised companies would bear as its corporate name "Commercial Credit Corporation" followed by the name of the city or municipality where its place of business is to be established; that the franchised companies would execute an exclusive management contract with GCC, giving the latter full control and management of the franchised companies' business and affairs; that, in return, GCC would provide the necessary management expertise, opportunities, connections, facilities and fund support; that in consideration for the arrangement, GCC would utilize the corporate and business facilities of the franchised companies, in addition to receiving royalties for the use of the name, business facilities and management of GCC. llcd The petition further alleges that relying on the representations and assurances of GCC, and reposing trust and confidence on the latter's integrity, expertise, and promised facilities, opportunities and fund support, and assurance of good earnings, individual petitioners separately invested in the equity of the franchised companies (the petitioning corporations), and even made deposits or placements in the latter. Not having the experience and expertise to manage a finance company, individual petitioners aver that they entrusted full control and management of the franchised companies to GCC through a management contract, under which GCC designated a resident manager, exclusively chosen by it, for each of the franchised companies. Petitioners moreover aver that, as part of GCC's scheme and device, and to circumvent the law, and rules and regulations of the Central Bank, GCC organized another corporation, CCC Equity Corporation (CCC Equity) which substituted GCC in managing the franchised companies. It is likewise alleged in the petition that while initial reports on the operations of the franchised companies showed satisfactory results, starting the early part of 1981, the suspicion of individual petitioners were aroused by adverse media reports pointing to anomalies in the operations of GCC which led to an investigation conducted by this Commission. Upon scrutiny of the state of affairs of the franchised companies, individual petitioners discovered dissipation of assets and resources of the franchised companies by GCC, and the incurring for the account of the latter, staggering amounts of liabilities, for the benefit of GCC and CCC Equity and to the prejudice of the petitioners and the investing public through anomalous and fraudulent practices, devices and schemes, such as the assignment by GCC of uncollectible accounts to the franchised companies, utilization of spurious commercial papers to generate paper revenues, fraudulent releases of collaterals and releases of unauthorized loans. Petitioners allege that they suffered losses and damages; the franchised companies are bankrupt or have actually collapsed which resulted, on the part of individual petitioners, in the loss of their investment and their being subjected to liabilities in their personal capacities. The petition likewise avers that as a final step in carrying out their fraudulent scheme and device to its conclusion, and to evade its liabilities and responsibilities, GCC had effectively divested itself of its assets and resources through a questionable receivables offsetting arrangement with respondent Resource and Finance Corporation. On the basis of these allegations, petitioners prayed that, pending the resolution of the case, GCC and CCC Equity be placed under receivership, that respondents be ordered to pay petitioners, as well as depositors of the franchised companies for the losses and damages sustained by reason of GCC's scheme and device and that the agreement between GCC and Resource and Finance Corporation be annulled; and ordered to cease and desist from further engaging as a finance company and that a financial and management audit be conducted insofar as the management of the franchised companies are concerned. On June 6, 1984, all the respondents, except CCC Equity, moved for a dismissal of the petition on the grounds that the Commission has no jurisdiction over the subject and nature of the suit and that the petitioners are not real parties in interest. Petitioners filed an opposition to this motion. Evidence was adduced by petitioners on their application for receivership and so did respondents on their motion to dismiss. Subsequently, respondents filed a supplemental motion to dismiss. Resolving these incidents, this Hearing Officer denied both the application for receivership of petitioners and respondents' motion (and supplemental motion) to dismiss. Accordingly, respondents filed their answer, averring therein that GCC never had nor has any intention, plan, scheme, or device or policy to defraud petitioners or the public; that the franchising scheme it embarked on was a valid, legitimate and lawful business; that the franchised companies were organized at the initiative, proposal or representation and voluntary desire of the local stockholders, including individual petitioners; that the GCC management contracts and equity participation alleged by petitioners only covered petitioners CCC-Quezon City and CCC-Olongapo; and that these contracts only pertained to the technical aspects of administration; that the boards, stockholders, and officers of the franchised companies remained in full control and management of the latter's businesses and operations; that GCC totally divested its entire shareholdings in CCC-Quezon City and CCC-Olongapo in 1974-1975 in compliance with applicable regulations of the Central Bank; that in all its business transactions with petitioners, GCC has always conducted itself at arms length, on the basis of full disclosure, sincerity and fairness; that individual petitioners are highly educated persons or businessmen, well experienced and have enough expertise in managing their own investments and businesses including financing as they in fact actively participated, contracted, managed and directed, as controlling stockholders, directors and/or officers, the franchised companies; that GCC did not cause the incorporation of CCC Equity Corporation, nor was it a stockholder of the latter, that the management contracts between the franchised companies and CCC Equity was the former's own free will and choice; that GCC and CCC Equity are two separate and distinct corporations; that from 1974 to 1975, GCC did not have any control or participation in the management, operation or administration of the franchised companies; that examinations of this Commission and the Central Bank confirm that there was no anomaly in the operation of GCC and that, on the contrary, GCC had large exposures in the franchised companies arising from the availment of discounting lines; that petitioners have overdue and defaulted outstanding liabilities to GCC; that petitioners admitted the existence and validity of, and committed to fully pay, these liabilities; that the alleged receivables offsetting with Resource and Finance Corporation is false and imaginary, the latter not even being a creditor of GCC; that the assets and resources of GCC could not be dissipated as representatives of the Central Bank are acting as controllers in all aspects of its affairs, business and operations; that GCC did not benefit or profit from its transactions with the franchised companies or with CCC Equity since, despite the assignment of their receivables to GCC, they nevertheless collected and received the proceeds thereof with obvious grave abuse of confidence and trust, which proceeds were not remitted to GCC; that GCC has nothing to do with the preparation of financial statements of the franchised companies' operations; that the resident manager exercised merely administration, mechanical and recommendatory function, and was not given any business discretion. GCC likewise avers that complaints for collection have been filed with various courts against the petitioners and that the instant suit was filed by petitioners with "gross bad faith and malice", as a futile tactical strategy, borne out of vengeance, fear and sheer desperation to harass and sabotage the normal operations of respondent GCC and as a fraudulent scheme to evade their respective obligations, liabilities and responsibilities to respondent GCC. By way of counterclaim, respondents seek to recover actual and moral damages from petitioners. llcd Sifting through the voluminous evidence, testimonial and documentary, adduced during the hearings on the case, we find convincing basis for petitioners' assertion that GCC exercised extensive control over the operations of the franchised companies, contrary to GCC's claim that its role in the franchised companies was purely administrative. Testifying as an adverse witness, Wilfredo Labayen, who used to be a Vice President of GCC, admitted that it was GCC which laid down the basic policies in the operation of the franchised corporations (t.s.n., July 23, 1984, pp. 32-33); these policies were carried out by resident managers who were hired, employed and under the payroll of GCC and whom the latter assigned to each of the franchised companies. While the role of the resident manager was supposed to be merely recommendatory to the Board of Directors of the franchised companies, his recommendations were generally followed; moreover, at the Board level, the representative or nominee of GCC therein, being considered as a "technical man", was normally followed (id., 37-39). As another indication of the wide latitude of authority exercised by the resident managers, they were made signatories of checks of the franchised companies (Exhibit "MM"). The degree of control that GCC had over the franchised companies was evident from communications, mostly in the form of memoranda, sent by GCC (and later on CCC Equity) to the franchised companies, in terms of personnel hiring and other actions (Exhibits "EE", "FF", "JJ", "KK" and "NN"), as well as with respect to the main financing activities of the franchised companies (Exhibit "LL"). Records of the case disclose that GCC organized CCC Equity to take over the management of, and equity in, the franchised companies; it was admitted by Labayen, and by no less than the former President of GCC that this had to be done because of the so called DOSRI regulations of the Central Bank which prohibited GCC from lending to the franchised companies. However, it is quite evident that CCC-Equity was merely an alter ego of GCC; they had practically common stockholders; the funds used by CCC-Equity in acquiring shares of stock in the franchised companies were advanced by GCC, which GCC never collected; the GCC officer, Labayen, who was handling the franchise companies' affairs as Vice President for franchise continued to do so with just a change in title to President of CCC-Equity. (t.s.n., July 23, 1984, pp. 40-60) Glaringly, in the computation of Labayen's compensation as President of CCC-Equity, his length of service with GCC was considered; moreover his bonuses were made dependent on the earnings not only of CCC-Equity, but likewise the earnings of GCC from the franchised companies (id.). Significantly, GCC never made secret its control over the franchised companies; on the contrary, for public consumption in newspaper publications, brochures and the like, the franchised companies were interchangeably referred to by GCC as its "branches" or "affiliates" part of the big "GCC family". (Exhibits "N", "O", "S", "W", "BB", "CC" and "DD") In addition to such various circumstances, the annual report of GCC included some highlights of the franchise corporations as duly reflected with consolidated financial statement. (T.S.N., July 23, 1984, pp. 45-46) In the light of all the foregoing, it is indubitable to us that, indeed, there was the so called GCC complex, or "family" as GCC itself called it, consisting of GCC, CCC-Equity, and the franchised companies, under the ambit of control and management of GCC itself. Evidence was presented showing that, in addition to their investments in the equity of the franchised companies, and advances made as in the case of petitioner Concepcion Blaylock, individual petitioners, in their capacity as directors of the franchised companies, were required by GCC to sign continuing guaranties in blank, purportedly as a "formality". (Exhibits "GG", "HH" and "II"; t.s.n., January 15, 1985, pp. 27-32) GCC has in fact instituted civil actions against some of the franchised companies for credit extended by it to the latter in the form of receivables discounting, and against some of the individual petitioners on the basis of the said continuing guaranties. Considering the foregoing circumstances, we find ample reason to pierce the veil of corporate fiction, as regards GCC and CCC-Equity and as regards GCC and the franchised companies. cdlex The corporate entity is disregarded 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. (Koppel Phil., Inc. v. Yatco, G.R. No. L-47673, October 10, 1946, 43 O.G. 4604) GCC, CCC-Equity and the franchised companies could indeed be viewed as one the "CCC family", as GCC itself calls the entire complex. In effect, therefore, GCC was providing credit accommodations to the public through its several adjuncts the franchised companies. As a consequence, we have to disregard as well the purported liabilities to GCC supposedly incurred by the franchised companies through the discounting process. Justice and equity dictate this; since it was GCC which was controlling the financing operations of the franchised companies, it would be quite inequitous for it to pass on the burden of losses on bad accounts to the latter. And with greater reason, individual petitioners who executed continuing guaranties could not be held responsible for these bad accounts; it is a basic rule of law that a guaranty is only secondary or collateral to the principal obligation. (38 Am Jur 1054) However, as to the claim of the petitioners that they be refunded by GCC for the investments they made in the franchised companies, we find no basis to sustain the same. Petitioners are encumbered to assume the risk attached to their investments from the time subscription was made. They are as much bound to share the business reverses of the franchise companies of which they are stockholders. Moreover, we find no basis to hold respondents Resource and Finance Corporation, Generoso Villanueva and Leonardo Alejandrino liable to petitioners in any manner. WHEREFORE, judgment is hereby rendered, as follows: 1. Declaring GCC, CCC-Equity and the franchised companies Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City and Commercial Credit Corporation of Quezon City as one corporation; 2. Declaring that the petitioning franchised companies are not liable for the payment of bad accounts assigned to, and discounted by GCC; 3. Declaring that individual petitioners who executed continuing guaranties to secure the obligations of the franchised companies to GCC arising from the discounting of accounts should not be held liable thereon; 4. Declaring that GCC is not liable to individual petitioners for the investments they made in the franchised companies; 5. Dismissing the petition, with respect to respondent Resource Finance Corporation, Generoso Villanueva and Leonardo Alejandrino. SO ORDERED. (SGD.) ANTONIO M. ESTEVES Hearing Officer