Philippine Supreme Court Jurisprudence

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the December 2, 2013 Decision¹ of the Court of Appeals (CA) in CA-G.R. SP No. 113832. The challenged ruling reversed the November 11, 2009 Order² of the Regional Trial Court (RTC) of Makati City, Branch 62, which dismissed the complaint against petitioners Nolasco Fernandez (Nolasco) and Maricris Fernandez (Maricris) as co-defendants in Civil Case No. 09-199.

The Facts

Everything Online, Inc. (EOL) is a corporation that offers internet services nationwide through franchisees.³ Smart Communications, Inc. (SMART), on the other hand, is a mobile phone service provider.⁴ Petitioners Nolasco and Maricris were the Chief Executive Officer (CEO) and Member of the Board of Directors of EOL, respectively.⁵

As alleged in the Amended Complaint,⁶ EOL sought SMART sometime in 2006 to provide the mobile communication requirements for its expansion. Series of meetings ensued between the parties where it was determined that EOL would be needing approximately 2,000 post-paid lines with corresponding cell phone units. Nineteen (19) of these lines shall be under the corporate account of EOL while the rest of the lines and phones shall be distributed to EOL's franchisees.⁷ In view of this, EOL's corporate president Salustiano G. Samaco III (Samaco III), signed on separate occasions, two (2) Corporate Service Applications (SAF) for the 2,000 post-paid lines with corresponding cell phone units. He also signed Letters of Undertaking⁸ to cover for the 1,119 phone lines issued by SMART to EOL thus far. Paragraph 8 of these Letters of Undertaking read:cralawred

8. The President and each one of the directors and officers of the corporation shall be held solidarily liable in their personal capacity with the SUBSCRIBER for all charges for the use of the SMART Celfones (sic) units acquired by the said SUBSCRIBER.⁹

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In September 2006, EOL demanded the release of the remaining phone lines to cover its initial order of 2,000 units. SMART informed EOL that before it approved further phone line applications, the parties should restate and clarify the agreements between them, to which EOL agreed.¹⁰

In a letter dated September 13, 2006 (Letter Agreement), SMART specified the terms of the agreement over the 1,119 phone lines it already issued in favor of EOL.¹¹ In addition to the Letter Agreement, EOL executed an Undertaking¹² (EOL Undertaking) where it affirmed its availment of 1,119 SMART cell phones and services. EOL also agreed to assume full responsibility for the charges incurred on the use of all these units. The pertinent portion of the EOL Undertaking signed by Samaco III and petitioner Nolasco provides:cralawred

x x x x

3. Everything Online, Inc. agrees that it shall be fully responsible for the settlement of whatever charges to be incurred under the above mobile numbers and shall fully comply with the terms and conditions pertaining to the Smart Corporate Service Application Form and other related Subscription Contracts. Likewise, Everything Online, Inc. shall bind itself to be continuously responsible regardless of assignment and movements of its designated users until such time that the units are validly transferred, after the expiration of the lock-in period, after twenty four (24) months for nineteen (19) lines at Plan 1200 and after thirty six (36) months for one thousand one hundred (1,100) lines at Plan 500, respectively.

x x x x

9. The President and each one of the directors and officers of Everything Online, Inc. shall be held solidarity liable in their personal capacity with the franchisee or assignee for all charges for the use of the SMART cellphone units acquired by Everything Online, Inc.¹³ (Emphases supplied)

SMART averred that after the execution of the EOL Undertaking, its credit and collection department sent, by email, phone bills to EOL that had been previously returned to SMART. These bills were for the collection of the monthly payment due on the lines that were supposedly given to EOL's franchisees. However, EOL allegedly refused to receive the bills, stating that it was not liable for the payment of bills of phone lines assigned to franchisees.¹⁴

On October 13, 2006, SMART notified EOL that its collectibles already amounted to at least P18,000,000.00 representing the costs of cell phone units and the plans usage. EOL officers were also reminded that under the EOL Undertaking and the Letter Agreements, it is bound to pay the bills of the franchisees, whether the phones were in the possession of the franchisees or not.¹⁵

On July 27, 2007, a meeting was purportedly held between the parties where EOL proposed to update the payments for 304 accounts of its franchisees and it would update and amend the monthly plan for the other 765 accounts. EOL then issued Banco De Oro Check No. 1003473 dated August 3, 2007 for P394,064.62 in favor of SMART as partial payment and as a sign of good faith. However, the BDO check was dishonored upon presentment due to insufficiency of funds.¹⁶

On November 8, 2007, SMART sent EOL a notice of final demand for the payment of the outstanding amount of F17,506,740.55. Despite receipt of the demand letter, EOL failed to pay the amount due. On January 2, 2008, another demand letter for P20,662,073.45¹⁷ was sent by SMART to EOL. No payment was made by EOL. SMART claimed that the total due from EOL already amounted to P39,770,810.87 as of October 31, 2008.¹⁸

SMART failed to collect from EOL despite repeated demands. Thus, on April 1, 2009, an Amended Complaint¹⁹ with an application for a writ of preliminary attachment was filed by SMART before the RTC of Makati, Branch 62 for Collection of Sum of Money docketed as Civil Case No. 09-199 against EOL and all its directors and officers including petitioners Nolasco and Maricris.

On April 20, 2009, the trial court gave due course to the application for the issuance of a writ of attachment and ordered the posting of an attachment bond in the amount of P39,770,810.87.²⁰

On June 15, 2009, petitioners filed a Motion to Dismiss With a Very Urgent Motion to Lift and Discharge Writ of Preliminary Attachment issued against them.²¹ Petitioners averred that they are not the real party in interest in the case.²² Maricris claimed that the only allegation holding the directors and officers personally and solidarily liable with EOL was the alleged provisions in the Letter Agreements²³ and EOL Undertaking.²⁴ The Letter Agreements and EOL Undertaking failed to show that she expressly agreed to be bound by the provisions contained therein. Accordingly, the complaint against her must be dismissed.²⁵

With respect to Nolasco, petitioners argued that while his signature appears in the EOL Undertaking, it is not a sufficient ground to implead him in the complaint together with EOL. It was SMART that drafted the EOL Undertaking and Nolasco's participation is limited to the affixing of his signature thereon after EOL's President has already signed it. Nolasco signed in good faith and without the opportunity to read the contents of the same. Be that as it may, Nolasco is not the real party in interest in this case because he was no longer an Officer/Director of EOL at the time the complaint was filed as their entire share was already assigned to one of EOL's directors.²⁶

The RTC Ruling

On November 11, 2009, the RTC issued an Order²⁷ granting the motions to dismiss. The dispositive portion of the Order reads:cralawred

WHEREFORE, finding the defendant individuals' separate Motion to Dismiss being impressed with merit, the Court GRANTS the same. The Complaint against the named individuals is hereby ordered DISMISSED. Defendant Everything Online, Inc., is ordered to file its responsive pleading within the non-extendible period of five (5) days from notice hereof. Consequently, the writs of attachment as well as collateral papers issued in pursuance to the writ in so far as they involve properties belonging to the named defendant individuals are hereby RECALLED and SET ASIDE.

SO ORDERED.²⁸ (Emphasis in the original)

EOL²⁹ and SMART³⁰ filed separate motions for partial reconsideration but these were denied by the trial court in its February 22, 2010 Order.³¹

Ascribing grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC, SMART elevated the case to the CA via a Petition for Certiorari under Rule 65 of the 1997 Rules of Civil Procedure.³²

Ruling of the CA

On December 2, 2013, the CA promulgated the assailed Decision³³ partly grating the respondent's petition for certiorari. The appellate court found grave abuse on the part of the trial court in dismissing the complaint against individual defendants. The CA ruled that there was overwhelming evidence indicating that Samaco III and Spouses Fernandez expressly bound themselves to be solidarity liable with EOL to SMART. The CA decreed as follows:cralawred

WHEREFORE, premises considered, the instant petition is PARTLY GRANTED. Accordingly, the assailed Orders are hereby MODIFIED to REINSTATE the complaint against private individual respondents Salustiano Samaco III and spouses Nolasco and Maricris Fernandez being corporate officers of private respondent Everything Online Inc.

SO ORDERED.³⁴ (Emphasis in the original)

Petitioners moved for reconsideration but, their Motion was denied by the CA in its Resolution³⁵ dated June 4, 2014, leading the petitioners to file the instant recourse anchored on the following grounds:cralawred

-A-

THE PETITION FOR CERTIORARI UNDER RULE 65 SHOULD NOT BE THE PROPER REMEDY AGAINST A FINAL ORDER OF DISMISSAL ISSUED BY THE REGIONAL TRIAL COURT OF MAKATI CITY, BRANCH 62.

-B-

THE REGIONAL TRIAL COURT OF MAKATI CITY, BRANCH 62 DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN DISMISSING THE COMPLAINT AGAINST PETITIONERS.³⁶

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The petition essentially presents the following issues for the Court's resolution: (1) whether or not an order of dismissal of the complaint should be assailed via a petition for certiorari under Rule 65; and (2) whether or not there was a ground to dismiss complaint for a collection of sum of money against petitioners as corporate officer and director.

Ruling of the Court

Before going into the substance of the petition, the Court shall first resolve the procedural question the petitioners raised.

Petitioners' argument that the petition for certiorari under Rule 65 is a wrong remedy and should have been dismissed by the CA fails to persuade.

Under Section 1, Rule 65 of the Rules of Court, a petition for certiorari may be filed when any tribunal, board or officer exercising judicial or quasi-judicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law. An act of a court or tribunal is considered committed with grave abuse of discretion if it is whimsical, arbitrary, or capricious amounting to "an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law, such as where the power is exercised in an arbitrary and despotic manner by reason of passion or hostility."³⁷

An order of dismissal of the complaint is a final order that is subject to appeal.³⁸ Section 1, Rule 41 of the Rules of Court reads:cralawred

Section 1. - Subject of appeal. An appeal may be taken from a judgment or final order that completely disposes of the case, or of a particular matter therein when declared by these Rules to be appealable.

The same provision also provides that no appeal may be taken from the following:cralawred

(a) An order denying a petition for relief or any similar motion seeking relief from judgment;
(b) An interlocutory order;
(c) An order disallowing or dismissing an appeal;
(d) An order denying a motion to set aside a judgment by consent, confession or compromise on the ground of fraud, mistake or duress, or any other ground vitiating consent;
(e) An order of execution;
(f) A judgment or final order for or against one or more of several parties or in separate claims, counterclaims, cross-claims and third-party complaints, while the main case is pending, unless the court allows an appeal therefrom; or
(g) An order dismissing an action without prejudice. (Emphasis supplied)

In all the above instances where the judgment or final order is not appealable, the aggrieved party may file an appropriate special civil action for certiorari under Rule 65.³⁹

Here, the RTC Order⁴⁰ granting the motion to dismiss filed by petitioners is a final order because it terminates the proceedings against them. However, the final order falls within exception (f) of the Rule since the case involves several defendants, and the complaint for sum of money against EOL is still pending. There being no appeal, "or any plain, speedy, and adequate remedy in law, the remedy of a special civil action for certiorari is proper as there is a need to promptly relieve the aggrieved party from the injurious effects of the acts of an inferior court or tribunal."⁴¹

Having settled procedural matters, for resolution is the substantive issue of whether or not there was a ground to dismiss complaint for a collection of sum of money against petitioners as corporate officer and director.

The Court finds the petition partly meritorious.

Petitioners asseverated in their motion to dismiss that the complaint fails to state a cause of action because it was brought against defendants who are not the real parties in interest.

A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit.⁴² Thus, "[a]ny decision rendered against a person who is not a real party in interest in the case cannot be executed."⁴³ Consequently, a "complaint filed against such a person should be dismissed for failure to state a cause of action."⁴⁴

As provided in Zuniga-Santos v. Santos-Gran, et al.:⁴⁵

A complaint states a cause of action if it sufficiently avers the existence of the three (3) essential elements of a cause of action, namely: (a) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (b) an obligation on the part of the named defendant to respect or not to violate such right; and (c) an act or omission on the part of the named defendant violative of the right of the plaintiff or constituting a breach of the obligation of defendant to the plaintiff for which the latter may maintain an action for recovery of damages. If the allegations of the complaint do not state the concurrence of these elements, the complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of action. (Emphasis supplied)

A judicious examination of the Amended Complaint⁴⁶ shows that petitioners were impleaded in the instant action based on the provisions of the Letter Agreement⁴⁷ and EOL Undertaking,⁴⁸ which purportedly bound them to be solidarity liable with the corporation in its obligation with SMART. In effect, the Amended Complaint seeks to pierce the veil of corporate fiction against Nolasco and Maricris in their capacities as corporate officer and director of EOL.

It is basic in corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected.⁴⁹ Inferred from a corporation's separate personality is that "consent by a corporation through its representatives is not consent of the representative, personally."⁵⁰ The corporate obligations, incurred through official acts of its representatives, are its own. Corollarily, a stockholder, director, or representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director, or representative.⁵¹

As a general rule, a corporation's representatives are not bound by the terms of the contract executed by the corporation. "They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation."⁵²

There are instances, however, when the distinction between personalities of directors, officers, and representatives, and of the corporation, are disregarded. This is piercing the veil of corporate fiction.⁵³

The doctrine of piercing the veil of corporate fiction is a legal precept that allows a corporation's separate personality to be disregarded under certain circumstances, so that a corporation and its stockholders or members, or a corporation and another related corporation could be treated as a single entity. It is meant to apply only in situations where the separate corporate personality of a corporation is being abused or being used for wrongful purposes.⁵⁴

The piercing of the corporate veil must be done with caution.⁵⁵ To justify the piercing of the veil of corporate fiction, "it must be shown by clear and convincing proof that the separate and distinct personality of the corporation was purposefully employed to evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings."⁵⁶

A corporate director, trustee, or officer is to be held solidarity liable with the corporation in the following instances:cralawred

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons;

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;

3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation; or

4) When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.⁵⁷

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These instances have not been shown in the case of petitioner Maricris. While the Amended Complaint alleged that EOL fraudulently refused to pay the amount due, nothing in the said pleading or its annexes would show the basis of Maricris' alleged fraudulent act that warrants piercing the corporate veil. No explanation or narration of facts was presented pointing to the circumstances constituting fraud which must be stated with particularity, thus rendering the allegation of fraud simply an unfounded conclusion of law. Without specific averments, "the complaint presents no basis upon which the court should act, or for the defendant to meet it with an intelligent answer and must, perforce, be dismissed for failure to state a cause of action."⁵⁸

In the determination of sufficiency of a cause of action for purposes of resolving a motion to dismiss, the court must decide, "hypothetically admitting the factual allegations in a complaint, whether it can grant the prayer in the complaint."⁵⁹

The Court pronounced in Guillermo, et al. v. Philippine Information Agency, et al.,⁶⁰ that:cralawred

It is well to point out that the plaintiffs cause of action should not merely be "stated" but, importantly, the statement thereof should be "sufficient," This is why the elementary test in a motion to dismiss on such ground is whether or not the complaint alleges facts which if true would justify the relief demanded. As a corollary, it has been held that only ultimate facts and not legal conclusions or evidentiary facts are considered for purposes of applying the test. This is consistent with Section 1, Rule 8 of the Rules of Court which states that the complaint need only allege the ultimate facts or the essential facts constituting the plaintiffs cause of action. A fact is essential if they cannot be stricken out without leaving the statement of the cause of action inadequate. Since the inquiry is into the sufficiency, not the veracity, of the material allegations, it follows that the analysis should be confined to the four corners of the complaint, and no other.⁶¹

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By merely stating a legal conclusion, the Amended Complaint presented no sufficient allegation against petitioner Maricris upon which the Court could grant the relief prayed for. The trial court correctly dismissed the complaint against Maricris on the ground of failure to state cause of action.

This is not the case with petitioner Nolasco. Nolasco, as CEO, signed the EOL Undertaking purportedly binding himself to be "held solidarily liable in his personal capacity with the franchisee or assignee for all charges for the use of SMART cell phone units acquired by Everything Online, Inc." Such allegation proffers hypothetically admitted ultimate facts, which would warrant an action for a collection for sum of money based on the provision of the EOL Undertaking.⁶²

Again, in filing a motion to dismiss on the ground of failure to state a cause of action, a defendant hypothetically admits the truth of the facts alleged in the complaint.⁶³ Since allegations of evidentiary facts and conclusions of law are normally omitted in pleadings, "the hypothetical admission extends only to the relevant and material facts well pleaded in the complaint, as well as inferences fairly deductible therefrom."⁶⁴

The following is clearly stipulated in Item 9 of the EOL Undertaking signed by Nolasco, viz.:cralawred

9. The President and each one of the directors and officers of Everything Online, Inc. shall be held solidarily liable in their personal capacity with the franchisee or assignee for all charges for the use of the SMART cellphone units acquired by Everything Online, Inc.⁶⁵

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Verily, the trial court erred in dismissing the complaint against petitioner Nolasco. The allegations in the complaint, regarding the possible personal liability of petitioner Nolasco based on Item 9 of EOL Undertaking,⁶⁶ sufficiently stated a cause of action. The question of whether petitioner Nolasco is a real party-in-interest who would be benefited or injured by the judgment, would be better threshed out in a full-blown trial. Indeed, in cases that call for the piercing of the corporate veil, "parties who are normally treated as distinct individuals should be made to participate in the proceedings in order to determine if such distinction should be disregarded and, if so, to determine the extent of their liabilities."⁶⁷

WHEREFORE, premises considered, the petition is PARTLY GRANTED. The December 2, 2013 Decision of Court of Appeals in CA-G.R. SP. No. 113832 is hereby MODIFIED to the extent that the complaint against petitioner Maricris Fernandez is dismissed for failure to state a cause of action.

SO ORDERED.

Leonen (Acting Chairperson), Gesmundo,^* Hernando, and Inting, JJ., concur.

September 11, 2019

NOTICE OF JUDGMENT

Sirs/Mesdames:cralawred

Please take notice that on July 17, 2019 a Decision, copy attached hereto, was rendered by the Supreme Court in the above-entitled case, the original of which was received by this Office on September 11, 2019 at 9:20 a.m.

Endnotes:

^* Designated additional Member, per raffle dated January 3, 2019.

¹ Penned by Associate Justice Angelita A. Gacutan (retired), with Associate Justices Fernanda Lampas Peralta and Francisco P. Acosta (retired) concurring; rollo, pp. 24-46.

² Id. at 90-94.

³ Id. at 52.

⁴ Id. at 53

⁵ Id. at 52.

⁶ Id. at 50-72.

⁷ Id. at 53.

⁸ Signed on June 22, 2006 and August 9, 2006, respectively, id. at 242-243.

⁹ Id.

¹⁰ Id. at 57.

¹¹ Id.

¹² Id. at 231-241.

¹³ Id. at 239.

¹⁴ Id. at 61.

¹⁵ Id. at 62.

¹⁶ Id. at 64.

¹⁷ Id.

¹⁸ Id. at 65.

¹⁹ Id. at 50-72.

²⁰ Id. at 334.

²¹ Id. at 78-89.

²² Id. at 79-80.

²³ Id. at 242-243.

²⁴ Id. at 231-241.

²⁵ Id. at 79-82.

²⁶ Id. at 82-84.

²⁷ Id. at 90-94.

²⁸ Id. at 94.

²⁹ Id. at 111-113. See Order dated February 22, 2010.

³⁰ Id. at 95-105.

³¹ Id. at 111-113.

³² Id. at 114-139.

³³ Id. at 24-46.

³⁴ Id. at 45.

³⁵ Id. at 48-49.

³⁶ Id. at 12.

³⁷Feliciano S. Pasok, Jr. v. Office of the Ombudsman-Mindanao and Rex Y. Dua, G.R. No. 218413, June 6, 2018, citing Callo-Claridad v. Esteban, 707 Phil. 172, 186 (2013).

³⁸Editha S. Medina, Raymond A. Dalandan, and Clemente A. Dalandan, as their Attorney-in-Fact v. Sps. Nicomedes and Brigida Lozada, G.R. No. 185303, August 1, 2018.

³⁹ Section 1, Rule 41 of the Rules of Court.

⁴⁰Rollo, pp. 90-94.

⁴¹ Id. at 95.

⁴² Section 2, Rule 3 of the Rules of Court.

⁴³Aniceto G. Saludo, Jr. v. Philippine National Bank, G.R. No. 193138, August 20, 2018, citing Aguila, Jr. v. Court of Appeals, 377 Phil. 257 (1999).

⁴⁴Aniceto G. Saludo, Jr. v. Philippine National Bank, supra.

⁴⁵ 745 Phil. 172, 180 (2014).

⁴⁶Rollo, pp. 50-72.

⁴⁷ Id. at 242-243.

⁴⁸ Id. at 231-241.

⁴⁹Zaragoza v. Tan, G.R. No. 225544, December 4, 2017, 847 SCRA 437, 449.

⁵⁰Lanuza, Jr., et al. v. BF Corporation, et al., 744 Phil. 612, 635 (2014).

⁵¹ Id.

⁵² Id.

⁵³University of Mindanao, Inc. v. Bangko Sentral Ng Pilipinas, et al., 776 Phil. 401, 439 (2016).

⁵⁴Veterans Federation of the Philippines v. Montenejo, G.R. No. 184819, November 29, 2017, 847 SCRA 1, 26-27.

⁵⁵California Manufacturing Company, Inc. v. Advanced Technology System, Inc. 809 Phil 425, 432 (2017).

⁵⁶Kukan International Corporation v. Hon. Amor Reyes, in her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and Romeo M. Morales, doing business under the name and style "RM Morales Trophies and Plaques," 646 Phil. 216, 237 (2010).

⁵⁷Heirs of Fe Tan Uy v. International Exchange Bank, 703 Phil. 477, 485-486 (2013).

⁵⁸Westmont Bank (now United Overseas Bank Phils.) v. Funai Phils. Corp., et al., 763 Phil. 245, 261 (2015).

⁵⁹Guillermo, et al. v. Philippine Information Agency, et al., 807 Phil. 555, 557 (2017).

⁶⁰Guillermo, et al. v. Philippine Information Agency, et al., supra.

⁶¹ Id. at 566-567, citing Zuniga-Santos v. Santos-Gran, et al., 745 Phil. 171, 180 (2014).

⁶²Rollo, pp. 50-72.

⁶³Pilipinas Shell Foundation, Inc., et al. v. Fredeluces, et al., 785 Phil. 411, 437 (2016).

⁶⁴ Westmont Bank (now United Overseas Bank Phils.) v. Funai Phils. Corp., et al., supra note 58, at 261.

⁶⁵Rollo, p. 239. Emphasis supplied.

⁶⁶ Id. at 50-72.

⁶⁷Lanuza, Jr., et al. v. BF Corporation, et al., supra note 50, at 641.