4. [G.R. No. 141994.
January 17, 2005] out that the names of the buildings there are foreign soundings.
FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO
MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE
OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
The Case
This petition for review[1] assails the 4 January 1999 Decision[2] and
26 January 2000 Resolution of the Court of Appeals in CA-G.R. CV
No. 40151. The Court of Appeals affirmed with modification the 14
December 1992 Decision[3] of the Regional Trial Court of Legazpi
City, Branch 10, in Civil Case No. 8236. The Court of Appeals held
Filipinas Broadcasting Network, Inc. and its broadcasters
Hermogenes Alegre and Carmelo Rima liable for libel and ordered
them to solidarily pay Ago Medical and Educational Center-Bicol
Christian College of Medicine moral damages, attorneys fees and
costs of suit.
The Antecedents
Expos is a radio documentary[4] program hosted by Carmelo Mel
Rima (Rima) and Hermogenes Jun Alegre (Alegre). [5] Expos is aired
every morning over DZRC-AM which is owned by Filipinas
Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi City,
the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima and Alegre
exposed various alleged complaints from students, teachers and
parents against Ago Medical and Educational Center-Bicol Christian
College of Medicine (AMEC) and its administrators. Claiming that
the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as
Dean of AMECs College of Medicine, filed a complaint for
damages[7] against FBNI, Rima and Alegre on 27 February 1990.
Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking
medical course at AMEC-BCCM, advise them to pass all subjects
because if they fail in any subject they will repeat their year level,
taking up all subjects including those they have passed already.
Several students had approached me stating that they had
consulted with the DECS which told them that there is no such
regulation. If [there] is no such regulation why is AMEC doing the
same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained
that the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if
the subject does not have an instructor - such greed for money on
the part of AMECs administration. Take the subject Anatomy:
students would pay for the subject upon enrolment because it is
offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be
moved to a later date because the school is still searching for the
appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational
Center has survived and has been surviving for the past few years
since its inception because of funds support from foreign
foundations. If you will take a look at the AMEC premises youll find
There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall?
That is a very concrete and undeniable evidence that the support
of foreign foundations for AMEC is substantial, isnt it? With the
report which is the basis of the expose in DZRC today, it would be
very easy for detractors and enemies of the Ago family to stop the
flow of support of foreign foundations who assist the medical
school on the basis of the latters purpose. But if the purpose of
the institution (AMEC) is to deceive students at cross purpose with
its reason for being it is possible for these foreign foundations to
lift or suspend their donations temporarily. [8]
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC
Science High School and the AMEC-Institute of Mass
Communication in their effort to minimize expenses in terms of
salary are absorbing or continues to accept rejects. For example
how many teachers in AMEC are former teachers of Aquinas
University but were removed because of immorality? Does it
mean that the present administration of AMEC have the total
definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping
ground, garbage, not merely of moral and physical misfits.
Probably they only qualify in terms of intellect. The Dean of
Student Affairs of AMEC is Justita Lola, as the family name implies.
She is too old to work, being an old woman. Is the AMEC
administration exploiting the very [e]nterprising or compromising
and undemanding Lola? Could it be that AMEC is just patiently
making use of Dean Justita Lola were if she is very old. As in
atmospheric situation zero visibility the plane cannot land,
meaning she is very old, low pay follows. By the way, Dean Justita
Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but
AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground
for moral and physically misfit people. What does this mean?
Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The
truth is this, that your are no longer fit to teach. You are too old.
As an aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and
chairman of the scholarship committee at that. The reason is
practical cost saving in salaries, because an old person is not
fastidious, so long as she has money to buy the ingredient of
beetle juice. The elderly can get by thats why she (Lola) was
taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It
is likely that the students would be influenced by evil. When they
become members of society outside of campus will be liabilities
rather than assets. What do you expect from a doctor who while
studying at AMEC is so much burdened with unreasonable
imposition? What do you expect from a student who aside from
peculiar problems because not all students are rich in their
struggle to improve their social status are even more burdened
with false regulations. xxx[9] (Emphasis supplied)
1
The complaint further alleged that AMEC is a reputable learning
institution. With the supposed exposs, FBNI, Rima and Alegre
transmitted malicious imputations, and as such, destroyed plaintiffs
(AMEC and Ago) reputation. AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the
selection and supervision of its employees, particularly Rima and
Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil
Lozares, filed an Answer[10] alleging that the broadcasts against
AMEC were fair and true. FBNI, Rima and Alegre claimed that they
were plainly impelled by a sense of public duty to report the
goings-on in AMEC, [which is] an institution imbued with public
interest.
Thereafter, trial ensued. During the presentation of the evidence
for the defense, Atty. Edmundo Cea, collaborating counsel of Atty.
Lozares, filed a Motion to Dismiss[11] on FBNIs behalf. The trial court
denied the motion to dismiss. Consequently, FBNI filed a separate
Answer claiming that it exercised due diligence in the selection and
supervision of Rima and Alegre. FBNI claimed that before hiring a
broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training
program after passing the interview. FBNI likewise claimed that it
always reminds its broadcasters to observe truth, fairness and
objectivity in their broadcasts and to refrain from using libelous and
indecent language. Moreover, FBNI requires all broadcasters to
pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP)
accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision [12] finding
FBNI and Alegre liable for libel except Rima. The trial court held
that the broadcasts are libelous per se. The trial court rejected the
broadcasters claim that their utterances were the result of straight
reporting because it had no factual basis. The broadcasters did not
even verify their reports before airing them to show good faith. In
holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas
only participation was when he agreed with Alegres expos. The trial
court found Rimas statement within the bounds of freedom of
speech, expression, and of the press. The dispositive portion of the
decision reads:
WHEREFORE, premises considered, this court finds for the
plaintiff. Considering the degree of damages caused by the
controversial utterances, which are not found by this court to be
really very serious and damaging, and there being no showing that
indeed the enrollment of plaintiff school dropped, defendants
Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network
(owner of the radio station DZRC), are hereby jointly and severally
ordered to pay plaintiff Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM) the amount
of P300,000.00 moral damages, plus P30,000.00 reimbursement of
attorneys fees, and to pay the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and
AMEC and Ago, on the other, appealed the decision to the Court of
Appeals. The Court of Appeals affirmed the trial courts judgment
with modification. The appellate court made Rima solidarily liable
with FBNI and Alegre. The appellate court denied Agos claim for
damages and attorneys fees because the broadcasts were directed
against AMEC, and not against her. The dispositive portion of the
Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED,
subject to the modification that broadcaster Mel Rima
is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for reconsideration which the
Court of Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the
questioned broadcasts are libelous per se and that FBNI, Rima
and Alegre failed to overcome the legal presumption of malice.
The Court of Appeals found Rima and Alegres claim that they
were actuated by their moral and social duty to inform the public
of the students gripes as insufficient to justify the utterance of the
defamatory remarks.
Finding no factual basis for the imputations against AMECs
administrators, the Court of Appeals ruled that the broadcasts
were made with reckless disregard as to whether they were true
or false. The appellate court pointed out that FBNI, Rima and
Alegre failed to present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to the Court
of Appeals, these circumstances cast doubt on the veracity of the
broadcasters claim that they were impelled by their moral and
social duty to inform the public about the students gripes.
The Court of Appeals found Rima also liable for libel since he
remarked that (1) AMEC-BCCM is a dumping ground for morally
and physically misfit teachers; (2) AMEC obtained the services of
Dean Justita Lola to minimize expenses on its employees salaries;
and (3) AMEC burdened the students with unreasonable
imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to exercise due
diligence in the selection and supervision of its employees for
allowing Rima and Alegre to make the radio broadcasts without
the proper KBP accreditation. The Court of Appeals denied Agos
claim for damages and attorneys fees because the libelous
remarks were directed against AMEC, and not against her. The
Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable
to pay AMEC moral damages, attorneys fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE
FOR PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS
OF SUIT.
The Courts Ruling
We deny the petition.
2
This is a civil action for damages as a result of the allegedly
defamatory remarks of Rima and Alegre against AMEC. [17] While
AMEC did not point out clearly the legal basis for its complaint, a
reading of the complaint reveals that AMECs cause of action is
based on Articles 30 and 33 of the Civil Code. Article
30[18] authorizes a separate civil action to recover civil liability
arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a
separate civil action for damages in cases of defamation, fraud,
and physical injuries. AMEC also invokes Article 19[20] of the Civil
Code to justify its claim for damages. AMEC cites Articles
2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable
with Rima and Alegre.
I.Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of a
vice or defect, real or imaginary, or any act or omission, condition,
status, or circumstance tending to cause the dishonor, discredit, or
contempt of a natural or juridical person, or to blacken the memory
of one who is dead.[24]
There is no question that the broadcasts were made public and
imputed to AMEC defects or circumstances tending to cause it
dishonor, discredit and contempt. Rima and Alegres remarks such
as greed for money on the part of AMECs administrators; AMEC is a
dumping ground, garbage of xxx moral and physical misfits; and
AMEC students who graduate will be liabilities rather than assets of
the society are libelous per se. Taken as a whole, the broadcasts
suggest that AMEC is a money-making institution where physically
and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious.
FBNI claims that Rima and Alegre were plainly impelled by their
civic duty to air the students gripes. FBNI alleges that there is no
evidence that ill will or spite motivated Rima and Alegre in making
the broadcasts. FBNI further points out that Rima and Alegre
exerted efforts to obtain AMECs side and gave Ago the opportunity
to defend AMEC and its administrators. FBNI concludes that since
there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and
Alegre failed to show adequately their good intention and justifiable
motive in airing the supposed gripes of the students. As hosts of a
documentary or public affairs program, Rima and Alegre should
have presented the public issues free from inaccurate and
misleading information.[26] Hearing the students alleged complaints
a month before the expos,[27] they had sufficient time to verify their
sources and information. However, Rima and Alegre hardly made a
thorough investigation of the students alleged gripes. Neither did
they inquire about nor confirm the purported irregularities in AMEC
from the Department of Education, Culture and Sports. Alegre
testified that he merely went to AMEC to verify his report from an
alleged AMEC official who refused to disclose any information.
Alegre simply relied on the words of the students because they
were many and not because there is proof that what they are
saying is true.[28] This plainly shows Rima and Alegres reckless
disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of
straight reporting. Significantly, some courts in the United States
apply the privilege of neutral reportage in libel cases involving
matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain
defamatory statements made against public figures is shielded
from liability, regardless of the republishers subjective awareness
of the truth or falsity of the accusation.[29] Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded
comments abound in the broadcasts. Moreover, there is no
existing controversy involving AMEC when the broadcasts were
made. The privilege of neutral reportage applies where the
defamed person is a public figure who is involved in an existing
controversy, and a party to that controversy makes the
defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not
apply to this case. Citing Borjal v. Court of Appeals,[31] FBNI
contends that the broadcasts fall within the coverage of
qualifiedly privileged communications for being commentaries on
matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed
to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court
elucidated on the doctrine of fair comment, thus:
[F]air commentaries on matters of public interest are privileged
and constitute a valid defense in an action for libel or slander. The
doctrine of fair comment means that while in general every
discreditable imputation publicly made is deemed false, because
every man is presumed innocent until his guilt is judicially proved,
and every false imputation is deemed malicious, nevertheless,
when the discreditable imputation is directed against a public
person in his public capacity, it is not necessarily actionable. In
order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a
comment based on a false supposition. If the comment is an
expression of opinion, based on established facts, then it is
immaterial that the opinion happens to be mistaken, as long as it
might reasonably be inferred from the facts.[32] (Emphasis
supplied)
True, AMEC is a private learning institution whose business of
educating students is genuinely imbued with public interest. The
welfare of the youth in general and AMECs students in particular
is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with
matters of public interest. However, unlike inBorjal, the
questioned broadcasts are not based on established facts. The
record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by
consistent reports of students and parents against plaintiff, yet,
defendants have not presented in court, nor even gave name of a
single student who made the complaint to them, much less
present written complaint or petition to that effect. To accept this
defense of defendants is too dangerous because it could easily
give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although
they could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible broadcasting which is
inimical to public interests.
Secondly, there is reason to believe that defendant radio
broadcasters, contrary to the mandates of their duties, did not
verify and analyze the truth of the reports before they aired it, in
order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not
accredited to offer Physical Therapy courses. Yet, plaintiff
produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broadcast,
3
accreditation to offer Physical Therapy course had already been
given the plaintiff, which certificate is signed by no less than the
Secretary of Education and Culture herself, Lourdes R. Quisumbing
(Exh. C-rebuttal). Defendants could have easily known this were
they careful enough to verify. And yet, defendants were very
categorical and sounded too positive when they made the
erroneous report that plaintiff had no permit to offer Physical
Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from
foreign foundations like Mcdonald Foundation prove not to be true
also. The truth is there is no Mcdonald Foundation existing.
Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first
missionary in Bicol of plaintiffs religion, as explained by Dr. Lita
Ago. Contrary to the claim of defendants over the air, not a single
centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though
denied by Dra. Ago, that when medical students fail in one subject,
they are made to repeat all the other subject[s], even those they
have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No
evidence was presented to prove the bases for these claims, at
least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits,
and immoral teachers, defendant[s] singled out Dean Justita Lola
who is said to be so old, with zero visibility already. Dean Lola
testified in court last Jan. 21, 1991, and was found to be 75 years
old. xxx Even older people prove to be effective teachers like
Supreme Court Justices who are still very much in demand as law
professors in their late years. Counsel for defendants is past 75 but
is found by this court to be still very sharp and effective. So is
plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit
yet, nor mentally infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather
than assets of our society is a mere conclusion. Being from the
place himself, this court is aware that majority of the medical
graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.[33]
Had the comments been an expression of opinion based on
established facts, it is immaterial that the opinion happens to be
mistaken, as long as it might reasonably be inferred from the facts.
[34]
However, the comments of Rima and Alegre were not backed up
by facts. Therefore, the broadcasts are not privileged and remain
libelous per se.
The broadcasts also violate the Radio Code [35] of the Kapisanan ng
mga Brodkaster sa Pilipinas, Ink. (Radio Code). Item I(B) of the
Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free
from personal bias, prejudice and inaccurate and misleading
information. x x x Furthermore, the station shall strive to present
balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision
of public affairs, public issues and commentary programs so that
they conform to the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator,
host and announcer to protect public interest, general welfare and
good order in the presentation of public affairs and public issues.
[36]
(Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio
Code, which lays down the code of ethical conduct governing
practitioners in the radio broadcast industry. The Radio Code is a
voluntary code of conduct imposed by the radio broadcast
industry on its own members. The Radio Code is a public warranty
by the radio broadcast industry that radio broadcast practitioners
are subject to a code by which their conduct are measured for
lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast
practitioners live up to the code of conduct of their profession,
just like other professionals. A professional code of conduct
provides the standards for determining whether a person has
acted justly, honestly and with good faith in the exercise of his
rights and performance of his duties as required by Article 19 [37] of
the Civil Code. A professional code of conduct also provides the
standards for determining whether a person who willfully causes
loss or injury to another has acted in a manner contrary to morals
or good customs under Article 21[38] of the Civil Code.
II. Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages
because it is a corporation.[39]
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock.[40] The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of
moral damages. However, the Courts statement inMambulao that
a corporation may have a good reputation which, if besmirched,
may also be a ground for the award of moral damages is an obiter
dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7
of Article 2219[43] of the Civil Code. This provision expressly
authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for
moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies
damages.[45] In such a case, evidence of an honest mistake or the
want of character or reputation of the party libeled goes only in
mitigation of damages.[46] Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition
precedent to the recovery of some damages.[47] In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral
damages.
However, we find the award of P300,000 moral damages
unreasonable. The record shows that even though the broadcasts
were libelous per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the
award of moral damages from P300,000 to P150,000.
4
III. Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages,
there is no basis for the award of attorneys fees. FBNI adds that the
instant case does not fall under the enumeration in Article
2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to
justify satisfactorily its claim for attorneys fees. AMEC did not
adduce evidence to warrant the award of attorneys fees. Moreover,
both the trial and appellate courts failed to explicitly state in their
respective decisions the rationale for the award of attorneys fees.
[49]
In Inter-Asia Investment Industries, Inc. v. Court of Appeals,
[50]
we held that:
[I]t is an accepted doctrine that the award thereof as an item of
damages is the exception rather than the rule, and counsels fees
are not to be awarded every time a party wins a suit. The power of
the court to award attorneys fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without
which the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only
in the decretal portion thereof, the legal reason for the award of
attorneys fees.[51](Emphasis supplied)
While it mentioned about the award of attorneys fees by stating
that it lies within the discretion of the court and depends upon the
circumstances of each case, the Court of Appeals failed to point out
any circumstance to justify the award.
IV. Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre
for the payment of damages and attorneys fees because it
exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a very
regimented process before they are allowed to go on air. Those who
apply for broadcaster are subjected to interviews, examinations
and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are
irrelevant to his competence as a broadcaster. FBNI points out that
the minor deficiencies in the KBP accreditation of Rima and Alegre
do not in any way prove that FBNI did not exercise the diligence of
a good father of a family in selecting and supervising them. Rimas
accreditation lapsed due to his non-payment of the KBP annual fees
while Alegres accreditation card was delayed allegedly for reasons
attributable to the KBP Manila Office. FBNI claims that membership
in the KBP is merely voluntary and not required by any law or
government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly
and severally liable for the tort which they commit. [52] Joint tort
feasors are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done
for their benefit.[53] Thus, AMEC correctly anchored its cause of
action against FBNI on Articles 2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is
solidarily liable to pay for damages arising from the libelous
broadcasts. As stated by the Court of Appeals, recovery for
defamatory statements published by radio or television may be
had from the owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the making
of the defamatory statements.[54] An employer and employee are
solidarily liable for a defamatory statement by the employee
within the course and scope of his or her employment, at least
when the employer authorizes or ratifies the defamation.[55] In this
case, Rima and Alegre were clearly performing their official duties
as hosts of FBNIs radio program Expos when they aired the
broadcasts. FBNI neither alleged nor proved that Rima and Alegre
went beyond the scope of their work at that time. There was
likewise no showing that FBNI did not authorize and ratify the
defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI
exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI merely showed
that it exercised diligence in the selection of its broadcasters
without introducing any evidence to prove that it observed the
same diligence in the supervision of Rima and Alegre. FBNI did not
show how it exercised diligence in supervising its broadcasters.
FBNIs alleged constant reminder to its broadcasters to observe
truth, fairness and objectivity and to refrain from using libelous
and indecent language is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of the
broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the
broadcasters performance are but a few of the many ways of
showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in the selection of
Rima and Alegre as broadcasters, bearing in mind their
qualifications. However, no clear and convincing evidence shows
that Rima and Alegre underwent FBNIs regimented process of
application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation,[56] which is one of FBNIs
requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the
broadcasters strong commitment to observe the broadcast
industrys rules and regulations. Clearly, these circumstances
show FBNIs lack of diligence in selecting and supervising Rima
and Alegre. Hence, FBNI is solidarily liable to pay damages
together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the
Decision of 4 January 1999 and Resolution of 26 January 2000 of
the Court of Appeals in CA-G.R. CV No. 40151 with the
MODIFICATION that the award of moral damages is reduced
from P300,000 to P150,000 and the award of attorneys fees is
deleted. Costs against petitioner.
SO ORDERED.
5. [G.R. No. 119002. October 19, 2000]
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN,
PHILIPPINE FOOTBALL FEDERATION, respondents.
On June 30 1989, petitioner International Express Travel and Tour
Services, Inc., through its managing director, wrote a letter to the
Philippine Football Federation (Federation), through its president
private respondent Henri Kahn, wherein the former offered its
services as a travel agency to the latter. [1] The offer was accepted.
5
Petitioner secured the airline tickets for the trips of the athletes and
officials of the Federation to the South East Asian Games in Kuala
Lumpur as well as various other trips to the People's Republic of
China and Brisbane. The total cost of the tickets amounted to
P449,654.83. For the tickets received, the Federation made two
partial payments, both in September of 1989, in the total amount
of P176,467.50.[2]
On 4 October 1989, petitioner wrote the Federation, through the
private respondent a demand letter requesting for the amount of
P265,894.33.[3] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00. [4]
On 27 December 1989, Henri Kahn issued a personal check in the
amount of P50,000 as partial payment for the outstanding balance
of the Federation.[5] Thereafter, no further payments were made
despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial
Court of Manila. Petitioner sued Henri Kahn in his personal capacity
and as President of the Federation and impleaded the Federation as
an alternative defendant. Petitioner sought to hold Henri Kahn
liable for the unpaid balance for the tickets purchased by the
Federation on the ground that Henri Kahn allegedly guaranteed the
said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not denying
the allegation that the Federation owed the amount P207,524.20,
representing the unpaid balance for the plane tickets, he averred
that the petitioner has no cause of action against him either in his
personal capacity or in his official capacity as president of the
Federation. He maintained that he did not guarantee payment but
merely acted as an agent of the Federation which has a separate
and distinct juridical personality. [7]
On the other hand, the Federation failed to file its answer, hence,
was declared in default by the trial court.[8]
In due course, the trial court rendered judgment and ruled in favor
of the petitioner and declared Henri Kahn personally liable for the
unpaid obligation of the Federation. In arriving at the said ruling,
the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions
had it been duly established that defendant Federation is a
corporation. The trouble, however, is that neither the plaintiff nor
the defendant Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation. In paragraph 2 of
its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports
association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation
has no power to enter into, or to ratify, a contract. The contract
entered into by its officers or agents on behalf of such association
is not binding on, or enforceable against it. The officers or agents
are themselves personally liable.
x x x[9]
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri
Kahn to pay the plaintiff the principal sum of P207,524.20, plus
the interest thereon at the legal rate computed from July 5, 1990,
the date the complaint was filed, until the principal obligation is
fully liquidated; and another sum of P15,000.00 for attorney's
fees.
The complaint of the plaintiff against the Philippine Football
Federation and the counterclaims of the defendant Henri Kahn are
hereby dismissed.
With the costs against defendant Henri Kahn. [10]
Only Henri Kahn elevated the above decision to the Court of
Appeals. On 21 December 1994, the respondent court rendered a
decision reversing the trial court, the decretal portion of said
decision reads:
WHEREFORE, premises considered, the judgment appealed from
is hereby REVERSED and SET ASIDE and another one is rendered
dismissing the complaint against defendant Henri S. Kahn. [11]
In finding for Henri Kahn, the Court of Appeals recognized the
juridical existence of the Federation. It rationalized that since
petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the
same as said entity has a separate and distinct personality from
its officers.
Petitioner filed a motion for reconsideration and as an alternative
prayer pleaded that the Federation be held liable for the unpaid
obligation. The same was denied by the appellate court in its
resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the
Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed
the complaint against the Philippine Football Federation, and the
plaintiff did not appeal from this decision. Hence, the Philippine
Football Federation is not a party to this appeal and consequently,
no judgment may be pronounced by this Court against the PFF
without violating the due process clause, let alone the fact that
the judgment dismissing the complaint against it, had already
become final by virtue of the plaintiff's failure to appeal
therefrom. The alternative prayer is therefore similarly DENIED.[12]
Petitioner now seeks recourse to this Court and alleges that the
respondent court committed the following assigned errors: [13]
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL
FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING
THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO
REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING
PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE
OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED
WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF
OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER
OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS
NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS
ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE
PFF IS SOLELY LIABLE FOR THE OBLIGATION.
6
The resolution of the case at bar hinges on the determination of the
existence of the Philippine Football Federation as a juridical
person. In the assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA cited
Republic Act 3135, otherwise known as the Revised Charter of the
Philippine Amateur Athletic Federation, and Presidential Decree No.
604 as the laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and
P.D. No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and functions
granted to these associations. Section 14 of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The
National Sports' Association shall have the following functions,
powers and duties:
1. To adopt a constitution and by-laws for their internal organization
and government;
2. To raise funds by donations, benefits, and other means for their
purposes.
3. To purchase, sell, lease or otherwise encumber property both
real and personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after
due consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this
Act.
Section 8 of P.D. 604, grants similar functions to these sports
associations:
SEC. 8. Functions, Powers, and Duties of National Sports
Association. - The National sports associations shall have the
following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization
and government which shall be submitted to the Department and
any amendment thereto shall take effect upon approval by the
Department:Provided, however, That no team, school, club,
organization, or entity shall be admitted as a voting member of an
association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their
purpose subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real
and personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other
than the Olympic and Asian Games, for the promotion of their
sport;
5. Affiliate with international or regional sports associations after
due consultation with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports
associations clearly indicate that these entities may acquire a
juridical personality. The power to purchase, sell, lease and
encumber property are acts which may only be done by persons,
whether natural or artificial, with juridical capacity. However, while
we agree with the appellate court that national sports
associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire
juridical personality, the State must give its consent either in the
form of a special law or a general enabling act. We cannot agree
with the view of the appellate court and the private respondent
that the Philippine Football Federation came into existence upon
the passage of these laws. Nowhere can it be found in R.A. 3135
or P.D. 604 any provision creating the Philippine Football
Federation. These laws merely recognized the existence of
national sports associations and provided the manner by which
these entities may acquire juridical personality. Section 11 of R.A.
3135 provides:
SEC. 11. National Sports' Association; organization and
recognition. - A National Association shall be organized for each
individual sports in the Philippines in the manner hereinafter
provided to constitute the Philippine Amateur Athletic Federation.
Applications for recognition as a National Sports' Association shall
be filed with the executive committee together with, among
others, a copy of the constitution and by-laws and a list of the
members of the proposed association, and a filing fee of ten
pesos.
The Executive Committee shall give the recognition applied for if
it is satisfied that said association will promote the purposes of
this Act and particularly section three thereof. No application shall
be held pending for more than three months after the filing
thereof without any action having been taken thereon by the
executive committee. Should the application be rejected, the
reasons for such rejection shall be clearly stated in a written
communication to the applicant. Failure to specify the reasons for
the rejection shall not affect the application which shall be
considered as unacted upon: Provided, however, That until the
executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly
elected members of the present executive committee of the
Philippine Amateur Athletic Federation. The said executive
committee shall be dissolved upon the organization of the
executive committee herein provided: Provided, further, That the
functioning executive committee is charged with the responsibility
of seeing to it that the National Sports' Associations are formed
and organized within six months from and after the passage of
this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for
accreditation or recognition as a national sports association for
each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the
Constitution and By-Laws and a list of the members of the
proposed association.
The Department shall give the recognition applied for if it is
satisfied that the national sports association to be organized will
promote the objectives of this Decree and has substantially
complied with the rules and regulations of the
Department: Provided, That the Department may withdraw
7
accreditation or recognition for violation of this Decree and such
rules and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have exclusive technical
control over the development and promotion of the particular sport
for which they are organized.
Clearly the above cited provisions require that before an entity may
be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine Amateur
Athletic Federation under R.A. 3135, and the Department of Youth
and Sports Development under P.D. 604. This fact of recognition,
however, Henri Kahn failed to substantiate. In attempting to prove
the juridical existence of the Federation, Henri Kahn attached to his
motion for reconsideration before the trial court a copy of the
constitution and by-laws of the Philippine Football
Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited by either
the Philippine Amateur Athletic Federation or the Department of
Youth and Sports Development. Accordingly, we rule that the
Philippine Football Federation is not a national sports association
within the purview of the aforementioned laws and does not have
corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn
should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled
principal in corporation law that any person acting or purporting to
act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract
entered into or for other acts performed as such agent. [14] As
president of the Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the
appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt
with the Federation in such a manner as to recognize and in effect
admit its existence. [15] The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The
application of the doctrine applies to a third party only when he
tries to escape liability on a contract from which he has benefited
on the irrelevant ground of defective incorporation. [16] In the case at
bar, the petitioner is not trying to escape liability from the contract
but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET
ASIDE. The decision of the Regional Trial Court of Manila, Branch
35, in Civil Case No. 90-53595 is hereby REINSTATED.
6. G.R. No. 167530 March 13, 2013
PHILIPPINE NATIONAL BANK, Petitioner, vs. HYDRO RESOURCES
CONTRACTORS CORPORATION, Respondent.
x-----------------------x
G.R. No. 167561
ASSET PRIVATIZATION TRUST, Petitioner, vs. HYDRO RESOURCES
CONTRACTORS CORPORATION, Respondent.
x-----------------------x
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs. HYDRO
RESOURCES CONTRACTORS CORPORATION, Respondent.
These petitions for review on certiorari1 assail the Decision 2 dated
November 30, 2004 and the Resolution3 dated March 22, 2005 of
the Court of Appeals in CA-G.R. CV No. 57553. The said Decision
affirmed the Decision4dated November 6, 1995 of the Regional
Trial Court (RTC) of Makati City, Branch 62, granting a judgment
award of P8,370,934.74, plus legal interest, in favor of respondent
Hydro Resources Contractors Corporation (HRCC) with the
modification that the Privatization and Management Office (PMO),
successor of petitioner Asset Privatization Trust (APT), 5 has been
held solidarily liable with Nonoc Mining and Industrial Corporation
(NMIC)6and petitioners Philippine National Bank (PNB) and
Development Bank of the Philippines (DBP), while the Resolution
denied reconsideration separately prayed for by PNB, DBP, and
APT.
Sometime in 1984, petitioners DBP and PNB foreclosed on certain
mortgages made on the properties of Marinduque Mining and
Industrial Corporation (MMIC). As a result of the foreclosure, DBP
and PNB acquired substantially all the assets of MMIC and
resumed the business operations of the defunct MMIC by
organizing NMIC.7 DBP and PNB owned 57% and 43% of the
shares of NMIC, respectively, except for five qualifying shares.8 As
of September 1984, the members of the Board of Directors of
NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta,
Geraldo Agulto, and Faustino Agbada, were either from DBP or
PNB.9
Subsequently, NMIC engaged the services of Hercon, Inc., for
NMICs Mine Stripping and Road Construction Program in 1985 for
a total contract price of P35,770,120. After computing the
payments already made by NMIC under the program and crediting
the NMICs receivables from
Hercon, Inc., the latter found that NMIC still has an unpaid balance
of P8,370,934.74.10 Hercon, Inc. made several demands on NMIC,
including a letter of final demand dated August 12, 1986, and
when these were not heeded, a complaint for sum of money was
filed in the RTC of Makati, Branch 136 seeking to hold petitioners
NMIC, DBP, and PNB solidarily liable for the amount owing Hercon,
Inc.11 The case was docketed as Civil Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was
acquired by HRCC in a merger. This prompted the amendment of
the complaint to substitute HRCC for Hercon, Inc.12
Thereafter, on December 8, 1986, then President Corazon C.
Aquino issued Proclamation No. 50 creating the APT for the
expeditious disposition and privatization of certain government
corporations and/or the assets thereof. Pursuant to the said
Proclamation, on February 27, 1987, DBP and PNB executed their
respective deeds of transfer in favor of the National Government
assigning, transferring and conveying certain assets and
liabilities, including their respective stakes in NMIC.13 In turn and
on even date, the National Government transferred the said
assets and liabilities to the APT as trustee under a Trust
Agreement.14 Thus, the complaint was amended for the second
time to implead and include the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of action. It
also asserted that its contract with HRCC was entered into by its
then President without any authority. Moreover, the said contract
allegedly failed to comply with laws, rules and regulations
concerning government contracts. NMIC further claimed that the
contract amount was manifestly excessive and grossly
8
disadvantageous to the government. NMIC made counterclaims for
the amounts already paid to Hercon, Inc. and attorneys fees, as
well as payment for equipment rental for four trucks, replacement
of parts and other services, and damage to some of NMICs
properties.16
For its part, DBPs answer17 raised the defense that HRCC had no
cause of action against it because DBP was not privy to HRCCs
contract with NMIC. Moreover, NMICs juridical personality is
separate from that of DBP. DBP further interposed a counterclaim
for attorneys fees.18
PNBs answer19 also invoked lack of cause of action against it. It
also raised estoppel on HRCCs part and laches as defenses,
claiming that the inclusion of PNB in the complaint was the first
time a demand for payment was made on it by HRCC. PNB also
invoked the separate juridical personality of NMIC and made
counterclaims for moral damages and attorneys fees. 20
APT set up the following defenses in its answer 21: lack of cause of
action against it, lack of privity between Hercon, Inc. and APT, and
the National Governments preferred lien over the assets of NMIC. 22
After trial, the RTC of Makati rendered a Decision dated November
6, 1995 in favor of HRCC. It pierced the corporate veil of NMIC and
held DBP and PNB solidarily liable with NMIC:
On the issue of whether or not there is sufficient ground to pierce
the veil of corporate fiction, this Court likewise finds for the
plaintiff.
From the documentary evidence adduced by the plaintiff, some of
which were even adopted by defendants and DBP and PNB as their
own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A", "I-5-
B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been
established that except for five (5) qualifying shares, NMIC is
owned by defendants DBP and PNB, with the former owning 57%
thereof, and the latter 43%. As of September 24, 1984, all the
members of NMICs Board of Directors, namely, Messrs. Jose
Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and
Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C",
"I-5-D").
The business of NMIC was then also being conducted and controlled
by both DBP and PNB. In fact, it was Rolando M. Zosa, then
Governor of DBP, who was signing and entering into contracts with
third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears that the
business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect
the rights of third persons, disregard legal fiction that two (2)
corporations are distinct entities, and treat them as identical." (Phil.
Veterans Investment Development Corp. vs. CA, 181 SCRA 669).
From all indications, it appears that NMIC is a mere adjunct,
business conduit or alter ego of both DBP and PNB. Thus, the DBP
and PNB are jointly and severally liable with NMIC for the latters
unpaid obligations to plaintiff.23
Having found DBP and PNB solidarily liable with NMIC, the
dispositive portion of the Decision of the trial court reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered
in favor of the plaintiff HYDRO RESOURCES CONTRACTORS
CORPORATION and against the defendants NONOC
MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF
THE PHILIPPINES and PHILIPPINE NATIONAL BANK, ordering the
aforenamed defendants, to pay the plaintiff jointly and severally,
the sum ofP8,370,934.74 plus legal interest thereon from date of
demand, and attorneys fees equivalent to 25% of the judgment
award.
The complaint against APT is hereby dismissed. However, APT, as
trustee of NONOC MINING AND INDUSTRIAL CORPORATION is
directed to ensure compliance with this Decision. 24
DBP and PNB filed their respective appeals in the Court of
Appeals. Both insisted that it was wrong for the RTC to pierce the
veil of NMICs corporate personality and hold DBP and PNB
solidarily liable with NMIC.25
The Court of Appeals rendered the Decision dated November 30,
2004, affirmed the piercing of the veil of the corporate personality
of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In
particular, the Court of Appeals made the following findings:
In the case before Us, it is indubitable that [NMIC] was owned by
appellants DBP and PNB to the extent of 57% and 43%
respectively; that said two (2) appellants are the only
stockholders, with the qualifying stockholders of five (5)
consisting of its own officers and included in its charter merely to
comply with the requirement of the law as to number of
incorporators; and that the directorates of DBP, PNB and [NMIC]
are interlocked.
xxxx
We find it therefore correct for the lower court to have ruled that:
"From all indications, it appears that NMIC is a mere adjunct,
business conduit or alter ego of both DBP and PNB. Thus, the DBP
and PNB are jointly and severally liable with NMIC for the latters
unpaid obligation to plaintiff."26(Citation omitted.)
The Court of Appeals then concluded that, "in keeping with the
concept of justice and fair play," the corporate veil of NMIC should
be pierced, ratiocinating:
For to treat NMIC as a separate legal entity from DBP and PNB for
the purpose of securing beneficial contracts, and then using such
separate entity to evade the payment of a just debt, would be the
height of injustice and iniquity. Surely that could not have been
the intendment of the law with respect to corporations. x x x. 27
The dispositive portion of the Decision of the Court of Appeals
reads:
WHEREFORE, premises considered, the Decision appealed from is
hereby MODIFIED. The judgment in favor of appellee Hydro
Resources Contractors Corporation in the amount
of P8,370,934.74 with legal interest from date of demand is
hereby AFFIRMED, but the dismissal of the case as against Assets
Privatization Trust is REVERSED, and its successor the
Privatization and Management Office is INCLUDED as one of those
jointly and severally liable for such indebtedness. The award of
attorneys fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28
The respective motions for reconsideration of DBP, PNB, and APT
were denied.29
9
Hence, these consolidated petitions.30
All three petitioners assert that NMIC is a corporate entity with a
juridical personality separate and distinct from both PNB and DBP.
They insist that the majority ownership by DBP and PNB of NMIC is
not a sufficient ground for disregarding the separate corporate
personality of NMIC because NMIC was not a mere adjunct,
business conduit or alter ego of DBP and PNB. According to them,
the application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the
ownership and control of the shareholdings of NMIC by DBP and
PNB were used to commit fraud, illegality or injustice. In the
absence of evidence that the stock control by DBP and PNB over
NMIC was used to commit some fraud or a wrong and that said
control was the proximate cause of the injury sustained by HRCC,
resort to the doctrine of "piercing the veil of corporate entity" is
misplaced.31
DBP and PNB further argue that, assuming they may be held
solidarily liable with NMIC to pay NMICs exclusive and separate
corporate indebtedness to HRCC, such liability of the two banks
was transferred to and assumed by the National Government
through the APT, now the PMO, under the respective deeds of
transfer both dated February 27, 1997 executed by DBP and PNB
pursuant to Proclamation No. 50 dated December 8, 1986 and
Administrative Order No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an unqualified
assumption by the National Government of all liabilities incurred by
NMIC, the National Government through the APT could not be held
liable for NMICs contractual liability. The APT asserts that HRCC
had not sufficiently shown that the APT is the successor-in-interest
of all the liabilities of NMIC, or of DBP and PNB as transferors, and
that the adjudged liability is included among the liabilities assigned
and transferred by DBP and PNB in favor of the National
Government.33
HRCC counters that both the RTC and the CA correctly applied the
doctrine of "piercing the veil of corporate fiction." It claims that
NMIC was the alter ego of DBP and PNB which owned, conducted
and controlled the business of NMIC as shown by the following
circumstances: NMIC was owned by DBP and PNB, the officers of
DBP and PNB were also the officers of NMIC, and DBP and PNB
financed the operations of NMIC. HRCC further argues that a parent
corporation may be held liable for the contracts or obligations of its
subsidiary corporation where the latter is a mere agency,
instrumentality or adjunct of the parent corporation. 34
Moreover, HRCC asserts that the APT was properly held solidarily
liable with DBP, PNB, and NMIC because the APT assumed the
obligations of DBP and PNB as the successor-in-interest of the said
banks with respect to the assets and liabilities of NMIC.35 As trustee
of the Republic of the Philippines, the APT also assumed the
responsibility of the Republic pursuant to the following provision of
Section 2.02 of the respective deeds of transfer executed by DBP
and PNB in favor of the Republic:
SECTION 2. TRANSFER OF BANKS LIABILITIES
xxxx
2.02 With respect to the Banks liabilities which are contingent and
those liabilities where the Banks creditors consent to the transfer
thereof is not obtained, said liabilities shall remain in the books of
the BANK with the GOVERNMENT funding the payment thereof. 36
After a careful review of the case, this Court finds the petitions
impressed with merit.
A corporation is an artificial entity created by operation of law. It
possesses the right of succession and such powers, attributes,
and properties expressly authorized by law or incident to its
existence.37 It has a personality separate and distinct from that of
its stockholders and from that of other corporations to which it
may be connected.38 As a consequence of its status as a distinct
legal entity and as a result of a conscious policy decision to
promote capital formation,39 a corporation incurs its own liabilities
and is legally responsible for payment of its obligations.40 In other
words, by virtue of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt or credit
of the stockholder.41 This protection from liability for shareholders
is the principle of limited liability.42
Equally well-settled is the principle that the corporate mask may
be removed or the corporate veil pierced when the corporation is
just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third
persons.43
However, the rule is that a court should be careful in assessing
the milieu where the doctrine of the corporate veil may be
applied. Otherwise an injustice, although unintended, may result
from its erroneous application.44 Thus, cutting through the
corporate cover requires an approach characterized by due care
and caution:
Hence, any application of the doctrine of piercing the corporate
veil should be done with caution. A court should be mindful of the
milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its
rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. x x x.45 (Emphases supplied;
citations omitted.)
Sarona v. National Labor Relations Commission46 has defined the
scope of application of the doctrine of piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) 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. (Citation omitted.)
Here, HRCC has alleged from the inception of this case that DBP
and PNB (and the APT as assignee of DBP and PNB) should be
held solidarily liable for using NMIC as alter ego.47 The RTC
sustained the allegation of HRCC and pierced the corporate veil of
NMIC pursuant to the alter ego theory when it concluded that
NMIC "is a mere adjunct, business conduit or alter ego of both
DBP and PNB."48 The Court of Appeals upheld such conclusion of
the trial court.49 In other words, both the trial and appellate courts
relied on the alter ego theory when they disregarded the separate
corporate personality of NMIC.
10
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of. 50 (Emphases
omitted.)
The first prong is the "instrumentality" or "control" test. This test
requires that the subsidiary be completely under the control and
domination of the parent.51 It examines the parent corporations
relationship with the subsidiary. 52It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct
corporate entity will be ignored.53 It seeks to establish whether the
subsidiary corporation has no autonomy and the parent
corporation, though acting through the subsidiary in form and
appearance, "is operating the business directly for itself." 54
The second prong is the "fraud" test. This test requires that the
parent corporations conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful.55 It examines the relationship of the
plaintiff to the corporation.56 It recognizes that piercing is
appropriate only if the parent corporation uses the subsidiary in a
way that harms the plaintiff creditor. 57 As such, it requires a
showing of "an element of injustice or fundamental unfairness." 58
The third prong is the "harm" test. This test requires the plaintiff to
show that the defendants control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered. 59 A
causal connection between the fraudulent conduct committed
through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff should be
established. The plaintiff must prove that, unless the corporate veil
is pierced, it will have been treated unjustly by the defendants
exercise of control and improper use of the corporate form and,
thereby, suffer damages.60
To summarize, piercing the corporate veil based on the alter ego
theory requires the concurrence of three elements: control of the
corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents
piercing the corporate veil.61
This Court finds that none of the tests has been satisfactorily met in
this case.
In applying the alter ego doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the
individual defendants relationship to that operation. 62 With respect
to the control element, it refers not to paper or formal control by
majority or even complete stock control but actual control which
amounts to "such domination of finances, policies and practices
that the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for its
principal."63 In addition, the control must be shown to have been
exercised at the time the acts complained of took place. 64
Both the RTC and the Court of Appeals applied the alter ego
theory and penetrated the corporate cover of NMIC based on two
factors: (1) the ownership by DBP and PNB of effectively all the
stocks of NMIC, and (2) the alleged interlocking directorates of
DBP, PNB and NMIC.65 Unfortunately, the conclusion of the trial
and appellate courts that the DBP and PNB fit the alter ego theory
with respect to NMICs transaction with HRCC on the premise of
complete stock ownership and interlocking directorates involved a
quantum leap in logic and law exposing a gap in reason and fact.
While ownership by one corporation of all or a great majority of
stocks of another corporation and their interlocking directorates
may serve as indicia of control, by themselves and without more,
however, these circumstances are insufficient to establish an alter
ego relationship or connection between DBP and PNB on the one
hand and NMIC on the other hand, that will justify the puncturing
of the latters corporate cover. This Court has declared that "mere
ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate
personality."66 This Court has likewise ruled that the "existence of
interlocking directors, corporate officers and shareholders is not
enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations." 67
True, the findings of fact of the Court of Appeals are conclusive
and cannot be reviewed on appeal to this Court, provided they are
borne out of the record or are based on substantial evidence. 68 It
is equally true that the question of whether one corporation is
merely an alter ego of another is purely one of fact. So is the
question of whether a corporation is a paper company, a sham or
subterfuge or whether the requisite quantum of evidence has
been adduced warranting the piercing of the veil of corporate
personality.69 Nevertheless, it has been held in Sarona v. National
Labor Relations Commission70 that this Court has the power to
resolve a question of fact, such as whether a corporation is a
mere alter ego of another entity or whether the corporate fiction
was invoked for fraudulent or malevolent ends, if the findings in
the assailed decision are either not supported by the evidence on
record or based on a misapprehension of facts.
In this case, nothing in the records shows that the corporate
finances, policies and practices of NMIC were dominated by DBP
and PNB in such a way that NMIC could be considered to have no
separate mind, will or existence of its own but a mere conduit for
DBP and PNB. On the contrary, the evidence establishes that
HRCC knew and acted on the knowledge that it was dealing with
NMIC, not with NMICs stockholders. The letter proposal of Hercon,
Inc., HRCCs predecessor-in-interest, regarding the contract for
NMICs mine stripping and road construction program was
addressed to and accepted by NMIC.71 The various billing reports,
progress reports, statements of accounts and communications of
Hercon, Inc./HRCC regarding NMICs mine stripping and road
construction program in 1985 concerned NMIC and NMICs
officers, without any indication of or reference to the control
exercised by DBP and/or PNB over NMICs affairs, policies and
practices.72
HRCC has presented nothing to show that DBP and PNB had a
hand in the act complained of, the alleged undue disregard by
NMIC of the demands of HRCC to satisfy the unpaid claims for
services rendered by HRCC in connection with NMICs mine
11
stripping and road construction program in 1985. On the contrary,
the overall picture painted by the evidence offered by HRCC is one
where HRCC was dealing with NMIC as a distinct juridical person
acting through its own corporate officers.73
Moreover, the finding that the respective boards of directors of
NMIC, DBP, and PNB were interlocking has no basis. HRCCs Exhibit
"I-5,"74 the initial General Information Sheet submitted by NMIC to
the Securities and Exchange Commission, relied upon by the trial
court and the Court of Appeals may have proven that DBP and PNB
owned the stocks of NMIC to the extent of 57% and 43%,
respectively. However, nothing in it supports a finding that NMIC,
DBP, and PNB had interlocking directors as it only indicates that, of
the five members of NMICs board of directors, four were nominees
of either DBP or PNB and only one was a nominee of both DBP and
PNB.75 Only two members of the board of directors of NMIC, Jose
Tengco, Jr. and Rolando Zosa, were established to be members of
the board of governors of DBP and none was proved to be a
member of the board of directors of PNB.76 No director of NMIC was
shown to be also sitting simultaneously in the board of
governors/directors of both DBP and PNB.
In reaching its conclusion of an alter ego relationship between DBP
and PNB on the one hand and NMIC on the other hand, the Court of
Appeals invoked Sibagat Timber Corporation v. Garcia, 77 which it
described as "a case under a similar factual milieu." 78 However, in
Sibagat Timber Corporation, this Court took care to enumerate the
circumstances which led to the piercing of the corporate veil of
Sibagat Timber Corporation for being the alter ego of Del Rosario &
Sons Logging Enterprises, Inc. Those circumstances were as
follows: holding office in the same building, practical identity of the
officers and directors of the two corporations and assumption of
management and control of Sibagat Timber Corporation by the
directors/officers of Del Rosario & Sons Logging Enterprises, Inc.
Here, DBP and PNB maintain an address different from that of
NMIC.79 As already discussed, there was insufficient proof of
interlocking directorates. There was not even an allegation of
similarity of corporate officers. Instead of evidence that DBP and
PNB assumed and controlled the management of NMIC, HRCCs
evidence shows that NMIC operated as a distinct entity endowed
with its own legal personality. Thus, what obtains in this case is a
factual backdrop different from, not similar to, Sibagat Timber
Corporation.
In relation to the second element, to disregard the separate
juridical personality of a corporation, the wrongdoing or unjust act
in contravention of a plaintiffs legal rights must be clearly and
convincingly established; it cannot be presumed. Without a
demonstration that any of the evils sought to be prevented by the
doctrine is present, it does not apply.80
In this case, the Court of Appeals declared:
We are not saying that PNB and DBP are guilty of fraud in forming
NMIC, nor are we implying that NMIC was used to conceal fraud. x x
x.81
Such a declaration clearly negates the possibility that DBP and PNB
exercised control over NMIC which DBP and PNB used "to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights." It is a recognition that, even assuming that
DBP and PNB exercised control over NMIC, there is no evidence that
the juridical personality of NMIC was used by DBP and PNB to
commit a fraud or to do a wrong against HRCC.
There being a total absence of evidence pointing to a fraudulent,
illegal or unfair act committed against HRCC by DBP and PNB
under the guise of NMIC, there is no basis to hold that NMIC was a
mere alter ego of DBP and PNB. As this Court ruled in Ramoso v.
Court of Appeals82:
As a general rule, a corporation will be looked upon as a legal
entity, unless and until sufficient reason to the contrary appears.
When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons. Also,
the corporate entity may be disregarded in the interest of justice
in such cases as fraud that may work inequities among members
of the corporation internally, involving no rights of the public or
third persons. In both instances, there must have been fraud, and
proof of it. For the separate juridical personality of a corporation
to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.
As regards the third element, in the absence of both control by
DBP and PNB of NMIC and fraud or fundamental unfairness
perpetuated by DBP and PNB through the corporate cover of
NMIC, no harm could be said to have been proximately caused by
DBP and PNB on HRCC for which HRCC could hold DBP and PNB
solidarily liable with NMIC.1wphi1
Considering that, under the deeds of transfer executed by DBP
and PNB, the liability of the APT as transferee of the rights, titles
and interests of DBP and PNB in NMIC will attach only if DBP and
PNB are held liable, the APT incurs no liability for the judgment
indebtedness of NMIC. Even HRCC recognizes that "as assignee of
DBP and PNB 's loan receivables," the APT simply "stepped into
the shoes of DBP and PNB with respect to the latter's rights and
obligations" in NMIC.83 As such assignee, therefore, the APT incurs
no liability with respect to NMIC other than whatever liabilities
may be imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer
executed by DBP and PNB which HRCC invokes, the APT cannot be
held liable. The contingent liability for which the National
Government, through the APT, may be held liable under the said
provision refers to contingent liabilities of DBP and PNB. Since
DBP and PNB may not be held solidarily liable with NMIC, no
contingent liability may be imputed to the APT as well. Only NMIC
as a distinct and separate legal entity is liable to pay its corporate
obligation to HRCC in the amount of P8,370,934.74, with legal
interest thereon from date of demand.
As trustee of the. assets of NMIC, however, the APT should ensure
compliance by NMIC of the judgment against it. The APT itself
acknowledges this.84
WHEREFORE, the petitions are hereby GRANTED.
The complaint as against Development Bank of the Philippines,
the Philippine National Bank, and the Asset Privatization Trust,
now the Privatization and Management Office, is DISMISSED for
lack of merit. The Asset Privatization Trust, now the Privatization
and Management Office, as trustee of Nonoc Mining and Industrial
Corporation, now the Philnico Processing Corporation, is
DIRECTED to ensure compliance by the Nonoc Mining and
Industrial Corporation, now the Philnico Processing Corporation,
with this Decision
7. G.R. No.176897 December 11, 2013
12
ADVANCE PAPER CORPORATION and GEORGE HAW, in his capacity
as President of Advance Paper Corporation, Petitioners, vs. ARMA
TRADERS CORPORATION, MANUEL TING, CHENG GUI and BENJAMIN
NG, Respondents. ANTONIO TAN and UY SENG KEE
WILLY, Respondents.
Before us is a Petition for Review1 seeking to set aside the Decision
of the Court of Appeals (CA) in CA-G.R. CV No. 71499 dated March
31, 2006 and the Resolution dated March 7, 2007.2 The Decision
reversed and set aside the ruling of the Regional Trial
Court (RTC) of Manila, Branch 18 in Civil Case No. 94-72526 which
ordered Arma Traders Corporation (Arma Traders) to pay Advance
Paper Corporation (Advance Paper) the sum ofP15,321,798.25 with
interest, and P1,500,000.00 for attorneys fees, plus the cost of the
suit.3
Factual Antecedents
Petitioner Advance Paper is a domestic corporation engaged in the
business of producing, printing, manufacturing, distributing and
selling of various paper products.4 Petitioner George Haw (Haw) is
the President while his wife, Connie Haw, is the General Manager. 5
Respondent Arma Traders is also a domestic corporation engaged
in the wholesale and distribution of school and office supplies, and
novelty products.6 Respondent Antonio Tan (Tan) was formerly the
President while respondent Uy Seng Kee Willy (Uy) is the Treasurer
of Arma Traders.7 They represented Arma Traders when dealing
with its supplier, Advance Paper, for about 14 years. 8
On the other hand, respondents Manuel Ting, Cheng Gui and
Benjamin Ng worked for Arma Traders as Vice-President, General
Manager and Corporate Secretary, respectively. 9
On various dates from September to December 1994, Arma Traders
purchased on credit notebooks and other paper products
amounting to P7,533,001.49 from Advance Paper. 10
Upon the representation of Tan and Uy, Arma Traders also obtained
three loans from Advance Paper in November 1994 in the amounts
of P3,380,171.82, P1,000,000.00, and P3,408,623.94 or a total
ofP7,788,796.76.11 Arma Traders needed the loan to settle its
obligations to other suppliers because its own collectibles did not
arrive on time.12 Because of its good business relations with Arma
Traders, Advance Paper extended the loans.13
As payment for the purchases on credit and the loan transactions,
Arma Traders issued 82 postdated checks14payable to cash or to
Advance Paper. Tan and Uy were Arma Traders authorized bank
signatories who signed and issued these checks which had the
aggregate amount of P15,130,636.87.15
Advance Paper presented the checks to the drawee bank but these
were dishonored either for "insufficiency of funds" or "account
closed." Despite repeated demands, however, Arma Traders failed
to settle its account with Advance Paper. 16
On December 29, 1994, the petitioners filed a complaint17 for
collection of sum of money with application for preliminary
attachment against Arma Traders, Tan, Uy, Ting, Gui, and Ng.
Claims of the petitioners
The petitioners claimed that the respondents fraudulently issued
the postdated checks as payment for the purchases and loan
transactions knowing that they did not have sufficient funds with
the drawee banks.18
To prove the purchases on credit, the petitioners presented the
summary of the transactions and their corresponding sales
invoices as their documentary evidence.19
During the trial, Haw also testified that within one or two weeks
upon delivery of the paper products, Arma Traders paid the
purchases in the form of postdated checks. Thus, he personally
collected these checks on Saturdays and upon receiving the
checks, he surrendered to Arma Traders the original of the sales
invoices while he retained the duplicate of the invoices. 20
To prove the loan transactions, the petitioners presented the
copies of the checks21 which Advance Paper issued in favor of
Arma Traders. The petitioners also filed a manifestation 22 dated
June 14, 1995, submitting a bank statement from Metrobank
EDSA Kalookan Branch. This was to show that Advance Papers
credit line with Metrobank has been transferred to the account of
Arma Traders as payee from October 1994 to December 1994.
Moreover, Haw testified to prove the loan transactions. When
asked why he considered extending the loans without any
collateral and loan agreement or promissory note, and only on the
basis of the issuance of the postdated checks, he answered that it
was because he trusted Arma Traders since it had been their
customer for a long time and that none of the previous checks
ever bounced.23
Claims of the respondents
The respondents argued that the purchases on credit were
spurious, simulated and fraudulent since there was no delivery of
the P7,000,000.00 worth of notebooks and other paper products.24
During the trial, Ng testified that Arma Traders did not purchase
notebooks and other paper products from September to
December 1994. He claimed that during this period, Arma Traders
concentrated on Christmas items, not school and office supplies.
He also narrated that upon learning about the complaint filed by
the petitioners, he immediately looked for Arma Traders records
and found no receipts involving the purchases of notebooks and
other paper products from Advance Paper.25
As to the loan transactions, the respondents countered that these
were the personal obligations of Tan and Uy to Advance Paper.
These loans were never intended to benefit the respondents.
The respondents also claimed that the loan transactions
were ultra vires because the board of directors of Arma Traders
did not issue a board resolution authorizing Tan and Uy to obtain
the loans from Advance Paper. They claimed that the borrowing of
money must be done only with the prior approval of the board of
directors because without the approval, the corporate officers are
acting in excess of their authority or ultra vires. When the acts of
the corporate officers are ultra vires, the corporation is not liable
for whatever acts that these officers committed in excess of their
authority. Further, the respondents claimed that Advance Paper
failed to verify Tan and Uys authority to transact business with
them. Hence, Advance Paper should suffer the consequences.26
The respondents accused Tan and Uy for conspiring with the
petitioners to defraud Arma Traders through a series of
transactions known as rediscounting of postdated checks. In
rediscounting, the respondents explained that Tan and Uy would
issue Arma Traders postdated checks to the petitioners in
exchange for cash, discounted by as much as 7% to 10%
depending on how long were the terms of repayment. The
13
rediscounted percentage represented the interest or profit earned
by the petitioners in these transactions.27
Tan did not file his Answer and was eventually declared in default.
On the other hand, Uy filed his Answer 28 dated January 20, 1995
but was subsequently declared in default upon his failure to appear
during the pre-trial. In his Answer, he admitted that Arma Traders
together with its corporate officers have been transacting business
with Advance Paper.29 He claimed that he and Tan have been
authorized by the board of directors for the past 13 years to issue
checks in behalf of Arma Traders to pay its obligations with
Advance Paper.30 Furthermore, he admitted that Arma Traders
checks were issued to pay its contractual obligations with Advance
Paper.31 However, according to him, Advance Paper was informed
beforehand that Arma Traders checks were funded out of
the P20,000,000.00 worth of collectibles coming from the
provinces. Unfortunately, the expected collectibles did not
materialize for unknown reasons.32
Ng filed his Answer33 and claimed that the management of Arma
Traders was left entirely to Tan and Uy. Thus, he never participated
in the companys daily transactions.34
Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders Vice-President for
Legal Affairs and Credit and Collection, testified that he
investigated the transactions involving Tan and Uy and discovered
that they were financing their own business using Arma Traders
resources. He also accused Haw for conniving with Tan and Uy in
fraudulently making Arma Traders liable for their personal debts.
He based this conclusion from the following: First, basic human
experience and common sense tell us that a lender will not agree
to extend additional loan to another person who already owes a
substantial sum from the lender in this case, petitioner Advance
Paper. Second,there was no other document proving the existence
of the loan other than the postdated checks. Third, the total of the
purchase and loan transactions vis--vis the total amount of the
postdated checks did not tally. Fourth, he found out that the
certified true copy of Advance Papers report with the Securities
and Exchange Commission (SEC report) did not reflect
the P15,000,000.00 collectibles it had with Arma Traders. 35
Atty. Ang also testified that he already filed several cases of estafa
and qualified theft36 against Tan and Uy and that several warrants
of arrest had been issued against them.
In their pre-trial brief,37 the respondents named Sharow Ong, the
secretary of Tan and Uy, to testify on how Tan and Uy conspired
with the petitioners to defraud Arma Traders. However, the
respondents did not present her on the witness stand.
The RTC Ruling
On June 18, 2001, the RTC ruled that the purchases on credit and
loans were sufficiently proven by the petitioners. Hence, the RTC
ordered Arma Traders to pay Advance Paper the sum
of P15,321,798.25 with interest, and P1,500,000.00 for attorneys
fees, plus the cost of the suit.
The RTC held that the respondents failed to present hard,
admissible and credible evidence to prove that the sale invoices
were forged or fictitious, and that the loan transactions were
personal obligations of Tan and Uy. Nonetheless, the RTC dismissed
the complaint against Tan, Uy, Ting, Gui and Ng due to the lack of
evidence showing that they bound themselves, either jointly or
solidarily, with Arma Traders for the payment of its account. 38
Arma Traders appealed the RTC decision to the CA.
The CA Ruling
The CA held that the petitioners failed to prove by preponderance
of evidence the existence of the purchases on credit and loans
based on the following grounds:
First, Arma Traders was not liable for the loan in the absence of a
board resolution authorizing Tan and Uy to obtain the loan from
Advance Paper.39 The CA acknowledged that Tan and Uy were
Arma Traders authorized bank signatories. However, the CA
explained that this is not sufficient because the authority to sign
the checks is different from the required authority to contract a
loan.40
Second, the CA also held that the petitioners presented
incompetent and inadmissible evidence to prove the purchases on
credit since the sales invoices were hearsay. 41 The CA pointed out
that Haws testimony as to the identification of the sales invoices
was not an exception to the hearsay rule because there was no
showing that the secretaries who prepared the sales invoices are
already dead or unable to testify as required by the Rules of
Court.42 Further, the CA noted that the secretaries were not
identified or presented in court.43
Third, the CA ruling heavily relied on Ngs Appellants Brief44 which
made the detailed description of the "badges of fraud." The CA
averred that the petitioners failed to satisfactorily rebut the
badges of fraud45 which include the inconsistencies in:
(1) "Exhibit E-26," a postdated check, which was allegedly issued
in favor of Advance Paper but turned out to be a check payable to
Top Line, Advance Papers sister company;46
(2) "Sale Invoice No. 8946," an evidence to prove the existence of
the purchases on credit, whose photocopy failed to reflect the
amount stated in the duplicate copy,47 and;
(3) The SEC report of Advance Paper for the year ended 1994
reflected its account receivables amounting to P219,705.19 only
an amount far from the claimed P15,321,798.25 receivables from
Arma Traders.48
Hence, the CA set aside the RTCs order for Arma Traders to pay
Advance Paper the sum of P15,321,798.25,P1,500,000.00 for
attorneys fees, plus cost of suit.49 It affirmed the RTC decision
dismissing the complaint against respondents Tan, Uy, Ting, Gui
and Ng.50 The CA also directed the petitioners to solidarily pay
each of the respondents their counterclaims of P250,000.00 as
moral damages, P250,000.00 as exemplary damages,
andP250,000.00 as attorneys fees.51
The Petition
The petitioners raise the following arguments.
First, Arma Traders led the petitioners to believe that Tan and Uy
had the authority to obtain loans since the respondents left the
active and sole management of the company to Tan and Uy since
1984. In fact, Ng testified that Arma Traders stockholders and
board of directors never conducted a meeting from 1984 to 1995.
Therefore, if the respondents position will be sustained, they will
have the absurd power to question all the business transactions of
Arma Traders.52 Citing Lipat v. Pacific Banking Corporation,53 the
petitioners said that if a corporation knowingly permits one of its
officers or any other agent to act within the scope of an apparent
14
authority, it holds him out to the public as possessing the power to
do those acts; thus, the corporation will, as against anyone who has
in good faith dealt with it through such agent, be estopped from
denying the agents authority.
Second, the petitioners argue that Haws testimony is not hearsay.
They emphasize that Haw has personal knowledge of the assailed
purchases and loan transactions because he dealt with the
customers, and supervised and directed the preparation of the
sales invoices and the deliveries of the goods.54 Moreover, the
petitioners stress that the respondents never objected to the
admissibility of the sales invoices on the ground that they were
hearsay.55
Third, the petitioners dispute the CAs findings on the existence of
the badges of fraud. The petitioners countered:
(1) The discrepancies between the figures in the 15 out of the 96
photocopies and duplicate originals of the sales invoices amounting
to P4,624.80 an insignificant amount compared to the total
purchases ofP7,533,001.49 may have been caused by the failure
to put the carbon paper.56 Besides, the remaining 81 sales invoices
are uncontroverted. The petitioners also raise the point that this
discrepancy is a nonissue because the duplicate originals were
surrendered in the RTC.57
(2) The respondents misled Haw during the cross-examination and
took his answer out of context.58 The petitioners argue that this
maneuver is insufficient to discredit Haws entire testimony. 59
(3) Arma Traders should be faulted for indicating Top Line as the
payee in Exhibit E-26 or PBC check no. 091014. Moreover, Exhibit
E-26 does not refer to PBC check no. 091014 but to PBC check no.
091032 payable to the order of cash.60
(4) The discrepancy in the total amount of the checks which
is P15,130,363.87 as against the total obligation
of P15,321,798.25 does not necessarily prove that the transactions
are spurious.61
(5) The difference in Advance Papers accounts receivables in the
SEC report and in Arma Traders obligation with Advance Paper was
based on non-existent evidence because Exhibit 294-NG does not
pertain to any balance sheet.62 Moreover, the term "accounts
receivable" is not synonymous with "cause of action." The
respondents cannot escape their liability by simply pointing the
SEC report because the petitioners have established their cause of
action that the purchases on credit and loan transactions took
place, the respondents issued the dishonored checks to cover their
debts, and they refused to settle their obligation with Advance
Paper.63
The Case for the Respondents
The respondents argue that the Petition for Review should be
dismissed summarily because of the following procedural
grounds: first, for failure to comply with A.M. No. 02-8-13-
SC;64 and second, the CA decision is already final and executory
since the petitioners filed their Motion for Reconsideration out of
time. They explain that under the rules of the CA, if the last day for
filing of any pleading falls on a Saturday not a holiday, the same
must be filed on said Saturday, as the Docket and Receiving
Section of the CA is open on a Saturday.65
The respondents argue that while as a general rule, a corporation is
estopped from denying the authority of its agents which it allowed
to deal with the general public; this is only true if the person
dealing with the agent dealt in good faith.66 In the present case,
the respondents claim that the petitioners are in bad faith
because the petitioners connived with Tan and Uy to make Arma
Traders liable for the non-existent deliveries of notebooks and
other paper products.67 They also insist that the sales invoices are
manufactured evidence.68
As to the loans, the respondents aver that these were Tan and
Uys personal obligations with Advance Paper. 69Moreover, while
the three cashiers checks were deposited in the account of Arma
Traders, it is likewise true that Tan and Uy issued Arma Traders
checks in favor of Advance Paper. All these checks are evidence of
Tan, Uy and Haws systematic conspiracy to siphon Arma Traders
corporate funds.70
The respondents also seek to discredit Haws testimony on the
basis of the following. First, his testimony as regards the sales
invoices is hearsay because he did not personally prepare these
documentary evidence. 71Second, Haw suspiciously never had any
written authority from his own Board of Directors to lend
money. Third,the respondents also questioned why Advance Paper
granted the P7,000,000.00 loan without requiring Arma Traders to
present any collateral or guarantees.72
The Issues
The main procedural and substantive issues are:
I. Whether the petition for review should be dismissed for failure
to comply with A.M. No. 02-8-13-SC.
II. Whether the petition for review should be dismissed on the
ground of failure to file the motion for reconsideration with the CA
on time.
III. Whether Arma Traders is liable to pay the loans applying the
doctrine of apparent authority.
IV. Whether the petitioners proved Arma Traders liability on the
purchases on credit by preponderance of evidence.
The Court's Ruling
We grant the petition.
The procedural issues.
First, the respondents correctly cited A.M. No. 02-8-13-SC dated
February 19, 2008 which refer to the amendment of the 2004
Rules on Notarial Practice. It deleted the Community Tax
Certificate among the accepted proof of identity of the affiant
because of its inherent unreliability. The petitioners violated this
when they used Community Tax Certificate No. 05730869 in their
Petition for Review.73 Nevertheless, the defective jurat in the
Verification/Certification of Non-Forum Shopping is not a fatal
defect because it is only a formal, not a jurisdictional, requirement
that the Court may waive.74 Furthermore, we cannot simply ignore
the millions of pesos at stake in this case. To do so might cause
grave injustice to a party, a situation that this Court intends to
avoid.
Second, no less than the CA itself waived the rules on the period
to file the motion for reconsideration. A review of the CA
Resolution75 dated March 7, 2007, reveals that the petitioners
Motion for Reconsideration was denied because the allegations
were a mere rehash of what the petitioners earlier argued not
because the motion for reconsideration was filed out of time.
15
The substantive issues.
Arma Traders is liable to pay the
loans on the basis of the doctrine of
apparent authority.
The doctrine of apparent authority provides that a corporation will
be estopped from denying the agents authority if it knowingly
permits one of its officers or any other agent to act within the
scope of an apparent authority, and it holds him out to the public
as possessing the power to do those acts. 76 The doctrine of
apparent authority does not apply if the principal did not commit
any acts or conduct which a third party knew and relied upon in
good faith as a result of the exercise of reasonable prudence.
Moreover, the agents acts or conduct must have produced a
change of position to the third partys detriment. 77
In Inter-Asia Investment Industries v. Court of Appeals,78 we
explained:
Under this provision [referring to Sec. 23 of the Corporation Code],
the power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged
in the board, subject to the articles of incorporation, bylaws, or
relevant provisions of law. However, just as a natural person who
may authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly
or impliedly by habit, custom or acquiescence in the general course
of business, viz.:
A corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that
[the] authority to do so has been conferred upon him, and this
includes powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred.
[A]pparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the
power to act or, in other words the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. It
requires presentation of evidence of similar act(s) executed either
in its favor or in favor of other parties. It is not the quantity of
similar acts which establishes apparent authority, but the vesting of
a corporate officer with the power to bind the
corporation. [emphases and underscores ours]
In Peoples Aircargo and Warehousing Co., Inc. v. Court of
Appeals,79 we ruled that the doctrine of apparent authority is
applied when the petitioner, through its president Antonio Punsalan
Jr., entered into the First Contract without first securing board
approval. Despite such lack of board approval, petitioner did not
object to or repudiate said contract, thus "clothing" its president
with the power to bind the corporation.
"Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict rule
that said officer has no inherent power to act for the corporation is
slowly giving way to the realization that such officer has certain
limited powers in the transaction of the usual and ordinary
business of the corporation."80 "In the absence of a charter or
bylaw provision to the contrary, the president is presumed to
have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual
duties."81
In the present petition, we do not agree with the CAs findings
that Arma Traders is not liable to pay the loans due to the lack of
board resolution authorizing Tan and Uy to obtain the loans. To
begin with, Arma Traders Articles of Incorporation 82 provides that
the corporation may borrow or raise money to meet the financial
requirements of its business by the issuance of bonds, promissory
notes and other evidence of indebtedness. Likewise, it states that
Tan and Uy are not just ordinary corporate officers and authorized
bank signatories because they are also Arma
Traders incorporators along with respondents Ng and Ting, and
Pedro Chao. Furthermore, the respondents, through Ng who is
Arma Traders corporate secretary, incorporator, stockholder and
director, testified that the sole management of Arma Traders was
left to Tan and Uy and that he and the other officers never dealt
with the business and management of Arma Traders for 14 years.
He also confirmed that since 1984 up to the filing of the
complaint against Arma Traders, its stockholders and board of
directors never had its meeting.83
Thus, Arma Traders bestowed upon Tan and Uy broad powers by
allowing them to transact with third persons without the
necessary written authority from its non-performing board of
directors. Arma Traders failed to take precautions to prevent its
own corporate officers from abusing their powers. Because of its
own laxity in its business dealings, Arma Traders is now estopped
from denying Tan and Uys authority to obtain loan from Advance
Paper.
We also reject the respondents claim that Advance Paper,
through Haw, connived with Tan and Uy. The records do not
contain any evidence to prove that the loan transactions were
personal to Tan and Uy. A different conclusion might have been
inferred had the cashiers checks been issued in favor of Tan and
Uy, and had the postdated checks in favor of Advance Paper been
either Tan and/or Uys, or had the respondents presented
convincing evidence to show how Tan and Uy conspired with the
petitioners to defraud Arma Traders.84 We note that the
respondents initially intended to present Sharow Ong, the
secretary of Tan and Uy, to testify on how Advance Paper
connived with Tan and Uy. As mentioned, the respondents failed to
present her on the witness stand.
The respondents failed to object to
the admissibility of the sales invoices
on the ground that they are hearsay
The rule is that failure to object to the offered evidence renders it
admissible, and the court cannot, on its own, disregard such
evidence.85 When a party desires the court to reject the evidence
offered, it must so state in the form of a timely objection and it
cannot raise the objection to the evidence for the first time on
appeal. Because of a partys failure to timely object, the evidence
becomes part of the evidence in the case. Thereafter, all the
parties are considered bound by any outcome arising from the
offer of evidence properly presented.86
In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M.
Ureta,87 however, we held:
16
[H]earsay evidence whether objected to or not cannot be given
credence for having no probative value.1wphi1 This principle,
however, has been relaxed in cases where, in addition to the failure
to object to the admissibility of the subject evidence, there were
other pieces of evidence presented or there were other
circumstances prevailing to support the fact in issue. (emphasis
and underscore ours; citation omitted)
We agree with the respondents that with respect to the
identification of the sales invoices, Haws testimony was hearsay
because he was not present during its preparation88 and the
secretaries who prepared them were not presented to identify them
in court. Further, these sales invoices do not fall within the
exceptions to the hearsay rule even under the "entries in the
course of business" because the petitioners failed to show that the
entrant was deceased or was unable to testify. 89
But even though the sales invoices are hearsay, nonetheless, they
form part of the records of the case for the respondents failure to
object as to the admissibility of the sales invoices on the ground
that they are hearsay. 90Based on the records, the respondents
through Ng objected to the offer "for the purpose [to] which they
are being offered" only not on the ground that they were
hearsay.91
The petitioners have proven their
claims for the unpaid purchases on
credit by preponderance of evidence.
We are not convinced by the respondents argument that the
purchases are spurious because no less than Uyadmitted that all
the checks issued were in payments of the contractual obligations
of the Arma Traders with Advance Paper.92 Moreover, there are
other pieces of evidence to prove the existence of the purchases
other than the sales invoices themselves. For one, Arma Traders
postdated checks evince the existence of the purchases on credit.
Moreover, Haw testified that within one or two weeks, Arma Traders
paid the purchases in the form of postdated checks. He personally
collected these checks on Saturdays and upon receiving the
checks, he surrendered to Arma Traders the original of the sales
invoices while he retained the duplicate of the invoices. 93
The respondents attempted to impugn the credibility of Haw by
pointing to the inconsistencies they can find from the transcript of
stenographic notes. However, we are not persuaded that these
inconsistencies are sufficiently pervasive to affect the totality of
evidence showing the general relationship between Advance Paper
and Arma Traders.
Additionally, the issue of credibility of witnesses is to be resolved
primarily by the trial court because it is in the better position to
assess the credibility of witnesses as it heard the testimonies and
observed the deportment and manner of testifying of the
witnesses. Accordingly, its findings are entitled to great respect and
will not be disturbed on appeal in the absence of any showing that
the trial court overlooked, misunderstood, or misapplied some facts
or circumstances of weight and substance which would have
affected the result of the case.94
In the present case, the RTC judge took into consideration the
substance and the manner by which Haw answered each
propounded questions to him in the witness stand. Hence, the
minor inconsistencies in Haws testimony notwithstanding, the RTC
held that the respondents claim that the purchase and loan
transactions were spurious is "not worthy of serious consideration."
Besides, the respondents failed to convince us that the RTC judge
overlooked, misunderstood, or misapplied some facts or
circumstances of weight and substance which would have
affected the result of the case.
On the other hand, we agree with the petitioners that the
discrepancies in the photocopy of the sales invoices and its
duplicate copy have been sufficiently explained. Besides, this is
already a non-issue since the duplicate copies were surrendered
in the RTC.95 Furthermore, the fact that the value of Arma Traders'
checks does not tally with the total amount of their obligation with
Advance Paper is not inconsistent with the existence of the
purchases and loan transactions.
As against the case and the evidence Advance Paper presented,
the respondents relied on the core theory of an alleged conspiracy
between Tan, Uy and Haw to defraud Arma Traders. However, the
records are bereft of supporting evidence to prove the alleged
conspiracy. Instead, the respondents simply dwelled on the minor
inconsistencies from the petitioners' evidence that the
respondents appear to have magnified. From these perspectives,
the preponderance of evidence thus lies heavily in the petitioners'
favor as the RTC found. For this reason, we find the petition
meritorious.
WHEREFORE, premises considered, we GRANT the petition. The
decision dated March 31, 2006 and the resolution dated March 7,
2007 of the Court of Appeals in CA-G.R. CV No. 71499 are
REVERSED and SET ASIDE. The Regional Trial Court decision in
Civil Case No. 94-72526 dated June 18, 2001 is REINSTATED. No
costs.
8. [G.R. No. 144476. April 8, 2003]
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW,
BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU,
INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA
TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the
SECURITIES AND EXCHANGE COMMISSION,respondents.
[G.R. No. 144629. April 8, 2003]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D.
TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND
RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG YONG,
JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents.
Before us are the (1) motion for reconsideration, dated March 15,
2002, of petitioner movants Ong Yong, Juanita Tan Ong, Wilson
Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the
Ongs); (2) motion for partial reconsideration, dated March 15,
2002, of petitioner movant Willie Ong seeking a reversal of this
Courts Decision,[1] dated February 1, 2002, in G.R. Nos. 144476
and 144629 affirming with modification the decision[2] of the Court
of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated
September 11, 1998; and (3) motion for issuance of writ of
execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow,
Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the
Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City
was threatened with stoppage and incompletion when its owner,
the First Landlink Asia Development Corporation (FLADC), which
17
was owned by the Tius, encountered dire financial difficulties. It
was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots
where the mall was being built, the Tius invited Ong Yong, Juanita
Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong
Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed to
maintain equal shareholdings in FLADC: the Ongs were to subscribe
to 1,000,000 shares at a par value of P100.00 each while the Tius
were to subscribe to an additional 549,800 shares at P100.00 each
in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five directors
while the Ongs were entitled to nominate the President, the
Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to
manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their
subscription to 1,000,000 shares of stock while the Tius committed
to contribute to FLADC a four-storey building and two parcels of
land respectively valued at P20 million (for 200,000 shares), P30
million (for 300,000 shares) and P49.8 million (for 49,800 shares) to
cover their additional 549,800 stock subscription therein. The Ongs
paid in another P70 million[3] to FLADC and P20 million to the Tius
over and above their P100 million investment, the total sum of
which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC,
however, was shortlived because the Tius, on February 23, 1996,
rescinded the Pre-Subscription Agreement. The Tius accused the
Ongs of (1) refusing to credit to them the FLADC shares covering
their real property contributions; (2) preventing David S. Tiu and
Cely Y. Tiu from assuming the positions of and performing their
duties as Vice-President and Treasurer, respectively, and (3)
refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely
S. Tiu to assume the positions and perform the duties of Vice-
President and Treasurer, respectively, but the Ongs prevented them
from doing so. Furthermore, the Ongs refused to provide them the
space for their executive offices as Vice-President and
Treasurer. Finally, and most serious of all, the Ongs refused to give
them the shares corresponding to their property contributions of a
four-story building, a 1,902.30 square-meter lot and a 151 square-
meter lot. Hence, they felt they were justified in setting aside their
Pre-Subscription Agreement with the Ongs who allegedly refused to
comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had
in fact assumed the positions of Vice-President and Treasurer of
FLADC but that it was they who refused to comply with the
corporate duties assigned to them. It was the contention of the
Ongs that they wanted the Tius to sign the checks of the
corporation and undertake their management duties but that the
Tius shied away from helping them manage the corporation. On the
issue of office space, the Ongs pointed out that the Tius did in fact
already have existing executive offices in the mall since they
owned it 100% before the Ongs came in. What the Tius really
wanted were new offices which were anyway subsequently
provided to them. On the most important issue of their alleged
failure to credit the Tius with the FLADC shares commensurate to
the Tius property contributions, the Ongs asserted that, although
the Tius executed a deed of assignment for the 1,902.30 square-
meter lot in favor of FLADC, they (the Tius) refused to pay P
570,690 for capital gains tax and documentary stamp tax. Without
the payment thereof, the SEC would not approve the valuation of
the Tius property contribution (as opposed to cash contribution).
This, in turn, would make it impossible to secure a new Transfer
Certificate of Title (TCT) over the property in FLADCs name. In any
event, it was easy for the Tius to simply pay the said transfer
taxes and, after the new TCT was issued in FLADCs name, they
could then be given the corresponding shares of stocks. On the
151 square-meter property, the Tius never executed a deed of
assignment in favor of FLADC. The Tius initially claimed that they
could not as yet surrender the TCT because it was still being
reconstituted by the Lichaucos from whom the Tius bought it. The
Ongs later on discovered that FLADC had in reality owned the
property all along, even before their Pre-Subscription Agreement
was executed in 1994. This meant that the 151 square-meter
property was at that time already the corporate property of
FLADC for which the Tius were not entitled to the issuance of new
shares of stock.
The controversy finally came to a head when this case was
commenced[4] by the Tius on February 27, 1996 at the Securities
and Exchange Commission (SEC), seeking confirmation of their
rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a
decision on May 19, 1997 confirming the rescission sought by the
Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the
rescission of the Pre-Subscription Agreement, and consequently
ordering:
(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for
1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to
conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,
132494, 134066 (formerly 15587), 135325 and 134204 and any
other title or deed in the name of FLADC, failing in which said
titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor
of the plaintiffs and to cancel the annotation of the Pre-
Subscription Agreement dated 15 August 1994 on TCT No. 134066
(formerly 15587);
(f) The individual defendants, individually and collectively, their
agents and representatives, to desist from exercising or
performing any and all acts pertaining to stockholder, director or
officer of FLADC or in any manner intervene in the management
and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00 and all
interest payments as well as any payments on principal received
from the P70,000,000.00 inexistent loan, plus the legal rate of
interest thereon from the date of their receipt of such payment
until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus
legal interest from the date of receipt of such amount.
18
SO ORDERED.[5]
On motion of both parties, the above decision was partially
reconsidered but only insofar as the Ongs P70 million was declared
not as a premium on capital stock but an advance (loan) by the
Ongs to FLADC and that the imposition of interest on it was correct.
[6]
Both parties appealed[7] to the SEC en banc which rendered a
decision on September 11, 1998, affirming the May 19, 1997
decision of the Hearing Officer. The SEC en banc confirmed the
rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on capital
and not as a loan or advance to FLADC, hence, not entitled to earn
interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on
October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the
Securities and Exchange Commission En Banc in SEC AC CASE NOS.
598 and 601 confirming the rescission of the Pre-Subscription
Agreement dated August 15, 1994 is hereby AFFIRMED, subject to
the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink
Asia Development Corporation in accordance with the following
cash and property contributions of the parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1)
million shares in First Landlink Asia Development Corporation at a
par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in
First Landlink Asia Development Corporation at a par value of
P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No.
15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00
per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer
Certificate of Title No. 15587 in the name of Masagana Telamart,
Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof is (sic)
hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to
pay the amount of P70,000,000.00 that was advanced to it by the
Ong Group upon the finality of this decision. Should the former
incur in delay in the payment thereof, it shall pay the legal interest
thereon pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of
P20,000,000.00 loaned them by the Ongs upon the finality of this
decision. Should the former incur in delay in the payment thereof, it
shall pay the legal interest thereon pursuant to Article 2209 of the
New Civil Code.
SO ORDERED.[9]
An interesting sidelight of the CA decision was its description of
the rescission made by the Tius as the height of ingratitude and
as pulling a fast one on the Ongs. The CA moreover found the Tius
guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account. [10] These were
findings later on affirmed in our own February 1, 2002 Decision
which is the subject of the instant motion for reconsideration. [11]
But there was also a strange aspect of the CA decision. The CA
concluded that both the Ongs and the Tius were in pari
delicto (which would not have legally entitled them to rescission)
but, for practical considerations, that is, their inability to work
together, it was best to separate the two groups by rescinding the
Pre-Subscription Agreement, returning the original investment of
the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both
parties filed separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et
al., the Ongs argued that the Tius may not properly avail of
rescission under Article 1191 of the Civil Code considering that
the Pre-Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the
rescission (capital assets and properties) had been acquired by a
third party (FLADC); that they did not commit a substantial and
fundamental breach of their agreement since they did not prevent
the Tius from assuming the positions of Vice-President and
Treasurer of FLADC, and that the failure to credit the 300,000
shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the
refusal of the Tius to pay the required transfer taxes to secure the
approval of the SEC for the property contribution and, thereafter,
the issuance of title in FLADCs name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate
court even for so called practical considerations or even to
prevent further squabbles and numerous litigations, since the
same are not valid grounds under the Corporation
Code. Moreover, the Ongs bewailed the failure of the CA to grant
interest on their P70 million and P20 million advances to FLADC
and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et
al., the Tius, on the other hand, contended that the rescission
should have been limited to the restitution of the parties
respective investments and not the liquidation of FLADC based on
the erroneous perception by the court that: the Masagana Citimall
was threatened with incompletion since FLADC was in financial
distress; that the Tius invited the Ongs to invest in FLADC to settle
its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the
Tius who executed the deed of assignment over the 151 square-
meter property commensurate to 49,800 shares in FLADC thereby
failing to pay the price for the said shares;that they did not turn
over to the Ongs the entire amount of FLADC funds; that they
were diverting rentals from lease contracts due to FLADC to their
own MATTERCO account; that the P70 million paid by the Ongs
was an advance and not a premium on capital; and that, by
rescinding the Pre-Subscription Agreement, they wanted to
wrestle away the management of the mall and prevent the Ongs
from enjoying the profits of their P190 million investment in
FLADC.
On February 1, 2002, this Court promulgated its Decision (the
subject of the instant motions), affirming the assailed decision of
the Court of Appeals but with the following modifications:
19
1. the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed from
the time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn
interest at ten percent (10%) per annum to be computed from the
date of the FLADC Board Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius
violated their respective obligations under the Pre-Subscription
Agreement. The Ongs prevented the Tius from assuming the
positions of Vice-President and Treasurer of the corporation. On the
other hand, the Decision established that the Tius failed to turn
over FLADC funds to the Ongs and that the Tius diverted rentals
due to FLADC to their MATTERCO account. Consequently, it held
that rescission was not possible since both parties were in pari
delicto. However, this Court agreed with the Court of Appeals that
the remedy of specific performance, as espoused by the Ongs, was
not practical and sound either and would only lead to further
squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for
Issuance of a Writ of Execution on the grounds that: (a) the SEC
order had become executory as early as September 11, 1998
pursuant to Sections 1 and 12, Rule 43 of the Rules of Court;
(b) any further delay would be injurious to the rights of the Tius
since the case had been pending for more than six years; and (c)
the SEC no longer had quasi-judicial jurisdiction under RA 8799
(Securities Regulation Code). The Ongs filed their opposition,
contending that the Decision dated February 1, 2002 was not yet
final and executory; that no good reason existed to issue a warrant
of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC
retained jurisdiction over pending cases involving intra-corporate
disputes already submitted for final resolution upon the effectivity
of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of
Execution, the Ongs filed their own Motion for Reconsideration;
Alternatively, Motion for Modification (of the February 1, 2002
Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy
under the premises; and (b) that, assuming rescission to be proper,
the subject decision of this Court should be modified to entitle
movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the
proper remedy), movants Ong argue that their alleged breach of
the Pre-Subscription Agreement was, at most, casual which did not
justify the rescission of the contract. They stress that providing
appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President
and Treasurer, respectively, had no bearing on their obligations
under the Pre-Subscription Agreement since the said obligation (to
provide executive offices) pertained to FLADC itself. Such obligation
arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs.
Likewise, the alleged failure of the Ongs to credit shares of stock in
favor of the Tius for their property contributions also pertained to
the corporation and not to the Ongs. Just the same, it could not be
done in view of the Tius refusal to pay the necessary transfer taxes
which in turn resulted in the inability to secure SEC approval for the
property contributions and the issuance of a new TCT in the name
of FLADC.
Besides, according to the Ongs, the principal objective of both
parties in entering into the Pre-Subscription Agreement in 1994
was to raise the P190 million desperately needed for the payment
of FLADCs loan to PNB. Hence, in this light, the alleged failure to
provide office space for the two corporate officers was no more
than an inconsequential infringement. For rescission to be
justified, the law requires that the breach of contract should be so
substantial or fundamental as to defeat the primary objective of
the parties in making the agreement. At any rate, the Ongs claim
that it was the Tius who were guilty of fundamental violations in
failing to remit funds due to FLADC and diverting the same to
their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that
both parties were guilty of violating the Pre-Subscription
Agreement, neither of them could resort to rescission under the
principle of pari delicto. In addition, since the cash and other
contributions now sought to be returned already belong to FLADC,
an innocent third party, said remedy may no longer be availed of
under the law.
On their second point (assuming rescission to be proper, the Ongs
should be given their proportionate share of the mall), movants
Ong vehemently take exception to the second item in the
dispositive portion of the questioned Decision insofar as it
decreed that whatever remains of the assets of FLADC and the
management thereof (after liquidation) shall be transferred to the
Tius. They point out that the mall itself, which would have been
foreclosed by PNB if not for their timely investment of P190
million in 1994 and which is now worth about P1 billion mainly
because of their efforts, should be included in any partition and
distribution. They (the Ongs) should not merely be given interest
on their capital investments. The said portion of our Decision,
according to them, amounted to the unjust enrichment of the Tius
and ran contrary to our own pronouncement that the act of the
Tius in unilaterally rescinding the agreement was the height of
ingratitude and an attempt to pull a fast one as it would prevent
the Ongs from enjoying the fruits of their P190 million investment
in FLADC. It also contravenes this Courts assurance in the
questioned Decision that the Ongs and Tius will have a bountiful
return of their respective investments derived from the profits of
the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration
dated March 8, 2002, pointing out that there was no violation of
the Pre-Subscription Agreement on the part of the Ongs;that, after
more than seven years since the mall began its operations,
rescission had become not only impractical but would also
adversely affect the rights of innocent parties; and that it would
be highly inequitable and unfair to simply return the P100 million
investment of the Ongs and give the remaining assets now
amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for
reconsideration, counter that the arguments therein are a mere
re-hash of the contentions in the Ongs petition for review and
previous motion for reconsideration of the Court of Appeals
decision. The Tius compare the arguments in said pleadings to
prove that the Ongs do not raise new issues, and, based on well-
settled jurisprudence,[12] the Ongs present motion is therefore pro-
forma and did not prevent the Decision of this Court from
attaining finality.
On January 29, 2003, the Special Second Division of this Court
held oral arguments on the respective positions of the parties. On
February 27, 2003, Dr. Willie Ong and the rest of the movants Ong
20
filed their respective memoranda. On February 28, 2003, the Tius
submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a
motion for reconsideration. In Philippine Consumers Foundation,
Inc. vs. National Telecommunications Commission, [13]this Court,
through then Chief Justice Felix V. Makasiar, said that its members
may and do change their minds, after a re-study of the facts and
the law, illuminated by a mutual exchange of views. [14] After a
thorough re-examination of the case, we find that our Decision of
February 1, 2002 overlooked certain aspects which, if not
corrected, will cause extreme and irreparable damage and
prejudice to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius
should not be blindly applied to meritorious motions for
reconsideration. As long as the same adequately raises a valid
ground[15] (i.e., the decision or final order is contrary to law), this
Court has to evaluate the merits of the arguments to prevent an
unjust decision from attaining finality. In Security Bank and Trust
Company vs. Cuenca,[16] we ruled that a motion for reconsideration
is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate
court. We explained there that a movant may raise the same
arguments, if only to convince this Court that its ruling was
erroneous. Moreover, the rule (that a motion is pro-forma if it only
repeats the arguments in the previous pleadings) will not apply if
said arguments were not squarely passed upon and answered in
the decision sought to be reconsidered. In the case at bar, no ruling
was made on some of the petitioner Ongs arguments. For instance,
no clear ruling was made on why an order distributing corporate
assets and property to the stockholders would not violate the
statutory preconditions for corporate dissolution or decrease of
authorized capital stock. Thus, it would serve the ends of justice to
entertain the subject motion for reconsideration since some
important issues therein, although mere repetitions, were not
considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally
rescind the Pre-Subscription Agreement. We rule that they could
not.
FLADC was originally incorporated with an authorized capital stock
of 500,000 shares with the Tius owning 450,200 shares
representing the paid-up capital. When the Tius invited the Ongs to
invest in FLADC as stockholders, an increase of the authorized
capital stock became necessary to give each group equal (50-50)
shareholdings as agreed upon in the Pre-Subscription
Agreement. The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each,
with the Ongs subscribing to 1,000,000 shares and the Tius to
549,800 more shares in addition to their 450,200 shares to
complete 1,000,000 shares. Thus, the subject matter of the
contract was the 1,000,000 unissued shares of FLADC stock
allocated to the Ongs. Since these were unissued shares, the
parties Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the Corporation
Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the
fact that theparties refer to it as a purchase or some other
contract (Italics supplied).
A subscription contract necessarily involves the corporation as
one of the contracting parties since the subject matter of the
transaction is property owned by the corporation its shares of
stock. Thus, the subscription contract (denominated by the
parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from the
viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius. Otherwise stated, the Tius did not
contract in their personal capacities with the Ongs since they
were not selling any of their own shares to them. It was FLADC
that did.
Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a civil
case for rescission on the ground of breach of contract filed by the
Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had
the legal personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real party in
interest therein. Article 1311 of the Civil Code provides that
contracts take effect only between the parties, their assigns and
heirs Therefore, a party who has not taken part in the transaction
cannot sue or be sued for performance or for cancellation thereof,
unless he shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there
are two contracts embodied in the Pre-Subscription Agreement: a
shareholders agreement between the Tius and the Ongs defining
and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription
of the parties to the corporation. They point out that these two
component parts form one whole agreement and that their terms
and conditions are intrinsically related and dependent on each
other. Thus, the breach of the shareholders agreement, which was
allegedly the consideration for the subscription contract, was also
a breach of the latter.
Aside from the fact that this is an entirely new angle never raised
in any of their previous pleadings until after the oral arguments on
January 29, 2003, we find this argument too strained for
comfort. It is obviously intended to remedy and cover up the Tius
lack of legal personality to rescind an agreement in which they
were personally not parties-in-interest. Assumingarguendo that
there were two sub-agreements embodied in the Pre-Subscription
Agreement, this Court fails to see how the shareholders
agreement between the Ongs and Tius can, within the bounds of
reason, be interpreted as the consideration of the subscription
contract between FLADC and the Ongs. There was nothing in the
Pre-Subscription Agreement even remotely suggesting such
alleged interdependence. Be that as it may, however, the Tius are
nevertheless not the proper parties to raise this point because
they were not parties to the subscription contract between FLADC
and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what
induced FLADC and the Ongs to enter into the subscription
contract. It is the Ongs alone who can say that. Though FLADC
was represented by the Tius in the subscription contract, FLADC
had a separate juridical personality from the Tius. The case before
us does not warrant piercing the veil of corporate fiction since
there is no proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice. [18]
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must
also fail because such an argument disregards the separate
juridical personality of FLADC.
21
The Tius allege that they were prevented from participating in the
management of the corporation. There is evidence that the Ongs
did prevent the rightfully elected Treasurer, Cely Tiu, from
exercising her function as such. The records show that the
President, Wilson Ong, supervised the collection and receipt of
rentals in the Masagana Citimall;[19] that he ordered the same to be
deposited in the bank;[20] and that he held on to the cash and
properties of the corporation.[21] Section 25 of the Corporation Code
prohibits the President from acting concurrently as Treasurer of the
corporation. The rationale behind the provision is to ensure the
effective monitoring of each officers separate functions.
However, although the Tius were adversely affected by the Ongs
unwillingness to let them assume their positions, rescission due to
breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of
Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no
legal personality to do so and the requirements of the law therefor
have not been met.A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just
about any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the
corporate assets to him without complying with the requirements of
the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject
agreement based on a less than substantial breach of subscription
contract. Not only are they not parties to the subscription contract
between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on breach of
contract, said action will nevertheless still not prosper since
rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the
Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923
case of Philippine Trust Co. vs. Rivera,[22] provides that
subscriptions to the capital stock of a corporation constitute a fund
to which the creditors have a right to look for the satisfaction of
their claims.[23] This doctrine is the underlying principle in the
procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital
only in three instances: (1) amendment of the Articles of
Incorporation to reduce the authorized capital stock, [24] (2)
purchase of redeemable shares by the corporation, regardless of
the existence of unrestricted retained earnings,[25] and (3)
dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power
of a corporation to acquire its own shares[26] and in Section 122 on
the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied
with.[27]
The distribution of corporate assets and property cannot be made
to depend on the whims and caprices of the stockholders, officers
or directors of the corporation, or even, for that matter, on the
earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and
procedures for the protection of corporate creditors are followed.
Otherwise, the corporate peace laudably hoped for by the court will
remain nothing but a dream because this time, it will be the
creditors turn to engage in squabbles and litigations should the
court order an unlawful distribution in blatant disregard of the
Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized distribution
of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the instances
when distribution of capital assets and property of the corporation
is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis,
result in the premature liquidation of the corporation without the
benefit of prior dissolution in accordance with Sections 117, 118,
119 and 120 of the Corporation Code.[28] The Tius maintain that
rescinding the subscription contract is not synonymous to
corporate liquidation because all rescission will entail would be
the simple restoration of the status quo ante and a return to the
two groups of their cash and property contributions. We wish it
were that simple. Very noticeable is the fact that the Tius do not
explain why rescission in the instant case will not effectively result
in liquidation. The Tius merely refer in cavalier fashion to the end-
result of rescission (which incidentally is 100% favorable to them)
but turn a blind eye to its unfair, inequitable and disastrous effect
on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim
that rescission of the agreement will not result in an unauthorized
liquidation of the corporation because their case is actually a
petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that (e)xcept
by decrease of capital stock, no corporation shall distribute any of
its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities. The Tius claim that their
case for rescission, being a petition to decrease capital stock,
does not violate the liquidation procedures under our laws. All
that needs to be done, according to them, is for this Court to
order (1) FLADC to file with the SEC a petition to issue a
certificate of decrease of capital stock and (2) the SEC to approve
said decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to
decrease capital stock because such action never complied with
the formal requirements for decrease of capital stock under
Section 33 of the Corporation Code. No majority vote of the board
of directors was ever taken. Neither was there any stockholders
meeting at which the approval of stockholders owning at least
two-thirds of the outstanding capital stock was secured. There
was no revised treasurers affidavit and no proof that said
decrease will not prejudice the creditors rights. On the contrary,
all their pleadings contained were alleged acts of violations by the
Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal
affairs of the corporation to compel FLADC to file at the SEC a
petition for the issuance of a certificate of decrease of stock.
Decreasing a corporations authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision that
only the stockholders and the directors can make, considering
that they are the contracting parties thereto. In this case, the Tius
are actually not just asking for a review of the legality and
fairness of a corporate decision. They want this Court to make a
corporate decision for FLADC. We decline to intervene and order
corporate structural changes not voluntarily agreed upon by its
stockholders and directors.
22
Truth to tell, a judicial order to decrease capital stock without the
assent of FLADCs directors and stockholders is a violation of the
business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of the
minority, as when plaintiffs aver that the defendants (members of
the board), have concluded a transaction among themselves as will
result in serious injury to the plaintiffs stockholders. [29]
The reason behind the rule is aptly explained by Dean Cesar L.
Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business
judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free
enterprise system prevailing in our social and economic set-up
dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are ill-
equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the
corporate business has been vested in the board and not with
courts.[30]
Apparently, the Tius do not realize the illegal consequences of
seeking rescission and control of the corporation to the exclusion of
the Ongs. Such an act infringes on the law on reduction of capital
stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its
authorized capital stock is not only against the law but is also
prejudicial to corporate creditors who enjoy absolute priority of
payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case
is not difficult to understand. If rescission is denied, will injustice be
inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact
and safe within FLADC. On the other hand, if rescission is granted,
will any of the parties suffer an injustice?Definitely yes because the
Ongs will find themselves out in the streets with nothing but the
money they had in 1994 while the Tius will not only enjoy a windfall
estimated to be anywhere from P450 million to P900 million [31] but
will also take over an extremely profitable business without much
effort at all.
Another very important point follows. The Court of Appeals and,
later on, our Decision dated February 1, 2002, stated that both
groups were in pari delicto, meaning, that both the Tius and the
Ongs committed breaches of the Pre-Subscription Agreement. This
may be true to a certain extent but, judging from the comparative
gravity of the acts separately committed by each group, we find
that the Ongs acts were relatively tame vis--vis those committed by
the Tius in not surrendering FLADC funds to the corporation and
diverting corporate income to their own MATTERCO account. The
Ongs were right in not issuing to the Tius the shares corresponding
to the four-story building and the 1,902.30 square-meter lot
because no title for it could be issued in FLADCs name, owing to
the Tius refusal to pay the transfer taxes. And as far as the 151
square-meter lot was concerned, why should FLADC issue
additional shares to the Tius for property already owned by the
corporation and which, in the final analysis, was already factored
into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the
Court of Appeals, to pull a fast one on the Ongs because that was
where the problem precisely started. It is clear that, when the
finances of FLADC improved considerably after the equity infusion
of the Ongs, the Tius started planning to take over the corporation
again and exclude the Ongs from it. It appears that the Tius
refusal to pay transfer taxes might not have really been at all
unintentional because, by failing to pay that relatively small
amount which they could easily afford, the Tius should have
expected that they were not going to be given the corresponding
shares. It was, from every angle, the perfect excuse for
blackballing the Ongs. In other words, the Tius created a problem
then used that same problem as their pretext for showing their
partners the door. In the process, they stood to be rewarded with
a bonanza of anywhere between P450 million to P900 million in
assets (from an investment of only P45 million which was nearly
foreclosed by PNB), to the extreme and irreparable damage of the
Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact
that the Masagana Citimall would not be what it has become
today were it not for the timely infusion of P190 million by the
Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they
originally invested in said mall. If only for this and the fact that
this Resolution can truly pave the way for both groups to enjoy
the fruits of their investments assuming good faith and honest
intentions we cannot allow the rescission of the subject
subscription agreement. The Ongs shortcomings were far from
serious and certainly less than substantial; they were in fact
remediable and correctable under the law. It would be totally
against all rules of justice, fairness and equity to deprive the Ongs
of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15,
2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna
Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion
for partial reconsideration, dated March 15, 2002, of petitioner
Willie Ong are hereby GRANTED. The Petition for Confirmation of
the Rescission of the Pre-Subscription Agreement docketed as SEC
Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The
unilateral rescission by the Tius of the subject Pre-Subscription
Agreement, dated August 15, 1994, is hereby declared as null and
void.
The motion for the issuance of a writ of execution, dated March
15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow,
Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is
hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002,
affirming with modification the decision of the Court of Appeals,
dated October 5, 1999, and the SEC en banc, dated September
11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
9. G.R. No. 183905 April 16, 2009
GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner,
- versus - THE HON. COURT OF APPEALS, BRION
x------------------------------------------------------------------------------------------
----- x
G.R. No. 184275
23
 SECURITIES AND EXCHANGE COMMISSION, COMMISSIONER JESUS
ENRIQUE G. MARTINEZ IN HIS CAPACITY AS OFFICER-IN-CHARGE OF
THE SECURITIES AND EXCHANGE COMMISSION and HUBERT G.
GUEVARA IN HIS CAPACITY AS DIRECTOR OF THE COMPLIANCE AND
ENFORCEMENT DEPT. OF SECURITIES Petitioners, - versus -
ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO,
JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAEZ, and
FRANCIS GILES PUNO, Respondents.
These are the undisputed facts.
The annual stockholders meeting (annual meeting) of the Manila
Electric Company (Meralco) was scheduled on 27 May 2008. [1] In
connection with the annual meeting, proxies [2] were required to be
submitted on or before 17 May 2008, and the proxy validation was
slated for five days later, or 22 May.[3]
In view of the resignation of Camilo Quiason,[4] the position of
corporate secretary of Meralco became vacant.[5] On 15 May 2008,
the board of directors of Meralco designated Jose Vitug [6] to act as
corporate secretary for the annual meeting. [7] However, when the
proxy validation began on 22 May, the proceedings were presided
over by respondent Anthony Rosete (Rosete), assistant corporate
secretary and in-house chief legal counsel of Meralco. [8] Private
respondents nonetheless argue that Rosete was the acting
corporate secretary of Meralco. [9] Petitioner Government Service
Insurance System (GSIS), a major shareholder in Meralco, was
distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management. [10]
On 23 May 2008, GSIS filed a complaint with the Regional Trial
Court (RTC) of Pasay City, docketed as R-PSY-08-05777-C4
seeking the declaration of certain proxies asinvalid.[11] Three days
later, on 26 May, GSIS filed a Notice with the RTC manifesting the
dismissal of the complaint.[12] On the same day, GSIS filed
an Urgent Petition[13] with the Securities and Exchange Commission
(SEC) seeking to restrain Rosete from recognizing, counting and
tabulating, directly or indirectly, notionally or actually or in
whatever way, form, manner or means, or otherwise honoring the
shares covered by the proxies in favor of respondents Manuel
Lopez,[14] Felipe Alfonso,[15] Jesus Francisco,[16] Oscar Lopez, Christian
Monsod,[17] Elpidio Ibaez,[18] Francisco Giles-Puno[19] or any officer
representing MERALCO Management, and to annul and declare
invalid said proxies.[20] GSIS also prayed for the issuance of a Cease
and Desist Order (CDO) to restrain the use of said proxies during
the annual meeting scheduled for the following day. [21] A CDO[22] to
that effect signed by SEC Commissioner Jesus Martinez was issued
on 26 May 2008, the same day the complaint was filed. During the
annual meeting held on the following day, Rosete announced that
the meeting would push through, expressing the opinion that
the CDO is null and void.[23]
On 28 May 2008, the SEC issued a Show Cause Order (SCO)
[24]
against private respondents, ordering them to appear before the
Commission on 30 May 2008 and explain why they should not be
cited in contempt. On 29 May 2008, respondents filed a petition for
certiorari with prohibition[25] with the Court of Appeals, praying that
theCDO and the SCO be annulled. The petition was docketed as CA-
G.R. SP No. 103692.
Many developments involving the Court of Appeals handling of CA-
G.R. SP No. 103692 and the conduct of several of its individual
justices are recounted in our Resolution dated 9 September
2008 in A.M. No. 08-8-11-CA (Re: Letter Of Presiding Justice
Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692).[26] On 23 July
2008, the Court of Appeals Eighth Division promulgated a decision
in the case with the following dispositive portion:
WHEREFORE, premises considered, the May 26, 2008 complaint
filed by GSIS in the SEC is hereby DISMISSED due to SECs lack of
jurisdiction, due to forum shopping by respondent GSIS, and due
to splitting of causes of action by respondent GSIS. Consequently,
the SECs undated cease and desist order and the SECs May 28,
2008 show cause order are hereby DECLARED VOID AB INITIO and
without legal effect and their implementation are hereby
permanently restrained.
The May 26, 2008 complaint filed by GSIS in the SEC is hereby
barred from being considered, out of equitable considerations, as
an election contest in the RTC, because the prescriptive period of
15 days from the May 27, 2008 Meralco election to file an election
contest in the RTC had already run its course, pursuant to Sec. 3,
Rule 6 of the interim Rules of Procedure Governing Intra-Corporate
Controversies under R.A. No. 8799, due to deliberate act of GSIS
in filing a complaint in the SEC instead of the RTC.
Let seventeen (17) copies of this decision be officially
TRANSMITTED to the Office of the Chief Justice and three (3)
copies to the Office of the Court Administrator:
(1) for sanction by the Supreme Court against the GSIS LAW
OFFICE for unauthorized practice of law,
(2) for sanction and discipline by the Supreme Court of GSIS
lawyers led by Atty. Estrella Elamparo-Tayag, Atty. Marcial C.
Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for
violation of Sec. 27 of Rule 138 of the Revised Rules of Court,
pursuant to Santayana v. Alampay, A.C. No. 5878, March 21, 2005
454 SCRA 1, and pursuant to Land Bank of the Philippines v.
Raymunda Martinez, G.R. No. 169008, August 14, 2007:
(a) for violating express provisions of law and defying public
policy in deliberately displacing the Office of the Government
Corporate Counsel (OGCC) from its duty as the exclusive lawyer of
GSIS, a government owned and controlled corporation (GOCC), by
admittedly filing and defending cases as well as appearing as
counsel for GSIS, without authority to do so, the authority
belonging exclusively to the OGCC;
(b) for violating the lawyers oath for failing in their duty to
act as faithful officers of the court by engaging in forum shopping;
(c) for violating express provisions of law most especially
those on jurisdiction which are mandatory; and
(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil
Procedure by deliberately splitting causes of action in order to file
multiple complaints: (i) in the RTC of Pasay City and (ii) in the SEC,
in order to ensure a favorable order. [27]
The promulgation of the said decision provoked a searing
controversy, as detailed in our Resolution in A.M. No. 08-8-11-CA.
Nonetheless, the appellate courts decision spawned three
different actions docketed with their own case numbers before
this Court. One of them, G.R. No. 183933, was initiated by
a Motion for Extension of Time to File Petition for Review filed by
the Office of the Solicitor General (OSG) in behalf of the SEC,
Commissioner Martinez in his capacity as officer-in-charge of the
SEC, and Hubert Guevarra in his capacity as Director of the
Compliance and Enforcement Department of the SEC. [28] However,
the OSG did not follow through with the filing of the petition for
review adverted to; thus, on 19 January 2009, the Court resolved
to declare G.R. No. 183933 closed and terminated. [29]
24
The two remaining cases before us are docketed as G.R. No.
183905 and 184275. G.R. No. 183905 pertains to a petition for
certiorari and prohibition filed by GSIS, against the Court of
Appeals, and respondents Rosete, Lopez, Alfonso, Francisco,
Monsod, Ibaez and Puno, all of whom serve in different corporate
capacities with Meralco or First Philippines Holdings Corporation, a
major stockholder of Meralco and an affiliate of the Lopez Group of
Companies. This petition seeks of the Court to declare the 23 July
2008 decision of the Court of Appeals null and void, affirm the SECs
jurisdiction over the petition filed before it by GSIS, and pronounce
that the CDO and the SCO orders are valid. This petition was filed in
behalf of GSIS by the GSIS Law Office; it was signed by the Chief
Legal Counsel and Assistant Legal Counsel of GSIS, and three self-
identified Attorney[s], presumably holding lawyer positions in GSIS.
[30]
The OSG also filed the other petition, docketed as G.R. No. 184275.
It identifies as its petitioners the SEC, Commissioner Martinez in his
capacity as OIC of the SEC, and Hubert Guevarra in his capacity as
Director of the Compliance and Enforcement Department of the
SEC the same petitioners in the aborted petition for review initially
docketed as G.R. No. 183933. Unlike what was adverted to in the
motion for extension filed by the same petitioners in G.R. No.
183933, the petition in G.R. No. 184275 is one for certiorari under
Rule 65 as indicated on page 3 thereof,[31] and not a petition for
review. Interestingly, save for the first page which leaves the
docket number blank, all 86 pages of this petition for certiorari
carry a header wrongly identifying the pleading as the non-existent
petition for review under G.R. No. 183933. This petition seeks the
reversal of the assailed decision of the Court of Appeals, the
recognition of the jurisdiction of the SEC over the petition of GSIS,
and the affirmation of the CDO and SCO.
II.
Private respondents seek the expunction of the petition filed by the
SEC in G.R. No. 184275. We agree that the petitioners therein,
namely: the SEC, Commissioner Marquez and Guevarra, are not real
parties-in-interest to the dispute and thus bereft of capacity to file
the petition. By way of simple illustration, to argue otherwise is to
say that the trial court judge, the National Labor Relations
Commission, or any quasi-judicial agency has the right to seek the
review of an appellate court decision reversing any of their rulings.
That prospect, as any serious student of remedial law knows, is
zero.
The Court, through the Resolution of the Third Division dated 2
September 2008, had resolved to treat the petition in G.R. No.
184275 as a petition for review on certiorari, but withheld giving
due course to it.[32] Under Section 1 of Rule 45, which governs
appeals by certiorari, the right to file the appeal is restricted to a
party, meaning that only the real parties-in-interest who litigated
the petition for certiorari before the Court of Appeals are entitled to
appeal the same under Rule 45. The SEC and its two officers may
have been designated as respondents in the petition for certiorari
filed with the Court of Appeals, but under Section 5 of Rule 65 they
are not entitled to be classified as real parties-in-interest. Under the
provision, the judge, court, quasi-judicial agency, tribunal,
corporation, board, officer or person to whom grave abuse of
discretion is imputed (the SEC and its two officers in this case) are
denominated only as public respondents. The provision further
states that public respondents shall not appear in or file an answer
or comment to the petition or any pleading therein. [33] Justice
Regalado explains:
[R]ule 65 involves an original special civil action specifically
directed against the person, court, agency or party a quo which
had committed not only a mistake of judgment but an error of
jurisdiction, hence should be made public respondents in that
action brought to nullify their invalid acts. It shall, however be the
duty of the party litigant, whether in an appeal under Rule 45 or in
a special civil action in Rule 65, to defend in his behalf and the
party whose adjudication is assailed, as he is the one interested in
sustaining the correctness of the disposition or the validity of the
proceedings.
xxx The party interested in sustaining the proceedings in the
lower court must be joined as a co-respondent and he has the
duty to defend in his own behalf and in behalf of the court which
rendered the questioned order. While there is nothing in the Rules
that prohibit the presiding judge of the court involved from filing
his own answer and defending his questioned order, the Supreme
Court has reminded judges of the lower courts to refrain from
doing so unless ordered by the Supreme Court.[ [34]] The judicial
norm or mode of conduct to be observed in trial and appellate
courts is now prescribed in the second paragraph of this section.
xxx
A person not a party to the proceedings in the trial court or in the
Court of Appeals cannot maintain an action for certiorari in the
Supreme Court to have the judgment reviewed. [35]
Rule 65 does recognize that the SEC and its officers should have
been designated as public respondents in the petition for
certiorari filed with the Court of Appeals. Yet their involvement in
the instant petition is not as original party-litigants, but as the
quasi-judicial agency and officers exercising the adjudicative
functions over the dispute between the two contending factions
within Meralco. From the onset, neither the SEC nor Martinez or
Guevarra has been considered as a real party-in-interest. Section
2, Rule 3 of the 1997 Rules of Civil Procedure provides that every
action must be prosecuted or defended in the name of the real
party in interest, that 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. It would be facetious to assume that the SEC
had any real interest or stake in the intra-corporate dispute within
Meralco.
We find our ruling in Hon. Santiago v. Court of Appeals[36] quite
apposite to the question at hand. Petitioner therein, a trial court
judge, had presided over an expropriation case. The litigants had
arrived at an amicable settlement, but the judge refused to
approve the same, even declaring it invalid. The matter was
elevated to the Court of Appeals, which promptly reversed the
trial court and approved the amicable settlement. The judge took
the extraordinary step of filing in his own behalf a petition for
review on certiorari with this Court, assailing the decision of the
Court of Appeals which had reversed him. In disallowing the
judges petition, the Court explained:
While the issue in the Court of Appeals and that raised by
petitioner now is whether the latter abused his discretion in
nullifying the deeds of sale and in proceeding with the
expropriation proceeding, that question is eclipsed by the concern
of whether Judge Pedro T. Santiago may file this petition at all.
And the answer must be in the negative, Section 1 of Rule 45
allows a party to appeal by certiorari from a judgment of the
Court of Appeals by filing with this Court a petition for review
on certiorari. But petitioner judge was not a party either in the
expropriation proceeding or in the certiorari proceeding in the
Court of Appeals. His being named as respondent in the Court of
Appeals was merely to comply with the rule that in original
25
petitions for certiorari, the court or the judge, in his capacity as
such, should be named as party respondent because the question
in such a proceeding is the jurisdiction of the court itself (See Mayol
v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules of
Court, Moran, Vol. II, 1979 ed., p. 471). "In special proceedings, the
judge whose order is under attack is merely a nominal party;
wherefore, a judge in his official capacity, should not be made to
appear as a party seeking reversal of a decision that is unfavorable
to the action taken by him. A decent regard for the judicial
hierarchy bars a judge from suing against the adverse opinion of a
higher court,. . . ." (Alcasid v. Samson, 102 Phil. 785, 740 [1957])
ACCORDINGLY, this petition is DENIED for lack of legal capacity to
sue by the petitioner.[37]
Justice Isagani Cruz added, in a Concurring Opinion
in Santiago: The judge is not an active combatant in such
proceeding and must leave it to the parties themselves to argue
their respective positions and for the appellate court to rule on the
matter without his participation.[38]
Note that in Santiago, the Court recognized the good faith of the
judge, who perceived the amicable settlement as a manifestly
iniquitous and illegal contract.[39] The SEC could have similarly felt
in good faith that the assailed Court of Appeals decision had unduly
impaired its prerogatives or caused some degree of hurt to it. Yet
assuming that there are rights or prerogatives peculiar to the SEC
itself that the appellate court had countermanded, these can be
vindicated in the petition for certiorari filed by GSIS, whose legal
capacity to challenge the Court of Appeals decision is without
question. There simply is no plausible reason for this Court to
deviate from a time-honored rule that preserves the purity of our
judicial and quasi-judicial offices to accommodate the SECs distrust
and resentment of the appellate courts decision. The expunction of
the petition in G.R. No. 184275 is accordingly in order.
At this point, only one petition remainsthe petition for certiorari
filed by GSIS in G.R. No. 183905. Casting off the uncritical and
unimportant aspects, the two main issues for adjudication are as
follows: (1) whether the SEC has jurisdiction over the petition filed
by GSIS against private respondents; and (2) whether
the CDO and SCO issued by the SEC are valid.
II.
It is our resolute inclination that this case, which raises interesting
questions of law, be decided solely on the merits, without regard to
the personalities involved or the well-reported drama preceding the
petition. To that end, the Court has taken note of reports in the
media that GSIS and the Lopez group have taken positive steps to
divest or significantly reduce their respective interests in Meralco.
[40]
These are developments that certainly ease the tension
surrounding this case, not to mention reason enough for the two
groups to make an internal reassessment of their respective
positions and interests in relation to this case. Still, the key legal
questions raised in the petition do not depend at all on the identity
of any of the parties, and would obtain the same denouement even
if this case was lodged by unknowns as petitioners against similarly
obscure respondents.
With the objective to resolve the key questions of law raised in the
petition, some of the issues raised diminish as peripheral. For
example, petitioners raise arguments tied to the behavior of
individual justices of the Court of Appeals, particularly former
Justice Vicente Roxas, in relation to this case as it was pending
before the appellate court. The Court takes cognizance of
our Resolution in A.M. No. 08-8-11-CA dated 9 September 2008,
which duly recited the various anomalous or unbecoming acts in
relation to this case performed by two of the justices who decided
the case in behalf of the Court of Appealsformer Justice Roxas
(the ponente) and Justice Bienvenido L. Reyes (the Chairman of
the 8th Division) as well as three other members of the Court of
Appeals. At the same time, the consensus of the Court as it
deliberated on A.M. No. 08-8-11-CA was to reserve comment or
conclusion on the assailed decision of the Court of Appeals, in
recognition of the reality that however stigmatized the actions
and motivations of Justice Roxas are, the decision is still the
product of the Court of Appeals as a collegial judicial body, and
not of one or some rogue justices. The penalties levied by the
Court on these appellate court justices, in our estimation, redress
the unwholesome acts which they had committed. At the same
time, given the jurisprudential importance of the questions of law
raised in the petition, any result reached without squarely
addressing such questions would be unsatisfactory, perhaps
derelict even.
III.
We now examine whether the SEC has jurisdiction over the
petition filed by GSIS. To recall, SEC has sought to enjoin the use
and annul the validation, of the proxies issued in favor of several
of the private respondents, particularly in connection with the
annual meeting.
A.
Jurisdiction is conferred by no other source but law. Both sides
have relied upon provisions of Rep. Act No. 8799, otherwise
known as the Securities Regulation Code (SRC), its implementing
rules (Amended Implementing Rules or AIRR-SRC), and other
related rules to support their competing contentions that either
the SEC or the trial courts has exclusive original jurisdiction over
the dispute.
GSIS primarily anchors its argument on two correlated provisions
of the SRC. These are Section 53.1 and Section 20.1, which we
cite:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses .
- 53.1. The Commission may, in its discretion, make such
investigations as it deems necessary to determine whether any
person has violated or is about to violate any provision of
this Code, any rule, regulation or order thereunder, or any rule of
an Exchange, registered securities association, clearing agency,
other self-regulatory organization, and may require or permit any
person to file with it a statement in writing, under oath or
otherwise, as the Commission shall determine, as to all facts and
circumstances concerning the matter to be investigated. The
Commission may publish information concerning any such
violations, and to investigate any fact, condition, practice or
matter which it may deem necessary or proper to aid in the
enforcement of the provisions of this Code, in the prescribing of
rules and regulations thereunder, or in securing information to
serve as a basis for recommending further legislation concerning
the matters to which this Code relates: xxx (emphasis supplied)
SEC. 20. Proxy Solicitations. 20.1. Proxies must be issued and
proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission;
The argument, stripped of extravagance, is that since proxy
solicitations following Section 20.1 have to be made in
accordance with rules and regulations issued by the SEC, it is the
SEC under Section 53.1 that has the jurisdiction to investigate
26
alleged violations of the rules on proxy solicitations. The GSIS
petition invoked AIRR-AIRR-SRC Rule 20, otherwise known as The
Proxy Rule, which enumerates the requirements as to form of proxy
and delivery of information to security holders. According to GSIS,
the information statement Meralco had filed with the SEC in
connection with the annual meeting did not contain any proxy form
as required under AIRR-SRC Rule 20.
On the other hand, private respondents argue before us that under
Section 5.2 of the SRC, the SECs jurisdiction over all cases
enumerated in Section 5 of Presidential Decree No. 902-A was
transferred to the courts of general jurisdiction or the appropriate
regional trial court. The two particular classes of cases in the
enumeration under Section 5 of Presidential Decree No. 902-A
which private respondents especially refer to are as follows:
xxx
(2) Controversies arising out of intra-corporate, partnership, or
association relations, between and among stockholders, members,
or associates; or association of which they are stockholders,
members, or associates, respectively;
3) Controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships, or
associations;
xxx
In addition, private respondents cite the Interim Rules on Intra-
Corporate Controversies (Interim Rules) promulgated by this Court
in 2001, most pertinently, Section 2 of Rule 6 (on Election
Contests), which defines election contests as follows:
SEC. 2. Definition. An election contest refers to any controversy or
dispute involving title or claim to any elective office in a stock or
nonstock corporation, the validation of proxies, the manner and
validity of elections and the qualifications of candidates, including
the proclamation of winners, to the office of director, trustee or
other officer directly elected by the stockholders in a close
corporation or by members of a nonstock corporation where the
articles of incorporation or bylaws so provide. (emphasis supplied)
The correct answer is not clear-cut, but there is one. In private
respondents favor, the provisions of law they cite pertain directly
and exclusively to the statutory jurisdiction of trial courts acquired
by virtue of the transfer of jurisdiction following the passage of the
SRC. In contrast, the SRC provisions relied upon by GSIS do not
immediately or directly establish that bodys jurisdiction over the
petition, since it necessitates the linkage of Section 20 to Section
53.1 of the SRC before the point can bear on us.
On the other hand, the distinction between proxy solicitation and
proxy validation cannot be dismissed offhand. The right of
a stockholder to vote by proxy is generallyestablished by the
Corporation Code,[41] but it is the SRC which specifically regulates
the form and use of proxies, more particularly the procedure of
proxy solicitation, primarily through Section 20. [42] AIRR-SRC Rule 20
defines the terms solicit and solicitation:
The terms solicit and solicitation include:
A. any request for a proxy whether or not accompanied by or
included in a form of proxy
B. any request to execute or not to execute, or to revoke, a
proxy; or
C. the furnishing of a form of proxy or other communication to
security holders under circumstance reasonably calculated to
result in the procurement, withholding or revocation of a proxy.
It is plain that proxy solicitation is a procedure that antecedes
proxy validation. The former involves the securing and submission
of proxies, while the latter concerns the validation of such secured
and submitted proxies. GSIS raises the sensible point that there
was no election yet at the time it filed its petition with the SEC,
hence no proper election contest or controversy yet over which
the regular courts may have jurisdiction. And the point ties its
cause of action to alleged irregularities in the proxy solicitation
procedure, a process that precedes either the validation of proxies
or the annual meeting itself.
Under Section 20.1, the solicitation of proxies must be in
accordance with rules and regulations issued by the SEC, such as
AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the
discretion to make such investigations as it deems necessary to
determine whether any person has violated any rule issued by it,
such as AIRR-SRC Rule 4. The investigatory power of the SEC
established by Section 53.1 is central to its regulatory authority,
most crucial to the public interest especially as it may pertain to
corporations with publicly traded shares. For that reason, we are
not keen on pursuing private respondents insistence that the GSIS
complaint be viewed as rooted in an intra-corporate controversy
solely within the jurisdiction of the trial courts to decide. It is
possible that an intra-corporate controversy may animate a
disgruntled shareholder to complain to the SEC a corporations
violations of SEC rules and regulations, but that motive alone
should not be sufficient to deprive the SEC of its investigatory and
regulatory powers, especially so since such powers are
exercisable on a motu proprio basis.
At the same time, Meralco raises the substantial point that
nothing in the SRC empowers the SEC to annul or invalidate
improper proxies issued in contravention of Section 20. It cites
that the penalties defined by the SEC itself for violation of Section
20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the
first offense, and pecuniary fines for succeeding offenses.
[43]
Indeed, if the SEC does not have the power to invalidate
proxies solicited in violation of its promulgated rules, serious
questions may be raised whether it has the power to adjudicate
claims of violation in the first place, since the relief it may extend
does not directly redress the cause of action of the complainant
seeking the exclusion of the proxies.
There is an interesting point, which neither party raises, and it
concerns Section 6(g) of Presidential Decree No. 902-A, which
states:
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx
(g) To pass upon the validity of the issuance and use of proxies
and voting trust agreements for absent stockholders or members;
xxx
As promulgated then, the provision would confer on the SEC the
power to adjudicate controversies relating not only to proxy
solicitation, but also to proxy validation. Should the proposition
27
hold true up to the present, the position of GSIS would have merit,
especially since Section 6 of Presidential Decree No. 902-A was not
expressly repealed or abrogated by the SRC.[44]
Yet a closer reading of the provision indicates that such power of
the SEC then was incidental or ancillary to the exercise of such
jurisdiction. Note that Section 6 is immediately preceded by Section
5, which originally conferred on the SEC original and exclusive
jurisdiction to hear and decide cases involving controversies in the
election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations. The
cases referred to in Section 5 were transferred from the jurisdiction
of the SEC to the regular courts with the passage of the SRC,
specifically Section 5.2. Thus, the SECs power to pass upon the
validity of proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its abrogated
jurisdictional powers.
Based on the foregoing, it is evident that the linchpin in deciding
the question is whether or not the cause of action of GSIS before
the SEC is intimately tied to an election controversy, as defined
under Section 5(c) of Presidential Decree No. 902-A. To answer that,
we need to properly ascertain the scope of the power of trial courts
to resolve controversies in corporate elections.
B.
Shares of stock in corporations may be divided into voting shares
and non-voting shares, which are generally issued as preferred or
redeemable shares.[45] Voting rights are exercised during regular or
special meetings of stockholders; regular meetings to be held
annually on a fixed date, while special meetings may be held at any
time necessary or as provided in the by-laws, upon due notice.
[46]
The Corporation Code provides for a whole range of matters
which can be voted upon by stockholders, including a limited set on
which even non-voting stockholders are entitled to vote on.[47] On
any of these matters which may be voted upon by stockholders,
the proxy device is generally available.[48]
Under Section 5(c) of Presidential Decree No. 902-A, in relation to
the SRC, the jurisdiction of the regular trial courts with respect to
election-related controversies is specifically confined to
controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships, or
associations. Evidently, the jurisdiction of the regular courts over
so-called election contests or controversies under Section 5(c) does
not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees,
in which stockholders are authorized to participate under Section
24 of the Corporation Code.[49]
This qualification allows for a useful distinction that gives due effect
to the statutory right of the SEC to regulate proxy solicitation, and
the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its
rules on proxy solicitation is unquestioned when proxies are
obtained to vote on matters unrelated to the cases enumerated
under Section 5 of Presidential Decree No. 902-A. However, when
proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly
seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in
relation to Section 5(c) of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular
courts over such controversies in the election of corporate directors
must be seen as intended to confine to one body the adjudication
of all related claims and controversy arising from the election of
such directors. For that reason, the aforequoted Section 2, Rule 6
of the Interim Rules broadly defines the term election contest as
encompassing all plausible incidents arising from the election of
corporate directors, including: (1) any controversy or dispute
involving title or claim to any elective office in a stock or nonstock
corporation, (2) the validation of proxies, (3) the manner and
validity of elections and (4) the qualifications of candidates,
including the proclamation of winners. If all matters anteceding
the holding of such election which affect its manner and conduct,
such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of
overlapping and competing jurisdictions between that body and
the regular courts becomes frighteningly real. From the language
of Section 5(c) of Presidential Decree No. 902-A, it is indubitable
that controversies as to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for election to the
board of directors are properly cognizable and adjudicable by the
regular courts exercising original and exclusive jurisdiction over
election cases. Questions relating to the proper solicitation of
proxies used in such election are indisputably related to such
issues, yet if the position of GSIS were to be upheld, they would
be resolved by the SEC and not the regular courts, even if they
fall within controversies in the election of directors.
The Court recognizes that GSISs position flirts with the abhorrent
evil of split jurisdiction,[50] allowing as it does both the SEC and the
regular courts to assert jurisdiction over the same controversies
surrounding an election contest. Should the argument of GSIS be
sustained, we would be perpetually confronted with the spectacle
of election controversies being heard and adjudicated by both the
SEC and the regular courts, made possible through a mere
allegation that the anteceding proxy solicitation process was
errant, but the competing cases filed with one objective in mind
to affect the outcome of the election of the board of directors.
There is no definitive statutory provision that expressly mandates
so untidy a framework, and we are disinclined to construe the SRC
in such a manner as to pave the way for the splitting of
jurisdiction.
Unlike either Section 20.1 or Section 53.1, which merely alludes to
the rule-making or investigatory power of the SEC, Section 5 of
Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction,
expressly granting as it does original and exclusive jurisdiction
first to the SEC, and now to the regular courts. The fact that the
jurisdiction of the regular courts under Section 5(c) is confined to
the voting on election of officers, and not on all matters which
may be voted upon by stockholders, elucidates that the power of
the SEC to regulate proxies remains extant and could very well be
exercised when stockholders vote on matters other than the
election of directors.
That the proxy challenge raised by GSIS relates to the election of
the directors of Meralco is undisputed. The controversy was
engendered by the looming annual meeting, during which the
stockholders of Meralco were to elect the directors of the
corporation. GSIS very well knew of that fact. On 17 March 2008,
the Meralco board of directors adopted a board resolution stating:
RESOLVED that the board of directors of the Manila Electric
Company (MERALCO) delegate, as it hereby delegates to the
Nomination & Governance Committee the authority to approve
and adopt appropriate rules on: (1) nomination of candidates for
election to the board of directors; (2) appreciation of ballots
during the election of members of the board of directors; and (3)
28
validation of proxies for regular or special meetings of the
stockholders.[51]
In addition, the Information Statement/Proxy form filed by First
Philippine Holdings Corporation with the SEC pursuant to Section 20
of the SRC, states:
REASON FOR SOLICITATION OF VOTES
The Solicitor is soliciting proxies from stockholders of the
Company for the purpose of electing the directors named under the
subject headed Directors in this Statement as well as to vote the
matters in the agenda of the meeting as provided for in the
Information Statement of the Company. All of the nominees are
current directors of the Company.[52]
Under the circumstances, we do not see it feasible for GSIS to posit
that its challenge to the solicitation or validation of proxies bore no
relation at all to the scheduled election of the board of directors of
Meralco during the annual meeting. GSIS very well knew that the
controversy falls within the contemplation of an election
controversy properly within the jurisdiction of the regular courts.
Otherwise, it would have never filed its original petition with the
RTC of Pasay. GSIS may have withdrawn its petition with the RTC on
a new assessment made in good faith that the controversy falls
within the jurisdiction of the SEC, yet the reality is that the
reassessment is precisely wrong as a matter of law.
IV.
The lack of jurisdiction of the SEC over the subject matter of GSISs
petition necessarily invalidates the CDO and SDO issued by that
body. However, especially with respect to the CDO, there is need
for this Court to squarely rule on the question pertaining to its
validity, if only for jurisprudential value and for the guidance of the
SEC.
To recount the facts surrounding the issuance of the CDO, GSIS filed
its petition with the SEC on 26 May 2008. The CDO, six (6) pages in
all with three (3) pages devoted to the tenability of granting the
injunctive relief, was issued on the very same day, 26 May 2008,
without notice or hearing. The CDO bore the signature of
Commissioner Jesus Martinez, identified therein as Officer-in-
Charge, and nobody elses.
The provisions of the SRC relevant to the issuance of a CDO are as
follows:
SEC. 5. Powers and Functions of the Commission.- 5.1. The
Commission shall act with transparency and shall have the powers
and functions provided by this Code, Presidential Decree No. 902-A,
the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and
functions:
xxx
(i) Issue cease and desist orders to prevent fraud or injury to the
investing public;
xxx
[SEC.] 53.3. Whenever it shall appear to the Commission that any
person has engaged or is about to engage in any act or practice
constituting a violation of any provision of this Code, any rule,
regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency or other self-
regulatory organization, it may issue an order to such person to
desist from committing such act or practice: Provided,
however, That the Commission shall not charge any person with
violation of the rules of an Exchange or other self regulatory
organization unless it appears to the Commission that such
Exchange or other self-regulatory organization is unable or
unwilling to take action against such person. After finding that
such person has engaged in any such act or practice and that
there is a reasonable likelihood of continuing, further or future
violations by such person, the Commission may issue ex-parte a
cease and desist order for a maximum period of ten (10) days,
enjoining the violation and compelling compliance with such
provision. The Commission may transmit such evidence as may
be available concerning any violation of any provision of this
Code, or any rule, regulation or order thereunder, to the
Department of Justice, which may institute the appropriate
criminal proceedings under this Code.
SEC. 64. Cease and Desist Order. 64.1. The Commission, after
proper investigation or verification, motu proprio, or upon verified
complaint by any aggrieved party, may issue a cease and desist
order without the necessity of a prior hearing if in its judgment
the act or practice, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public.
64.2. Until the Commission issues a cease and desist order, the
fact that an investigation has been initiated or that a complaint
has been filed, including the contents of the complaint, shall be
confidential. Upon issuance of a cease and desist order, the
Commission shall make public such order and a copy thereof shall
be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was
issued may, within five (5) days from receipt of the order, file a
formal request for a lifting thereof. Said request shall be set for
hearing by the Commission not later than fifteen (15) days from
its filing and the resolution thereof shall be made not later than
ten (10) days from the termination of the hearing. If the
Commission fails to resolve the request within the time herein
prescribed, the cease and desist order shall automatically be
lifted.
There are three distinct bases for the issuance by the SEC of
the CDO. The first, allocated by Section 5(i), is predicated on a
necessity to prevent fraud or injury to the investing public. No
other requisite or detail is tied to this CDO authorized under
Section 5(i).
The second basis, found in Section 53.3, involves a determination
by the SEC that any person has engaged or is about to engage in
any act or practice constituting a violation of any provision of this
Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency or
other self-regulatory organization. The provision additionally
requires a finding that there is a reasonable likelihood of
continuing [or engaging in] further or future violations by such
person. The maximum duration of the CDO issued under Section
53.3 is ten (10) days.
The third basis for the issuance of a CDO is Section 64.
This CDO is founded on a determination of an act or practice,
which unless restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice to
the investing public. Section 64.1 plainly provides three segregate
instances upon which the SEC may issue the CDO under this
29
provision: (1) after proper investigation or verification, (2) motu
proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section
64, the respondent to the CDO may file a formal request for the
lifting thereof, which the SEC must hear within fifteen (15) days
from filing and decide within ten (10) days from the hearing.
It appears that the CDO under Section 5(i) is similar to
the CDO under Section 64.1. Both require a common finding of a
need to prevent fraud or injury to the investing public. At the same
time, no mention is made whether the CDO defined under Section
5(i) may be issued ex-parte, while the CDO under Section 64.1
requires grave and irreparable injury, language absent in Section
5(i). Notwithstanding the similarities between Section 5(i) and
Section 64.1, it remains clear that the CDO issued under Section
53.3 is a distinct creation from that under Section 64.
The Court of Appeals cited the CDO as having been issued in
violation of the constitutional provision on due process, which
requires both prior notice and prior hearing.[53] Yet interestingly,
the CDO as contemplated in Section 53.3 or in Section 64, may be
issued ex-parte (under Section 53.3) or without necessity of
hearing (under Section 64.1). Nothing in these provisions impose a
requisite hearing before the CDO may be issued thereunder.
Nonetheless, there are identifiable requisite actions on the part of
the SEC that must be undertaken before the CDO may be issued
either under Section 53.3 or Section 64. In the case of Section 53.3,
the SEC must make two findings: (1) that such person has engaged
in any such act or practice, and (2) that there is a reasonable
likelihood of continuing, (or engaging in) further or future violations
by such person. In the case of Section 64, the SEC must adjudge
that the act, unless restrained, will operate as a fraud on investors
or is otherwise likely to cause grave or irreparable injury or
prejudice to the investing public.
Noticeably, the CDO is not precisely clear whether it was issued on
the basis of Section 5.1, Section 53.3 or Section 64 of the SRC.
The CDO actually refers and cites all three provisions, yet it is
apparent that a singular CDO could not be founded on Section
5.1, Section 53.3 and Section 64 collectively. At the very least,
the CDO under Section 53.3 and under Section 64 have their
respective requisites and terms.
GSIS was similarly cagey in its petition before the SEC, it
demurring to state whether it was seeking the CDO under Section
5.1, Section 53.3, or Section 64. Considering that injunctive relief
generally avails upon the showing of a clear legal right to such
relief, the inability or unwillingness to lay bare the precise statutory
basis for the prayer for injunction is an obvious impediment to a
successful application. Nonetheless, the error of the SEC in granting
the CDO without stating which kind of CDO it was issuing is more
unpardonable, as it is an act that contravenes due process of law.
We have particularly required, in administrative proceedings, that
the body or tribunal in all controversial questions, render its
decision in such a manner that the parties to the proceeding can
know the various issues involved, and the reason for the decision
rendered.[54] This requirement is vital, as its fulfillment would afford
the adverse party the opportunity to interpose a reasoned and
intelligent appeal that is responsive to the grounds cited against it.
The CDO extended by the SEC fails to provide the needed
reasonable clarity of the rationale behind its issuance.
The subject CDO first refers to Section 64, citing its provisions,
then stating: [p]rescinding from the aforequoted, there can be no
doubt whatsoever that the Commission is in fact mandated to take
up, if expeditiously, any verified complaint praying for the
provisional remedy of a cease and desist order. [55] The CDO then
discusses the nature of the right of GSIS to obtain the CDO, as
well as the urgent and paramount necessity to prevent serious
damage because the stockholders meeting is scheduled on May
28, 2008 x x x Had the CDO stopped there, the unequivocal
impression would have been that the order is based on Section
64.
But the CDO goes on to cite Section 5.1, quoting paragraphs (i)
and (n) in full, ratiocinating that under these provisions, the SEC
had the power to issue cease and desist orders to prevent fraud
or injury to the public and such other measures necessary to carry
out the Commissions role as regulator. [56] Immediately thence,
the CDO cites Section 53.3 as providing that whenever it shall
appear to the Commission that nay person has engaged or is
about to engage in any act or practice constituting a violation of
any provision, any rule, regulation or order thereunder, the
Commission may issue ex-parte a cease and desist order for a
maximum period of ten (10) days, enjoining the violation and
compelling compliance therewith. [57]
The citation in the CDO of Section 5.1, Section 53.3 and Section
64 together may leave the impression that it is grounded on all
three provisions, and that may very well have been the intention
of the SEC. Assuming that is so, it is legally impermissible for the
SEC to have utilized both Section 53.3 and Section 64 as basis for
the CDO at the same time. The CDO under Section 53.3 is
premised on distinctly different requisites than the CDO under
Section 64. Even more crucially, the lifetime of the CDO under
Section 53.3 is confined to a definite span of ten (10) days, which
is not the case with the CDO under Section 64. This CDO under
Section 64 may be the object of a formal request for lifting within
five (5) days from its issuance, a remedy not expressly afforded to
the CDO under Section 53.3.
Any respondent to a CDO which cites both Section 53.3 and
Section 64 would not have an intelligent or adequate basis to
respond to the same. Such respondent would not know whether
the CDO would have a determinate lifespan of ten (10) days, as in
Section 53.3, or would necessitate a formal request for lifting
within five (5) days, as required under Section 64.1. This lack of
clarity is to the obvious prejudice of the respondent, and is in
clear defiance of the constitutional right to due process of law.
Indeed, the veritable mlange that the assailed CDO is, with its
jumbled mixture of premises and conclusions, the antithesis of
due process.
Had the CDO issued by the SEC expressed the length of its term,
perhaps greater clarity would have been offered on what Section
of the SRC it is based. However, theCDO is precisely silent as to
its lifetime, thereby precluding much needed clarification. In view
of the statutory differences among the three CDOs under the SRC,
it is essential that the SEC, in issuing such injunctive relief,
identify the exact provision of the SRC on which the CDO is
founded. Only by doing so could the adversely affected party be
able to properly evaluate whatever his responses under the law.
To make matters worse for the SEC, the fact that the CDO was
signed, much less apparently deliberated upon, by only by one
commissioner likewise renders the order fatally infirm.
The SEC is a collegial body composed of a Chairperson and four
(4) Commissioners.[58] In order to constitute a quorum to conduct
business, the presence of at least three (3) Commissioners is
required.[59] In the leading case of GMCR v. Bell,[60] we definitively
explained the nature of a collegial body, and how the act of one
30
member of such body, even if the head, could not be considered as
that of the entire body itself. Thus:
We hereby declare that the NTC is a collegial body requiring a
majority vote out of the three members of the commission in order
to validly decide a case or any incident therein. Corollarily, the
vote alone of the chairman of the commission, as in this case, the
vote of Commissioner Kintanar, absent the required concurring
vote coming from the rest of the membership of the commission to
at least arrive at a majority decision, is not sufficient to legally
render an NTC order, resolution or decision.
Simply put, Commissioner Kintanar is not the National
Telecommunications Commission. He alone does not speak for and
in behalf of the NTC. The NTC acts through a three-man body, and
the three members of the commission each has one vote to cast in
every deliberation concerning a case or any incident therein that is
subject to the jurisdiction of the NTC. When we consider the
historical milieu in which the NTC evolved into the quasi-judicial
agency it is now under Executive Order No. 146 which organized
the NTC as a three-man commission and expose the illegality of all
memorandum circulars negating the collegial nature of the NTC
under Executive Order No. 146, we are left with only one logical
conclusion: the NTC is a collegial body and was a collegial body
even during the time when it was acting as a one-man regime. [61]
We can adopt a virtually word-for-word observation with respect to
former Commissioner Martinez and the SEC. Simply put,
Commissioner Martinez is not the SEC. He alone does not speak for
and in behalf of the SEC. The SEC acts through a five-person
body, and the five members of the commission each has one vote
to cast in every deliberation concerning a case or any incident
therein that is subject to the jurisdiction of the SEC.
GSIS attempts to defend former Commissioner Martinezs action,
but its argument is without merit. It cites SEC Order No. 169, Series
of 2008, whereby Martinez was designated as Officer-in-Charge of
the Commission for the duration of the official travel of the
Chairperson to Paris, France, to attend the 33rd Annual Conference
of the [IOSCO] from May 26-30, 2008.[62] As officer-in-charge
(OIC), Martinez was authorized to sign all documents and papers
and perform all other acts and deeds as may be necessary in the
day-to-day operation of the Commission.
It is clear that Martinez was designated as OIC because of the
official travel of only one member, Chairperson Fe
Barin. Martinez was not commissioned to act as the SEC itself. At
most, he was to act in place of Chairperson Barin in the exercise of
her duties as Chairperson of the SEC. Under Section 4.3 of the SRC,
the Chairperson is the chief executive officer of the SEC, and thus
empowered to execute and administer the policies, decisions,
orders and resolutions approved by the Commission, as well as to
have the general executive direction and supervision of the work
and operation of the Commission.[63] It is in relation to the exercise
of these duties of the Chairperson, and not to the functions of the
Commission, that Martinez was authorized to sign all documents
and papers and perform all other acts and deeds as may be
necessary in the day-to-day operation of the Commission.
GSIS likewise cites, as authority for Martinezs unilateral issuance of
the CDO, Section 4.6 of the SRC, which states that the SEC may, for
purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual
Commissioner or staff member of the Commission except its review
or appellate authority and its power to adopt, alter and supplement
any rule or regulation. Reliance on this provision is inappropriate.
First, there is no convincing demonstration that the SEC had
delegated to Martinez the authority to issue the CDO. The SEC
Order designating Martinez as OIC only authorized him to exercise
the functions of the absent Chairperson, and not of the
Commission. If the Order is read as enabling Martinez to issue
the CDO in behalf of the Commission, it would be akin to
conceding that the SEC Chairperson, acting alone, can issue
the CDO in behalf of the SEC itself. That again contravenes our
holding in GMCR v. Bell.
In addition, it is clear under Section 4.6 that the ability to
delegate functions to a single commissioner does not extend to
the exercise of the review or appellate authority of the SEC. The
issuance of the CDO is an act of the SEC itself done in the
exercise of its original jurisdiction to review actual cases or
controversies. If it has not been clear to the SEC before, it should
be clear now that its power to issue a CDO can not, under the
SRC, be delegated to an individual commissioner.
V.
In the end, even assuming that the events narrated in our
Resolution in A.M. No. 08-8-11-CA constitute sufficient basis to
nullify the assailed decision of the Court of Appeals, still it remains
clear that the reliefs GSIS seeks of this Court have no basis in law.
Notwithstanding the black mark that stains the appellate courts
decision, the first paragraph of its fallo, to the extent that it
dismissed the complaint of GSIS with the SEC for lack of
jurisdiction and consequently nullified the CDO and SDO, defies
unbiased scrutiny and deserves affirmation.
A
In its dispositive portion, the Court of Appeals likewise pronounced
that the complaint filed by GSIS with the SEC should be barred
from being considered as an election contest in the RTC, given
that the fifteen (15) day prescriptive period to file an election
contest with the RTC, under Section 3, Rule 6 of the Interim Rules,
had already run its course.[64]Yet no such relief was requested by
private respondents in their petition for certiorari filed with the
Court of Appeals[65]. Without disputing the legal predicates
surrounding this pronouncement, we note that its tenor, if not the
text, unduly suggests an unwholesome pre-emptive strike. Given
our observations in A.M. No. 08-8-11-CA of the undue interest
exhibited by the author of the appellate court decision, such
declaration is best deleted. Nonetheless, we do trust that any
court or tribunal that may be confronted with that premise
adverted to by the Court of Appeals would know how to properly
treat the same.
B.
Finally, we turn to the sanction on the lawyers of GSIS imposed
by the Court of Appeals.
Nonetheless, we find that as a matter of law the sanctions are
unwarranted. The charter of GSIS[66] is unique among government
owned or controlled corporations with original charter in that it
allocates a role for its internal legal counsel that is in conjunction
with or complementary to the Office of the Government Corporate
Counsel (OGCC), which is the statutory legal counsel for GOCCs.
Section 47 of GSIS charter reads:
SEC. 47. Legal Counsel.The Government Corporate Counsel shall
be the legal adviser and consultant of GSIS, but GSIS may assign
to the Office of the Government Corporate Counsel (OGCC) cases
for legal action or trial, issues for legal opinions, preparation and
review of contracts/agreements and others, as GSIS may decide
31
or determine from time to time: Provided, however, That the
present legal services group in GSIS shall serve as its in-house legal
counsel.
The GSIS may, subject to approval by the proper court, deputize
any personnel of the legal service group to act as special sheriff in
the enforcement of writs and processes issued by the court, quasi-
judicial agencies or administrative bodies in cases involving GSIS.
[67]
The designation of the OGCC as the legal counsel for GOCCs is set
forth by statute, initially by Rep. Act No. 3838, then reiterated by
the Administrative Code of 1987.[68]Given that the designation is
statutory in nature, there is no impediment for Congress to impose
a different role for the OGCC with respect to particular GOCCs it
may charter. Congress appears to have done so with respect to
GSIS, designating the OGCC as a legal adviser and consultant,
rather than as counsel to GSIS. Further, the law clearly vests unto
GSIS the discretion, rather than the duty, to assign cases to the
OGCC for legal action, while designating the present legal services
group of GSIS as in-house legal counsel. This situates GSIS
differently from the Land Bank of the Philippines, whose own in-
house lawyers have persistently argued before this Court to no
avail on their alleged right nto file petitions before us instead of the
OGCC.[69] Nothing in the Land Bank charter[70] vested it with the
discretion to choose when to assign cases to the OGCC,
notwithstanding the establishment of its own Legal Department. [71]
Congress is not bound to retain the OGCC as the primary or
exclusive legal counsel of GSIS even if it performs such a role for
other GOCCs. To bind Congress to perform in that manner would be
akin to elevating the OGCCs statutory role to irrepealable status,
and it is basic that Congress is barred from passing irrepealable
laws.[72]
C.
We close by acknowledging that the surrounding circumstances
behind these petitions are unfortunate, given the events as
narrated in A.M. No. 08-8-11-CA. While due punishment has been
meted on the errant magistrates, the corporate world may very
well be reminded that the members of the judiciary are not to be
viewed or treated as mere pawns or puppets in the internecine
fights businessmen and their associates wage against other
businessmen in the quest for corporate dominance. In the end, the
petitions did afford this Court to clarify consequential points of law,
points rooted in principles which will endure long after the names of
the participants in these cases have been forgotten.
WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack
of capacity of the petitioner to bring forth the suit.
The petition in G.R. No. 183905 is DISMISSED for lack of merit
except that the second and third paragraphs of the fallo of the
assailed decision dated 23 July 2008 of the Court of Appeals,
including subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the
second paragraph, are hereby DELETED.
No pronouncements as to costs.
10. G.R. No. 165887 June 6, 2011
MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION,
versus - MIGUEL LIM, in his personal capacity as Stockholder of
Ruby Industrial Corporation and representing the MINORITY
STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and the
MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION,
G.R. No. 165929
CHINA BANKING CORPORATION, - versus - MIGUEL LIM, in his personal
capacity as a stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL
CORPORATION,
This case is brought to us on appeal for the fourth time, involving
the same parties and interests litigating on issues arising from
rehabilitation proceedings initiated by Ruby Industrial Corporation
wayback in 1983.
Following is the factual backdrop of the present controversy, as
culled from the records and facts set forth in the ponencia of Chief
Justice Reynato S. Puno in Ruby Industrial Corporation v. Court of
Appeals.[1]
The Antecedents
Ruby Industrial Corporation (RUBY) is a domestic corporation
engaged in glass manufacturing. Reeling from severe liquidity
problems beginning in 1980, RUBY filed onDecember 13, 1983 a
petition for suspension of payments with the Securities and
Exchange Commission (SEC) docketed as SEC Case No. 2556. On
December 20, 1983, the SEC issued an order declaring RUBY
under suspension of payments and enjoining the disposition of its
properties pending hearing of the petition, except insofar as
necessary in its ordinary operations, and making payments
outside of the necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel created the
management committee (MANCOM) for RUBY, composed of
representatives from Allied Leasing and Finance Corporation
(ALFC), Philippine Bank of Communications (PBCOM), China
Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim
Giang. The MANCOM was tasked to perform the following
functions: (1) undertake the management of RUBY; (2) take
custody and control over all existing assets and liabilities of RUBY;
(3) evaluate RUBYs existing assets and liabilities, earnings and
operations; (4) determine the best way to salvage and protect the
interest of its investors and creditors; and (5) study, review and
evaluate the proposed rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to the
SEC: the BENHAR/RUBY Rehabilitation Plan of the majority
stockholders led by Yu Kim Giang, and the Alternative Plan of the
minority stockholders represented by Miguel Lim (Lim).
Under the BENHAR/RUBY Plan, Benhar International, Inc.
(BENHAR) -- a domestic corporation engaged in the importation
and sale of vehicle spare parts which is wholly owned by the Yu
family and headed by Henry Yu, who is also a director and
majority stockholder of RUBY -- shall lend its P60 million credit line
in China Bank to RUBY, payable within ten (10) years. Moreover,
BENHAR shall purchase the credits of RUBYs creditors and
mortgage RUBYs properties to obtain credit facilities for
RUBY. Upon approval of the rehabilitation plan, BENHAR shall
control and manage RUBYs operations. For its service, BENHAR
shall receive a management fee equivalent to 7.5% of RUBYs net
sales.
The BENHAR/RUBY Plan was opposed by 40% of the stockholders,
including Lim, a minority shareholder of RUBY. ALFC, the biggest
32
unsecured creditor of RUBY and chairman of the management
committee, also objected to the plan as it would transfer RUBYs
assets beyond the reach and to the prejudice of its unsecured
creditors.
On the other hand, the Alternative Plan of RUBYs minority
stockholders proposed to: (1) pay all RUBYs creditors without
securing any bank loan; (2) run and operate RUBY without charging
management fees; (3) buy-out the majority shares or sell their
shares to the majority stockholders; (4) rehabilitate RUBYs two
plants; and (5) secure a loan at 25% interest, as against the 28%
interest charged in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for
evaluation.
On October 28, 1988, the SEC Hearing Panel approved the
BENHAR/RUBY Plan. The minority stockholders thru Lim appealed to
the SEC En Banc which, in its November 15, 1988 Order, enjoined
the implementation of the BENHAR/RUBY Plan. On December 20,
1988 after the expiration of the temporary restraining order (TRO),
the SEC En Banc granted the writ of preliminary injunction against
the enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu,
RUBY and Yu Kim Giang questioned the issuance of the writ in their
petition filed in the Court of Appeals (CA), docketed as CA-G.R. SP
No. 16798. The CA denied their appeal.[2] Upon elevation to this
Court (G.R. No. L-88311), we issued a minute resolution
dated February 28, 1990 denying the petition and upholding the
injunction against the implementation of the BENHAR/RUBY Plan.
Meanwhile, BENHAR paid off Far East Bank & Trust Company
(FEBTC), one of RUBYs secured creditors. By May 30, 1988, FEBTC
had already executed a deed of assignment of credit and mortgage
rights in favor of BENHAR. BENHAR likewise paid the other secured
creditors who, in turn, assigned their rights in favor of
BENHAR.These acts were done by BENHAR despite the SECs TRO
and injunction and even before the SEC Hearing Panel approved the
BENHAR/RUBY Plan on October 28, 1988.
ALFC and Miguel Lim moved to nullify the deeds of assignment
executed in favor of BENHAR and cite the parties thereto in
contempt for willful violation of theDecember 20, 1983 SEC order
enjoining RUBY from disposing its properties and making payments
pending the hearing of its petition for suspension of
payments. They also charged that in paying off FEBTCs credits,
FEBTC was given undue preference over the other creditors of
RUBY. Acting on the motions, the SEC Hearing Panel nullified the
deeds of assignment executed by RUBYs creditors in favor of
BENHAR and declared the parties thereto guilty of indirect
contempt. BENHAR and RUBY appealed to the SECEn Banc which
denied their appeal. BENHAR and RUBY joined by Henry Yu and Yu
Kim Giang appealed to the CA (CA-G.R. SP No. 18310). By
Decision[3] dated August 29, 1990, the CA affirmed the SEC ruling
nullifying the deeds of assignment. The CA also declared its
decision final and executory as to RUBY and Yu Kim Giang for their
failure to file their pleadings within the reglementary period. By
Resolution dated August 26, 1991 in G.R. No. 96675,[4] this Court
affirmed the CAs decision.
Earlier, on May 29, 1990, after the SEC En Banc enjoined the
implementation of BENHAR/RUBY Plan, RUBY filed with the SEC En
Banc an ex parte petition to create a new management committee
and to approve its revised rehabilitation plan (Revised
BENHAR/RUBY Plan). Under the revised plan, BENHAR shall
receive P34.068 million of the P60.437 Million credit facility to be
extended to RUBY, as reimbursement for BENHARs payment to
some of RUBYs creditors. The SEC En Banc directed RUBY to submit
its revised rehabilitation plan to its creditors for comment and
approval while the petition for the creation of a new management
committee was remanded for further proceedings to the SEC
Hearing Panel. The Alternative Plan of RUBYs minority
stockholders was also forwarded to the hearing panel for
evaluation.
On April 26, 1991, over ninety percent (90%) of RUBYs creditors
objected to the Revised BENHAR/RUBY Plan and the creation of a
new management committee.Instead, they endorsed the minority
stockholders Alternative Plan. At the hearing of the petition for the
creation of a new management committee, three (3) members of
the original management committee (Lim, ALFC and Pilipinas
Shell) opposed the Revised BENHAR/RUBY Plan on grounds
that: (1) it would legitimize the entry of BENHAR, a total stranger,
to RUBY as BENHAR would become the biggest creditor of
RUBY; (2) it would put RUBYs assets beyond the reach of the
unsecured creditors and the minority stockholders; and (3) it was
not approved by RUBYs stockholders in a meeting called for the
purpose.
Notwithstanding the objections of 90% of RUBYs creditors and
three members of the MANCOM, the SEC Hearing Panel approved
on September 18, 1991 the Revised BENHAR/RUBY Plan and
dissolved the existing management committee. It also created a
new management committee and appointed BENHAR as one of its
members. In addition to the powers originally conferred to the
management committee under Presidential Decree (P.D.) No. 902-
A, the new management committee was tasked to oversee the
implementation by the Board of Directors of the revised
rehabilitation plan for RUBY.
The original management committee (MANCOM), Lim and ALFC
appealed to the SEC En Banc which affirmed the approval of the
Revised BENHAR/RUBY Plan and the creation of a new
management committee on July 30, 1993. To ensure that the
management of RUBY will not be controlled by any group, the SEC
appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as
additional members of the new management committee. Further,
it declared that BENHARs membership in the new management
committee is subject to the condition that BENHAR will extend its
credit facilities to RUBY without using the latters assets as
security or collateral.
Lim, ALFC and MANCOM moved for reconsideration while RUBY
and BENHAR asked the SEC to reconsider the portion of its Order
prohibiting BENHAR from utilizing RUBYs assets as
collateral. On October 15, 1993, the SEC denied the motion of
Lim, ALFC and the original management committee but granted
RUBY and BENHARs motion and allowed BENHAR to use RUBYs
assets as collateral for loans, subject to the approval of the
majority of all the members of the new management committee.
Lim, ALFC and MANCOM appealed to the CA (CA-G.R. SP Nos.
32404, 32469 & 32483) which by Decision[5] dated March 31,
1995 set aside the SECs approval of the Revised BENHAR/RUBY
Plan and remanded the case to the SEC for further
proceedings. The CA ruled that the revised plan circumvented its
earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of
assignment executed by RUBYs creditors in favor of
BENHAR. Since under the revised plan, BENHAR was to
receive P34.068 Million of the P60.437 Million credit facility to be
extended to RUBY, as settlement for its advance payment to
RUBYs seven (7) secured creditors, such payments made by
BENHAR under the void Deeds of Assignment, in effect were
recognized as payable to BENHAR under the revised plan. The
motion for reconsideration filed by BENHAR and RUBY was
likewise denied by the CA.[6]
33
Undaunted, RUBY and BENHAR filed a petition for review in this
Court (G.R. Nos. 124185-87 entitled Ruby Industrial Corporation v.
Court of Appeals) alleging that the CA gravely abused its discretion
in substituting its judgment for that of the SEC, and in allowing Lim,
ALFC and MANCOM to file separate petitions prepared by lawyers
representing themselves as belonging to different firms. By
Decision[7] dated January 20, 1998, we sustained the CAs ruling that
the Revised BENHAR/RUBY Plan contained provisions which
circumvented its final decision in CA-G.R. SP No. 18310, nullifying
the deeds of assignment of credits and mortgages executed by
RUBYs creditors in favor of BENHAR, as well as this Courts
Resolution in G.R. No. 96675, affirming the said CAs decision. We
thus held:
Specifically, the Revised BENHAR/RUBY Plan considered as valid the
advance payments made by BENHAR in favor of some of RUBYs
creditors. The nullity of BENHARs unauthorized dealings with RUBYs
creditors is settled. The deeds of assignment between BENHAR and
RUBYs creditors had been categorically declared void by the SEC
Hearing Panel in two (2) orders issued on January 12,
1989 and March 15, 1989. x x x
xxxx
These orders were upheld by the SEC en banc and the Court of
Appeals. In CA-G.R. SP No. 18310, the Court of Appeals ruled as
follows:
xxxxxxxxx
1) x x x when the Deed of Assignment was executed on May 30,
1988 by and between Ruby Industrial Corp., Benhar International,
Inc., and FEBTC, the Rehabilitation Plan proposed by petitioner
Ruby Industrial Corp. for Benhar International, Inc. to assume all
petitioners obligation has not been approved by the SEC. The
Rehabilitation Plan was not approved until October 28, 1988. There
was a willful and blatant violation of the SEC order dated December
20, 1983 on the part of petitioner Ruby Industrial Corp.,
represented by Yu Kim Giang, by Benhar International, Inc.,
represented by Henry Yu and by FEBTC.
2) The magnitude and coverage of the transactions involved were
such that Yu Kim Giang and the other signatories cannot feign
ignorance or pretend lack of knowledge thereto in view of the fact
that they were all signatories to the transaction and privy to all the
negotiations leading to the questioned transactions. In executing
the Deeds of Assignment, the petitioners totally disregarded the
mandate contained in the SEC order not to dispose the properties
of Ruby Industrial Corp. in any manner whatsoever pending the
approval of the Rehabilitation Plan and rendered illusory the SEC
efforts to rehabilitate the petitioner corporation to the best
interests of all the creditors.
3) The assignments were made without prior approval of the
Management Committee created by the SEC in an Order
dated August 10, 1984. Under Sec. 6, par. d, sub. par. (2) of P.D.
902-A as amended by P.D. 1799, the Management Committee,
rehabilitation receiver, board or body shall have the power to take
custody and control over all existing assets of such entities under
management notwithstanding any provision of law, articles of
incorporation or by-law to the contrary. The SEC therefore has the
power and authority, through a Management Committee composed
of petitioners creditors or through itself directly, to declare all
assignment of assets of the petitioner Corporation declared under
suspension of payments, null and void, and to conserve the same
in order to effect a fair, equitable and meaningful rehabilitation of
the insolvent corporation.
4) x x x. The acts for which petitioners were held in indirect
contempt by the SEC arose from the failure or willful refusal by
petitioners to obey the lawful order of the SEC not to dispose of
any of its properties in any manner whatsoever without authority
or approval of the SEC. The execution of the Deeds of Assignment
tend to defeat or obstruct the administration of justice. Such acts
are offenses against the SEC because they are calculated to
embarrass, hinder and obstruct the tribunal in the administration
of justice or lessen its authority.
xxx
Even the SEC en banc, in its July 30, 1993 Order affirming the
approval of the Revised BENHAR/RUBY Plan, has acknowledged
the invalidity of the subject deeds of assignment.However, to
justify its approval of the plan and the appointment of BENHAR to
the new management committee, it gave the lame excuse that
BENHAR became RUBYs creditor for having paid RUBYs debts. x x
x
xxxx
For its part, the Court of Appeals noted that the approved Revised
BENHAR/RUBY Plan gave undue preference to BENHAR. The
records, indeed, show that BENHARs offer to lend its credit facility
in favor of RUBY is conditioned upon the payment of the amount it
advanced to RUBYs creditors, x x x
xxxx
In fact, BENHAR shall receive P34.068 Million out of the P60.437
Million credit facility to be extended to RUBY for the latters
rehabilitation.
Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency.When a
distressed company is placed under rehabilitation, the
appointment of a management committee follows to avoid
collusion between the previous management and creditors it
might favor, to the prejudice of the other creditors. All assets of a
corporation under rehabilitation receivership are held in trust for
the equal benefit of all creditors to preclude one from obtaining
an advantage or preference over another by the expediency of
attachment, execution or otherwise. As between the creditors, the
key phrase is equality in equity. Once the corporation threatened
by bankruptcy is taken over by a receiver, all the creditors ought
to stand on equal footing. Not any one of them should be paid
ahead of the others. This is precisely the reason for suspending all
pending claims against the corporation under receivership.
[8]
(Additional emphasis supplied.)
Aside from the undue preference that would have been given to
BENHAR under the Revised BENHAR/RUBY Plan, we also
found RUBYs dealing with BENHAR highly irregular and its
proposed financing scheme more costly and ultimately prejudicial
to RUBY. Thus:
Parenthetically, BENHAR is a domestic corporation engaged in
importing and selling vehicle spare parts with an authorized
capital stock of thirty million pesos. Yet, it offered to lend its credit
facility in the amount of sixty to eighty million pesos to RUBY. It is
to be noted that BENHAR is not a lending or financing corporation
and lending its credit facilities, worth more than double its
authorized capitalization, is not one of the powers granted to it
under its Articles of Incorporation. Significantly, Henry Yu, a
director and a majority stockholder of RUBY is, at the same time,
34
a stockholder of BENHAR, a corporation owned and controlled by
his family. These circumstances render the deals between BENHAR
and RUBY highly irregular.
xxxx
Moreover, when RUBY initiated its petition for suspension of
payments with the SEC, BENHAR was not listed as one of RUBYs
creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only
served as a conduit of RUBY. As aptly stated in the challenged Court
of Appeals decision:
Benhars role in the Revised Benhar/Ruby Plan, as envisioned by the
majority stockholders, is to contract the loan for Ruby and, serving
the role of a financier, relend the same to Ruby. Benhar is merely
extending its credit line facility with China Bank, under which the
bank agrees to advance funds to the company should the need
arise. This is unlikely a loan in which the entire amount is made
available to the borrower so that it can be used and programmed
for the benefit of the companys financial and operational
needs. Thus, it is actually China Bank which will be the source of
the funds to be relent to Ruby. Benhar will not shell out a single
centavo of its own funds. It is the assets of Ruby which will be
mortgaged in favor of Benhar. Benhars participation will only make
the rehabilitation plan more costly and, because of the mortgage of
its (Rubys) assets to a new creditor, will create a situation which is
worse than the present. x x x
We need not say more.[9] (Additional emphasis supplied.)
After the finality of the above decision, the SEC set the case for
further proceedings.[10] On March 14, 2000, Bank of the Philippine
Islands (BPI), one of RUBYs secured creditors, filed a Motion to Vacate
Suspension Order[11] on grounds that there is no existing
management committee and that no decision has been rendered in
the case for more than 16 years already, which is beyond the period
mandated by Sec. 3-8 of the Rules of Procedure on Corporate
Recovery. RUBY filed its opposition,[12] asserting that the MANCOM
never relinquished its status as the duly appointed management
committee as it resisted the orders of the second and third
management committees subsequently created, which have been
nullified by the CA and later this Court. As to the applicability of the
cited rule under the Rules on Corporate Recovery, RUBY pointed out
that this case was filed long before the effectivity of said rules. It also
pointed out that the undue delay in the approval of the rehabilitation
plan being due to the numerous appeals taken by the minority
stockholders and MANCOM to the CA and this Court, from the SEC
approval of the BENHAR/RUBY Plan. Since there have already been
steps taken to finally settle RUBYs obligations with its creditors, it
was contended that the application of the mandatory period under
the cited provision would cause prejudice and injustice to RUBY.
It appears that even earlier during the pendency of the appeals in
the CA, BENHAR and RUBY have performed other acts in pursuance
of the BENHAR/RUBY Plan approved by the SEC.
On September 1, 1996, Lim received a Notice of Stockholders
Meeting scheduled on September 3, 1996 signed by a certain Mr.
Edgardo M. Magtalas, the Designated Secretary of RUBY and
stating the matters to be taken up in said meeting, which include
the extension of RUBYs corporate term for another twenty-five (25)
years and election of Directors.[13] At the scheduled stockholders
meeting of September 3, 1996, Lim together with other minority
stockholders, appeared in order to put on record their objections on
the validity of holding thereof and the matters to be taken
therein. Specifically, they questioned the percentage of
stockholders present in the meeting which the majority claimed
stood at 74.75% of the outstanding capital stock of RUBY.
The aforesaid stockholders meeting was the subject of the Motion
to Cite For Contempt[14] and Supplement to Motion to Cite For
Contempt[15] filed by Lim before the CA where their petitions for
review (CA-G.R. Nos. 32404, 32469 and 32483) were then
pending. Lim argued that the majority stockholders claimed to
have increased their shares to 74.75% by subscribing to the
unissued shares of the authorized capital stock (ACS). Lim pointed
out that such move of the majority was in implementation of the
BENHAR/RUBY Plan which calls for capital infusion of P11.814
Million representing the unissued and unsubscribed portion of the
present ACS of P23.7 Million, and the Revised BENHAR/RUBY Plan
which proposed an additional subscription of P30 Million. Since
the implementation of both majority plans have been enjoined by
the SEC and CA, the calling of the special stockholders meeting by
the majority stockholders clearly violated the said injunction
orders. This circumstance certainly affects the determination of
quorum, the voting requirements for corporate term extension, as
well as the election of Directors pursuant to the July 30, 1993
Order and October 15, 1993 Resolution of the SEC enjoining not
only the implementation of the revised plan but also the doing of
any act that may render the appeal from the approval of the said
plan moot and academic.
The aforementioned capital infusion was taken up by RUBYs board
of directors in a special meeting[16] held on October 2,
1991 following the issuance by the SEC of its Order
dated September 18, 1991[17] approving the Revised
BENHAR/RUBY Plan and creating a new management committee
to oversee its implementation. During the said meeting, the board
asserted its authority and resolved to take over the management
of RUBYs funds, properties and records and to demand an
accounting from the MANCOM which was ordered dissolved by the
SEC. The board thus resolved that:
The corporation be authorized to issue out of the unissued portion
of the authorized capital stocks of the corporation in the form of
common stocks 11.8134.00 [Million] after comparing this with the
audited financial statement prepared by SGV as of December 31,
1982, to be subscribed and paid in full by the present
stockholders in proportion to their present stockholding in the
corporation on staggered basis starting October 28, December 27
then February 28 and April 28 as the last installment date at 25%
for each period. It was also moved and seconded that should any
of the stockholders fail to exercise their rights to buy the number
of shares they are qualified to buy by making the first installment
payment of 25% on or before October 13, 1991, then the other
stockholders may buy the same and that only when none of the
present stockholders are interested in the shares may there be a
resort to selling them by public auction.[18]
As reflected in the Minutes of the special board meeting, a
representative of the absent directors (Tan Chai, Tomas Lim,
Miguel Lim and Yok Lim) came to submit their letter addressed to
the Chairman suggesting that said meeting be deferred until the
September 18, 1991 SEC Order becomes final and executory. The
directors present nevertheless proceeded with the meeting upon
their belief that neither appeal nor motion for reconsideration can
stay the SEC order. [19]
The resolution to extend RUBYs corporate term, which was to
expire on January 2, 1997, was approved during the September 3,
1996 stockholders meeting, as recommended by the board of
directors composed of Henry Yu (Chairman), James Yu, David
Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu and Vivian L.
35
Yu. The board certified that said resolution was approved by
stockholders representing two-thirds (2/3) of RUBYs outstanding
capital stock.[20] Per Certification[21] dated August 31, 1995 issued
by Yu Kim Giang as Executive Vice-President of RUBY, the majority
stockholders own 74.75% of RUBYs outstanding capital stock as
of October 27, 1991. The Amended Articles of Incorporation was
filed with the SEC on September 24, 1996.[22]
On March 17, 2000, Lim filed a Motion[23] informing the SEC of acts
being performed by BENHAR and RUBY through directors who were
illegally elected, despite the pendency of the appeal before this
Court questioning the SEC approval of the BENHAR/RUBY Plan and
creation of a new management committee, and after this Court had
denied their motion for reconsideration of the January 20,
1998 decision in G.R. Nos. 124185-87. Lim reiterated that before
the matter of extension of corporate life can be passed upon by the
stockholders, it is necessary to determine the percentage
ownership of the outstanding shares of the corporation. The
majority stockholders claimed that they have increased their
shareholdings from 59.828% to 74.75% as a result of the illegal and
invalid stockholders meeting on September 3, 1996. The additional
subscription of shares cannot be done as it implements the
BENHAR/RUBY Plan against which an existing injunction is still
effective based on the SEC Order dated January 6, 1989, and which
was struck down under the final decision of this Court in G.R. Nos.
124185-87. Hence, the implementation of the new percentage
stockholdings of the majority stockholders and the calling of
stockholders meeting and the subsequent resolution approving the
extension of corporate life of RUBY for another twenty-five (25)
years, were all done in violation of the decisions of the CA and this
Court, and without compliance with the legal requirements under
the Corporation Code. There being no valid extension of corporate
term, RUBYs corporate life had legally ceased. Consequently, Lim
moved that the SEC: (1) declare as null and void the infusion of
additional capital made by the majority stockholders and restore
the capital structure of RUBY to its original structure prior to the
time injunction was issued; and (2) declare as null and void the
resolution of the majority stockholders extending the corporate life
of RUBY for another twenty-five (25) years.
The MANCOM concurred with Lim and made a similar
manifestation/comment[24] regarding the irregular and invalid
capital infusion and extension of RUBYs corporate term approved
by stockholders representing only 60% of RUBYs outstanding
capital stock. It further stated that the foregoing acts were
perpetrated by the majority stockholders without even consulting
the MANCOM, which technically stepped into the shoes of RUBYs
board of directors. Since RUBY was still under a state of suspension
of payment at the time the special stockholders meeting was
called, all corporate acts should have been made in consultation
and close coordination with the MANCOM.
Lim likewise filed an Opposition[25] to BPIs Motion to Vacate
Suspension Order, asserting that the management committee
originally created by the SEC continues to control the corporate
affairs and properties of RUBY. He also contended that the
SEC Rules of Procedure on Corporate Recovery cannot apply in this
case which was filed long before the effectivity of said rules.
On the other hand, RUBY filed its Opposition [26] to the Motion filed
by Lim denying the allegation of Lim that RUBYs corporate
existence had ceased. RUBY claimed that due notice were given to
all stockholders of the October 2, 1991 special meeting in which
the infusion of additional capital was discussed. It further
contended that the CA decision setting aside the SEC orders
approving the Revised BENHAR/RUBY Plan, which was subsequently
affirmed by this Court on January 20, 1998, did not nullify the
resolution of RUBYs board of directors to issue the previously
unissued shares. The amendment of its articles of incorporation
on the extension of RUBYs corporate term was duly submitted
with and approved by the SEC as per the Certification
dated September 24, 1996.
The MANCOM also filed its Opposition [27] to BPIs Motion to Vacate
Suspension Order, stating that it has continuously performed its
primary function of preserving the assets of RUBY and undertaken
the management of RUBYs day-to-day affairs. It expressed belief
that between chaotic foreclosure proceedings and collection suits
that would be triggered by the vacation of the suspension order
and an orderly settlement of creditors claims before the SEC, the
latter path is the more prudent and logical course of
action. OnApril 28, 2000, it submitted to the court copies of the
minutes of meetings held from January 18, 1999 to December 1,
1999 in pursuance of its mandate to preserve the assets and
administer the business affairs of RUBY.[28]
On August 23, 2000, China Bank filed a Manifestation [29] echoing
the contentions of BPI that as there is no existing management
committee and no rehabilitation plan approved even after the
240-day period, warrants the application of Sec. 4-9 of the
SEC Rules of Procedure on Corporate Recovery such that the
petition is deemed ipso factodenied and dismissed. China Bank
lamented that the length of time that has lapsed, as well as the
parties actuations, completely betrays a genuine attempt to
rehabilitate RUBYs moribund operations all to the dismay, damage
and prejudice of RUBYs creditors. It stressed that the proceedings
cannot be prolonged nor used as a ploy to defer indefinitely the
payment of long overdue obligations of RUBY to its creditors. With
the case having been ipso facto dismissed, there is no need of
further action from the parties or an order from the
SEC. Consequently, RUBYs creditors may now take whatever legal
action they may deem appropriate to protect their rights
including, but not limited to extrajudicial foreclosure.
On September 11, 2000, the SEC granted Lims request for the
issuance of subpoena duces tecum/ad testificandum to Ms.
Jocelyn Sta. Ana of BPI for the latter to testify and bring all
documents and records pertaining to RUBY.[30] Earlier, Lim moved
for a hearing to verify the information that China Bank and BPI
had separately executed deeds of assignment in favor of Greener
Investment Corporation, a company owned by Yu Kim Giang, one
of RUBYs majority stockholders.[31] Said hearing, however, did not
push through in view of RUBYs proposal for a compromise
agreement.[32] Lim submitted his comments on the Proposed
Compromise Agreement, but there was no response from RUBY
and the majority stockholders.[33] The minority stockholders
likewise served a copy of the revised Compromise Agreement to
the majority stockholders.[34] Lim moved that the case be assigned
to a new Panel of Hearing Officers and the majority stockholders
be made to declare in a hearing whether they accept the
counterproposals of the minority in their draft Amicable
Settlement in order that the case can proceed immediately to
liquidation.[35]
On January 25, 2001, the MANCOM filed with the SEC its
Resolution unanimously adopted on January 19, 2001 affirming
that: (1) MANCOM was never informed nor advised of the
supposed capital infusion by the majority stockholders in October
1991 and it never actually received any such additional
subscription nor signed any document attesting to or authorizing
the said increase of RUBYs capital stock or the extension of its
corporate life; (2) MANCOM continuously recognizes the 60%-40%
ratio of shareholding profile between the majority and minority
stockholders, with the majority having 59.828% while the minority
36
holds 40.172% shareholding; (3) as there was no valid increase in
the shareholding of the majority and consequently no valid
extension of corporate term, the liquidation of RUBY is thus in
order; (4) to date, the majority stockholders or Yu Kim Giang have
not complied with the December 22, 1989 SEC order for them to
turn over the cash including bank deposits, all other financial
records and documents of RUBY including transfer certificates of
title over its real properties, and render an accounting of all the
money received by RUBY; and (5) pursuant to this Courts ruling in
G.R. No. 96675 dated August 26, 1991, the previous deeds of
assignment made in favor of BENHAR by Florence Damon,
Philippine Bank of Communications, Philippine Commercial
International Bank, Philippine Trust Company, PCI Leasing and
Finance, Inc. and FEBTC, having been earlier declared void by the
SEC Hearing Panel, and the CA decision in CA-G.R. SP No. 18310
affirmed by this Court have no legal effect and are deemed void.[36]
On the other hand, Lim filed a Supplement (to Manifestation and
Motion dated January 18, 2001)[37] reiterating his pending motion
filed on March 15, 2000 for the SEC to implement this Courts
January 20, 1998 Decision in G.R. Nos. 124185-87 which states in
part that [t]he SEC therefore has the power and authority, directly
to declare all assignment of assets of the petitioner Corporation
declared under suspension of payments, null and void, and to
conserve the same in order to effect a fair, equitable and
meaningful rehabilitation of the insolvent corporation. Lim
contended that the SEC retains jurisdiction over pending
suspension of payment/rehabilitation cases filed as of June 30,
2000 until these are finally disposed, pursuant to Sec. 5.2 of the
Securities Regulation Code (Republic Act [R.A.] No.
8799). Considering that the Management Committee is intact, the
majority stockholders cannot act in an illegal manner with regard to
RUBYs assets. He thus concluded that the continued disobedience
of the majority stockholders to the orders and decisions of the SEC
and CA, as affirmed by this Court, have certainly rendered any
additional assignments, such as the Deeds of Assignment executed
by BPI and China Bank with BENHAR, Henry Yu or conduits of the
majority stockholders, null and void.
The MANCOM manifested that it is adopting in toto the
Manifestation and Motion dated January 18, 2001 filed by Lim. It
also moved for the SEC to conduct further proceedings as directed
by this Court. Considering that there is no chance at all for the
proposed rehabilitation of RUBY in light of strict implementation by
government authorities of environmental laws particularly on
pollution control, and MANCOMs assent to effect a liquidation, the
MANCOM asserted that a hearing should focus on the eventual
liquidation of RUBY. It added that a dismissal under the
circumstances would be tantamount to a perceived shirking by the
SEC of its mandate to afford all creditors ample opportunity to
recover on their respective financial exposure with RUBY. [38]
On May 15, 2001, the MANCOM submitted copies of minutes of
meetings held from April 13, 2000 to December 29, 2000.[39]
On September 20, 2001, the SEC issued an Order directing the
Management Committee to submit a detailed report not mere
minutes of meetings -- on the status of the rehabilitation process
and financial condition of RUBY, which should contain a statement
on the feasibility of the rehabilitation plan.[40] The MANCOM
complied with the said order on February 15, 2002.[41] The majority
stockholders and RUBY moved to dismiss the petition and strike
from the records the Compliance/Report. MANCOM filed its omnibus
opposition to the said motions. There was further exchange of
pleadings by the parties on the matter of whether the SEC should
already dismiss the petition of RUBY as prayed for by the majority
stockholders and RUBY, or proceed with supervised liquidation of
RUBY as proposed by the MANCOM and minority stockholders.
The SECs Ruling
On September 18, 2002, the SEC issued its Order[42] denying the
petition for suspension of payments, as follows:
WHEREFORE, in view of the foregoing, the Commission hereby
resolves to terminate the proceedings and DENY the instant
petition.
Accordingly, pursuant to Sec. 5-5 of the SECs Rules of Procedure
on Corporate Recovery, which provides:
Discharge of the Management Committee -- The Management
Committee shall be discharged and dissolved under the following
circumstances:
a. Whenever the Commission, on motion or motu prop[r]io, has
determined that the necessity for the Management Committee no
longer exists;
b. Upon the appointment of a liquidator under these Rules;
c. By agreement of the parties;
d. Upon termination of the proceedings.
Upon its discharge and dissolution, the Management Committee
shall submit its final report and render an accounting of its
management within such reasonable time as the Commission may
allow.
the Management Committee is hereby DISSOLVED. It is likewise
ordered to:
(1) Make an inventory of the assets, funds and properties of the
petitioner;
(2) Turn-over the aforementioned assets, funds and properties to
the proper party(ies);
(3) Render an accounting of its management; and
(4) Submit its Final Report to the Commission.
The MANCOM is ordered to comply with the foregoing within a
non-extendible period of thirty (30) days from receipt of this
Order. Relative to any compensation owing to the MANCOM, it is
left to the determination of the parties concerned.
No pronouncement as to costs.
SO ORDERED.[43]
The SEC declared that since its order declaring RUBY under a
state of suspension of payments was issued on December 20,
1983, the 180-day period provided in Sec. 4-9 of theRules of
Procedure on Corporate Recovery had long lapsed. Being a
remedial rule, said provision can be applied retroactively in this
case. The SEC also overruled the objections raised by the minority
stockholders regarding the questionable issuance of shares of
stock by the majority stockholders and extension of RUBYs
corporate term, citing the presumption of regularity in the act of a
government entity which obtains upon the SECs approval of
RUBYs amendment of articles of incorporation. It pointed out that
Lim raised the issue only in the year 2000. Moreover, the SEC
37
found that notwithstanding his allegations of fraud, Lim never
proved the illegality of the additional infusion of the capitalization
by RUBY so as to warrant a finding that there was indeed an
unlawful act.[44]
Lim, in his personal capacity and in representation of the minority
stockholders of RUBY, filed a petition for review with prayer for a
temporary restraining order and/or writ of preliminary injunction
before the CA (CA-G.R. SP No. 73195) assailing the SEC order
dismissing the petition and dissolving the MANCOM.
Ruling of the CA
On May 26, 2004, the CA rendered its Decision,[45] the dispositive
portion of which states:
WHEREFORE, the Questioned Order dated 18 September 2002
issued by the Securities and Exchange Commission in SEC Case No.
2556 entitled In the Matter of the Petition for Suspension of
Payments, Ruby Industrial Corporation, Petitioner, is hereby SET
ASIDE, and consequently:
(1) the infusion of additional capital made by the majority
stockholders be declared null and void and restoring the capital
structure of Ruby to its original structure prior to the time the
injunction was issued, that is, majority stockholders 59.828% and
the minority stockholders 40.172% of the authorized capital stock
of Ruby Industrial Corporation.
(2) the resolution of the majority stockholders, who represents only
59.828% of the outstanding capital stock of Ruby, extending the
corporate life of Ruby for another twenty-five (25) years which was
made during the supposed stockholders meeting held on 03
September 1996 be declared null and void;
(3) implementing the invalidation of any and all illegal assignments
of credit/purchase of credits and the cancellation of mortgages
connected therewith made by the creditors of Ruby Industrial
Corporation during the effectivity of the suspension of payments
order including that of China Bank and BPI and to deliver to
MANCOM or the Liquidator all the original of the Deeds of
Assignments and the registered titles thereto and any other
documents related thereto; and order their unwinding and requiring
the majority stockholders to account for all illegal assignments
(amounts, dates, interests, etc. and present the original documents
supporting the same); and
(4) ordering the Securities and Exchange Commission to supervise
the liquidation of Ruby Industrial Corporation after the foregoing
steps shall have been undertaken.
SO ORDERED.[46]
According to the CA, the SEC erred in not finding that the October
2, 1991 meeting held by RUBYs board of directors was illegal
because the MANCOM was neither involved nor consulted in the
resolution approving the issuance of additional shares of RUBY.
The CA further noted that the October 2, 1991 board meeting was
conducted on the basis of the September 18, 1991 order of the SEC
Hearing Panel approving the Revised BENHAR/RUBY Plan, which
plan was set aside under this Courts January 20, 1998 Decision in
G.R. Nos. 124185-87. The CA pointed out that records confirmed
the proposed infusion of additional capital for RUBYs rehabilitation,
approved during said meeting, as implementing the Revised
BENHAR/RUBY Plan. Necessarily then, such capital infusion is
covered by the final injunction against the implementation of the
revised plan. It must be recalled that this Court affirmed the CAs
ruling that the revised plan not only recognized the void deeds of
assignments entered into with some of RUBYs creditors in
violation of the CAs decision in CA-G.R. SP No. 18310, but also
maintained a financing scheme which will just make the
rehabilitation plan more costly and create a worse situation for
RUBY.
On the supposed delay of the minority stockholders in raising the
issue of the validity of the infusion of additional capital effected
by the board of directors, the CA held that laches is inapplicable in
this case. It noted that Lim sought relief while the case is still
pending before the SEC. If ever there was delay, the same is not
fatal to the cause of the minority stockholders.
The CA likewise faulted the SEC in relying on the presumption of
regularity on the matter of the extension of RUBYs corporate term
through the filing of amended articles of incorporation. In doing
so, the CA totally disregarded the evidence which rebutted said
presumption, as demonstrated by Lim: (1) it was the board of
directors and not the stockholders which conducted the meeting
without the approval of the MANCOM; (2) there was no written
waivers of the minority stockholders pre-emptive rights and thus
it was irregular to merely notify them of the board of directors
meeting and ask them to exercise their option; (3) there was an
existing permanent injunction against any additional capital
infusion on the BENHAR/RUBY Plan, while the CA and this Court
both rejected the Revised BENHAR/RUBY Plan; (4) there was no
General Information Sheet reports made to the SEC on the alleged
capital infusion, as per certification by the SEC; (5) the
Certification stating the present percentage of majority
shareholding, dated December 21, 1993 and signed by Yu Kim
Giang -- which was not sworn to before a Notary Public -- was
supposedly filed in 1996 with the SEC but it does not bear a
stamped date of receipt, and was only attached in a 2000 motion
long after the October 1991 board meeting; (6) said Certification
was contradicted by the SEC list of all stockholders of RUBY, in
which the majority remained at 59.828% and the minority
shareholding at 40.172% as of October 27, 1991; (7) certain
receipts for the amount of P1.7 million was presented by the
majority stockholders only in the year 2000, long after Lim
questioned the inclusion of extension of corporate term in the
Notice of Meeting when Lim filed before the CA a motion to cite
for contempt (CA-G.R. Nos. 32404, 32469 and 32483); and (8) this
Courts decisions in the cases elevated to it had recognized the
40% stockholding of the minority. Upon the foregoing grounds, the
CA said that the SEC should have invalidated the resolution
extending the corporate term of RUBY for another twenty-five (25)
years.
With the expiration of the RUBYs corporate term, the CA ruled that
it was error for the SEC in not commencing liquidation
proceedings. As to the dismissal of RUBYs petition for suspension
of payments, the CA held that the SEC erred when it retroactively
applied Sec. 4-9 of the Rules of Procedure on Corporate Recovery.
Such retroactive application of procedural rules admits of
exceptions, as when it would impair vested rights or cause
injustice. In this case, the CA emphasized that the two decisions
of this Court still have to be implemented by the SEC, but to date
the SEC has failed to unwound the illegal assignments and order
the assignees to surrender the Deeds of Assignment to the
MANCOM.
On the issue of violation of the rule against forum shopping, the
CA held that this is not applicable because the parties in CA-G.R.
SP No. 73169 (filed by MANCOM) and CA-G.R. SP No. 73195 (filed
by Lim) are not the same and they do not have the same
38
interest. This issue was in fact already resolved in G.R. Nos.
124185-87 wherein this Court, citing Ramos, Sr. v. Court of
Appeals[47] declared that private respondents Lim, the unsecured
creditors (ALFC) and MANCOM cannot be considered to have
engaged in forum shopping in filing separate petitions with the CA
as each have distinct rights to protect.
The CA also found that the belated submission of the special power
of attorney executed by the other minority stockholders
representing 40.172% of RUBYs ownership has no bearing to the
continuation of the petition filed with the appellate court. Moreover,
since the petition is in the nature of a derivative suit, Lim clearly
can file the same not only in representation of the minority
stockholders but also in behalf of the corporation itself which is the
real party in interest. Thus, notwithstanding that Lims ownership in
RUBY comprises only 1.4% of the outstanding capital stock, as
claimed by the majority stockholders, his petition may not be
dismissed on this ground.
The Consolidated Petitions
From the Decision of the CA, China Bank and the Majority
Stockholder joined by RUBY, filed separate petitions before this
Court.
In G.R. No. 165887, petitioners Majority Stockholders and RUBY
raised the following grounds for the reversal of the assailed
decision and the reinstatement of the SECs September 18, 2002
Order:
First Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED
CONTRARY TO LAW AND PRECEDENTS WHEN IT GAVE DUE COURSE
TO, AND, THEREAFTER, SUSTAINED, A FORMALLY AND
SUBSTANTIALLY DEFECTIVE PETITION FOR REVIEW.
Second Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED IN A
MANNER AT WAR WITH ORDERLY PROCEDURE AND APPLICABLE
JURISPRUDENCE WHEN IT REVERSED THE ORDER OF DISMISSAL OF
THE SECURITIES AND EXCHANGE COMMISSION AND SUBSTITUTED
ITS JUDGMENT FOR THAT OF THE LATTER IN THE DETERMINATION
OF ISSUES WELL WITHIN THE EXPERTISE OF THE COMMISSION.
Third Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED IN
GRAVE ABUSE OF ITS DISCRETION AND, IN FACT, IN EXCESS OR
LACK OF JURISDICTION -- WHEN IT SUSTAINED COLLATERAL
ATTACKS OF FINAL ADJUDICATIONS OF THE SECURITIES AND
EXCHANGE COMMISSION.[48]
On the other hand, petitioner China Bank in G.R. No. 165929 puts
forth the argument that the principle of stare decisis cannot be
given effect in this case considering the prevailing factual
circumstances, as to do so would result in manifest injustice. It
contends that the reason for the declaration of nullity of the Deed
of Assignment pronounced more than a decade ago, has become
legally inefficacious by its obsolescence. The creditors of RUBY
have the right to recover their credit. But when the CA ordered the
nullification of China Banks Deed of Assignment in favor of Greener
Investment Corporation, it practically dashed its last hope for ever
recovering its credit.
China Bank is of the view that the CA overstretched the import of
this Courts January 20, 1998 decision in G.R. Nos. 124185-87
when the SEC was ordered to conduct further proceedings, as to
include the unwinding of the alleged illegal assignment of
credits. The rehabilitation of RUBY, if it still may be capable of, is
not made dependent on the unwinding by the SEC of the illegal
assignments, as the same concerns only the issue of who shall
now become the creditors of RUBY, and does not alter the fact
that RUBY has hefty loan obligations and it has not enough cash
flow to pay for the same.
Deploring the principal parties penchant for prolonged litigation
resulting considerably in irreversible losses to RUBY, China Bank
maintains that from the report submitted by the MANCOM to the
SEC, it can be clearly seen that no attempt at rehabilitation
whatsoever had been pursued. Given the current situation, China
Bank prays that the CA Decision be reversed and its Deed of
Assignment in favor of Greener Investment Corporation be
recognized and given full legal effect.
In fine, main issues to be resolved are: (1) whether private
respondents MANCOM and Lim engaged in forum shopping when
they filed separate petitions before the CA assailing the
September 18, 2002 SEC Order; (2) whether the defects in the
certification of non-forum shopping submitted by Lim warrant the
dismissal of his petition before the CA; (3) whether the CA was
correct in reversing the SECs order dismissing the petition for
suspension of payment.
Our Ruling
The petitions have no merit.
On the charge of forum shopping, we have already ruled on the
matter in G.R. Nos. 124185-87. Thus:
We hold that private respondents are not guilty of forum-
shopping. In Ramos, Sr. v. Court of Appeals, we ruled:
The private respondents can be considered to have engaged in
forum shopping if all of them, acting as one group, filed identical
special civil actions in the Court of Appeals and in this
Court. There must be identity of parties or interests represented,
rights asserted and relief sought in different tribunals. In the case
at bar, two groups of private respondents appear to have acted
independently of each other when they sought relief from the
appellate court. Both groups sought relief from the same tribunal.
It would not matter even if there are several divisions in the Court
of Appeals. The adverse party can always ask for the
consolidation of the two cases. x x x
In the case at bar, private respondents represent different groups
with different interests the minority stockholders group,
represented by private respondent Lim; the unsecured creditors
group, Allied Leasing & Finance Corporation; and the old
management group. Each group has distinct rights to protect. In
line with our ruling in Ramos, the cases filed by private
respondents should be consolidated. In fact, BENHAR and RUBY
did just that in their urgent motions filed on December 1,
1993 and December 6, 1993, respectively, they prayed for the
consolidation of the cases before the Court of Appeals.[49]
In the present case, no consolidation of CA-G.R. SP Nos. 73169
(filed by MANCOM) which was earlier assigned to the Thirteenth
Division and CA-G.R. SP No. 73195 (filed by Lim) decided by the
Second Division, took place. In their Comment filed before CA-G.R.
39
SP No. 73169, the Majority Stockholders and RUBY (private
respondents therein) prayed for the dismissal of said case arguing
that MANCOM, of which Lim is a member, circumvented the
proscription against forum shopping. The CAs Thirteenth Division,
however, disagreed with private respondents and granted the
motion to withdraw petition filed by MANCOM which manifested
that the Second Division in CA-G.R. SP No. 73195 by Decision dated
May 26, 2004 had granted the reliefs similar to those prayed for in
their petition, said decision being binding on MANCOM which was
also impleaded in said case (CA-G.R. SP No. 73195). The Thirteenth
Division also cited our pronouncement in G.R. Nos. 124185-87 to
the effect that there was no violation on the rule on forum shopping
because MANCOM and Lim or the minority shareholders of RUBY
represent different interests.[50]
As to the alleged defects in the certificate of non-forum shopping
submitted by Lim, we find no error committed by the CA in holding
that the belated submission of a special power of attorney
executed in Lims favor by the minority stockholders has no bearing
to the continuation of the case as supported by ample
jurisprudence. To appreciate the liberal stance adopted by the CA,
one must take into account the previous history of the petitions for
review before the CA involving the SEC September 18, 2002 Order.
It was actually the third time that Lim and/or MANCOM have
challenged certain acts perpetrated by the majority stockholders
which are prejudicial to RUBY, such as the execution of deeds of
assignment during the effectivity of the suspension order in pursuit
of two rehabilitation plans submitted by them together with
BENHAR. The assignment of RUBYs credits to BENHAR gave the
secured creditors undue advantage over RUBYs prime properties
and put these assets beyond the reach of the unsecured
creditors. Each time they go to court, Lim and MANCOM essentially
advance the interest of the corporation itself. They have
consistently taken the position that RUBYs assets should be
preserved for the equal benefit of all its creditors, and vigorously
resisted any attempt of the controlling stockholders to favor any or
some of its creditors by entering into questionable deals or
financing schemes under two BENHAR/RUBY Plans. Viewed in this
light, the CA was therefore correct in recognizing Lims right to
institute a stockholders action in which the real party in interest is
the corporation itself.
A derivative action is a suit by a shareholder to enforce a corporate
cause of action.[51] It is a remedy designed by equity and has been
the principal defense of the minority shareholders against abuses
by the majority.[52] For this purpose, it is enough that a member or a
minority of stockholders file a derivative suit for and in behalf of a
corporation.[53] An individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock
in order to protect or vindicate corporate rights, whenever officials
of the corporation refuse to sue or are the ones to be sued or hold
the control of the corporation. In such actions, the suing
stockholder is regarded as the nominal party, with the corporation
as the party in interest.[54]
Now, on the third and substantive issue concerning the SECs
dismissal of RUBYs petition for suspension of payment.
The SEC based its action on Sec. 4-9 of the Rules of Procedure on
Corporate Recovery,[55] which provides:
SEC. 4-9. Period of Suspension Order. The suspension order shall be
effective for a period of sixty (60) days from the date of its
issuance. The order shall be automatically vacated upon the lapse
of the sixty-day period unless extended by the Commission. Upon
motion, the Commission may grant an extension thereof for a
period of not more than sixty (60) days in each application if the
Commission is satisfied that the debtor and its officers have been
acting in good faith and with due diligence, and that the debtor
would likely be able to make a viable rehabilitation plan. After the
lapse of one hundred and eighty (180) days from the issuance of
the suspension order, no extension of the said order shall be
granted by the Commission if opposed in writing by a majority of
any class of creditors. The Commission may grant an extension
beyond one hundred eighty (180) days only if it appears by
convincing evidence that there is a good chance for the
successful rehabilitation of the debtor and the opposition thereto
by the creditor appears manifestly unreasonable.
In any event, the petition is deemed ipso facto denied and
dismissed if no Rehabilitation Plan was approved by the
Commission upon the lapse of the order or the last extension
thereof. In such case, the debtor shall come under the dissolution
and liquidation proceedings of Rule V of these Rules. (Emphasis
supplied.)
According to the SEC, even if the 180 days maximum period of
suspension order is counted from the finality of this Courts
decision in G.R. Nos. 124185-87 in December 1998, still this case
had gone beyond the period mandated in the Rules for a
corporation under suspension of payment to have a rehabilitation
plan approved by the Commission.
While it is true that the Rules of Procedure on Corporate
Recovery authorizes the dismissal of a petition for suspension of
payment where there is no rehabilitation plan approved within the
maximum period of the suspension order, it must be recalled that
there was in fact not one, but two rehabilitation
plans (BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan)
submitted by the majority stockholders which were approved by
the SEC. The implementation of the first plan was enjoined when
it was seriously challenged in the courts by the minority
stockholders through Lim. The second revised plan superseded
the first plan, but eventually nullified by the CA and the CA
decision declaring it void was affirmed by this Court in G.R. Nos.
124185-87. Given this factual milieu, the automatic application of
the lifting of the suspension order as interpreted by the SEC in
its September 18, 2002 Order would be unfair and highly
prejudicial to the financially distressed corporation.
Moreover, records reveal that the delay in the proceedings after
the case was set for hearing following this Courts final judgment
in G.R. Nos. 124185-87, was not due to any fault or neglect on the
part of MANCOM or the minority stockholders. The idea
propounded by the petitioners majority stockholders that this
case is about a minority in a corporation holding hostage the
majority indefinitely by simple assertion that the formers rights
have been transgressed by the latter is, downright misleading.
First, the SEC did not even mention in its September 18, 2002
Order that when this Court remanded to it the case for further
proceedings, there remained only the Alternative Plan of RUBYs
minority stockholders which had earlier been forwarded to the
SEC Hearing Panel. With the CA Decision setting aside the SEC
approval of the Revised BENHAR/RUBY Plan, as affirmed by this
Court, it behooves on the SEC to recognize the fact that the
Alternative Plan was endorsed by 90% of the RUBYs creditors who
had objected to the Revised BENHAR/RUBY Plan. Yet, not a single
step was taken by the SEC to address those findings and
conclusions made by the CA and this Court on the highly
disadvantageous and onerous provisions of the Revised
BENHAR/RUBY Plan.
40
Moreover, the SEC failed to act on motions filed by Lim and
MANCOM to implement this Courts January 20, 1998 Decision in
G.R. Nos. 124185-87, by declaring all deeds of assignment with
BENHAR and/or the conduits of Henry Yu of no force and legal
effect, which of course necessitates the surrender by the concerned
creditors of those void deeds of assignment. Petitioner China Bank
dismisses it as unnecessary and immaterial to the continued
inability of RUBY to settle its long overdue debts. However, the CA
said that the foregoing acts should have been done by the SEC for
proper documentation and orderly settlement after proper
accounting of the assignment transactions. The appellate court
then concluded that dismissal of the petition under Sec. 4-9 of
the Rules of Procedure on Corporate Recovery would impair the
vested rights of the minority stockholders under this Courts
decision invalidating the aforesaid deeds of assignment, thus:
We agree with the observations of the petition that if the illegal
assignments not having been unwound and the mortgages not
canceled, the majority, their alter ego, and/or cohorts will claim to
be secured creditors and freely collect extra-judicially the
obligations covered by the illegal assignments. Ruby has very little
money compared to the P200 Million probable liability to the illegal
assignees as unilaterally stated by Ruby without audit (previously
merely totaled to P34 Million in 1998 as stated in the revised
rehabilitation plan). Foreclosure of the mortgages by the illegal
assignees will follow; Ruby will lose all its prime properties; there
will be no assets left for unsecured creditors; and there will be no
residual P600 Million assets to divide.[56]
Evidently, the minority stockholders and MANCOM had already
foreseen the impossibility of implementing a viable rehabilitation
plan if the illegal assignments made by its creditors with BENHAR
and the majority stockholders, and subsequently, with conduits of
RUBY or Henry Yu, are not properly unwound and those directors
responsible for the void transactions not required to make a full
accounting. Contrary to petitioner China Banks insinuation that the
minority stockholders merely want to prolong the litigation to the
great prejudice and damage to RUBYs creditors, MANCOM and Lim
had determined and moved for SEC-supervised liquidation
proceedings as the more prudent course of action for an orderly
and equitable settlement of RUBYs liabilities.
Records likewise revealed that the SEC chose to keep silent and
failed to assist the MANCOM and minority stockholders in their
efforts to demand compliance from the majority stockholders or Yu
Kim Giang (who headed the first MANCOM) with the December 22,
1989 Order directing them to turn over the cash, financial records
and documents of RUBY, including certificates of title over RUBYs
real properties, and render an accounting of all moneys received
and payments made by RUBY. On January 18, 2002, the MANCOM
even filed a Motion[57] to require Yu Kim Giang to render
report/accounting of RUBY from 1983 to the 1st quarter of 1990,
stating that despite a commitment from Mr. Giang, he has
seemingly delayed his compliance, hence frustrating the desire of
MANCOM to submit a comprehensive and complete report for the
whole period of 1983 up to the present. To underscore the
importance of making the said records available for scrutiny of the
SEC and MANCOM, Lim manifested before the SEC that--
Indeed, the majority is actually unwilling (and not merely unable) to
submit such records because these will show, among others:
(1) The majority to minority ratio in the corporate ownership is
59.828% :40.172%;
(2) The actual amounts of the bank loans paid off by Benhar
International[,] Inc. and/or Henry Yu would be very low;
(3) The illegal payment of the bank loans and illegal assignments
of the mortgages to Benhar/Henry Yu are contrary to the
Honorable Commissions Order of 20 December 1983 for
suspension of payments;
(4) The earnings of the corporation from 1983 to 1989 amounted
to millions and cannot be accounted for by the majority and the
first Mancom;
(5) The money may have been spent to pay off some of the loans
to the bank but Benhar and Henry Yu fraudulently claim credit
therefor.[58]
It must be noted that MANCOM had rejected the two rehabilitation
plans proposed by BENHAR and the majority stockholders. In
shifting the blame to the MANCOM and minority stockholders for
the delay in the approval of a viable rehabilitation plan, the SEC
apparently overlooked that from the time the SEC approved the
Revised BENHAR/RUBY Plan and dissolved the MANCOM, the
majority stockholders has denied MANCOM access to corporate
papers, documents evidencing the amounts actually paid to
creditor banks/assignors, financial statements and titles over
RUBYs real properties.
Although the SEC granted MANCOM and Lims request for a
hearing and direct a representative from BPI to bring all
documents relative to the assignment of RUBYs credit, said
hearing did not materialize after the majority stockholders
proposed a compromise agreement with the minority
stockholders. But as it turned out, this development only caused
further delay because the majority stockholders were unwilling to
turn over documents, funds and properties in their possession,
and would neither make a full accounting or disclosure of RUBYs
transactions, especially the actual amounts paid and rates of
interest on the loan assignments. In this state of things, the
MANCOM and minority stockholders resolved that the more
reasonable and practical option is to move for a SEC-supervised
liquidation proceedings.
The other ground invoked by Lim and MANCOM for the propriety
of liquidation is the expiration of RUBYs corporate term. The SEC,
however, held that the filing of the amendment of articles of
incorporation by RUBY in 1996 complied with all the legal
requisites and hence the presumption of regularity
stands. Records show that the validity of the infusion of additional
capital which resulted in the alleged increase in the shareholdings
of petitioners majority stockholders in October 1991 was
questioned by MANCOM and Lim even before the majority
stockholders filed their motion to dismiss in the year 2000.
A stock corporation is expressly granted the power to issue or sell
stocks.[59] The power to issue shares of stock in a corporation is
lodged in the board of directors and no stockholders meeting is
required to consider it because additional issuances of shares of
stock does not need approval of the stockholders.[60] What is only
required is the board resolution approving the additional issuance
of shares. The corporation shall also file the necessary application
with the SEC to exempt these from the registration requirements
under the Revised Securities Act (now the Securities Regulation
Code).
The new management committee created pursuant to SEC Order
dated September 18, 1991 apparently had no participation in
the October 2, 1991 board resolution approving the issuance of
additional shares. The move was part of the boards assertion of
control over the management in RUBY following the approval of
the Revised BENHAR/RUBY Plan.The minority stockholders
41
registered their objection during the said meeting by asking the Creditors (p.a. for 3 years) year
board to defer action as the SEC September 18, 1991 Order was installment,
still on appeal with the SEC En Banc. When the SEC En Banc denied interest-free
their appeal and motion for reconsideration under its July 30,
1993 and October 15, 1993 orders, Lim, MANCOM and ALFC filed (Rollo, CA-G.R. SP No. 32404, p. 727)
petitions for review with the CA which set aside the said orders. As
already mentioned, this Court affirmed the CA ruling in G.R. Nos. Needless to state, the foregoing payment schedules as embodied
124185-87. in the said plan which gives Benhar undue advantage over the
other creditors goes against the very essence of rehabilitation,
Contrary to the assertion of petitioners majority stockholders, our which requires that no creditor should be preferred over the
decision in G.R. Nos. 124185-87 nullified the deeds of other. Indeed, a comparison of the salient features of the Revised
assignment not solely on the ground of violation of the injunction Benhar/Ruby Plan and the Alternative Plan will readily show just
orders issued by the SEC and CA. As earlier mentioned, we affirmed how stacked in favor of Benhar are the provisions of the former
the CAs finding that the re-lending scheme under the Revised plan:
BENHAR/RUBY Plan will not only make rehabilitation more costly for
RUBY, but also worsen its financial condition because of the Benhar/Ruby Plan Alternative Plan
mortgage of its assets to a new creditor. To better illumine this
1. Benhar plays a major role. It 1. The original creditors are
point, we quote from the CA decision in CA-G.R. SP Nos. 32404,
will be paid P34.068M out the ones recognized. The
32469 and 32483 comparing the provisions of the rehabilitation
ofP60.437 M total amount due amount payable is lower
proposals submitted by the majority stockholders (Revised
to creditors but not explained as because interests are not
BENHAR/RUBY Plan) and the minority stockholders (Alternative
to how arrived at. capitalized.
Plan):
2. Benhar will not assign the 2. Direct credit of P80M
there is no need for Benhar to act as financier, as Ruby itself can
credit facility of P80M unless loan and will be borrowed
very well secure such credit accommodation using its assets as
theP34.068M above stated is from the bank(s) like Allied,
collateral. Verily, Benhars pretext at magnanimity is deception of
paid. UCPB, Metrobank or
the highest order considering that: (1) as embodied in the heading
Equitable Bank or even
Sources and Uses of Funds in the Revised Benhar/Ruby Plan,
China Bank.
the P80-Million loan/credit facility to be extended by Benhar will be
used to pay P60.437-Million loans of Ruby. Of the P60.437- 3. The main assets are to 3. Mortgaged
Million, P34.068-Million will be paid to Benhar as payment for the bemortgaged to the creditor- to bank(s)directly.
amounts it paid in consideration of the nullified assignments; (2) assignor of Benhar and if the
The Deed of Assignment of Credit Facility will be executed by illegal assignments are
Benhar in favor of Ruby only upon payment of Ruby of such amount recognized, then Benhar shall
already advanced by Benhar, i.e. the P34.068-Million credit have to be recognized as
assigned to Benhar by the seven (7) secured creditors. mortgagee even when it is a
disqualified creditor and/or
The Revised Benhar/Ruby Plan, in fact, gives Benhar undue mortgagee.
preference on the matter of repayment. Under the said plan, the
creditors of Ruby will be paid in accordance with the following 4. Start up cost P16,880 and 4. Plant B = P25,640
schedules: based on 1988 figures and
projections. Year IV estimated P40. M
Secured Creditors P17.022M To be paid in
cash with Plant A = 22.40
China Banking 12% interest
Corp. p.a. Year V estimated P30. M

BPI 5. Rehabilitation only of Plant B. 5. Rehabilitation of both

plants.
Philippine Orient
6. Recognition of Benhar re- 6. None
Unsecured P 9.347M To be paid in lender/financier.
Creditors Allied cash interest-
Leasing f[r]ee 7. Because of the SEC Order he 7. Pilipinas Shell
got an MC seat and and the representative be retained.
Filcor Finance Pilipinas Shell representative of
trade creditors was retained.
Benhar
8. Credit facility is being 8. Credit facility directly to
For having paid P34.068M To be paid in assigned or re-lent by Benhar. Ruby.
cash
Ruby obligations 9. Authorized Benhar to 9. None going to the
with interest mortgage assets of Ruby itself. minority but to actual
to 7 creditors charge Only remaining unencumbered lenders.
asset is one (1) real
Trade/Other P2.871M Totalling P8.6 property.Two (2) prime
14M to be properties already encumbered
paid in 3-

42
 to Assignor of Benhar.
10. Capacity of only one (1)
plant stated at 72% (overrated)
11. Projection figures based on
May, 1990 forex exchange
rate. Cost of importation and
other local supplier currently
cannot be met.
12. Market and economic slow
down not taken into
consideration.
13. Discriminatory to creditors
Benhar-capitalized with
undisclosed rates of interest.
10. Capacity of two (2)
plants progressive to 75%
or 80% with purchase of
new machines.
11. Minority RP can be
updated at current foreign
exchange rate.
12. Taken into
consideration so will
upgrade to meet
competition.
13. Not discriminatory.
were not notified of said board meeting. At any rate, the CA
decision nullifying the Revised BENHAR/RUBY Plan was affirmed
by this Court on January 20, 1998. Hence, the legitimate concerns
of the minority stockholders and MANCOM who objected to the
capital infusion which resulted in the dilution of their
shareholdings, the expiration of RUBYs corporate term and the
pending incidents on the void deeds of assignment of credit all
these should have been duly considered and acted upon by the
SEC when the case was remanded to it for further
proceedings. With the final rejection of the courts of the Revised
BENHAR/RUBY Plan, it was grave error for the SEC not to act
decisively on the motions filed by the minority stockholders who
have maintained that the issuance of additional shares did not
help improve the situation of RUBY except to stifle the opposition
coming from the MANCOM and minority stockholders by diluting
the latters shareholdings. Worse, the SEC ignored the evidence
adduced by the minority stockholders indicating that the correct
amount of subscription of additional shares was not paid by the
majority stockholders and that SEC official records still reflect the
60%-40% percentage of ownership of RUBY.

14. Original Figures of illegally 14. Original figures will be The SEC remained indifferent to the reliefs sought by the minority
assigned loans from FEBTC, used original figures plans stockholders, saying that the issue of the validity of the additional
PCIB, PTC which totaled 12% interest only. capital infusion was belatedly raised.Even assuming the October
toP11,419,036.87 but now 2, 1991 board meeting indeed took place, the SEC did nothing to
entered as P21,378,002.71.The ascertain whether indeed, as the minority claimed: (1) the
interest is undisclosed and may minority stockholders were not given notice as required and
have been capitalized. Figures reasonable time to exercise their pre-emptive rights; and (2) the
for the other four (4) secured capital infusion was not for the purpose of rehabilitation but a
lenders not available mere ploy to divest the minority stockholders of their 40.172%
individually. Total of seven (7) shareholding and reduce it to a mere 25.25%.
secured lenders given
as P34.068 M. The foregoing matters, along with the persistent refusal of the
majority stockholders, led by Yu Kim Giang, to give a full
15. Interest is 28% with Benhar 15. Interest is 25% payable accounting of their transactions involving RUBYs credits and
as conduit. to the bank. This is still properties, were extensively argued by the minority stockholders
subject to current market in their opposition to the motions to dismiss/vacate suspension
rates to be negotiated by order filed by the majority stockholders and BPI, as follows:
the minority.
Their receipts only show supposed payment by the majority of a
16. Call on unissued shares 15. Additional subscription total of P1,759,150.00 out of the correct amount of
forP11.814 M and if minority will of P16M within 6 months P7,068,079.92.00 (sic) (59.828% of P11.814 million required
take up their pre-emptive rights by the minority capital infusion under the MRP and RRP) which should have been
and dilute minority stockholders. the amount paid by them under the RRP which requires full
shareholdings. payment. Thus, they sought to attain a 74.75% equity from a
59.828% original equity by playing more tricks and stating that,
x x x x[61]
under the general rule, they are supposedly allowed to pay-up
only 25% of their subscription. Unfortunately for them, in a
Prior to the September 18, 1991 Order approving the Revised
rehabilitation supervised by the SEC and with an existing
BENHAR/RUBY Plan and dissolving the MANCOM, majority of
Mancom, the general rule does not apply. What is stated in the
RUBYs creditors (90%) have already withdrawn their support to
rehabilitation plan must be strictly followed provided the
the revised plan and manifested that they were only lately
rehabilitation plan has been finally approved.
informed about another plan submitted by the minority
stockholders. Hence, these creditors wrote individual letters to
It must be remembered that in October 2 to 17, 1991, the
the SEC Hearing Panel expressing their agreement with and
amounts owed by Ruby to the banks who illegally assigned their
endorsement of the Alternative Plan of the minority stockholders.
[62]
loans/credit was stated at P34 Million. Operations needed another
P20 Million plus. A capital infusion of P1,759,150.00 was so
miniscule and clearly not for rehabilitation but was intended to
The Revised BENHAR/RUBY Plan had proposed the calling for
deprive the minority of its blocking position and property rights
subscription of unissued shares through a Board Resolution from
since distribution after liquidation is based on the percentage of
the P11.814 million of the P23.7 million ACS in order to allow the
stockholdings. It is not only unfair, inequitable and not meaningful
long overdue program of the REHAB Program. RUBY will offer for
it is clearly dishonest.
subscription 118,140 shares of stocks at par value of P100 each to
all stockholders on record, payable within 15 days, or within a
xxxx
reasonable period from SEC approval of the revised plan. [63] This
was implemented by the October 2, 1991 meeting of the Board of Assuming arguendo that the Board of Directors could act
Directors led by Yu Kim Giang. The minority directors claimed they independently and this did not violate any injunction, if the capital

43
infusion was actually made, the Board of Directors had the duty to
report this to the Mancom because they would then fall under
existing assets and would be part of the evaluation of the proposed
RRP, necessary for management and in the overall plan of
rehabilitation. Nothing of this kind happened and the belated proof
cannot correct this situation.
xxxx
It is not true that there is benevolence on the part of the majority
when they maneuvered the illegal assignments and paid the
banks. The loan obligations remain as accounts payable of Ruby
and have even been bloated to gigantic proportions and yet the
SEC does not even ask them to account how much these
obligations are now and the majority should have reported these to
the Mancom, but the majority has not. These anomalous situations
have been made to continue long enough and, we pray, should be
addressed by the Honorable Commission.
xxxx
The SEC must understand that, being head of the first Mancom, YU
KIM GIANG had the same obligation to render a report to the SEC as
the present Mancom now. To single out the present Mancom to do
this when a complete report cannot be made without these starting
records is discriminatory, unfair and violates the rules of
accountancy. For example, where is the report on the illegal
assignments and mortgages complete with details? Where did the
rentals for the period from 1983 to 1989 go? This amounted to
millions. There are no reports on these. By not requiring the first
Mancom to Report, the SEC is preventing the complete picture on
the liabilities and finances of Ruby from being seen and is
sheltering Ruby and the majority.[64] (Additional emphasis supplied.)
Pre-emptive right under Sec. 39 of the Corporation Code refers to
the right of a stockholder of a stock corporation to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied
under the articles of incorporation, and subject to certain
exceptions and limitations.The stockholder must be given a
reasonable time within which to exercise their preemptive
rights. Upon the expiration of said period, any stockholder who has
not exercised such right will be deemed to have waived it. [65]
The validity of issuance of additional shares may be questioned if
done in breach of trust by the controlling stockholders. Thus, even
if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Section 39 or because it is denied
or limited in the articles of incorporation, an issue of shares may
still be objectionable if the directors acted in breach of trust and
their primary purpose is to perpetuate or shift control of the
corporation, or to freeze out the minority interest. [66] In this case,
the following relevant observations should have signaled greater
circumspection on the part of the SEC -- upon the third and last
remand to it pursuant to our January 20, 1998 decision -- to
demand transparency and accountability from the majority
stockholders, in view of the illegal assignments and objectionable
features of the Revised BENHAR/RUBY Plan, as found by the CA and
as affirmed by this Court:
There can be no gainsaying the well-established rule in corporate
practice and procedure that the will of the majority shall govern in
all matters within the limits of the act of incorporation and lawfully
enacted by-laws not proscribed by law. It is, however, equally true
that other stockholders are afforded the right to intervene
especially during critical periods in the life of a corporation like
reorganization, or in this case, suspension of payments, more
so, when the majority seek to impose their will and through
fraudulent means, attempt to siphon off Rubys valuable assets to
the great prejudice of Ruby itself, as well as the minority
stockholders and the unsecured creditors.
Certainly, the minority stockholders and the unsecured creditors
are given some measure of protection by the law from the abuses
and impositions of the majority, more so in this case, considering
the give-away signs of private respondents perfidy strewn all over
the factual landscape. Indeed, equity cannot deprive the minority
of a remedy against the abuses of the majority, and the present
action has been instituted precisely for the purpose of protecting
the true and legitimate interests of Ruby against the Majority
Stockholders. On this score, the Supreme Court, has ruled that:
Generally speaking, the voice of the majority of the stockholders
is the law of the corporation, but there are exceptions to this
rule. There must necessarily be a limit upon the power of the
majority. Without such a limit the will of the majority will be
absolute and irresistible and might easily degenerate into
absolute tyranny. x x x[67] (Additional emphasis supplied.)
Lamentably, the SEC refused to heed the plea of the minority
stockholders and MANCOM for the SEC to order RUBY to
commence liquidation proceedings, which is allowed under Sec. 4-
9 of the Rules on Corporate Recovery. Under the circumstances,
liquidation was the only hope of the minority stockholders for
effecting an orderly and equitable settlement of RUBYs
obligations, and compelling the majority stockholders to account
for all funds, properties and documents in their possession, and
make full disclosure on the nullified credit assignments. Oblivious
to these pending incidents so crucial to the protection of the
interest of the majority of creditors and minority shareholders, the
SEC simply stated that in the interim, RUBYs corporate term was
validly extended, as if such extension would provide the solution
to RUBYs myriad problems.
Extension of corporate term requires the vote of 2/3 of the
outstanding capital stock in a stockholders meeting called for the
purpose.[68] The actual percentage of shareholdings in RUBY as of
September 3, 1996 -- when the majority stockholders allegedly
ratified the board resolution approving the extension of RUBYs
corporate life to another 25 years was seriously disputed by the
minority stockholders, and we find the evidence of compliance
with the notice and quorum requirements submitted by the
majority stockholders insufficient and doubtful. Consequently, the
SEC had no basis for its ruling denying the motion of the minority
stockholders to declare as without force and effect the extension
of RUBYs corporate existence.
Liquidation, or the settlement of the affairs of the corporation,
consists of adjusting the debts and claims, that is, of collecting all
that is due the corporation, the settlement and adjustment of
claims against it and the payment of its just debts. [69] It involves
the winding up of the affairs of the corporation, which means the
collection of all assets, the payment of all its creditors, and the
distribution of the remaining assets, if any, among the
stockholders thereof in accordance with their contracts, or if there
be no special contract, on the basis of their respective interests. [70]
Section 122 of the Corporation Code, which is applicable to the
present case, provides:
SEC. 122. Corporate liquidation. -- Every corporation whose
charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued
44
as a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which
it was established.
At any time during said three (3) years, said corporation is
authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other
persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all
interests which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to
any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as otherwise allowed by
this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its
debts and liabilities.
Since the corporate life of RUBY as stated in its articles of
incorporation expired, without a valid extension having been
effected, it was deemed dissolved by such expiration without need
of further action on the part of the corporation or the State. [71] With
greater reason then should liquidation ensue considering that the
last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate
Recovery mandates the SEC to order the dissolution and liquidation
proceedings under Rule VI. Sec. 6-1, Rule VI likewise authorizes the
SEC on motion or motu proprio, or upon recommendation of the
management committee, to order dissolution of the debtor
corporation and the liquidation of its remaining assets, appointing a
Liquidator for the purpose, if the continuance in business of the
debtor is no longer feasible or profitable or no longer works to the
best interest of the stockholders, parties-litigants, creditors, or the
general public.
It cannot be denied that with the current divisiveness, distrust and
antagonism between the majority and minority stockholders, the
long agony and extreme prejudice caused by numerous litigations
to the creditors, and the bleak prospects for business recovery in
the light of problems with the local government which are
implementing more restrictions and anti-pollution measures that
practically banned the operation of RUBYs glass plant liquidation
becomes the only viable course for RUBY to stave off any further
losses and dissipation of its assets. Liquidation would also ensure
an orderly and equitable settlement of all creditors of RUBY, both
secured and unsecured.
The SECs utter disregard of the rights of the minority in applying
the provisions of the Rules of Procedure on Corporate Recovery is
inconsistent with the policy of liberal construction of the said rules
to assist the parties in obtaining a just, expeditious and
inexpensive settlement of cases.[72] Petitioners majority
stockholders, however, assert that the findings and conclusions of
the SEC on the matter of the dismissal of RUBYs petition are
binding and conclusive upon the CA and this Court. They contend
that reviewing courts are not supposed to substitute their judgment
for those made by administrative bodies specifically clothed with
authority to pass upon matters over which they have acquired
expertise.[73] Given our foregoing findings clearly showing that the
SEC acted arbitrarily and committed patent errors and grave
abuse of discretion, this case falls under the exception to the
general rule.
As we held in Ruby Industrial Corporation v. Court of Appeals:
The settled doctrine is that factual findings of an administrative
agency are accorded respect and, at times, finality for they have
acquired the expertise inasmuch as their jurisdiction is confined to
specific matters. Nonetheless, these doctrines do not apply when
the board or official has gone beyond his statutory authority,
exercised unconstitutional powers or clearly acted arbitrarily and
without regard to his duty or with grave abuse of
discretion. In Leongson vs. Court of Appeals, we held: once the
actuation of the administrative official or administrative board or
agency is tainted by a failure to abide by the command of the law,
then it is incumbent on the courts of justice to set matters right,
with this Tribunal having the last say on the matter. [74]
Petitioners majority stockholders further insist that the minority
stockholders were mistaken when they contended that the
rehabilitation of RUBY is dependent on the unwinding by the SEC
of the illegal assignments and mortgages. They assert that aside
from the fact that the SEC had nothing to unwind because the
alleged illegal assignments and mortgages were already declared
null and void, the said assignments and mortgages will not affect
the rehabilitation of Ruby; the same affecting only the issue of
how, as to whowill be its creditors.
Such contention is untenable and contrary to our previous ruling
in G.R. Nos. 124185-87. With the nullification of the deeds of
assignments of credit executed by some of Rubys secured
creditors in favor of BENHAR, it logically follows that the assignors
or the original bank creditors remain as the creditors on record of
RUBY. We have noted that BENHAR, which is controlled by the
family of Henry Yu who is also a director and stockholder of RUBY,
was not listed as one of RUBYs creditors at the time RUBY filed the
petition for suspension of payment. Petitioners majority
stockholders insinuation that RUBYs credits may have been
assigned to third parties, if not referring to BENHAR or its
conduits, implies two things: either the assignments declared void
by this Courts January 20, 1998 decision continues to be
recognized by the majority stockholders, in violation of the said
decision, or other third parties in connivance with BENHAR and/or
the controlling stockholders had subsequently entered the picture,
without approval of the SEC and while the SEC December 20,
1983 Order enjoining the disposition of RUBYs properties was in
force.
The majority stockholders eagerness to have the suspension order
lifted or vacated by the SEC without any order for its liquidation
evinces a total disregard of the mandate of Sec. 4-9 of the Rules
of Procedure on Corporate Recovery, and their obvious lack of any
intent to render an accounting of all funds, properties and details
of the unlawful assignment transactions to the prejudice of RUBY,
minority stockholders and the majority of RUBYs creditors. The
majority stockholders and BENHARs conduits must not be allowed
to evade the duty to make such full disclosure and account any
money due to RUBY to enable the latter to effect a fair, orderly
and equitable settlement of all its obligations, as well as
distribution of any remaining assets after paying all its debtors.
In fine, no error was committed by the CA when it set aside the
September 18, 2002 Order of the SEC and declared the nullity of
the acts of majority stockholders in implementing capital infusion
through issuance of additional shares in October 1991, the board
resolution approving the extension of RUBYs corporate term for
45
another 25 years, and any illegal assignment of credit executed by
RUBYs creditors in favor of third parties and/or conduits of the
controlling stockholders. The CA likewise correctly ordered the
delivery of all documents relative to the said assignment of credits
to the MANCOM or the Liquidator, the unwinding of these void
deeds of assignment, and their full accounting by the majority
stockholders.
The petitioners majority stockholders and China Bank cannot be
permitted to raise any issue again regarding the validity
of any assignment of credit made during the effectivity of the
suspension order and before the finality of the September 18, 2002
Order lifting the same. While China Bank is not precluded from
questioning the validity of theDecember 20, 1983 suspension order
on the basis of res judicata, it is, however, barred from doing so by
the principle of law of the case. We have held that when the
validity of an interlocutory order has already been passed upon on
appeal, the Decision of the Court on appeal becomes the law of the
case between the same parties. Law of the case has been defined
as the opinion delivered on a former appeal. More specifically, it
means that whatever is once irrevocably established as the
controlling legal rule of decision between the same parties in the
same case continues to be the law of the case, whether correct on
general principles or not, so long as the facts on which such
decision was predicated continue to be the facts of the case before
the court.[75]
The unwinding process of all such illegal assignment of RUBYs
credits is critical and necessary, in keeping with good faith and as a
matter of fairness and justice to all parties affected, particularly the
unsecured creditors who stands to suffer most if left with nothing of
the assets of RUBY, and the minority stockholders who waged legal
battles to defend the interest of RUBY and protect the rights of the
minority from the abuses of the controlling stockholders. As
correctly stated by the CA:
Liquidation is imperative because the unsecured creditor must
negotiate the amount of the imputable interest rate on its long
unpaid credit, the decision on which assets are to be sold to
liquidate the illegally assigned credits must be made, the other
secured credits and the trade credits must be determined, and
most importantly, the restoration of the 40.172% minority
percentage of ownership must be done.[76]
However, we do not agree that it is the SEC which has the authority
to supervise RUBYs liquidation.
In the case of Union Bank of the Philippines v. Concepcion,[77] the
Court is presented with the issue of whether the SEC had
jurisdiction to proceed with insolvency proceedings after it was
shown that the debtor corporation can no longer be rehabilitated.
We held that although jurisdiction over a petition to declare a
corporation in a state of insolvency strictly lies with regular courts,
the SEC possessed ample power under P.D. No. 902-A, as amended,
to declare a corporation insolvent as an incident of and in
continuation of its already acquired jurisdiction over the petition to
be declared in a state of suspension of payments in the two
instances provided in Sec. 5 (d)[78] thereof.
Subsequently, in Consuelo Metal Corporation v. Planters
Development Bank[79] the Court was again confronted with the
same issue. The original petition filed by the debtor corporation
was for suspension of payment, rehabilitation and appointment of a
rehabilitation receiver or management committee. Finding the
petition sufficient in form and substance, the SEC issued an order
suspending immediately all actions for claims against the petitioner
pending before any court, tribunal or body until further orders from
the court. It also created a management committee to undertake
petitioners rehabilitation. Four years later, upon the management
committees recommendation, the SEC issued an omnibus order
directing the dissolution and liquidation of the petitioner, and that
the proceedings on and implementation of the order of liquidation
be commenced at the Regional Trial Court to which the case was
transferred. However, the trial court refused to act on the motion
filed by the petitioner who requested for the issuance of a TRO
against the extrajudicial foreclosure initiated by one of its
creditors. The trial court ruled that since the SEC had already
terminated and decided on the merits the petition for suspension
of payment, the trial court no longer had legal basis to act on
petitioners motion. It likewise denied the motion for
reconsideration stating that petition for suspension of payment
could not be converted into a petition for dissolution and
liquidation because they covered different subject matters and
were governed by different rules. Petitioners remedy thus was to
file a new petition for dissolution and liquidation either with the
SEC or the trial court.
When the case was elevated to the CA, the petition was dismissed
affirming that under Sec. 121 of the Corporation Code, the SEC
had jurisdiction to hear the petition for dissolution and
liquidation. On motion for reconsideration, the CA remanded the
case to the SEC for proceedings under Sec. 121 of the Corporation
Code. The CA denied the motion for reconsideration filed by the
respondent creditor, who then filed a petition for review with this
Court.
We ruled that the SEC observed the correct procedure under the
present law, in cases where it merely retained jurisdiction over
pending cases for suspension of payments/rehabilitation, thus:
Republic Act No. 8799 (RA 8799) transferred to the appropriate
regional trial courts the SECs jurisdiction defined under Section
5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:
The Commissions jurisdiction over all cases enumerated under
Sec. 5 of Presidential Decree No. 902-A is hereby transferred to
the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that
shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for suspension
of payment and issued a suspension order on 2 April 1996 after it
found CMCs petition to be sufficient in form and substance. While
CMCs petition was still pending with the SEC as of 30 June 2000, it
was finally disposed of on 29 November 2000 when the SEC
issued its Omnibus Order directing the dissolution of CMC and the
transfer of the liquidation proceedings before the appropriate trial
court. The SEC finally disposed of CMCs petition for suspension of
payment when it determined that CMC could no longer be
successfully rehabilitated.
However, the SECs jurisdiction does not extend to the liquidation
of a corporation. While the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over the liquidation of the
corporation now pertains to the appropriate regional trial courts.
This is the reason why the SEC, in its 29 November 2000 Omnibus
46
Order, directed that the proceedings on and implementation of the
order of liquidation be commenced at the Regional Trial Court to
which this case shall be transferred. This is the correct procedure
because the liquidation of a corporation requires the settlement of
claims for and against the corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is in the best
position to convene all the creditors of the corporation, ascertain
their claims, and determine their preferences. [80] (Additional
emphasis supplied.)
In view of the foregoing, the SEC should now be directed to transfer
this case to the proper RTC which shall supervise the liquidation
proceedings under Sec. 122 of theCorporation Code. Under Sec. 6
(d) of P.D. 902-A, the SEC is empowered, on the basis of the
findings and recommendations of the management committee or
rehabilitation receiver, or on its own findings, to determine that the
continuance in business of a debtor corporation under suspension
of payment or rehabilitation would not be feasible or profitable nor
work to the best interest of the stockholders, parties-litigants,
creditors, or the general public, order the dissolution of such
corporation and its remaining assets liquidated accordingly. As
mentioned earlier, the procedure is governed by Rule VI of the
SEC Rules of Procedure on Corporate Recovery.
However, R.A. No. 10142[81] otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, now provides for
court proceedings in the rehabilitation or liquidation of debtors,
both juridical and natural persons, in a manner that will ensure or
maintain certainty and predictability in commercial affairs, preserve
and maximize the value of the assets of these debtors, recognize
creditor rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated. Considering that
this case was still pending when the new law took effect last year,
the RTC to which this case will be transferred shall be guided by
Sec. 146 of said law, which states:
SEC. 146. Application to Pending Insolvency, Suspension of
Payments and Rehabilitation Cases. This Act shall govern all
petitions filed after it has taken effect. All further proceedings in
insolvency, suspension of payments and rehabilitation cases then
pending, except to the extent that in opinion of the court their
application would not be feasible or would work injustice, in which
event the procedures set forth in prior laws and regulations shall
apply.
WHEREFORE, the petitions for review on certiorari are DENIED. The
Decision dated May 26, 2004 and Resolution dated November 4, 2004
of the Court of Appeals in CA-G.R. SP No. 73195 are
hereby AFFIRMED with MODIFICATION in that the Securities and
Exchange Commission is hereby ordered to TRANSFER SEC Case No.
2556 to the appropriate Regional Trial Court which is
hereby DIRECTED to supervise the liquidation of Ruby Industrial
Corporation under the provisions of R.A. No. 10142.
With costs against the petitioners.
11. [G.R. No. 124293. January 31, 2005]
J.G. SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS;
COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET
PRIVATIZATION TRUST; and PHILYARDS HOLDINGS,
INC., respondents.
For resolution before this Court are two motions filed by the
petitioner, J.G. Summit Holdings, Inc. for reconsideration of our
Resolution dated September 24, 2003 and to elevate this case to
the Court En Banc. The petitioner questions the Resolution which
reversed our Decision of November 20, 2000, which in turn
reversed and set aside a Decision of the Court of Appeals
promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of
September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development
Corporation (NIDC), a government corporation, entered into a
Joint Venture Agreement (JVA) with Kawasaki Heavy Industries,
Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation
and management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering
Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI
will contribute P330 million for the capitalization of PHILSECO in
the proportion of 60%-40% respectively. One of its salient features
is the grant to the parties of the right of first refusal should either
of them decide to sell, assign or transfer its interest in the joint
venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [PHILSECO] to any third party without giving the
other under the same terms the right of first refusal. This
provision shall not apply if the transferee is a corporation owned
or controlled by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and
interest in PHILSECO to the Philippine National Bank (PNB). Such
interests were subsequently transferred to the National
Government pursuant to Administrative Order No. 14. On
December 8, 1986, President Corazon C. Aquino issued
Proclamation No. 50 establishing the Committee on Privatization
(COP) and the Asset Privatization Trust (APT) to take title to, and
possession of, conserve, manage and dispose of non-performing
assets of the National Government. Thereafter, on February 27,
1987, a trust agreement was entered into between the National
Government and the APT wherein the latter was named the
trustee of the National Government's share in PHILSECO. In 1989,
as a result of a quasi-reorganization of PHILSECO to settle its huge
obligations to PNB, the National Government's shareholdings in
PHILSECO increased to 97.41% thereby reducing KAWASAKI's
shareholdings to 2.59%.
In the interest of the national economy and the government, the
COP and the APT deemed it best to sell the National
Government's share in PHILSECO to private entities. After a series
of negotiations between the APT and KAWASAKI, they agreed that
the latter's right of first refusal under the JVA be "exchanged" for
the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to
name a company in which it was a stockholder, which could
exercise the right to top. On September 7, 1990, KAWASAKI
informed APT that Philyards Holdings, Inc. (PHI)[1] would exercise
its right to top.
At the pre-bidding conference held on September 18, 1993,
interested bidders were given copies of the JVA between NIDC and
KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted
for the National Government's 87.6% equity share in PHILSECO.
The provisions of the ASBR were explained to the interested
bidders who were notified that the bidding would be held on
December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through
public bidding is the National Government's equity in PHILSECO
47
consisting of 896,869,942 shares of stock (representing 87.67% of
PHILSECO's outstanding capital stock), which will be sold as a
whole block in accordance with the rules herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the
final approval of both the APT Board of Trustees and the Committee
on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all
bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis.
The Indicative price set for the National Government's 87.67%
equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED
MILLION (P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of
Trustees at its regular meeting following the bidding, for the
purpose of determining whether or not it should be endorsed by the
APT Board of Trustees to the COP, and the latter approves the
same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or
its nominee, [PHILYARDS] Holdings, Inc., that the highest bid is
acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a
period of thirty (30) calendar days from the date of receipt of such
advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus five
(5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. exercise their "Option to Top the Highest Bid," they
shall so notify the APT about such exercise of their option and
deposit with APT the amount equivalent to ten percent (10%) of the
highest bid plus five percent (5%) thereof within the thirty (30)-day
period mentioned in paragraph 6.0 above. APT will then serve
notice upon Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. declaring them as the preferred bidder and they shall
have a period of ninety (90) days from the receipt of the APT's
notice within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. fail to exercise their "Option to Top the Highest Bid"
within the thirty (30)-day period, APT will declare the highest bidder
as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with
appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding period.
The bidder shall likewise be responsible for informing itself with
respect to any and all conditions concerning the PHILSECO Shares
which may, in any manner, affect the bidder's proposal. Failure on
the part of the bidder to so examine and inform itself shall be its
sole risk and no relief for error or omission will be given by APT or
COP. . . .
At the public bidding on the said date, petitioner J.G. Summit
Holdings, Inc.[2] submitted a bid of Two Billion and Thirty Million
Pesos (P2,030,000,000.00) with an acknowledgment of KAWASAKI/
[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has
up to thirty (30) days to act on APT's recommendation based on
the result of this bidding. Should the COP approve the highest bid,
APT shall advise Kawasaki Heavy Industries, Inc. and/or its
nominee, [PHILYARDS] Holdings, Inc. that the highest bid is
acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a
period of thirty (30) calendar days from the date of receipt of such
advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus
five (5%) percent thereof.
As petitioner was declared the highest bidder, the COP approved
the sale on December 3, 1993 "subject to the right of Kawasaki
Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's
bid by 5% as specified in the bidding rules."
On December 29, 1993, petitioner informed APT that it was
protesting the offer of PHI to top its bid on the grounds that: (a)
the KAWASAKI/PHI consortium composed of KAWASAKI,
[PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life
violated the ASBR because the last four (4) companies were the
losing bidders thereby circumventing the law and prejudicing the
weak winning bidder; (b) only KAWASAKI could exercise the right
to top; (c) giving the same option to top to PHI constituted
unwarranted benefit to a third party; (d) no right of first refusal
can be exercised in a public bidding or auction sale; and (e) the JG
Summit consortium was not estopped from questioning the
proceedings.
On February 2, 1994, petitioner was notified that PHI had fully
paid the balance of the purchase price of the subject bidding. On
February 7, 1994, the APT notified petitioner that PHI had
exercised its option to top the highest bid and that the COP had
approved the same on January 6, 1994. On February 24, 1994, the
APT and PHI executed a Stock Purchase Agreement.
Consequently, petitioner filed with this Court a Petition for
Mandamus under G.R. No. 114057. On May 11, 1994, said petition
was referred to the Court of Appeals. On July 18, 1995, the Court
of Appeals denied the same for lack of merit. It ruled that the
petition for mandamus was not the proper remedy to question the
constitutionality or legality of the right of first refusal and the right
to top that was exercised by KAWASAKI/PHI, and that the matter
must be brought "by the proper party in the proper forum at the
proper time and threshed out in a full blown trial." The Court of
Appeals further ruled that the right of first refusal and the right to
top are prima facie legal and that the petitioner, "by participating
in the public bidding, with full knowledge of the right to top
granted to KAWASAKI/[PHILYARDS] isestopped from questioning
the validity of the award given to [PHILYARDS] after the latter
exercised the right to top and had paid in full the purchase price
of the subject shares, pursuant to the ASBR." Petitioner filed a
Motion for Reconsideration of said Decision which was denied on
March 15, 1996. Petitioner thus filed a Petition for Certiorari with
this Court alleging grave abuse of discretion on the part of the
appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision
ruling among others that the Court of Appeals erred when it
dismissed the petition on the sole ground of the impropriety of the
special civil action of mandamus because the petition was also
one of certiorari. It further ruled that a shipyard like PHILSECO is a
public utility whose capitalization must be sixty percent (60%)
Filipino-owned. Consequently, the right to top granted to
KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted
for the sale of the 87.67% equity of the National Government in
PHILSECO is illegal not only because it violates the rules on
48
competitive bidding but more so, because it allows foreign
corporations to own more than 40% equity in the shipyard. It also
held that "although the petitioner had the opportunity to examine
the ASBR before it participated in the bidding, it cannot be
estopped from questioning the unconstitutional, illegal and
inequitable provisions thereof." Thus, this Court voided the transfer
of the national government's 87.67% share in PHILSECO to
Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the
highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is
GRANTED. The assailed Decision and Resolution of the Court of
Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay
to APT its bid price of Two Billion Thirty Million Pesos
(P2,030,000,000.00), less its bid deposit plus interests upon the
finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit
and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of
stocks representing 87.6% of PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One
Hundred Thirty-One Million Five Hundred Thousand Pesos
(P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted]
three basic issues for x x x resolution: (1) Whether PHILSECO is a
public utility; (2) Whether under the 1977 JVA, KAWASAKI can
exercise its right of first refusal only up to 40% of the total
capitalization of PHILSECO; and (3) Whether the right to top
granted to KAWASAKI violates the principles of competitive bidding.
[3]
(citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor
of the respondents. On the first issue, we held that Philippine
Shipyard and Engineering Corporation (PHILSECO) is not a public
utility, as by nature, a shipyard is not a public utility [4] and that no
law declares a shipyard to be a public utility. [5] On the second issue,
we found nothing in the 1977 Joint Venture Agreement (JVA) which
prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan
(KAWASAKI) from acquiring more than 40% of PHILSECOs total
capitalization.[6] On the final issue, we held that the right to top
granted to KAWASAKI in exchange for its right of first refusal did not
violate the principles of competitive bidding.[7]
On October 20, 2003, the petitioner filed a Motion for
Reconsideration[8] and a Motion to Elevate This Case to the
Court En Banc.[9] Public respondents Committee on Privatization
(COP) and Asset Privatization Trust (APT), and private respondent
Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G.
Summit Holdings, Inc.s (JG Summits) Motion for Reconsideration
and Motion to Elevate This Case to the Court En Banc on January
29, 2004 and February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this
litigation are the following:
1. Whether there are sufficient bases to elevate the case at bar to
the Court en banc.
2. Whether the motion for reconsideration raises any new matter
or cogent reason to warrant a reconsideration of this Courts
Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en
banc on the following grounds:
1. The main issue of the propriety of the bidding process involved
in the present case has been confused with the policy issue of the
supposed fate of the shipping industry which has never been an
issue that is determinative of this case. [10]
2. The present case may be considered under the Supreme Court
Resolution dated February 23, 1984 which included among en
banc cases those involving a novel question of law and those
where a doctrine or principle laid down by the Court en banc or in
division may be modified or reversed.[11]
3. There was clear executive interference in the judicial functions
of the Court when the Honorable Jose Isidro Camacho, Secretary
of Finance, forwarded to Chief Justice Davide, a memorandum
dated November 5, 2001, attaching a copy of the Foreign
Chambers Report dated October 17, 2001, which matter was
placed in the agenda of the Court and noted by it in a formal
resolution dated November 28, 2001.[12]
Opposing J.G. Summits motion to elevate the case en banc,
PHILYARDS points out the petitioners inconsistency in
previously opposing PHILYARDS Motion to Refer the Case to the
Court En Banc. PHILYARDS contends that J.G. Summit should now
be estopped from asking that the case be referred to the Court en
banc. PHILYARDS further contends that the Supreme Court en
banc is not an appellate court to which decisions or resolutions of
its divisions may be appealed citing Supreme Court Circular No. 2-
89 dated February 7, 1989.[13] PHILYARDS also alleges that there is
no novel question of law involved in the present case as the
assailed Resolution was based on well-settled jurisprudence.
Likewise, PHILYARDS stresses that the Resolution was merely an
outcome of the motions for reconsideration filed by it and the COP
and APT and is consistent with the inherent power of courts to
amend and control its process and orders so as to make them
conformable to law and justice. (Rule 135, sec. 5)[14] Private
respondent belittles the petitioners allegations regarding the
change in ponente and the alleged executive interference as
shown by former Secretary of Finance Jose Isidro Camachos
memorandum dated November 5, 2001 arguing that these do not
justify a referral of the present case to the Court en banc.
In insisting that its Motion to Elevate This Case to the Court En
Banc should be granted, J.G. Summit further argued that: its
Opposition to the Office of the Solicitor Generals Motion to Refer is
different from its own Motion to Elevate; different grounds are
invoked by the two motions; there was unwarranted executive
interference; and the change in ponente is merely noted in
asserting that this case should be decided by the Court en banc.
[15]
We find no merit in petitioners contention that the propriety of the
bidding process involved in the present case has been confused
with the policy issue of the fate of the shipping industry which,
49
petitioner maintains, has never been an issue that is determinative
of this case. The Courts Resolution of September 24, 2003 reveals a
clear and definitive ruling on the propriety of the bidding process.
In discussing whether the right to top granted to KAWASAKI in
exchange for its right of first refusal violates the principles of
competitive bidding, we made an exhaustive discourse on the rules
and principles of public bidding and whether they were complied
with in the case at bar.[16] This Court categorically ruled on the
petitioners argument that PHILSECO, as a shipyard, is a public
utility which should maintain a 60%-40% Filipino-foreign equity
ratio, as it was a pivotal issue. In doing so, we recognized the
impact of our ruling on the shipbuilding industry which was beyond
avoidance.[17]
We reject petitioners argument that the present case may be
considered under the Supreme Court Resolution dated February 23,
1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down
by the court en banc or in division may be modified or reversed.
The case was resolved based on basic principles of the right of first
refusal in commercial law and estoppel in civil law. Contractual
obligations arising from rights of first refusal are not new in this
jurisdiction and have been recognized in numerous cases.
[18]
Estoppel is too known a civil law concept to require an elongated
discussion. Fundamental principles on public bidding were likewise
used to resolve the issues raised by the petitioner. To be sure,
petitioner leans on the right to top in a public bidding in arguing
that the case at bar involves a novel issue. We are not swayed. The
right to top was merely a condition or a reservation made in the
bidding rules which was fully disclosed to all bidding parties.
In Bureau Veritas, represented by Theodor H. Hunermann v. Office
of the President, et al., [19]we dealt with this conditionality, viz:
x x x It must be stressed, as held in the case of A.C. Esguerra &
Sons v. Aytona, et al., (L-18751, 28 April 1962, 4 SCRA 1245), that
in an "invitation to bid, there is a condition imposed upon the
bidders to the effect that the bidding shall be subject to the right of
the government to reject any and all bids subject to its discretion.
In the case at bar, the government has made its choice and unless
an unfairness or injustice is shown, the losing bidders have no
cause to complain nor right to dispute that choice. This is a well-
settled doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is
vested in the Government agencies entrusted with that function.
The discretion given to the authorities on this matter is of such
wide latitude that the Courts will not interfere therewith, unless it is
apparent that it is used as a shield to a fraudulent award (Jalandoni
v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion
is a policy decision that necessitates prior inquiry, investigation,
comparison, evaluation, and deliberation. This task can best be
discharged by the Government agencies concerned, not by the
Courts. The role of the Courts is to ascertain whether a branch or
instrumentality of the Government has transgressed its
constitutional boundaries. But the Courts will not interfere with
executive or legislative discretion exercised within those
boundaries. Otherwise, it strays into the realm of policy decision-
making.
It is only upon a clear showing of grave abuse of discretion that the
Courts will set aside the award of a contract made by a government
entity. Grave abuse of discretion implies a capricious, arbitrary and
whimsical exercise of power (Filinvest Credit Corp. v. Intermediate
Appellate Court, No. 65935, 30 September 1988, 166 SCRA 155).
The abuse of discretion must be so patent and gross as to amount
to an evasion of positive duty or to a virtual refusal to perform a
duty enjoined by law, as to act at all in contemplation of law, where
the power is exercised in an arbitrary and despotic manner by
reason of passion or hostility (Litton Mills, Inc. v. Galleon Trader,
Inc., et al[.], L-40867, 26 July 1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse of
discretion on the part of public respondents when they awarded
the CISS contract to Respondent SGS. In the "Invitation to
Prequalify and Bid" (Annex "C," supra), the CISS Committee made
an express reservation of the right of the Government to "reject
any or all bids or any part thereof or waive any defects contained
thereon and accept an offer most advantageous to the
Government." It is a well-settled rule that where such reservation
is made in an Invitation to Bid, the highest or lowest bidder, as
the case may be, is not entitled to an award as a matter of
right (C & C Commercial Corp. v. Menor, L-28360, 27 January
1983, 120 SCRA 112). Even the lowest Bid or any Bid may be
rejected or, in the exercise of sound discretion, the award may be
made to another than the lowest bidder (A.C. Esguerra & Sons v.
Aytona, supra, citing 43 Am. Jur., 788). (emphases supplied)
Like the condition in the Bureau Veritas case, the right to top was
a condition imposed by the government in the bidding rules which
was made known to all parties. It was a condition imposed on all
bidders equally, based on the APTs exercise of its discretion in
deciding on how best to privatize the governments shares in
PHILSECO. It was not a whimsical or arbitrary condition plucked
from the ether and inserted in the bidding rules but a condition
which the APT approved as the best way the government could
comply with its contractual obligations to KAWASAKI under the JVA
and its mandate of getting the most advantageous deal for the
government. The right to top had its history in the mutual right of
first refusal in the JVA and was reached by agreement of the
government and KAWASAKI.
Further, there is no executive interference in the functions of this
Court by the mere filing of a memorandum by Secretary of
Finance Jose Isidro Camacho. The memorandum was merely noted
to acknowledge its filing. It had no further legal significance.
Notably too, the assailed Resolution dated September 24, 2003
was decided unanimously by the Special First Division in favor of
the respondents.
Again, we emphasize that a decision or resolution of a Division is
that of the Supreme Court[20] and the Court en banc is not an
appellate court to which decisions or resolutions of a Division may
be appealed.[21]
For all the foregoing reasons, we find no basis to elevate this case
to the Court en banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioners Motion
for Reconsideration. First, that a fair resolution of the case should
be based on contract law, not on policy considerations; the
contracts do not authorize the right to top to be derived from the
right of first refusal.[22] Second, that neither the right of first
refusal nor the right to top can be legally exercised by the
consortium which is not the proper party granted such right under
either the JVA or the Asset Specific Bidding Rules (ASBR). [23] Third,
that the maintenance of the 60%-40% relationship between the
National Investment and Development Corporation (NIDC) and
KAWASAKI arises from contract and from the Constitution because
PHILSECO is a landholding corporation and need not be a public
utility to be bound by the 60%-40% constitutional limitation. [24]
50
On the other hand, private respondent PHILYARDS asserts that J.G.
Summit has not been able to show compelling reasons to warrant a
reconsideration of the Decision of the Court. [25] PHILYARDS denies
that the Decision is based mainly on policy considerations and
points out that it is premised on principles governing obligations
and contracts and corporate law such as the rule requiring respect
for contractual stipulations, upholding rights of first refusal, and
recognizing the assignable nature of contracts rights. [26] Also, the
ruling that shipyards are not public utilities relies on established
case law and fundamental rules of statutory construction.
PHILYARDS stresses that KAWASAKIs right of first refusal or even
the right to top is not limited to the 40% equity of the latter. [27] On
the landholding issue raised by J.G. Summit, PHILYARDS emphasizes
that this is a non-issue and even involves a question of fact. Even
assuming that this Court can take cognizance of such question of
fact even without the benefit of a trial, PHILYARDS opines that
landholding by PHILSECO at the time of the bidding is irrelevant
because what is essential is that ultimately a qualified entity would
eventually hold PHILSECOs real estate properties. [28] Further, given
the assignable nature of the right of first refusal, any applicable
nationality restrictions, including landholding limitations, would not
affect the right of first refusal itself, but only the manner of its
exercise.[29] Also, PHILYARDS argues that if this Court takes
cognizance of J.G. Summits allegations of fact regarding PHILSECOs
landholding, it must also recognize PHILYARDS assertions that
PHILSECOs landholdings were sold to another corporation.[30] As
regards the right of first refusal, private respondent explains that
KAWASAKIs reduced shareholdings (from 40% to 2.59%) did not
translate to a deprivation or loss of its contractually granted right
of first refusal.[31] Also, the bidding was valid because PHILYARDS
exercised the right to top and it was of no moment that losing
bidders later joined PHILYARDS in raising the purchase price. [32]
In cadence with the private respondent PHILYARDS, public
respondents COP and APT contend:
1. The conversion of the right of first refusal into a right to top by
5% does not violate any provision in the JVA between NIDC and
KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by
the constitutional restriction on foreign ownership.
3. The petitioner is legally estopped from assailing the validity of
the proceedings of the public bidding as it voluntarily submitted
itself to the terms of the ASBR which included the provision on the
right to top.
4. The right to top was exercised by PHILYARDS as the nominee of
KAWASAKI and the fact that PHILYARDS formed a consortium to
raise the required amount to exercise the right to top the highest
bid by 5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the
acquisition of lands does not apply to PHILSECO because as
admitted by petitioner itself, PHILSECO no longer owns real
property.
6. Petitioners motion to elevate the case to the Court en banc is
baseless and would only delay the termination of this case.[33]
In a Consolidated Comment dated March 8, 2004, J.G. Summit
countered the arguments of the public and private respondents in
this wise:
1. The award by the APT of 87.67% shares of PHILSECO to
PHILYARDS with losing bidders through the exercise of a right to
top, which is contrary to law and the constitution is null and void
for being violative of substantive due process and the abuse of
right provision in the Civil Code.
a. The bidders[] right to top was actually exercised by losing
bidders.
b. The right to top or the right of first refusal cannot co-exist with
a genuine competitive bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the
start of this case but is shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first
refusal was agreed upon and at the time of the bidding are most
relevant.
d. Whether a shipyard is a public utility is not the core issue in this
case.
3. Fraud and bad faith attend the alleged conversion of an
inexistent right of first refusal to the right to top.
a. The history behind the birth of the right to top shows fraud and
bad faith.
b. The right of first refusal was, indeed, effectively useless.
4. Petitioner is not legally estopped to challenge the right to top in
this case.
a. Estoppel is unavailing as it would stamp validity to an act that
is prohibited by law or against public policy.
b. Deception was patent; the right to top was an attractive
nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced
from the right of first refusal is not new and we have already ruled
on the issue in our Resolution of September 24, 2003. We upheld
the mutual right of first refusal in the JVA. [34] We also ruled that
nothing in the JVA prevents KAWASAKI from acquiring more than
40% of PHILSECOs total capitalization. [35]Likewise, nothing in the
JVA or ASBR bars the conversion of the right of first refusal to the
right to top. In sum, nothing new and of significance in the
petitioners pleading warrants a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the
right of first refusal nor the right to top can legally be exercised by
the consortium which is not the proper party granted such right
under either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of
Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI), has
joined PHILYARDS in the latter's effort to raise P2.131 billion
necessary in exercising the right to top is not contrary to law,
public policy or public morals. There is nothing in the ASBR that
bars the losing bidders from joining either the winning bidder
(should the right to top is not exercised) or KAWASAKI/PHI (should
it exercise its right to top as it did), to raise the purchase price.
51
The petitioner did not allege, nor was it shown by competent
evidence, that the participation of the losing bidders in the public
bidding was done with fraudulent intent. Absent any proof of fraud,
the formation by [PHILYARDS] of a consortium is legitimate in a free
enterprise system. The appellate court is thus correct in holding the
petitioner estopped from questioning the validity of the transfer of
the National Government's shares in PHILSECO to respondent. [36]
Further, we see no inherent illegality on PHILYARDS act in seeking
funding from parties who were losing bidders. This is a purely
commercial decision over which the State should not interfere
absent any legal infirmity. It is emphasized that the case at bar
involves the disposition of shares in a corporation which the
government sought to privatize. As such, the persons with whom
PHILYARDS desired to enter into business with in order to raise
funds to purchase the shares are basically its business. This is in
contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity of
the buyer/bidder or financier constitutes an important
consideration. In such cases, the government would have to take
utmost precaution to protect public interest by ensuring that the
parties with which it is contracting have the ability to satisfactorily
construct or operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO
is a landholding company, KAWASAKI could exercise its right of first
refusal only up to 40% of the shares of PHILSECO due to the
constitutional prohibition on landholding by corporations with more
than 40% foreign-owned equity. It further argues that since
KAWASAKI already held at least 40% equity in PHILSECO, the right
of first refusal was inutile and as such, could not subsequently be
converted into the right to top. [37] Petitioner also asserts that, at
present, PHILSECO continues to violate the constitutional provision
on landholdings as its shares are more than 40% foreign-owned.
[38]
PHILYARDS admits that it may have previously held land but had
already divested such landholdings.[39] It contends, however, that
even if PHILSECO owned land, this would not affect the right of first
refusal but only the exercise thereof. If the land is retained, the
right of first refusal, being a property right, could be assigned to a
qualified party. In the alternative, the land could be divested before
the exercise of the right of first refusal. In the case at bar,
respondents assert that since the right of first refusal was validly
converted into a right to top, which was exercised not by
KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e.,
60% of its shares are owned by Filipinos), then there is no violation
of the Constitution.[40] At first, it would seem that questions of fact
beyond cognizance by this Court were involved in the issue.
However, the records show that PHILYARDS admits it had owned
land up until the time of the bidding.[41] Hence, the only issue is
whether KAWASAKI had a valid right of first refusal over PHILSECO
shares under the JVA considering that PHILSECO owned land until
the time of the bidding and KAWASAKI already held 40% of
PHILSECOs equity.
We uphold the validity of the mutual rights of first refusal under the
JVA between KAWASAKI and NIDC. First of all, the right of first
refusal is a property right of PHILSECO shareholders, KAWASAKI and
NIDC, under the terms of their JVA. This right allows them to
purchase the shares of their co-shareholder before they are offered
to a third party. The agreement of co-shareholders to mutually
grant this right to each other, by itself, does not constitute a
violation of the provisions of the Constitution limiting land
ownership to Filipinos and Filipino corporations. As PHILYARDS
correctly puts it, if PHILSECO still owns land, the right of first refusal
can be validly assigned to a qualified Filipino entity in order to
maintain the 60%-40% ratio. This transfer, by itself, does not
amount to a violation of the Anti-Dummy Laws, absent proof of any
fraudulent intent. The transfer could be made either to a nominee
or such other party which the holder of the right of first refusal
feels it can comfortably do business with. Alternatively, PHILSECO
may divest of its landholdings, in which case KAWASAKI, in
exercising its right of first refusal, can exceed 40% of PHILSECOs
equity. In fact, it can even be said that if the foreign shareholdings
of a landholding corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is adversely affected
but the capacity of the corporation to own land that is, the
corporation becomes disqualified to own land. This finds support
under the basic corporate law principle that the corporation and
its stockholders are separate juridical entities. In this vein, the
right of first refusal over shares pertains to the shareholders
whereas the capacity to own land pertains to the corporation.
Hence, the fact that PHILSECO owns land cannot deprive
stockholders of their right of first refusal. No law disqualifies a
person from purchasing shares in a landholding corporation even
if the latter will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. This is the clear
import of the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the
State. The State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations
at least sixty per centum of whose capital is owned by such
citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law.
In cases of water rights for irrigation, water supply, fisheries, or
industrial uses other than the development of water power,
beneficial use may be the measure and limit of the grant.
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private lands
shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of
the public domain.[42] (emphases supplied)
The petitioner further argues that an option to buy land is void in
itself (Philippine Banking Corporation v. Lui She, 21 SCRA 52
[1967]). The right of first refusal granted to KAWASAKI, a Japanese
corporation, is similarly void. Hence, the right to top, sourced from
the right of first refusal, is also void.[43] Contrary to the contention
of petitioner, the case of Lui She did not that say an option to buy
land is void in itself, for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is
valid. So is an option giving an alien the right to buy real
property on condition that he is granted Philippine citizenship. As
this Court said in Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the
use of lands for residential purposes. Since their residence in the
Philippines is temporary, they may be granted temporary rights
such as a lease contract which is not forbidden by the
Constitution. Should they desire to remain here forever and share
our fortunes and misfortunes, Filipino citizenship is not impossible
to acquire.
52
But if an alien is given not only a lease of, but also an option to
buy, a piece of land, by virtue of which the Filipino owner cannot
sell or otherwise dispose of his property, this to last for 50 years,
then it becomes clear that the arrangement is a virtual transfer of
ownership whereby the owner divests himself in stages not only of
the right to enjoy the land (jus possidendi, jus utendi, jus fruendi
and jus abutendi) but also of the right to dispose of it (jus
disponendi) rights the sum total of which make up ownership. It is
just as if today the possession is transferred, tomorrow, the use,
the next day, the disposition, and so on, until ultimately all the
rights of which ownership is made up are consolidated in an alien.
And yet this is just exactly what the parties in this case did within
this pace of one year, with the result that Justina Santos'[s]
ownership of her property was reduced to a hollow concept. If this
can be done, then the Constitutional ban against alien landholding
in the Philippines, as announced in Krivenko vs. Register of Deeds,
is indeed in grave peril.[44] (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it amounted
to a virtual transfer of ownership as the owner could not sell or
dispose of his properties. The contract in Lui Sheprohibited the
owner of the land from selling, donating, mortgaging, or
encumbering the property during the 50-year period of the option
to buy. This is not so in the case at bar where the mutual right of
first refusal in favor of NIDC and KAWASAKI does not amount to a
virtual transfer of land to a non-Filipino. In fact, the case at bar
involves a right of first refusal over shares of stock while the Lui
She case involves an option to buy the land itself. As discussed
earlier, there is a distinction between the shareholders ownership
of shares and the corporations ownership of land arising from the
separate juridical personalities of the corporation and its
shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges
that PHILSECO continues to violate the Constitution as its foreign
equity is above 40% and yet owns long-term leasehold rights which
are real rights.[45] It cites Article 415 of the Civil Code which
includes in the definition of immovable property, contracts for
public works, and servitudes and other real rights over immovable
property.[46] Any existing landholding, however, is denied by
PHILYARDS citing its recent financial statements. [47] First, these are
questions of fact, the veracity of which would require introduction
of evidence. The Court needs to validate these factual allegations
based on competent and reliable evidence. As such, the Court
cannot resolve the questions they pose. Second, J.G. Summit
misreads the provisions of the Constitution cited in its own
pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private
respondent is not a 60%-40% corporation, and this violates the
Constitution x x x The violation continues to this day because under
the law,it continues to own real property
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14,
Article XIV of the 1973 Constitution (the JVA was signed in 1977),
provided:
Save in cases of hereditary succession, no private lands shall be
transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain.
32.1 This provision is the same as Section 7, Article XII of the 1987
Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire
or hold lands of the public domain are corporations at least 60%
of which is owned by Filipino citizens (Sec. 22, Commonwealth Act
141, as amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in
the Constitution applies only to ownership of land.[48] It does not
extend to immovable or real property as defined under Article 415
of the Civil Code. Otherwise, we would have a strange situation
where the ownership of immovable property such as trees, plants
and growing fruit attached to the land[49] would be limited to
Filipinos and Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for
Reconsideration is DENIED WITH FINALITY and the decision
appealed from is AFFIRMED. The Motion to Elevate This Case to
the Court En Banc is likewise DENIED for lack of merit.
12. G.R. No. 165744 August 11, 2008
OSCAR C. REYES versus HON. REGIONAL TRIAL COURT OF MAKATI,
Branch 142, ZENITH INSURANCE CORPORATION, and RODRIGO C.
REYES
This Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeks to set aside the Decision of the Court of Appeals (CA)
[1]
promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA
Decision affirmed the Order of the Regional Trial Court (RTC),
Branch 142, Makati City dated November 29, 2002[2] in Civil Case
No. 00-1553 (entitled "Accounting of All Corporate Funds and
Assets, and Damages") which denied petitioner Oscar C. Reyes
(Oscar) Motion to Declare Complaint as Nuisance or Harassment
Suit.
BACKGROUND FACTS
Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two
of the four children of the spouses Pedro and Anastacia
Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of
stock of Zenith Insurance Corporation (Zenith), a domestic
corporation established by their family. Pedro died in 1964, while
Anastacia died in 1993. Although Pedros estate was judicially
partitioned among his heirs sometime in the 1970s, no similar
settlement and partition appear to have been made with
Anastacias estate, which included her shareholdings in Zenith. As
of June 30, 1990, Anastacia owned 136,598 shares of Zenith;
Oscar and Rodrigo owned 8,715,637 and 4,250 shares,
respectively.[3]
On May 9, 2000, Zenith and Rodrigo filed a complaint[4] with the
Securities and Exchange Commission (SEC) against Oscar,
docketed as SEC Case No. 05-00-6615. The complaint stated that
it is a derivative suit initiated and filed by the complainant
Rodrigo C. Reyes to obtain an accounting of the funds and assets
of ZENITH INSURANCE CORPORATION which are now or formerly
in the control, custody, and/or possession of respondent [herein
petitioner Oscar] and to determine the shares of stock of
deceased spouses Pedro and Anastacia Reyes that were
arbitrarily and fraudulently appropriated [by Oscar] for himself
[and] which were not collated and taken into account in the
partition, distribution, and/or settlement of the estate of the
deceased spouses, for which he should be ordered to account for
all the income from the time he took these shares of stock, and
should now deliver to his brothers and sisters their just and
respective shares.[5] [Emphasis supplied.]
53
 In his Answer with Counterclaim,[6] Oscar denied the charge that he
illegally acquired the shares of Anastacia Reyes. He asserted, as a
defense, that he purchased the subject shares with his own funds
from the unissued stocks of Zenith, and that the suit is not a bona
fide derivative suit because the requisites therefor have not been
complied with. He thus questioned the SECs jurisdiction to
entertain the complaint because it pertains to the settlement of the
estate of Anastacia Reyes.
When Republic Act (R.A.) No. 8799[7] took effect, the SECs
exclusive and original jurisdiction over cases enumerated in Section
5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC
designated as a special commercial court. [8] The records of Rodrigos
SEC case were thus turned over to the RTC, Branch 142, Makati,
and docketed as Civil Case No. 00-1553.
On October 22, 2002, Oscar filed a Motion to Declare Complaint as
Nuisance or Harassment Suit.[9] He claimed that the complaint is a
mere nuisance or harassment suit and should, according to the
Interim Rules of Procedure for Intra-Corporate Controversies, be
dismissed; and that it is not a bona fide derivative suit as it
partakes of the nature of a petition for the settlement of estate of
the deceased Anastacia that is outside the jurisdiction of a special
commercial court. The RTC, in its Order dated November 29,
2002 (RTC Order), denied the motion in part and declared:
A close reading of the Complaint disclosed the presence of two (2)
causes of action, namely: a) a derivative suit for accounting of the
funds and assets of the corporation which are in the control,
custody, and/or possession of the respondent [herein petitioner
Oscar] with prayer to appoint a management committee; and b) an
action for determination of the shares of stock of deceased spouses
Pedro and Anastacia Reyes allegedly taken by respondent, its
accounting and the corresponding delivery of these shares to the
parties brothers and sisters. The latter is not a derivative suit and
should properly be threshed out in a petition for settlement of
estate.
Accordingly, the motion is denied. However, only the derivative
suit consisting of the first cause of action will be taken cognizance
of by this Court.[10]
Oscar thereupon went to the CA on a petition for certiorari,
prohibition, and mandamus[11] and prayed that the RTC Order be
annulled and set aside and that the trial court be prohibited from
continuing with the proceedings. The appellate court affirmed the
RTC Order and denied the petition in its Decision dated May 26,
2004. It likewise denied Oscars motion for reconsideration in a
Resolution dated October 21, 2004.
Petitioner now comes before us on appeal through a petition for
review on certiorari under Rule 45 of the Rules of Court.
ASSIGNMENT OF ERRORS
Petitioner Oscar presents the following points as conclusions the
CA should have made:
1. that the complaint is a mere nuisance or harassment suit that
should be dismissed under the Interim Rules of Procedure of Intra-
Corporate Controversies; and
2. that the complaint is not a bona fide derivative suit but is in
fact in the nature of a petition for settlement of estate; hence, it is
outside the jurisdiction of the RTC acting as a special commercial
court.
Accordingly, he prays for the setting aside and annulment of the
CA decision and resolution, and the dismissal of Rodrigos
complaint before the RTC.
THE COURTS RULING
We find the petition meritorious.
The core question for our determination is whether the trial court,
sitting as a special commercial court, has jurisdiction over the
subject matter of Rodrigos complaint. To resolve it, we rely on the
judicial principle that jurisdiction over the subject matter of a case
is conferred by law and is determined by the allegations of the
complaint, irrespective of whether the plaintiff is entitled to all or
some of the claims asserted therein.[12]
JURISDICTION OF SPECIAL COMMERCIAL COURTS
P.D. No. 902-A enumerates the cases over which the SEC (now
the RTC acting as a special commercial court) exercises exclusive
jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnership, and other forms of associations
registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
a) Devices or schemes employed by or any acts of
the board of directors, business associates, its officers or partners,
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate or
partnership relations, between and among stockholders,
members, or associates; between any or all of them and the
corporation, partnership or association of which they are
stockholders, members, or associates, respectively; and between
such corporation, partnership or association and the State insofar
as it concerns their individual franchise or right to exist as such
entity; and
c) Controversies in the election or appointment of
directors, trustees, officers, or managers of such corporations,
partnerships, or associations.
The allegations set forth in Rodrigos complaint principally invoke
Section 5, paragraphs (a) and (b) above as basis for the exercise
of the RTCs special court jurisdiction. Our focus in examining the
allegations of the complaint shall therefore be on these two
provisions.
Fraudulent Devices and Schemes
The rule is that a complaint must contain a plain, concise, and
direct statement of the ultimate facts constituting the plaintiffs
cause of action and must specify the relief sought.[13]Section 5,
Rule 8 of the Revised Rules of Court provides that in all averments
of fraud or mistake, the circumstances constituting fraud or
mistake must be stated with particularity. [14] These rules find
specific application to Section 5(a) of P.D. No. 902-A which speaks
of corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the
stockholders.
54
 In an attempt to hold Oscar responsible for corporate fraud,
Rodrigo alleged in the complaint the following:
3. This is a complaintto determine the shares of stock of the
deceased spouses Pedro and Anastacia Reyes that were arbitrarily
and fraudulently appropriated for himself [herein petitioner
Oscar] which were not collated and taken into account in the
partition, distribution, and/or settlement of the estate of the
deceased Spouses Pedro and Anastacia Reyes, for which he should
be ordered to account for all the income from the time he took
these shares of stock, and should now deliver to his brothers and
sisters their just and respective shares with the corresponding
equivalent amount of P7,099,934.82 plus interest thereon from
1978 representing his obligations to the Associated Citizens Bank
that was paid for his account by his late mother, Anastacia C.
Reyes. This amount was not collated or taken into account in the
partition or distribution of the estate of their late mother, Anastacia
C. Reyes.
3.1. Respondent Oscar C. Reyes, through other schemes of fraud
including misrepresentation, unilaterally, and for his own benefit,
capriciously transferred and took possession and control of the
management of Zenith Insurance Corporation which is considered
as a family corporation, and other properties and businesses
belonging to Spouses Pedro and Anastacia Reyes.
xxxx
4.1. During the increase of capitalization of Zenith Insurance
Corporation, sometime in 1968, the property covered by TCT No.
225324 was illegally and fraudulently used by respondent as a
collateral.
xxxx
5. The complainant Rodrigo C. Reyes discovered that by some
manipulative scheme, the shareholdings of their deceased mother,
Doa Anastacia C. Reyes, shares of stocks and [sic] valued in the
corporate books at P7,699,934.28, more or less, excluding interest
and/or dividends, had been transferred solely in the name of
respondent. By such fraudulent manipulations and
misrepresentation, the shareholdings of said respondent Oscar C.
Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic]
the majority stockholder of Zenith Insurance Corporation, which
portion of said shares must be distributed equally amongst the
brothers and sisters of the respondent Oscar C. Reyes including the
complainant herein.
xxx
9.1 The shareholdings of deceased Spouses Pedro Reyes
and Anastacia C. Reyes valued at P7,099,934.28 were illegally and
fraudulently transferred solely to the respondents [herein petitioner
Oscar] name and installed himself as a majority stockholder of
Zenith Insurance Corporation [and] thereby deprived his brothers
and sisters of their respective equal shares thereof including
complainant hereto.
xxxx
10.1 By refusal of the respondent to account of his [sic]
shareholdings in the company, he illegally and fraudulently
transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated
and/or distributed equally amongst the children, including the
complainant Rodrigo C. Reyes herein, to their damage and
prejudice.
xxxx
11.1 By continuous refusal of the respondent to account of his
[sic] shareholding with Zenith Insurance Corporation[,]
particularly the number of shares of stocks illegally and
fraudulently transferred to him from their deceased parents Sps.
Pedro and Anastacia Reyes[,] which are all subject for collation
and/or partition in equal shares among their children. [Emphasis
supplied.]
Allegations of deceit, machination, false pretenses,
misrepresentation, and threats are largely conclusions of law that,
without supporting statements of the facts to which the
allegations of fraud refer, do not sufficiently state an effective
cause of action.[15] The late Justice Jose Feria, a noted authority in
Remedial Law, declared that fraud and mistake are required to be
averred with particularity in order to enable the opposing party to
controvert the particular facts allegedly constituting such fraud or
mistake.[16]
Tested against these standards, we find that the charges of fraud
against Oscar were not properly supported by the required factual
allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not
particular enough to bring the controversy within the special
commercial courts jurisdiction; they are not statements of
ultimate facts, but are mere conclusions of law: how and why the
alleged appropriation of shares can be characterized as illegal and
fraudulent were not explained nor elaborated on.
Not every allegation of fraud done in a corporate setting or
perpetrated by corporate officers will bring the case within the
special commercial courts jurisdiction. To fall within this
jurisdiction, there must be sufficient nexus showing that the
corporations nature, structure, or powers were used to facilitate
the fraudulent device or scheme. Contrary to this concept, the
complaint presented a reverse situation. No corporate power or
office was alleged to have facilitated the transfer of the shares;
rather, Oscar, as an individual and without reference to his
corporate personality, was alleged to have transferred the shares
of Anastacia to his name, allowing him to become the majority
and controlling stockholder of Zenith, and eventually, the
corporations President. This is the essence of the complaint read
as a whole and is particularly demonstrated under the following
allegations:
5. The complainant Rodrigo C. Reyes discovered that by some
manipulative scheme, the shareholdings of their deceased
mother, Doa Anastacia C. Reyes, shares of stocks and [sic] valued
in the corporate books at P7,699,934.28, more or less, excluding
interest and/or dividends, had been transferred solely in the name
of respondent. By such fraudulent manipulations and
misrepresentation, the shareholdings of said respondent Oscar C.
Reyes abruptly increased to P8,715,637.00 [sic] and becomes
[sic] the majority stockholder of Zenith Insurance
Corporation, which portion of said shares must be distributed
equally amongst the brothers and sisters of the respondent Oscar
C. Reyes including the complainant herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes
and Anastacia C. Reyes valued at P7,099,934.28 were illegally
and fraudulently transferred solely to the respondents [herein
petitioner Oscar] name and installed himself as a majority
stockholder of Zenith Insurance Corporation [and] thereby
55
deprived his brothers and sisters of their respective equal shares
thereof including complainant hereto. [Emphasis supplied.]
In ordinary cases, the failure to specifically allege the fraudulent
acts does not constitute a ground for dismissal since such defect
can be cured by a bill of particulars. In cases governed by the
Interim Rules of Procedure on Intra-Corporate Controversies,
however, a bill of particulars is a prohibited pleading.[17] It is
essential, therefore, for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant
wishes to invoke the courts special commercial jurisdiction.
We note that twice in the course of this case, Rodrigo had been
given the opportunity to study the propriety of amending or
withdrawing the complaint, but he consistently refused. The courts
function in resolving issues of jurisdiction is limited to the review of
the allegations of the complaint and, on the basis of these
allegations, to the determination of whether they are of such
nature and subject that they fall within the terms of the law
defining the courts jurisdiction. Regretfully, we cannot read into the
complaint any specifically alleged corporate fraud that will call for
the exercise of the courts special commercial jurisdiction. Thus, we
cannot affirm the RTCs assumption of jurisdiction over Rodrigos
complaint on the basis of Section 5(a) of P.D. No. 902-A. [18]
Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in the
Courts approach in classifying what constitutes an intra-corporate
controversy. Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate controversy was
limited to a consideration of the intra-corporate relationship
existing between or among the parties.[19] The types of
relationships embraced under Section 5(b), as declared in the case
of Union Glass & Container Corp. v. SEC,[20] were as follows:
a) between the corporation, partnership, or association and the
public;
b) between the corporation, partnership, or association and its
stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the
State as far as its franchise, permit or license to operate is
concerned; and
d) among the stockholders, partners, or associates
themselves. [Emphasis supplied.]
The existence of any of the above intra-corporate relations was
sufficient to confer jurisdiction to the SEC, regardless of the subject
matter of the dispute. This came to be known as the relationship
test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol
Mountain Reserve, Inc.,[21] the Court introduced the nature of the
controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an
intra-corporate controversy; to rely on the relationship test alone
will divest the regular courts of their jurisdiction for the sole reason
that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or
minimizing the value of the nature of the transactions which gives
rise to the dispute.
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate.
[22]
The controversy must not only be rooted in the existence of an
intra-corporate relationship, but must as well pertain to the
enforcement of the parties correlative rights and obligations
under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no
intra-corporate controversy exists.
The Court then combined the two tests and declared that
jurisdiction should be determined by considering not only the
status or relationship of the parties, but also the nature of the
question under controversy.[23] This two-tier test was adopted in
the recent case of Speed Distribution, Inc. v. Court of Appeals:[24]
To determine whether a case involves an intra-corporate
controversy, and is to be heard and decided by the branches of
the RTC specifically designated by the Court to try and decide
such cases, two elements must concur: (a) the status or
relationship of the parties; and (2) the nature of the question that
is the subject of their controversy.
The first element requires that the controversy must arise out of
intra-corporate or partnership relations between any or all of the
parties and the corporation, partnership, or association of which
they are stockholders, members or associates; between any or all
of them and the corporation, partnership, or association of which
they are stockholders, members, or associates, respectively; and
between such corporation, partnership, or association and the
State insofar as it concerns their individual franchises. The second
element requires that the dispute among the parties be
intrinsically connected with the regulation of the corporation. If
the nature of the controversy involves matters that are purely civil
in character, necessarily, the case does not involve an intra-
corporate controversy.
Given these standards, we now tackle the question posed for our
determination under the specific circumstances of this case:
Application of the Relationship Test
Is there an intra-corporate relationship between the parties that
would characterize the case as an intra-corporate dispute?
We point out at the outset that while Rodrigo holds shares of
stock in Zenith, he holds them in two capacities: in his own right
with respect to the 4,250 shares registered in his name, and as
one of the heirs of Anastacia Reyes with respect to the 136,598
shares registered in her name. What is material in resolving the
issues of this case under the allegations of the complaint is
Rodrigos interest as an heir since the subject matter of the
present controversy centers on the shares of stocks belonging to
Anastacia, not on Rodrigos personally-owned shares nor on his
personality as shareholder owning these shares. In this light, all
reference to shares of stocks in this case shall pertain to the
shareholdings of the deceased Anastacia and the parties interest
therein as her heirs.
Article 777 of the Civil Code declares that the successional rights
are transmitted from the moment of death of the
decedent. Accordingly, upon Anastacias death, her children
acquired legal title to her estate (which title includes her
shareholdings in Zenith), and they are, prior to the estates
partition, deemed co-owners thereof.[25] This status as co-owners,
however, does not immediately and necessarily make them
stockholders of the corporation. Unless and until there is
56
compliance with Section 63 of the Corporation Code on the manner
of transferring shares, the heirs do not become registered
stockholders of the corporation. Section 63 provides:
Section 63. Certificate of stock and transfer of shares. The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is recorded
in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of
the certificate or certificates, and the number of shares
transferred. [Emphasis supplied.]
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
Simply stated, the transfer of title by means of succession, though
effective and valid between the parties involved (i.e., between the
decedents estate and her heirs), does not bind the corporation and
third parties. The transfer must be registered in the books of the
corporation to make the transferee-heir a stockholder entitled to
recognition as such both by the corporation and by third parties. [26]
We note, in relation with the above statement, that in Abejo v.
Dela Cruz[27] and TCL Sales Corporation v. Court of Appeals[28] we
did not require the registration of the transfer before considering
the transferee a stockholder of the corporation (in effect upholding
the existence of an intra-corporate relation between the parties and
bringing the case within the jurisdiction of the SEC as an intra-
corporate controversy). A marked difference, however, exists
between these cases and the present one.
In Abejo and TCL Sales, the transferees held definite and
uncontested titles to a specific number of shares of the corporation;
after the transferee had established prima facie ownership over the
shares of stocks in question, registration became a mere formality
in confirming their status as stockholders. In the present case, each
of Anastacias heirs holds only an undivided interest in the
shares. This interest, at this point, is still inchoate and subject to
the outcome of a settlement proceeding; the right of the heirs to
specific, distributive shares of inheritance will not be determined
until all the debts of the estate of the decedent are paid. In short,
the heirs are only entitled to what remains after payment of the
decedents debts;[29] whether there will be residue remains to be
seen. Justice Jurado aptly puts it as follows:
No succession shall be declared unless and until a liquidation of
the assets and debts left by the decedent shall have been made
and all his creditors are fully paid. Until a final liquidation is made
and all the debts are paid, the right of the heirs to inherit remains
inchoate. This is so because under our rules of
procedure, liquidation is necessary in order to determine whether
or not the decedent has left any liquid assets which may be
transmitted to his heirs.[30] [Emphasis supplied.]
Rodrigo must, therefore, hurdle two obstacles before he can be
considered a stockholder of Zenith with respect to the
shareholdings originally belonging to Anastacia. First, he must
prove that there are shareholdings that will be left to him and his
co-heirs, and this can be determined only in a settlement of the
decedents estate. No such proceeding has been commenced to
date. Second, he must register the transfer of the shares allotted
to him to make it binding against the corporation. He cannot
demand that this be done unless and until he has established his
specific allotment (and prima facie ownership) of the
shares. Without the settlement of Anastacias estate, there can be
no definite partition and distribution of the estate to the
heirs. Without the partition and distribution, there can be no
registration of the transfer. And without the registration, we
cannot consider the transferee-heir a stockholder who may invoke
the existence of an intra-corporate relationship as premise for an
intra-corporate controversy within the jurisdiction of a special
commercial court.
In sum, we find that insofar as the subject shares of stock
(i.e., Anastacias shares) are concerned Rodrigo cannot be
considered a stockholder of Zenith. Consequently, we cannot
declare that an intra-corporate relationship exists that would
serve as basis to bring this case within the special commercial
courts jurisdiction under Section 5(b) of PD 902-A, as
amended. Rodrigos complaint, therefore, fails the relationship
test.
Application of the Nature of Controversy Test
The body rather than the title of the complaint determines the
nature of an action.[31] Our examination of the complaint yields the
conclusion that, more than anything else, the complaint is about
the protection and enforcement of successional rights. The
controversy it presents is purely civil rather than corporate,
although it is denominated as a complaint for accounting of all
corporate funds and assets.
Contrary to the findings of both the trial and appellate courts, we
read only one cause of action alleged in the complaint. The
derivative suit for accounting of the funds and assets of the
corporation which are in the control, custody, and/or possession of
the respondent [herein petitioner Oscar] does not constitute a
separate cause of action but is, as correctly claimed by Oscar,
only an incident to the action for determination of the shares of
stock of deceased spouses Pedro and Anastacia Reyes allegedly
taken by respondent, its accounting and the corresponding
delivery of these shares to the parties brothers and sisters. There
can be no mistake of the relationship between the accounting
mentioned in the complaint and the objective of partition and
distribution when Rodrigo claimed in paragraph 10.1 of the
complaint that:
10.1 By refusal of the respondent to account of [sic] his
shareholdings in the company, he illegally and fraudulently
transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly
collated and/or distributed equally amongst the children including
the complainant Rodrigo C. Reyes herein to their damage and
prejudice.
We particularly note that the complaint contained no sufficient
allegation that justified the need for an accounting other than to
determine the extent of Anastacias shareholdings for purposes of
distribution.
Another significant indicator that points us to the real nature of
the complaint are Rodrigos repeated claims of illegal and
fraudulent transfers of Anastacias shares by Oscar to the
prejudice of the other heirs of the decedent; he cited these
allegedly fraudulent acts as basis for his demand for the collation
and distribution of Anastacias shares to the heirs.These claims tell
us unequivocally that the present controversy arose from the
57
parties relationship as heirs of Anastacia and not as shareholders
of Zenith. Rodrigo, in filing the complaint, is enforcing his rights as
a co-heir and not as a stockholder of Zenith. The injury he seeks to
remedy is one suffered by an heir (for the impairment of his
successional rights) and not by the corporation nor by Rodrigo as a
shareholder on record.
More than the matters of injury and redress, what Rodrigo clearly
aims to accomplish through his allegations of illegal acquisition by
Oscar is the distribution of Anastacias shareholdings without a prior
settlement of her estate an objective that, by law and established
jurisprudence, cannot be done. The RTC of Makati, acting as a
special commercial court, has no jurisdiction to settle, partition,
and distribute the estate of a deceased. A relevant provision
Section 2 of Rule 90 of the Revised Rules of Court that
contemplates properties of the decedent held by one of the heirs
declares:
Questions as to advancement made or alleged to have been made
by the deceased to any heir may be heard and determined by
the court having jurisdiction of the estate proceedings; and the
final order of the court thereon shall be binding on the person
raising the questions and on the heir. [Emphasis supplied.]
Worth noting are this Courts statements in the case of Natcher v.
Court of Appeals:[32]
Matters which involve settlement and distribution of the estate of
the decedent fall within the exclusive province of the probate
court in the exercise of its limited jurisdiction.
xxxx
It is clear that trial courts trying an ordinary action cannot resolve
to perform acts pertaining to a special proceeding because it is
subject to specific prescribed rules. [Emphasis supplied.]
That an accounting of the funds and assets of Zenith to determine
the extent and value of Anastacias shareholdings will be
undertaken by a probate court and not by a special commercial
court is completely consistent with the probate courts limited
jurisdiction. It has the power to enforce an accounting as a
necessary means to its authority to determine the properties
included in the inventory of the estate to be administered, divided
up, and distributed. Beyond this, the determination of title or
ownership over the subject shares (whether belonging to Anastacia
or Oscar) may be conclusively settled by the probate court as a
question of collation or advancement. We had occasion to
recognize the courts authority to act on questions of title or
ownership in a collation or advancement situation in Coca v.
Pangilinan[33] where we ruled:
It should be clarified that whether a particular matter should be
resolved by the Court of First Instance in the exercise of its general
jurisdiction or of its limited probate jurisdiction is in reality not a
jurisdictional question. In essence, it is a procedural question
involving a mode of practice "which may be waived."
As a general rule, the question as to title to property should not be
passed upon in the testate or intestate proceeding. That question
should be ventilated in a separate action. That general rule has
qualifications or exceptions justified by expediency and
convenience.
Thus, the probate court may provisionally pass upon in an
intestate or testate proceeding the question of inclusion in, or
exclusion from, the inventory of a piece of property without
prejudice to its final determination in a separate action.
Although generally, a probate court may not decide a question of
title or ownership, yet if the interested parties are all heirs, or the
question is one of collation or advancement, or the parties
consent to the assumption of jurisdiction by the probate court and
the rights of third parties are not impaired, the probate court is
competent to decide the question of ownership. [Citations
omitted. Emphasis supplied.]
In sum, we hold that the nature of the present controversy is not
one which may be classified as an intra-corporate dispute and is
beyond the jurisdiction of the special commercial court to
resolve. In short, Rodrigos complaint also fails the nature of the
controversy test.
DERIVATIVE SUIT
Rodrigos bare claim that the complaint is a derivative suit will not
suffice to confer jurisdiction on the RTC (as a special commercial
court) if he cannot comply with the requisites for the existence of
a derivative suit. These requisites are:
a. the party bringing suit should be a shareholder during the
time of the act or transaction complained of, the number of
shares not being material;
b. the party has tried to exhaust intra-corporate remedies, i.e.,
has made a demand on the board of directors for the appropriate
relief, but the latter has failed or refused to heed his plea; and
c. the cause of action actually devolves on the corporation;
the wrongdoing or harm having been or being caused to the
corporation and not to the particular stockholder bringing the suit.
[34]
Based on these standards, we hold that the allegations of the
present complaint do not amount to a derivative suit.
First, as already discussed above, Rodrigo is not a shareholder
with respect to the shareholdings originally belonging to
Anastacia; he only stands as a transferee-heir whose rights to the
share are inchoate and unrecorded. With respect to his own
individually-held shareholdings, Rodrigo has not alleged any
individual cause or basis as a shareholder on record to proceed
against Oscar.
Second, in order that a stockholder may show a right to sue on
behalf of the corporation, he must allege with some particularity
in his complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the directors or
other officers for appropriate relief with the expressed intent to
sue if relief is denied.[35]Paragraph 8 of the complaint hardly
satisfies this requirement since what the rule contemplates is the
exhaustion of remedies within the corporate setting:
8. As members of the same family, complainant Rodrigo C. Reyes
has resorted [to] and exhausted all legal means of resolving the
dispute with the end view of amicably settling the case, but the
dispute between them ensued.
Lastly, we find no injury, actual or threatened, alleged to have
been done to the corporation due to Oscars acts. If indeed he
illegally and fraudulently transferred Anastacias shares in his own
name, then the damage is not to the corporation but to his co-
heirs; the wrongful transfer did not affect the capital stock or the
58
assets of Zenith. As already mentioned, neither has Rodrigo alleged
any particular cause or wrongdoing against the corporation that he
can champion in his capacity as a shareholder on record. [36]
In summary, whether as an individual or as a derivative suit, the
RTC sitting as special commercial court has no jurisdiction to hear
Rodrigos complaint since what is involved is the determination and
distribution of successional rights to the shareholdings of Anastacia
Reyes. Rodrigos proper remedy, under the circumstances, is to
institute a special proceeding for the settlement of the estate of the
deceased Anastacia Reyes, a move that is not foreclosed by the
dismissal of his present complaint.
WHEREFORE, we hereby GRANT the petition and REVERSE the
decision of the Court of Appeals dated May 26, 2004 in CA-G.R. SP
No. 74970. The complaint before the Regional Trial Court, Branch
142, Makati, docketed as Civil Case No. 00-1553, is
ordered DISMISSED for lack of jurisdiction.
13. G.R. No. 200094 June 10, 2013
BENIGNO M. VIGILLA, ALFONSO M. BONGOT, ROBERTO CALLESA,
LINDA C. CALLO, NILO B. CAMARA, ADELIA T. CAMARA, ADOLFO G.
PINON, JOHN A. FERNANDEZ, FEDERICO A. CALLO, MAXIMA P.
ARELLANO, JULITO B. COST ALES, SAMSON F. BACHAR, EDWIN P.
DAMO, RENA TO E. FERNANDEZ, GENARO F.CALLO, JIMMY C. ALETA,
and EUGENIO SALINAS, Petitioners, vs. PHILIPPINE COLLEGE
OFCRIMINOLOGY INC. and/or GREGORY ALAN F.
BAUTISTA, Respondents.
This is a petition for review on certiorari under Rule 45 of the Rules
of Court assailing the September 16, 2011 Decision 1 of the Court of
Appeals (CA), in CA-G.R. SP No. 120225, which affirmed the
February 11, 2011 Resolution2 and the April 28, 20113 Resolution of
the National Labor Relations Commission (NLRC). The two NLRC
resolutions affirmed with modifications the July 30, 2010
Decision4 of the Labor Arbiter (LA) finding that (a) Metropolitan
Building Services, Inc. (MBMSI) was a labor-only contractor; (b)
respondent Philippine College of Criminology Inc. (PCCr) was the
petitioners real principal employer; and (c) PCCr acted in bad faith
in dismissing the petitioners. The NLRC, however, declared that the
claims of the petitioners were settled amicably because of the
releases, waivers and quitclaims they had executed.
The Antecedents
PCCr is a non-stock educational institution, while the petitioners
were janitors, janitresses and supervisor in the Maintenance
Department of PCCr under the supervision and control of Atty.
Florante A. Seril (Atty. Seril), PCCrs Senior Vice President for
Administration. The petitioners, however, were made to
understand, upon application with respondent school, that they
were under MBMSI, a corporation engaged in providing janitorial
services to clients. Atty. Seril is also the President and General
Manager of MBMSI.
Sometime in 2008, PCCr discovered that the Certificate of
Incorporation of MBMSI had been revoked as of July 2, 2003. On
March 16, 2009, PCCr, through its President, respondent Gregory
Alan F. Bautista (Bautista), citing the revocation, terminated the
schools relationship with MBMSI, resulting in the dismissal of the
employees or maintenance personnel under MBMSI, except Alfonso
Bongot (Bongot) who was retired.
In September, 2009, the dismissed employees, led by their
supervisor, Benigno Vigilla (Vigilla), filed their respective
complaints for illegal dismissal, reinstatement, back wages,
separation pay (for Bongot), underpayment of salaries, overtime
pay, holiday pay, service incentive leave, and 13th month pay
against MBMSI, Atty. Seril, PCCr, and Bautista.
In their complaints, they alleged that it was the school, not
MBMSI, which was their real employer because (a) MBMSIs
certification had been revoked; (b) PCCr had direct control over
MBMSIs operations; (c) there was no contract between MBMSI
and PCCr; and (d) the selection and hiring of employees were
undertaken by PCCr.
On the other hand, PCCr and Bautista contended that (a) PCCr
could not have illegally dismissed the complainants because it
was not their direct employer; (b) MBMSI was the one who had
complete and direct control over the complainants; and (c) PCCr
had a contractual agreement with MBMSI, thus, making the latter
their direct employer.
On September 11, 2009, PCCr submitted several documents
before LA Ronaldo Hernandez, including releases, waivers and
quitclaims in favor of MBMSI executed by the complainants to
prove that they were employees of MBMSI and not PCCr. 5 The said
documents appeared to have been notarized by one Atty. Ramil
Gabao. A portion of the releases, waivers and quitclaims uniformly
reads:
For and in consideration of the total amount of ______________, as
and by way of separation pay due to the closure of the Company
brought about by serious financial losses, receipt of the total
amount is hereby acknowledged, I _______________, x x x forever
release and discharge x x x METROPOLITAN BUILDING
MAINTENANCE SERVICES, INC., of and from any and all claims,
demands, causes of actions, damages, costs, expenses,
attorneys fees, and obligations of any nature whatsoever, known
or unknown, in law or in equity, which the undersigned has, or
may hereafter have against the METROPOLITAN BUILDING
MAINTENANCE SERVICES, INC., whether administrative, civil or
criminal, and whether or not arising out of or in relation to my
employment with the above company or third persons.6
Ruling of the Labor Arbiter
After due proceedings, the LA handed down his decision, finding
that (a) PCCr was the real principal employer of the
complainants ; (b) MBMSI was a mere adjunct or alter ego/labor-
only contractor; (c) the complainants were regular employees of
PCCr; and (d) PCCr/Bautista were in bad faith in dismissing the
complainants.
The LA ordered the respondents (a) to reinstate petitioners except
Bongot who was deemed separated/retired; (b) to pay their full
back wages from the date of their illegal dismissal until actual
reinstatement (totalingP2,963,584.25); (c) to pay Bongots
separation or retirement pay benefit under the Labor Code
(amounting toP254,010.00); (d) to pay their 3-year Service
Incentive Leave Pay (P4,245.60 each) except Vigilla (P5,141.40);
(e) to pay all the petitioners moral and exemplary damages in the
combined amount of P150,000.00; and finally (f) to pay 10% of
the total computable award as Attorneys Fees.
The LA explained that PCCr was actually the one which exercised
control over the means and methods of the work of the
petitioners, thru Atty. Seril, who was acting, throughout the time
in his capacity as Senior Vice President for Administration of PCCr,
not in any way or time as the supposed employer/general
manager or president of MBMSI.
59
Despite the presentation by the respondents of the releases,
waivers and quitclaims executed by petitioners in favor of MBMSI,
the LA did not touch on the validity and authenticity of the same.
Neither did he discuss the effects of such releases, waivers and
quitclaims on petitioners claims.
Ruling of the NLRC
Not satisfied, the respondents filed an appeal before the NLRC. In
its Resolution, dated February 11, 2011, the NLRC affirmed the LAs
findings. Nevertheless, the respondents were excused from their
liability by virtue of the releases, waivers and quitclaims executed
by the petitioners. Specifically, the NLRC pointed out:
As Respondent MBMSI and Atty. Seril, together are found to be
labor only contractor, they are solidarily liable with Respondent
PCCr and Gregory Alan F. Bautista for the valid claims of
Complainants pursuant to Article 109 of the Labor Code on the
solidary liability of the employer and indirect employer. This
liability, however, is effectively expunged by the acts of the 17
Complainants of executing Release, Waiver, and Quitclaims (pp.
170-184, Records) in favor of Respondent MBMSI. The liability being
joined, the release of one redounds to the benefit of the others,
pursuant to Art. 1217 of the Civil Code, which provides that
"Payment made by one of the solidary debtors extinguishes the
obligation. x x x."7
In their motion for reconsideration, petitioners attached as annexes
their affidavits denying that they had signed the releases, waivers,
and quitclaims. They prayed for the reinstatement in toto of the
July 30, 2010 Decision of the LA. 8 MBMSI/Atty. Seril also filed a
motion for reconsideration9 questioning the declaration of the NLRC
that he was solidarily liable with PCCr.
On April 28, 2011, NLRC modified its February 11, 2011 Resolution
by affirming the July 30, 2010 Decision10 of the LA only in so far as
complainants Ernesto B. Ayento and Eduardo B. Salonga were
concerned. As for the other 17 complainants, the NLRC ruled that
their awards had been superseded by their respective releases,
waivers and quitclaims.
The seventeen (17) complainants filed with the CA a petition for
certiorari under Rule 65 faulting the NLRC with grave abuse of
discretion for absolving the respondents from their liability by
virtue of their respective releases, waivers and quitclaims.
Ruling of the Court of Appeals
On September 16, 2011, the CA denied the petition and affirmed
the two Resolutions of the NLRC, dated February 11, 2011 and April
28, 2011. The CA pointed out that based on the principle of solidary
liability and Article 121711 of the New Civil Code, petitioners
respective releases, waivers and quitclaims in favor of MBMSI and
Atty. Seril redounded to the benefit of the respondents. The CA also
upheld the factual findings of the NLRC as to the authenticity and
due execution of the individual releases, waivers and quitclaims
because of the failure of petitioners to substantiate their claim of
forgery and to overcome the presumption of regularity of a
notarized document. Petitioners motion for reconsideration was
likewise denied by the CA in its January 4, 2012 Resolution.
Hence, this petition under Rule 45 challenging the CA Decision
anchored on the following
GROUNDS
The Hon. Court of Appeals COMMITTED REVERSIBLE ERRORS when:
A. IT CONSIDERED RESPONDENT METROPOLITAN BUILDING
MAINTENANCE SERVICES, INC.S LIABILITY AS SOLIDARY TO
RESPONDENT PHILIPPINE COLLEGE OF CRIMINOLOGY, INC., WHEN
IN FACT THERE IS NO LEGAL BASIS TO THAT EFFECT.
B. IT DID NOT AFFIRM THE DECISION OF THE HON. LABOR
ARBITER, DATED JULY 30, 2010, AS TO 17 PETITIONERS IN THIS
CASE, DISREGARDING THE CORPORATION LAW AND
JURISPRUDENCE OF THE HON. SUPREME COURT IN SO FAR AS
QUITLCLAIMS, RELEASE AND WAIVERS ARE CONCERNED IN LABOR
CASES.
C. IT AFFIRMED THE DECISION OF THE HON. NATIONAL LABOR
RELATIONS COMMISSION, THAT THE 17 COMPLAINANTS HAVE
SETTLED THEIR CLAIMS BY VIRTUE OF ALLEGED RELEASES,
WAIVERS AND QUITCLAIMS SIGNED BY THE COMPLAINANTS IN
FAVOR OF METROPOLITAN BUILDING MAINTENANCE, INC.
D. IT DID NOT TAKE INTO CONSIDERATION SUBSTANTIAL
EVIDENCE OF PETITIONERS/COMPLAINANTS DISPUTING THE
ALLEGED WAIVERS, RELEASES AND QUITCLAIMS, INCLUDING THE
ALLEGED NOTARIZATION THEREOF.12
The petition fails.
The grounds cited by the petitioners boil down to this basic issue:
whether or not their claims against the respondents were
amicably settled by virtue of the releases, waivers and quitclaims
which they had executed in favor of MBMSI.
In resolving this case, the Court must consider three (3) important
sub-issues, to wit:
(a) whether or not petitioners executed the said releases, waivers
and quitclaims;
(b) whether or not a dissolved corporation can enter into an
agreement such as releases, waivers and quitclaims beyond the
3-year winding up period under Section 122 of the Corporation
Code; and
(c) whether or not a labor-only contractor is solidarily liable with
the employer.
The Releases, Waivers and
Quitclaims are Valid
Petitioners vehemently deny having executed any release, waiver
or quitclaim in favor of MBMSI. They insist that PCCr forged the
documents just to evade their legal obligations to them, alleging
that the contents of the documents were written by one person,
whom they identified as Reynaldo Chavez, an employee of PCCr,
whose handwriting they were familiar with.13
To begin with, their posture was just an afterthought. Petitioners
had several opportunities to question the authenticity of the said
documents but did not do so. The records disclose that during the
proceedings before the LA, PCCr submitted several documents,
including the subject releases, waivers and quitclaims executed
on September 11, 2009 in favor of MBMSI,14 but petitioners never
put their genuineness and due execution at issue. These were
brought up again by the respondents in their Memorandum of
Appeal,15 but again petitioners did not bother to dispute them.
It was only after the NLRCs declaration in its February 11, 2011
Resolution that the claims of petitioners had been settled
amicably by virtue of the releases, waivers and quitclaims, that
60
petitioners, in their motion for reconsideration, 16 denied having
executed any of these instruments. This passiveness and
inconsistency of petitioners will not pass the scrutiny of this Court.
At any rate, it is quite apparent that this petition raises questions of
fact inasmuch as this Court is being asked to revisit and assess
anew the factual findings of the CA and the NLRC regarding the
validity, authenticity and due execution of the subject releases,
waivers and quitclaims.
Well-settled is the rule that this Court is not a trier of facts and this
doctrine applies with greater force in labor cases. Questions of fact
are for the labor tribunals to resolve.17 Only errors of law are
generally reviewed in petitions for review on certiorari criticizing
decisions of the CA. Moreover, findings of fact of quasi-judicial
bodies like the NLRC, as affirmed by the CA, are generally
conclusive on this Court.18 Hence, as correctly declared by the CA,
the following NLRC factual findings are binding and conclusive on
this Court:
We noted that the individual quitclaims, waivers and releases
executed by the complainants showing that they received their
separation pay from MBMSI were duly notarized by a Notary Public.
Such notarization gives prima facie evidence of their due execution.
Further, said releases, waivers, and quitclaims were not refuted nor
disputed by complainants herein, thus, we have no recourse but to
uphold their due execution. 19
Even if the Court relaxes the foregoing rule, there is still no reason
to reverse the factual findings of the NLRC and the CA. What is on
record is only the self-serving allegation of petitioners that the
releases, waivers and quitclaims were mere forgeries. Petitioners
failed to substantiate this allegation. As correctly found by the CA:
"petitioners have not offered concrete proof to substantiate their
claim of forgery. Allegations are not evidence." 20
On the contrary, the records confirm that petitioners were really
paid their separation pay and had executed releases, waivers and
quitclaims in return. In his motion for reconsideration of the
February 11, 2011 Resolution of the NLRC, Atty. Seril, President and
General Manager of MBMSI, stated that the amount of
2,000,000.00 "was coursed by PCCr to me, to be handed to the
complainants, through its employee, Rey Chavez." 21
Petitioners requested the Court to take a look at such releases,
waivers and quitclaims, particularly their contents and the
handwriting, but they failed to attach to the records copies of the
said documents which they claimed to have been forged. The
petition is dismissible on this ground alone. The Rules of Court
require the petition to be accompanied by such material portions of
the record as would support the petition. 22 Failure to comply with
the requirements regarding "the contents of and the documents
which should accompany the petition" is a ground for the dismissal
of the appeal.23
Moreover, mere unsubstantiated allegations of lack of voluntariness
in executing the documents will not suffice to overcome the
presumption of authenticity and due execution of a duly notarized
document. As correctly held by the NLRC, "such notarization gives
prima facie evidence of their due execution." 24
Petitioners contend that the alleged notarization of the releases,
waivers and quitclaims by one Atty. Ramil Gabao did not take place,
because there were no records of such documents in the Notary
Section of Manila. Thus, the prima facie evidence thereof has been
disputed.
The Court is not moved. Respondents should not be penalized for
the failure of the notary public to submit his Notarial Report. In
Destreza v. Rinoza-Plazo,25 this Court stated that "the notarized
deed of sale should be admitted as evidence despite the failure of
the Notary Public in submitting his notarial report to the notarial
section of the RTC Manila." The Court expounded:
It is the swearing of a person before the Notary Public and the
latters act of signing and affixing his seal on the deed that is
material and not the submission of the notarial report. Parties who
appear before a notary public to have their documents notarized
should not be expected to follow up on the submission of the
notarial reports. They should not be made to suffer the
consequences of the negligence of the Notary Public in following
the procedures prescribed by the Notarial Law. 26
It would have been different if the notary public was not a lawyer
or was not commissioned as such. In this regard, however,
petitioners offered no proof.
On the Revocation of MBMSIs
Certificate of Incorporation
Petitioners further argue that MBMSI had no legal personality to
incur civil liabilities as it did not exist as a corporation on account
of the fact that its Certificate of Incorporation had been revoked
on July 2, 2003. Petitioners ask this Court to exempt MBMSI from
its liabilities because it is no longer existing as a corporation.
The Court cannot accommodate the prayer of petitioners.
The executed releases, waivers and quitclaims are valid and
binding notwithstanding the revocation of MBMSIs Certificate of
Incorporation. The revocation does not result in the termination of
its liabilities. Section 12227 of the Corporation Code provides for a
three-year winding up period for a corporation whose charter is
annulled by forfeiture or otherwise to continue as a body
corporate for the purpose, among others, of settling and closing
its affairs.
Even if said documents were executed in 2009, six (6) years after
MBMSIs dissolution in 2003, the same are still valid and binding
upon the parties and the dissolution will not terminate the
liabilities incurred by the dissolved corporation pursuant to
Sections 122 and 14528 of the Corporation Code. In the case of
Premiere Development Bank v. Flores,29 the Court held that a
corporation is allowed to settle and close its affairs even after the
winding up period of three (3) years. The Court wrote:
As early as 1939, this Court held that, although the time during
which the corporation, through its own officers, may conduct the
liquidation of its assets and sue and be sued as a corporation is
limited to three years from the time the period of dissolution
commences, there is no time limit within which the trustees must
complete a liquidation placed in their hands. What is provided in
Section 122 of the Corporation Code is that the conveyance to the
trustees must be made within the three-year period. But it may be
found impossible to complete the work of liquidation within the
three-year period or to reduce disputed claims to judgment. The
trustees to whom the corporate assets have been conveyed
pursuant to the authority of Section 122 may sue and be sued as
such in all matters connected with the liquidation.
Furthermore, Section 145 of the Corporation Code clearly provides
that "no right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members,
61
directors, trustees, or officers, shall be removed or impaired either
by the subsequent dissolution of said corporation." Even if no
trustee is appointed or designated during the three-year period of
the liquidation of the corporation, the Court has held that the board
of directors may be permitted to complete the corporate liquidation
by continuing as "trustees" by legal implication. 30 [Emphases
supplied; citations omitted]
A Labor-only Contractor is Solidarily
Liable with the Employer
The issue of whether there is solidary liability between the labor-
only contractor and the employer is crucial in this case. If a labor-
only contractor is solidarily liable with the employer, then the
releases, waivers and quitclaims in favor of MBMSI will redound to
the benefit of PCCr. On the other hand, if a labor-only contractor is
not solidarily liable with the employer, the latter being directly
liable, then the releases, waivers and quitclaims in favor of MBMSI
will not extinguish the liability of PCCr.
On this point, petitioners argue that there is no solidary liability to
speak of in case of an existence of a labor-only contractor.
Petitioners contend that under Article 10631 of the Labor Code, a
labor-only contractors liability is not solidary as it is the employer
who should be directly responsible to the supplied worker. They
argue that Article 10932 of the Labor Code (solidary liability of
employer/indirect employer and contractor/subcontractor) and
Article 1217 of the New Civil Code (extinguishment of solidary
obligation) do not apply in this case. Hence, the said releases,
waivers and quitclaims which they purportedly issued in favor of
MBMSI and Atty. Seril do not automatically release respondents
from their liability.
Again, the Court disagrees.
The NLRC and the CA correctly ruled that the releases, waivers and
quitclaims executed by petitioners in favor of MBMSI redounded to
the benefit of PCCr pursuant to Article 1217 of the New Civil Code.
The reason is that MBMSI is solidarily liable with the respondents
for the valid claims of petitioners pursuant to Article 109 of the
Labor Code.
As correctly pointed out by the respondents, the basis of the
solidary liability of the principal with those engaged in labor-only
contracting is the last paragraph of Article 106 of the Labor Code,
which in part provides: "In such cases labor-only contracting, the
person or intermediary shall be considered merely as an agent of
the employer who shall be responsible to the workers in the same
manner and extent as if the latter were directly employed by him."
Section 19 of Department Order No. 18-02 issued by the
Department of Labor and Employment (DOLE), which was still in
effect at the time of the promulgation of the subject decision and
resolution, interprets Article 106 of the Labor Code in this wise:
Section 19. Solidary liability. The principal shall be deemed as the
direct employer of the contractual employees and therefore,
solidarily liable with the contractor or subcontractor for whatever
monetary claims the contractual employees may have against the
former in the case of violations as provided for in Sections 5
(LaborOnly contracting), 6 (Prohibitions), 8 (Rights of Contractual
Employees) and 16 (Delisting) of these Rules. In addition, the
principal shall also be solidarily liable in case the contract between
the principal and contractor or subcontractor is preterminated for
reasons not attributable to the fault of the contractor or
subcontractor. [Emphases supplied].
The DOLE recognized anew this solidary liability of the principal
employer and the labor-only contractor when it issued
Department Order No. 18-A, series of 2011, which is the latest set
of rules implementing Articles 106-109 of the Labor Code. Section
27 thereof reads:
Section 27. Effects of finding of labor-only contracting and/or
violation of Sections 7, 8 or 9 of the Rules. A finding by competent
authority of labor-only contracting shall render the principal jointly
and severally liable with the contractor to the latters employees,
in the same manner and extent that the principal is liable to
employees directly hired by him/her, as provided in Article 106 of
the Labor Code, as amended.
A finding of commission of any of the prohibited activities in
Section 7, or violation of either Sections 8 or 9 hereof, shall render
the principal the direct employer of the employees of the
contractor or subcontractor, pursuant to Article 109 of the Labor
Code, as amended. (Emphasis supplied.)
These legislative rules and regulations designed to implement a
primary legislation have the force and effect of law. A rule is
binding on the courts so long as the procedure fixed for its
promulgation is followed and its scope is within the statutory
authority granted by the legislature. 33
Jurisprudence is also replete with pronouncements that a job-only
contractor is solidarily liable with the employer. One of these is
the case of Philippine Bank of Communications v. NLRC34 where
this Court explained the legal effects of a job-only contracting, to
wit:
Under the general rule set out in the first and second paragraphs
of Article 106, an employer who enters into a contract with a
contractor for the performance of work for the employer, does not
thereby create an employer-employees relationship between
himself and the employees of the contractor. Thus, the employees
of the contractor remain the contractor's employees and his
alone. Nonetheless when a contractor fails to pay the wages of his
employees in accordance with the Labor Code, the employer who
contracted out the job to the contractor becomes jointly and
severally liable with his contractor to the employees of the latter
"to the extent of the work performed under the contract" as such
employer were the employer of the contractor's employees. The
law itself, in other words, establishes an employer-employee
relationship between the employer and the job contractor's
employees for a limited purpose, i.e., in order to ensure that the
latter get paid the wages due to them.
A similar situation obtains where there is "labor only" contracting.
The "labor-only" contractor-i.e "the person or intermediary" - is
considered "merely as an agent of the employer." The employer is
made by the statute responsible to the employees of the "labor
only" contractor as if such employees had been directly employed
by the employer. Thus, where "labor-only" contracting exists in a
given case, the statute itself implies or establishes an employer-
employee relationship between the employer (the owner of the
project) and the employees of the "labor only" contractor, this
time for a comprehensive purpose: "employer for purposes of this
Code, to prevent any violation or circumvention of any provision
of this Code." The law in effect holds both the employer and the
"laboronly" contractor responsible to the latter's employees for
the more effective safeguarding of the employees' rights under
the Labor Code.35 [Emphasis supplied].
The case of San Miguel Corporation v. MAERC Integrated Services,
Inc.36 also recognized this solidary liability between a labor-only
62
contractor and the employer. In the said case, this Court gave the
distinctions between solidary liability in legitimate job contracting
and in labor-only contracting, to wit:
In legitimate job contracting, the law creates an employer-
employee relationship for a limited purpose, i.e., to ensure that the
employees are paid their wages. The principal employer becomes
jointly and severally liable with the job contractor only for the
payment of the employees' wages whenever the contractor fails to
pay the same. Other than that, the principal employer is not
responsible for any claim made by the employees.
On the other hand, in labor-only contracting, the statute creates an
employer-employee relationship for a comprehensive purpose: to
prevent a circumvention of labor laws. The contractor is considered
merely an agent of the principal employer and the latter is
responsible to the employees of the labor-only contractor as if such
employees had been directly employed by the principal employer.
The principal employer therefore becomes solidarily liable with the
labor-only contractor for all the rightful claims of the
employees.37 [Emphases supplied; Citations omitted]
Recently, this Court reiterated this solidary liability of labor-only
contractor in the case of 7K Corporation v. NLRC38 where it was
ruled that the principal employer is solidarily liable with the labor-
only contractor for the rightful claims of the employees.
Conclusion
Considering that MBMSI, as the labor-only contractor, is solidarily
liable with the respondents, as the principal employer, then the
NLRC and the CA correctly held that the respondents solidary
liability was already expunged by virtue of the releases, waivers
and quitclaims executed by each of the petitioners in favor of
MBMSI pursuant to Article 1217 of the Civil Code which provides
that "payment made by one of the solidary debtors extinguishes
the obligation."
This Court has constantly applied the Civil Code provisions on
solidary liability, specifically Articles 1217 and 1222, 39 to labor
cases. In Varorient Shipping Co., Inc. v. NLRC, 40 this Court held:
The POEA Rules holds her, as a corporate officer, solidarily liable
with the local licensed manning agency. Her liability is inseparable
from those of Varorient and Lagoa. If anyone of them is held liable
then all of them would be liable for the same obligation. Each of the
solidary debtors, insofar as the creditor/s is/are concerned, is the
debtor of the entire amount; it is only with respect to his co-debtors
that he/she is liable to the extent of his/her share in the obligation.
Such being the case, the Civil Code allows each solidary debtor, in
actions filed by the creditor/s, to avail himself of all defenses which
are derived from the nature of the obligation and of those which
are personal to him, or pertaining to his share [citing Section 1222
of the Civil Code]. He may also avail of those defenses personally
belonging to his co-debtors, but only to the extent of their share in
the debt. Thus, Varorient may set up all the defenses pertaining to
Colarina and Lagoa; whereas Colarina and Lagoa are liable only to
the extent to which Varorient may be found liable by the
court.1wphi1
xxxx
If Varorient were to be found liable and made to pay pursuant
thereto, the entire obligation would already be extinguished [citing
Article 1217 of the Civil Code] even if no attempt was made to
enforce the judgment against Colarina. Because there existed a
common cause of action against the three solidary obligors, as the
acts and omissions imputed against them are one and the same,
an ultimate finding that Varorient was not liable would, under
these circumstances, logically imply a similar exoneration from
liability for Colarina and Lagoa, whether or not they interposed
any defense.41 [Emphases supplied]
In light of these conclusions, the Court holds that the releases,
waivers and quitclaims executed by petitioners in favor of MBMSI
redounded to the respondents' benefit. The liabilities of the
respondents to petitioners are now deemed extinguished. The
Court cannot allow petitioners to reap the benefits given to them
by MBMSI in exchange for the releases, waivers and quitclaims
and, again, claim the same benefits from PCCr.
While it is the duty of the courts to prevent the exploitation of
employees, it also behooves the courts to protect the sanctity of
contracts that do not contravene the law. 42 The law in protecting
the rights of the laborer authorizes neither oppression nor self-
destruction of the employer. While the Constitution is committed
to the policy of social justice and the protection of the working
class, it should not be supposed that every labor dispute will be
automatically decided in favor of labor. Management also has its
own rights, which, as such, are entitled to respect and
enforcement in the interest of simple fair play. Out of its concern
for those with less privileges in life, the Court has inclined more
often than not toward the worker and upheld his cause in his
conflicts with the employer. Such favoritism, however, has not
blinded the Court to the rule that justice is in every case for the
deserving, to be dispensed in the light of the established facts
and applicable law and doctrine.43
WHEREFORE, the petition is DENIED.
14. [G.R. No. 138104. April 11, 2002]
MR HOLDINGS, LTD., petitioner, vs. SHERIFF CARLOS P. BAJAR,
SHERIFF FERDINAND M. JANDUSAY, SOLIDBANK CORPORATION,
AND MARCOPPER MINING CORPORATION, respondents.
In the present Petition for Review on Certiorari, petitioner MR
Holdings, Ltd. assails the a) Decision[1] dated January 8, 1999 of
the Court of Appeals in CA-G.R. SP No. 49226 finding no grave
abuse of discretion on the part of Judge Leonardo P. Ansaldo of the
Regional Trial Court (RTC), Branch 94, Boac, Marinduque, in
denying petitioners application for a writ of preliminary injunction;
[2]
and b)Resolution[3] dated March 29, 1999 denying petitioners
motion for reconsideration.
The facts of the case are as follows:
Under a Principal Loan Agreement[4] and Complementary Loan
Agreement,[5] both dated November 4, 1992, Asian Development
Bank (ADB), a multilateral development finance institution,
agreed to extend to Marcopper Mining Corporation (Marcopper) a
loan in the aggregate amount of US$40,000,000.00 to finance the
latters mining project at Sta. Cruz, Marinduque. The principal loan
of US$ 15,000,000.00 was sourced from ADBs ordinary capital
resources, while the complementary loan of US$ 25,000,000.00
was funded by the Bank of Nova Scotia, a participating finance
institution.
On even date, ADB and Placer Dome, Inc., (Placer Dome), a
foreign corporation which owns 40% of Marcopper, executed a
Support and Standby Credit Agreement whereby the latter agreed
to provide Marcopper with cash flow support for the payment of
its obligations to ADB.
63
To secure the loan, Marcopper executed in favor of ADB a Deed of
Real Estate and Chattel Mortgage[6] dated November 11, 1992,
covering substantially all of its (Marcoppers) properties and assets
in Marinduque. It was registered with the Register of Deeds on
November 12, 1992.
When Marcopper defaulted in the payment of its loan obligation,
Placer Dome, in fulfillment of its undertaking under the Support and
Standby Credit Agreement, and presumably to preserve its
international credit standing, agreed to have its subsidiary
corporation, petitioner MR Holding, Ltd., assumed Marcoppers
obligation to ADB in the amount of US$
18,453,450.02. Consequently, in an Assignment Agreement[7] dated
March 20, 1997, ADB assigned to petitioner all its rights, interests
and obligations under the principal and complementary loan
agreements, (Deed of Real Estate and Chattel Mortgage, and
Support and Standby Credit Agreement). On December 8, 1997,
Marcopper likewise executed a Deed of Assignment[8] in favor of
petitioner. Under its provisions, Marcopper assigns, transfers, cedes
and conveys to petitioner, its assigns and/or successors-in-interest
all of its (Marcoppers) properties, mining equipment and facilities,
to wit:
Land and Mining Rights
Building and Other Structures
Other Land Improvements
Machineries & Equipment, and Warehouse Inventory
Mine/Mobile Equipment
Transportation Equipment and Furniture & Fixtures
Meanwhile, it appeared that on May 7, 1997, Solidbank Corporation
(Solidbank) obtained a Partial Judgment[9] against Marcopper from
the RTC, Branch 26, Manila, in Civil Case No. 96-80083
entitledSolidbank Corporation vs. Marcopper Mining Corporation,
John E. Loney, Jose E. Reyes and Teodulo C. Gabor, Jr., the decretal
portion of which reads:
WHEREFORE, PREMISES CONSIDERED, partial judgment is hereby
rendered ordering defendant Marcopper Mining Corporation, as
follows:
1. To pay plaintiff Solidbank the sum of Fifty Two Million Nine
Hundred Seventy Thousand Pesos Seven Hundred Fifty Six and
89/100 only (PHP 52,970,756.89), plus interest and charges until
fully paid;
2. To pay an amount equivalent to Ten Percent (10%) of above-
stated amount as attorneys fees; and
3. To pay the costs of suit.
"SO ORDERED.
Upon Solidbanks motion, the RTC of Manila issued a writ of
execution pending appeal directing Carlos P. Bajar, respondent
sheriff, to require Marcopper to pay the sums of money to satisfy
the Partial Judgment.[10] Thereafter, respondent Bajar issued two
notices of levy on Marcoppers personal and real properties, and
over all its stocks of scrap iron and unserviceable mining
equipment.[11] Together with sheriff Ferdinand M. Jandusay (also a
respondent) of the RTC, Branch 94, Boac, Marinduque, respondent
Bajar issued two notices setting the public auction sale of the
levied properties on August 27, 1998 at the Marcopper mine site. [12]
Having learned of the scheduled auction sale, petitioner served an
Affidavit of Third-Party Claim[13] upon respondent sheriffs on
August 26, 1998, asserting its ownership over all Marcoppers
mining properties, equipment and facilities by virtue of the Deed
of Assignment.
Upon the denial of its Affidavit of ThirdParty Claim by the RTC of
Manila,[14] petitioner commenced with the RTC of Boac,
Marinduque, presided by Judge Leonardo P. Ansaldo, a complaint
for reivindication of properties, etc., with prayer for preliminary
injunction and temporary restraining order against respondents
Solidbank, Marcopper, and sheriffs Bajar and Jandusay. [15] The
case was docketed as Civil Case No. 98-13.
In an Order[16]dated October 6, 1998, Judge Ansaldo
denied petitioners application for a writ of preliminary injunction
on the ground that a) petitioner has no legal capacity to sue, it
being a foreign corporation doing business in the Philippines
without license; b) an injunction will amount to staying the
execution of a final judgment by a court of co-equal and
concurrent jurisdiction; and c) the validity of the Assignment
Agreement and the Deed of Assignment has been put into serious
question by the timing of their execution and registration.
Unsatisfied, petitioner elevated the matter to the Court of Appeals
on a Petition for Certiorari, Prohibition and Mandamus, docketed
therein as CA-G.R. SP No. 49226. On January 8, 1999, the Court of
Appeals rendered a Decision holding that Judge Ansaldo did not
commit grave abuse of discretion in denying petitioners prayer for
a writ of preliminary injunction, ratiocinating as follows:
Petitioner contends that it has the legal capacity to sue and seek
redress from Philippine courts as it is a non-resident foreign
corporation not doing business in the Philippines and suing on
isolated transactions.
xxxxxx
We agree with the finding of the respondent court that petitioner
is not suing on an isolated transaction as it claims to be, as it is
very obvious from the deed of assignment and its relationships
with Marcopper and Placer Dome, Inc. that its unmistakable
intention is to continue the operations of Marcopper and shield its
properties/assets from the reach of legitimate creditors, even
those holding valid and executory court judgments against
it. There is no other way for petitioner to recover its huge financial
investments which it poured into Marcoppers rehabilitation and
the local situs where the Deeds of Assignment were executed,
without petitioner continuing to do business in the country.
xxxxxx
While petitioner may just be an assignee to the Deeds of
Assignment, it may still fall within the meaning of doing business
in light of the Supreme Court ruling in the case of Far East
International Import and Export Corporation vs. Nankai Kogyo Co.,
6 SCRA 725, that:
Where a single act or transaction however is not merely incidental
or casual but indicates the foreign corporations intention to do
other business in the Philippines, said single act or transaction
constitutes doing or engaging in or transacting business in the
Philippines.
Furthermore, the court went further by declaring that even a
single act may constitute doing business if it is intended to be the
64
beginning of a series of transactions. (Far East International Import
and Export Corporation vs. Nankai Kogyo Co. supra).
On the issue of whether petitioner is the bona fide owner of all the
mining facilities and equipment of Marcopper, petitioner relies
heavily on the Assignment Agreement allegedly executed on March
20, 1997 wherein all the rights and interest of Asian Development
Bank (ADB) in a purported Loan Agreement were ceded and
transferred in favor of the petitioner as assignee, in addition to a
subsequent Deed of Assignment dated December 28, 1997
conveying absolutely all the properties, mining equipment and
facilities of Marcopper in favor of petitioner.
The Deeds of Assignment executed in favor of petitioner cannot be
binding on the judgment creditor, private respondent Solidbank,
under the general legal principle that contracts can only bind the
parties who had entered into it, and it cannot favor or prejudice a
third person (Quano vs. Court of Appeals, 211 SCRA 40). Moreover,
by express stipulation, the said deeds shall be governed,
interpreted and construed in accordance with laws of New York.
The Deeds of Assignment executed by Marcopper, through its
President, Atty. Teodulo C. Gabor, Jr., were clearly made in bad faith
and in fraud of creditors, particularly private respondent Solidbank.
The first Assignment Agreement purportedly executed on March 20,
1997 was entered into after Solidbank had filed on September 19,
1996 a case against Marcopper for collection of sum of money
before Branch 26 of the Regional Trial Court docketed as Civil Case
No. 96-80083. The second Deed of Assignment purportedly
executed on December 28, 1997 was entered into by President
Gabor after Solidbank had filed its Motion for Partial Summary
Judgment, after the rendition by Branch 26 of the Regional Trial
Court of Manila of a Partial Summary Judgment and after the said
trial court had issued a writ of execution, and which judgment was
later affirmed by the Court of Appeals. While the assignments
(which were not registered with the Registry of Property as required
by Article 1625 of the new Civil Code) may be valid between the
parties thereof, it produces no effect as against third parties. The
purported execution of the Deeds of Assignment in favor of
petitioner was in violation of Article 1387 of the New Civil Code x x
x. (Emphasis Supplied)
Hence, the present Petition for Review on Certiorari by MR
Holdings, Ltd. moored on the following grounds:
A. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN COMPLETELY DISREGARDING AS A MATERIAL FACT OF
THE CASE THE EXISTENCE OF THE PRIOR, REGISTERED 1992 DEED
OF REAL ESTATE AND CHATTEL MORTGAGE CREATING A LIEN OVER
THE LEVIED PROPERTIES, SUBJECT OF THE ASSIGNMENT
AGREEMENT DATED MARCH 20, 1997, THUS, MATERIALLY
CONTRIBUTING TO THE SAID COURTS MISPERCEPTION AND
MISAPPRECIATION OF THE MERITS OF PETITIONERS CASE.
B. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN MAKING A FACTUAL FINDING THAT THE SAID
ASSIGNMENT AGREEMENT IS NOT REGISTERED, THE SAME BEING
CONTRARY TO THE FACTS ON RECORD, THUS, MATERIALLY
CONTRIBUTING TO THE SAID COURTS MISPERCEPTION AND
MISAPPRECIATION OF THE MERITS OF PETITIONERS CASE.
C. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN MAKING A FACTUAL FINDING ON THE EXISTENCE OF AN
ATTACHMENT ON THE PROPERTIES SUBJECT OF INSTANT CASE, THE
SAME BEING CONTRARY TO THE FACTS ON RECORD, THUS,
MATERIALLY CONTRIBUTING TO THE SAID COURTS MISPERCEPTION
AND MISAPPRECIATION OF THE MERITS OF PETITIONERS CASE.
D. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN HOLDING THAT THE SAID ASSIGNMENT AGREEMENT
AND THE DEED OF ASSIGNMENT ARE NOT BINDING ON
RESPONDENT SOLIDBANK WHO IS NOT A PARTY THERETO, THE
SAME BEING CONTRARY TO LAW AND ESTABLISHED
JURISPRUDENCE ON PRIOR REGISTERED MORTGAGE LIENS AND
ON PREFERENCE OF CREDITS.
E. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN FINDING THAT THE AFOREMENTIONED ASSIGNMENT
AGREEMENT AND DEED OF ASSIGNMENT ARE SHAM, SIMULATED,
OF DUBIOUS CHARACTER, AND WERE MADE IN BAD FAITH AND IN
FRAUD OF CREDITORS, PARTICULARLY RESPONDENT SOLIDBANK,
THE SAME BEING IN COMPLETE DISREGARD OF, VIZ: (1) THE LAW
AND ESTABLISHED JURISPRUDENCE ON PRIOR, REGISTERED
MORTGAGE LIENS AND ON PREFERENCE OF CREDITS, BY REASON
OF WHICH THERE EXISTS NO CAUSAL CONNECTION BETWEEN THE
SAID CONTRACTS AND THE PROCEEDINGS IN CIVIL CASE NO. 96-
80083; (2) THAT THE ASIAN DEVELOPMENT BANK WILL NOT OR
COULD NOT HAVE AGREED TO A SHAM; SIMULATED, DUBIOUS
AND FRAUDULENT TRANSACTION; AND (3) THAT RESPONDENT
SOLIDBANKS BIGGEST STOCKHOLDER, THE BANK OF NOVA
SCOTIA, WAS A MAJOR BENEFICIARY OF THE ASSIGNMENT
AGREEMENT IN QUESTION.
F. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN HOLDING THAT PETITIONER IS WITHOUT LEGAL
CAPACITY TO SUE AND SEEK REDRESS FROM PHILIPPINE COURTS,
IT BEING THE CASE THAT SECTION 133 OF THE CORPORATION
CODE IS WITHOUT APPLICATION TO PETITIONER, AND IT BEING
THE CASE THAT THE SAID COURT MERELY RELIED ON SURMISES
AND CONJECTURES IN OPINING THAT PETITIONER INTENDS TO DO
BUSINESS IN THE PHILIPPINES.
G. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN HOLDING THAT RESPONDENT MARCOPPER, PLACER
DOME, INC., AND PETITIONER ARE ONE AND THE SAME ENTITY,
THE SAME BEING WITHOUT FACTUAL OR LEGAL BASIS.
H. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN HOLDING PETITIONER GUILTY OF FORUM SHOPPING, IT
BEING CLEAR THAT NEITHER LITIS PENDENTIA NOR RES
JUDICATA MAY BAR THE INSTANT REIVINDICATORY ACTION, AND IT
BEING CLEAR THAT AS THIRD-PARTY CLAIMANT, THE LAW
AFFORDS PETITIONER THE RIGHT TO FILE SUCH REIVINDICATORY
ACTION.
I. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN RENDERING A DECISION WHICH IN EFFECT SERVES AS
JUDGMENT ON THE MERITS OF THE CASE.
J. THE SHERIFFS LEVY AND SALE, THE SHERIFFS CERTIFICATE OF
SALE DATED OCTOBER 12, 1998, THE RTC-MANILA ORDER DATED
FEBRUARY 12, 1999, AND THE RTC-BOAC ORDER DATED
NOVEMBER 25, 1998 ARE NULL AND VOID.
K. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE
ERROR IN AFFIRMING THE DENIAL BY THE RTC-BOAC OF
PETITIONERS APPLICATION FOR PRELIMINARY INJUNCTION, THE
SAME BEING IN TOTAL DISREGARD OF PETITIONERS RIGHT
AS ASSIGNEE OF A PRIOR, REGISTERED MORTGAGE LIEN, AND IN
DISREGARD OF THE LAW AND JURISPRUDENCE ON PREFERENCE
OF CREDIT."
In its petition, petitioner alleges that it is not doing business in the
Philippines and characterizes its participation in the assignment
contracts (whereby Marcoppers assets where transferred to it) as
65
mere isolated acts that cannot foreclose its right to sue in local
courts. Petitioner likewise maintains that the two assignment
contracts, although executed during the pendency of Civil Case No.
96-80083 in the RTC of Manila, are not fraudulent conveyances as
they were supported by valuable considerations. Moreover, they
were executed in connection with prior transactions that took place
as early as 1992 which involved ADB, a reputable financial
institution. Petitioner further claims that when it paid Marcoppers
obligation to ADB, it stepped into the latters shoes and acquired its
(ADBS) rights, titles, and interests under the Deed of Real Estate
and Chattel Mortgage. Lastly, petitioner asserts its existence as a
corporation, separate and distinct from Placer Dome and
Marcopper.
In its comment, Solidbank avers that: a) petitioner is doing
business in the Philippines and this is evidenced by the huge
investment it poured into the assignment contracts; b) granting
that petitioner is not doing business in the Philippines, the nature of
its transaction reveals an intention to do business or to begin a
series of transaction in the country; c) petitioner, Marcopper and
Placer Dome are one and the same entity, petitioner being then a
wholly-owned subsidiary of Placer Dome, which, in turn, owns 40%
of Marcopper; d) the timing under which the assignments contracts
were executed shows that petitioners purpose was to defeat any
judgment favorable to it (Solidbank); and e) petitioner violated the
rule on forum shopping since the object of Civil Case No. 98-13 (at
RTC, Boac, Marinduque) is similar to the other cases filed by
Marcopper in order to forestall the sale of the levied properties.
Marcopper, in a separate comment, states that it is merely a
nominal party to the present case and that its principal concerns
are being ventilated in another case.
The petition is impressed with merit.
Crucial to the outcome of this case is our resolution of the following
issues: 1) Does petitioner have the legal capacity to sue? 2) Was
the Deed of Assignment between Marcopper and petitioner
executed in fraud of creditors? 3) Are petitioner MR Holdings, Ltd.,
Placer Dome, and Marcopper one and the same entity? and 4) Is
petitioner guilty of forum shopping?
We shall resolve the issues in seriatim.
I as a shareholder by a foreign entity in domestic corporations duly
The Court of Appeals ruled that petitioner has no legal capacity to
sue in the Philippine courts because it is a foreign corporation doing
business here without license. A review of this ruling does not pose
much complexity as the principles governing a foreign
corporations right to sue in local courts have long been settled by
our Corporation Law.[17] These principles may be condensed in three
statements, to wit: a) if a foreign corporation does business in the
Philippines without a license, it cannot sue before the Philippine
courts;[18] b) if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine courts on an
isolated transaction[19]or on a cause of action entirely independent
of any business transaction;[20] and c) if a foreign corporation does
business in the Philippines with the required license, it can
sue before Philippine courts on any transaction. Apparently, it is not
the absence of the prescribed license but the doing (of) business in
the Philippines without such license which debars the foreign
corporation from access to our courts.[21]
The task at hand requires us to weigh the facts vis--vis the
established principles. The question whether or not a foreign
corporation is doing business is dependent principally upon the
facts and circumstances of each particular case, considered in the
light of the purposes and language of the pertinent statute or
statutes involved and of the general principles governing the
jurisdictional authority of the state over such corporations. [22]
Batas Pambansa Blg. 68, otherwise known as The Corporation
Code of the Philippines, is silent as to what constitutes doing
or transacting business in the Philippines. Fortunately,
jurisprudence has supplied the deficiency and has held that the
term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and
object for which the corporation was organized. [23] In Mentholatum
Co. Inc., vs. Mangaliman,[24] this Court laid down the test to
determine whether a foreign company is doing business, thus:
x x x The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has
substantially retired from it and turned it over to
another. (Traction Cos. vs. Collectors of Int. Revenue [C.C.A.,
Ohio], 223 F. 984,987.) x x x.
The traditional case law definition has metamorphosed into a
statutory definition, having been adopted with some qualifications
in various pieces of legislation in our jurisdiction. For instance,
Republic Act No. 7042, otherwise known as the Foreign
Investment Act of 1991, defines doing business as follows:
d) The phrase doing business shall include soliciting orders,
service contracts, opening offices, whether called liaison offices or
branches; appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for
a period or periods totalling one hundred eight(y) (180) days or
more; participating in the management, supervision or control of
any domestic business, firm, entity, or corporation in the
Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works; or the exercise of some
of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of
the business organization; Provided, however, That the phrase
doing business shall not be deemed to include mere investment
registered to do business, and/or the exercise of rights as such
investor, nor having a nominee director or officer to represent its
interests in such corporation, nor appointing a representative or
distributor domiciled in the Philippines which transacts business in
its own name and for its own account. (Emphasis supplied) [25]
Likewise, Section 1 of Republic Act No. 5455,[26] provides that:
SECTION. 1. Definition and scope of this Act. - (1) x x x the phrase
doing business shall include soliciting orders, purchases, service
contracts, opening offices, whether called liaison offices or
branches; appointing representatives or distributors who are
domiciled in the Philippines or who in any calendar year stay in
the Philippines for a period or periods totaling one hundred eighty
days or more; participating in the management, supervision or
control of any domestic business firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of
the business organization.
66
There are other statutes[27] defining the term doing business in the
same tenor as those above-quoted, and as may be observed, one
common denominator among them all is the concept of continuity.
In the case at bar, the Court of Appeals categorized as doing
business petitioners participation under the Assignment Agreement
and the Deed of Assignment. This is simply untenable. The
expression doing business should not be given such a strict and
literal construction as to make it apply to any corporate
dealing whatever.[28] At this early stage and with petitioners acts or
transactions limited to the assignment contracts, it cannot be
said that it had performed acts intended to continue the business
for which it was organized. It may not be amiss to point out
that the purpose or business for which petitioner was organized is
not discernible in the records. No effort was exerted by the Court of
Appeals to establish the nexus between petitioners business and
the acts supposed to constitute doing business. Thus, whether the
assignment contracts were incidental to petitioners business or
were continuation thereof is beyond determination. We cannot
apply the case cited by the Court of Appeals, Far East Intl Import
and Export Corp. vs. Nankai Kogyo Co., Ltd.,[29] which held that a
single act may still constitute doing business if it is not merely
incidental or casual, but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do
other business in the state. In said case, there was an express
admission from an official of the foreign corporation that he was
sent to the Philippines to look into the operation of mines, thereby
revealing the foreign corporations desire to continue engaging in
business here. But in the case at bar, there is no evidence of similar
desire or intent.Unarguably, petitioner may, as the Court of Appeals
suggested, decide to operate Marcoppers mining business, but, of
course, at this stage, that is a mere speculation. Or it may decide
to sell the credit secured by the mining properties to an offshore
investor, in which case the acts will still be isolated transactions. To
see through the present facts an intention on the part of petitioner
to start a series of business transaction is to rest on assumptions or
probabilities falling short of actual proof. Courts should never base
its judgments on a state of facts so inadequately developed that it
cannot be determined where inference ends and conjecture begins.
Indeed, the Court of Appeals holding that petitioner was
determined to be doing business in the Philippines is based mainly
on conjectures and speculation. In concluding that
the unmistakable intentionof petitioner is to continue Marcoppers
business, the Court of Appeals hangs on the wobbly premise that
there is no other way for petitioner to recover its huge financial
investments which it poured into Marcoppers rehabilitation without
it (petitioner) continuing Marcoppers business in the country. [30] This
is a mere presumption. Absent overt acts of petitioner from which
we may directly infer its intention to continue Marcoppers business,
we cannot give our concurrence. Significantly, a view subscribed
upon by many authorities is that the mere ownership by a foreign
corporation of a property in a certain state,unaccompanied by its
active use in furtherance of the business for which it was formed, is
insufficient in itself to constitute doing business. [31] In Chittim vs.
Belle Fourche Bentonite Products Co.,[32] it was held that even if a
foreign corporation purchased and took conveyances of a mining
claim, did some assessment work thereon, and endeavored to sell
it, its acts will not constitute the doing of business so as to subject
the corporation to the statutory requirements for the transacting of
business. On the same vein, petitioner, a foreign corporation, which
becomes the assignee of mining properties, facilities and
equipment cannot be automatically considered as doing business,
nor presumed to have the intention of engaging in mining business.
One important point. Long before petitioner assumed Marcoppers
debt to ADB and became their assignee under the two assignment
contracts, there already existed a Support and Standby Credit
Agreement between ADB and Placer Dome whereby the latter
bound itself to provide cash flow support for Marcoppers payment
of its obligations to ADB. Plainly, petitioners payment of US$
18,453, 450.12 to ADB was more of a fulfillment of an obligation
under the Support and Standby Credit Agreement rather than an
investment. That petitioner had to step into the shoes of ADB as
Marcoppers creditor was just a necessary legal consequence of
the transactions that transpired. Also, we must hasten to add that
the Support and Standby Credit Agreement was executed four (4)
years prior to Marcoppers insovency, hence, the alleged intention
of petitioner to continue Marcoppers business could have no basis
for at that time, Marcoppers fate cannot yet be determined.
In the final analysis, we are convinced that petitioner was
engaged only in isolated acts or transactions. Single or isolated
acts, contracts, or transactions of foreign corporations are not
regarded as a doing or carrying on of business. Typical examples
of these are the making of a single contract, sale, sale with the
taking of a note and mortgage in the state to secure payment
therefor, purchase, or note, or the mere commission of a tort. [33] In
these instances, there is no purpose to do any other business
within the country.
II
Solidbank contends that from the chronology and timing of
events, it is evident that there existed a pre-set pattern of
response on the part of Marcopper to defeat whatever court ruling
that may be rendered in favor of Solidbank.
We are not convinced.
While it may appear, at initial glance, that the assignment
contracts are in the nature of fraudulent conveyances, however, a
closer look at the events that transpired prior to the execution of
those contracts gives rise to a different conclusion. The obvious
flaw in the Court of Appeals Decision lies in its constricted view of
the facts obtaining in the case. In its factual narration, the Court
of Appeals definitely left out some events. We shall see later the
significance of those events.
Article 1387 of the Civil Code of the Philippines provides:
Art. 1387. All contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to have been entered
into in fraud of creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when
made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been
issued. The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party seeking
rescission.
In addition to these presumptions, the design to defraud creditors
may be proved in any other manner recognized by law and of
evidence.
This article presumes the existence of fraud made by a
debtor. Thus, in the absence of satisfactory evidence to the
contrary, an alienation of a property will be held fraudulent if it is
made after a judgment has been rendered against the debtor
making the alienation.[34] This presumption of fraud is not
conclusive and may be rebutted by satisfactory and convincing
evidence. All that is necessary is to establish affirmatively that the
67
conveyance is made in good faith and for a sufficient and valuable
consideration.[35]
The Assignment Agreement and the Deed of Assignment were
executed for valuable considerations. Patent from the Assignment
Agreement is the fact that petitioner assumed the payment of US$
18,453,450.12 to ADB in satisfaction of Marcoppers remaining debt
as of March 20, 1997.[36] Solidbank cannot deny this fact
considering that a substantial portion of the said payment, in the
sum of US$ 13,886,791.06, was remitted in favor of the Bank of
Nova Scotia, its major stockholder.[37]
The facts of the case so far show that the assignment contracts
were executed in good faith. The execution of the Assignment
Agreement on Macrh 20, 1997 and the Deed of Assignment on
December 8,1997 is not the alpha of this case. While the execution
of these assignment contracts almost coincided with the rendition
on May 7, 1997 of the Partial Judgment in Civil Case No. 96-80083
by the Manila RTC, however, there was no intention on the part of
petitioner to defeat Solidbanks claim. It bears reiterating that as
early as November 4, 1992, Placer Dome had already bound itself
under a Support and Standby Credit Agreement to provide
Marcopper with cash flow support for the payment to ADB of its
obligations. When Marcopper ceased operations on account of
disastrous mine tailings spill into the Boac River and ADB pressed
for payment of the loan, Placer Dome agreed to have its subsidiary,
herein petitioner, paid ADB the amount of US
$18,453,450.12. Thereupon, ADB and Marcopper executed,
respectively, in favor of petitioner an Assignment Agreement and a
Deed of Assignment. Obviously, the assignment contracts were
connected with transactions that happened long before the
rendition in 1997 of the Partial Judgment in Civil Case No. 96-80083
by the Manila RTC. Those contracts cannot be viewed in isolation. If
we may add, it is highly inconceivable that ADB, a reputable
international financial organization, will connive with Marcopper to
feign or simulate a contract in 1992 just to defraud Solidbank for its
claim four years thereafter. And it is equally incredible for petitioner
to be paying the huge sum of US $ 18, 453, 450.12 to ADB only for
the purpose of defrauding Solidbank of the sum of P52,970.756.89.
It is said that the test as to whether or not a conveyance is
fraudulent is -- does it prejudice the rights of creditors?[38] We
cannot see how Solidbanks right was prejudiced by the assignment
contracts considering that substantially all of Marcoppers
properties were already covered by the registered Deed of Real
Estate and Chattel Mortgage executed by Marcopper in favor of
ADB as early as November 11, 1992. As such, Solidbank cannot
assert a better right than ADB, the latter being a preferred
creditor. It is basic that mortgaged properties answer primarily for
the mortgaged credit, not for the judgment credit of the
mortgagors unsecured creditor. Considering that petitioner
assumed Marcoppers debt to ADB, it follows that Solidbanks right
as judgment creditor over the subject properties must give way to
that of the former.
III
The record is lacking in circumstances that would suggest that
petitioner corporation, Placer Dome and Marcopper are one and the
same entity. While admittedly, petitioner is a wholly-owned
subsidiary of Placer Dome, which in turn, which, in turn, was then a
minority stockholder of Marcopper, however, the mere fact that a
corporation owns all of the stocks of another corporation, taken
alone is not sufficient to justify their being treated as one entity. If
used to perform legitimate functions, a subsidiarys separate
existence shall be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to those
arising in their respective business.[39]
The recent case of Philippine National Bank vs. Ritratto Group
Inc.,[40] outlines the circumstances which are useful in the
determination of whether a subsidiary is but a mere
instrumentality of the parent-corporation, to wit:
(a) The parent corporation owns all or most of the capital stock of
the subsidiary.
(b) The parent and subsidiary corporations have common
directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of
the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or
losses of the subsidiary.
(g) The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
the parent corporation.
(h) In the papers of the parent corporation or in the statements of
its officers, the subsidiary is described as a department or division
of the parent corporation, or its business or financial responsibility
is referred to as the parent corporations own.
(i) The parent corporation uses the property of the subsidiary as
its own.
(j) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary, but take their
orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not
observed.
In this catena of circumstances, what is only extant in the records
is the matter of stock ownership. There are no other factors
indicative that petitioner is a mere instrumentality of Marcopper
or Placer Dome. The mere fact that Placer Dome agreed, under
the terms of the Support and Standby Credit Agreement to
provide Marcopper with cash flow support in paying its obligations
to ADB, does not mean that its personality has merged with that
of Marcopper. This singular undertaking, performed by Placer
Dome with its own stockholders in Canada and elsewhere, is not a
sufficient ground to merge its corporate personality with
Marcopper which has its own set of shareholders, dominated
mostly by Filipino citizens. The same view applies to petitioners
payment of Marcoppers remaining debt to ADB.
With the foregoing considerations and the absence of fraud in the
transaction of the three foreign corporations, we find it improper
to pierce the veil of corporate fiction that equitable doctrine
developed to address situations where the corporate personality
of a corporation is abused or used for wrongful purposes.
IV
On the issue of forum shopping, there could have been a violation
of the rules thereon if petitioner and Marcopper were indeed one
and the same entity. But since petitioner has a separate
68
personality, it has the right to pursue its third-party claim by filing
the independent reivindicatory action with the RTC of Boac,
Marinduque, pursuant to Rule 39, Section 16 of the 1997 Rules of
Civil Procedures. This remedy has been recognized in a long line of
cases decided by this Court.[41] In Rodriguez vs. Court of Appeals,
[42]
we held:
. . . It has long been settled in this jurisdiction that the claim of
ownership of a third party over properties levied for execution of a
judgment presents no issue for determination by the court issuing
the writ of execution.
. . .Thus, when a property levied upon by the sheriff pursuant to a
writ of execution is claimed by third person in a sworn statement of
ownership thereof, as prescribed by the rules, an entirely different
matter calling for a new adjudication arises. And dealing as it does
with the all important question of title, it is reasonable to require
the filing of proper pleadings and the holding of a trial on the
matter in view of the requirements of due process.
. . . In other words, construing Section 17 of Rule 39 of the Revised
Rules of Court (now Section 16 of the 1997 Rules of Civil
Procedure), the rights of third-party claimants over certain
properties levied upon by the sheriff to satisfy the judgment may
not be taken up in the case where such claims are presented but in
a separate and independent action instituted by the claimants.
(Emphasis supplied)
This reivindicatory action has for its object the recovery of
ownership or possession of the property seized by the sheriff,
despite the third party claim, as well as damages resulting
therefrom, and it may be brought against the sheriff and such other
parties as may be alleged to have connived with him in the
supposedly wrongful execution proceedings, such as the judgment
creditor himself. Such action is an entirely separate and distinct
action from that in which execution has been issued. Thus, there
being no identity of parties and cause of action between Civil Case
No. 98-13 (RTC, Boac) and those cases filed by Marcopper,
including Civil Case No. 96-80083 (RTC, Manila) as to give rise
to res judicata or litis pendentia, Solidbanks allegation of forum-
shopping cannot prosper.[43]
All considered, we find petitioner to be entitled to the issuance of a
writ of preliminary injunction. Section 3, Rule 58 of the 1997 Rules
of Civil Procedure provides:
SEC. 3 Grounds for issuance of preliminary injunction. A preliminary
injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the commission
or continuance of the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited period or
perpetually;
(b) That the commission, continuance or non-performance of the
acts or acts complained of during the litigation would probably
work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or
is attempting to do, or is procuring or suffering to be done, some
act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to
render the judgment ineffectual.
Petitioners right to stop the further execution of the properties
covered by the assignment contracts is clear under the facts so far
established. An execution can be issued only against a party and
not against one who did not have his day in court. [44] The duty of
the sheriff is to levy the property of the judgment debtor not that
of a third person. For, as the saying goes, one mans goods shall
not be sold for another man's debts.[45] To allow the execution of
petitioners properties would surely work injustice to it and render
the judgment on the reivindicatory action, should it be favorable,
ineffectual. In Arabay, Inc., vs. Salvador,[46] this Court held that an
injunction is a proper remedy to prevent a sheriff from selling the
property of one person for the purpose of paying the debts of
another; and that while the general rule is that no court has
authority to interfere by injunction with the judgments or decrees
of another court of equal or concurrent or coordinate jurisdiction,
however, it is not so when a third-party claimant is involved. We
quote the instructive words of Justice Querube C. Makalintal
in Abiera vs. Court of Appeals,[47] thus:
The rationale of the decision in the Herald Publishing Company
case[48] is peculiarly applicable to the one before Us, and removes
it from the general doctrine enunciated in the decisions cited by
the respondents and quoted earlier herein.
1. Under Section 17 of Rule 39 a third person who claims property
levied upon on execution may vindicate such claim by
action. Obviously a judgment rendered in his favor, that is,
declaring him to be the owner of the property, would not
constitute interference with the powers or processes of the court
which rendered the judgment to enforce which the execution was
levied. If that be so and it is so because the property, being that
of a stranger, is not subject to levy then an interlocutory order
such as injunction, upon a claim and prima facie showing of
ownership by the claimant, cannot be considered as such
interference either.
WHEREFORE, the petition is GRANTED. The assailed Decision
dated January 8, 1999 and the Resolution dated March 29, 1999
of the Court of Appeals in CA G.R. No. 49226 are set aside. Upon
filing of a bond of P1,000,000.00, respondent sheriffs are
restrained from further implementing the writ of execution issued
in Civil Case No. 96-80083 by the RTC, Branch 26, Manila, until
further orders from this Court. The RTC, Branch 94, Boac,
Marinduque, is directed to dispose of Civil Case No. 98-13 with
dispatch.
15. G.R. No. 171995 April 18, 2012
STEELCASE, INC., Petitioner, vs. DESIGN INTERNATIONAL
SELECTIONS, INC., Respondent.
This is a petition for review on certiorari under Rule 45 assailing
the March 31, 2005 Decision1 of the Court of Appeals (CA) which
affirmed the May 29, 2000 Order2 of the Regional Trial Court,
Branch 60, Makati City (RTC), dismissing the complaint for sum of
money in Civil Case No. 99-122 entitled "Steelcase, Inc. v. Design
International Selections, Inc."
The Facts
Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation
existing under the laws of Michigan, United States of
America (U.S.A.), and engaged in the manufacture of office
furniture with dealers worldwide.3 Respondent Design
International Selections, Inc. (DISI) is a corporation existing under
Philippine Laws and engaged in the furniture business, including
the distribution of furniture. 4
69
Sometime in 1986 or 1987, Steelcase and DISI orally entered into a
dealership agreement whereby Steelcase granted DISI the right to
market, sell, distribute, install, and service its products to end-user
customers within the Philippines. The business relationship
continued smoothly until it was terminated sometime in January
1999 after the agreement was breached with neither party
admitting any fault.5
On January 18, 1999, Steelcase filed a complaint 6 for sum of money
against DISI alleging, among others, that DISI had an unpaid
account of US$600,000.00. Steelcase prayed that DISI be ordered
to pay actual or compensatory damages, exemplary damages,
attorneys fees, and costs of suit.
In its Answer with Compulsory Counterclaims 7 dated February 4,
1999, DISI sought the following: (1) the issuance of a temporary
restraining order (TRO) and a writ of preliminary injunction to enjoin
Steelcase from selling its products in the Philippines except through
DISI; (2) the dismissal of the complaint for lack of merit; and (3) the
payment of actual, moral and exemplary damages together with
attorneys fees and expenses of litigation. DISI alleged that the
complaint failed to state a cause of action and to contain the
required allegations on Steelcases capacity to sue in the
Philippines despite the fact that it (Steelcase) was doing business in
the Philippines without the required license to do so. Consequently,
it posited that the complaint should be dismissed because of
Steelcases lack of legal capacity to sue in Philippine courts.
On March 3, 1999, Steelcase filed its Motion to Admit Amended
Complaint8 which was granted by the RTC, through then Acting
Presiding Judge Roberto C. Diokno, in its Order 9 dated April 26,
1999. However, Steelcase sought to further amend its complaint by
filing a Motion to Admit Second Amended Complaint10 on March 13,
1999.
In his Order11 dated November 15, 1999, Acting Presiding Judge
Bonifacio Sanz Maceda dismissed the complaint, granted the TRO
prayed for by DISI, set aside the April 26, 1999 Order of the RTC
admitting the Amended Complaint, and denied Steelcases Motion
to Admit Second Amended Complaint. The RTC stated that in
requiring DISI to meet the Dealer Performance Expectation and in
terminating the dealership agreement with DISI based on its failure
to improve its performance in the areas of business planning,
organizational structure, operational effectiveness, and efficiency,
Steelcase unwittingly revealed that it participated in the operations
of DISI. It then concluded that Steelcase was "doing business" in
the Philippines, as contemplated by Republic Act(R.A.) No. 7042
(The Foreign Investments Act of 1991), and since it did not have
the license to do business in the country, it was barred from
seeking redress from our courts until it obtained the requisite
license to do so. Its determination was further bolstered by the
appointment by Steelcase of a representative in the Philippines.
Finally, despite a showing that DISI transacted with the local
customers in its own name and for its own account, it was of the
opinion that any doubt in the factual environment should be
resolved in favor of a pronouncement that a foreign corporation
was doing business in the Philippines, considering the twelve-year
period that DISI had been distributing Steelcase products in the
Philippines.
Steelcase moved for the reconsideration of the questioned Order
but the motion was denied by the RTC in its May 29, 2000 Order. 12
Aggrieved, Steelcase elevated the case to the CA by way of appeal,
assailing the November 15, 1999 and May 29, 2000 Orders of the
RTC. On March 31, 2005, the CA rendered its Decision affirming the
RTC orders, ruling that Steelcase was a foreign corporation doing or
transacting business in the Philippines without a license. The CA
stated that the following acts of Steelcase showed its intention to
pursue and continue the conduct of its business in the Philippines:
(1) sending a letter to Phinma, informing the latter that the
distribution rights for its products would be established in the
near future and directing other questions about orders for
Steelcase products to Steelcase International; (2) cancelling
orders from DISIs customers, particularly Visteon, Phils., Inc.
(Visteon); (3) continuing to send its products to the Philippines
through Modernform Group Company Limited(Modernform), as
evidenced by an Ocean Bill of Lading; and (4) going beyond the
mere appointment of DISI as a dealer by making several
impositions on management and operations of DISI. Thus, the CA
ruled that Steelcase was barred from access to our courts for
being a foreign corporation doing business here without the
requisite license to do so.
Steelcase filed a motion for reconsideration but it was denied by
the CA in its Resolution dated March 23, 2006. 13
Hence, this petition.
The Issues
Steelcase filed the present petition relying on the following
grounds:
I THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR
WHEN IT FOUND THAT STEELCASE HAD BEEN "DOING BUSINESS"
IN THE PHILIPPINES WITHOUT A LICENSE.
II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
NOT FINDING THAT RESPONDENT WAS ESTOPPED FROM
CHALLENGING STEELCASES LEGAL CAPACITY TO SUE, AS AN
AFFIRMATIVE DEFENSE IN ITS ANSWER.
The issues to be resolved in this case are:
(1) Whether or not Steelcase is doing business in the Philippines
without a license; and
(2) Whether or not DISI is estopped from challenging the
Steelcases legal capacity to sue.
The Courts Ruling
The Court rules in favor of the petitioner.
Steelcase is an unlicensed foreign corporation NOT doing business
in the Philippines
Anent the first issue, Steelcase argues that Section 3(d) of R.A.
No. 7042 or the Foreign Investments Act of 1991(FIA) expressly
states that the phrase "doing business" excludes the appointment
by a foreign corporation of a local distributor domiciled in the
Philippines which transacts business in its own name and for its
own account. Steelcase claims that it was not doing business in
the Philippines when it entered into a dealership agreement with
DISI where the latter, acting as the formers appointed local
distributor, transacted business in its own name and for its own
account. Specifically, Steelcase contends that it was DISI that sold
Steelcases furniture directly to the end-users or customers who,
in turn, directly paid DISI for the furniture they bought. Steelcase
further claims that DISI, as a non-exclusive dealer in the
Philippines, had the right to market, sell, distribute and service
Steelcase products in its own name and for its own account.
70
Hence, DISI was an independent distributor of Steelcase products,
and not a mere agent or conduit of Steelcase.
On the other hand, DISI argues that it was appointed by Steelcase
as the latters exclusive distributor of Steelcase products. DISI
likewise asserts that it was not allowed by Steelcase to transact
business in its own name and for its own account as Steelcase
dictated the manner by which it was to conduct its business,
including the management and solicitation of orders from
customers, thereby assuming control of its operations. DISI further
insists that Steelcase treated and considered DISI as a mere
conduit, as evidenced by the fact that Steelcase itself directly sold
its products to customers located in the Philippines who were
classified as part of their "global accounts." DISI cited other
established circumstances which prove that Steelcase was doing
business in the Philippines including the following: (1) the sale and
delivery by Steelcase of furniture to Regus, a Philippine client,
through Modernform, a Thai corporation allegedly controlled by
Steelcase; (2) the imposition by Steelcase of certain requirements
over the management and operations of DISI; (3) the
representations made by Steven Husak as Country Manager of
Steelcase; (4) the cancellation by Steelcase of orders placed by
Philippine clients; and (5) the expression by Steelcase of its desire
to maintain its business in the Philippines. Thus, Steelcase has no
legal capacity to sue in Philippine Courts because it was doing
business in the Philippines without a license to do so.
The Court agrees with the petitioner.
The rule that an unlicensed foreign corporations doing business in
the Philippine do not have the capacity to sue before the local
courts is well-established. Section 133 of the Corporation Code of
the Philippines explicitly states:
Sec. 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative
agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine
laws.
The phrase "doing business" is clearly defined in Section 3(d) of
R.A. No. 7042 (Foreign Investments Act of 1991), to wit:
d) The phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison" offices
or branches; appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business"
shall not be deemed to include mere investment as a shareholder
by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having
a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own
name and for its own account; (Emphases supplied)
This definition is supplemented by its Implementing Rules and
Regulations, Rule I, Section 1(f) which elaborates on the meaning
of the same phrase:
f. "Doing business" shall include soliciting orders, service
contracts, opening offices, whether liaison offices or branches;
appointing representatives or distributors, operating under full
control of the foreign corporation, domiciled in the Philippines or
who in any calendar year stay in the country for a period totalling
one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally
incident to and in progressive prosecution of commercial gain or
of the purpose and object of the business organization.
The following acts shall not be deemed "doing business" in the
Philippines:
1. Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the
exercise of rights as such investor;
2. Having a nominee director or officer to represent its interest in
such corporation;
3. Appointing a representative or distributor domiciled in the
Philippines which transacts business in the representative's or
distributor's own name and account;
4. The publication of a general advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in the
Philippines;
6. Consignment by a foreign entity of equipment with a local
company to be used in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of
sale which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to
operate it, and similar incidental services. (Emphases supplied)
From the preceding citations, the appointment of a distributor in
the Philippines is not sufficient to constitute "doing business"
unless it is under the full control of the foreign corporation. On the
other hand, if the distributor is an independent entity which buys
and distributes products, other than those of the foreign
corporation, for its own name and its own account, the latter
cannot be considered to be doing business in the Philippines. 14 It
should be kept in mind that the determination of whether a
foreign corporation is doing business in the Philippines must be
judged in light of the attendant circumstances.15
In the case at bench, it is undisputed that DISI was founded in
1979 and is independently owned and managed by the spouses
Leandro and Josephine Bantug.16 In addition to Steelcase
products, DISI also distributed products of other companies
including carpet tiles, relocatable walls and theater settings.17 The
71
dealership agreement between Steelcase and DISI had been
described by the owner himself as:
xxx basically a buy and sell arrangement whereby we would inform
Steelcase of the volume of the products needed for a particular
project and Steelcase would, in turn, give special quotations or
discounts after considering the value of the entire package. In
making the bid of the project, we would then add out profit margin
over Steelcases prices. After the approval of the bid by the client,
we would thereafter place the orders to Steelcase. The latter, upon
our payment, would then ship the goods to the Philippines, with us
shouldering the freight charges and taxes. 18 [Emphasis supplied]
This clearly belies DISIs assertion that it was a mere conduit
through which Steelcase conducted its business in the country.
From the preceding facts, the only reasonable conclusion that can
be reached is that DISI was an independent contractor, distributing
various products of Steelcase and of other companies, acting in its
own name and for its own account.
The CA, in finding Steelcase to be unlawfully engaged in business
in the Philippines, took into consideration the delivery by Steelcase
of a letter to Phinma informing the latter that the distribution rights
for its products would be established in the near future, and also its
cancellation of orders placed by Visteon. The foregoing acts were
apparently misinterpreted by the CA. Instead of supporting the
claim that Steelcase was doing business in the country, the said
acts prove otherwise. It should be pointed out that no sale was
concluded as a result of these communications. Had Steelcase
indeed been doing business in the Philippines, it would have readily
accepted and serviced the orders from the abovementioned
Philippine companies. Its decision to voluntarily cease to sell its
products in the absence of a local distributor indicates its refusal to
engage in activities which might be construed as "doing business."
Another point being raised by DISI is the delivery and sale of
Steelcase products to a Philippine client by Modernform allegedly
an agent of Steelcase. Basic is the rule in corporation law that a
corporation has a separate and distinct personality from its
stockholders and from other corporations with which it may be
connected.19 Thus, despite the admission by Steelcase that it owns
25% of Modernform, with the remaining 75% being owned and
controlled by Thai stockholders,20 it is grossly insufficient to justify
piercing the veil of corporate fiction and declare that Modernform
acted as the alter ego of Steelcase to enable it to improperly
conduct business in the Philippines. The records are bereft of any
evidence which might lend even a hint of credence to DISIs
assertions. As such, Steelcase cannot be deemed to have been
doing business in the Philippines through Modernform.
Finally, both the CA and DISI rely heavily on the Dealer Performance
Expectation required by Steelcase of its distributors to prove that
DISI was not functioning independently from Steelcase because the
same imposed certain conditions pertaining to business planning,
organizational structure, operational effectiveness and efficiency,
and financial stability. It is actually logical to expect that Steelcase,
being one of the major manufacturers of office systems furniture,
would require its dealers to meet several conditions for the grant
and continuation of a distributorship agreement. The imposition of
minimum standards concerning sales, marketing, finance and
operations is nothing more than an exercise of sound business
practice to increase sales and maximize profits for the benefit of
both Steelcase and its distributors. For as long as these
requirements do not impinge on a distributors independence, then
there is nothing wrong with placing reasonable expectations on
them.
All things considered, it has been sufficiently demonstrated that
DISI was an independent contractor which sold Steelcase products
in its own name and for its own account. As a result, Steelcase
cannot be considered to be doing business in the Philippines by its
act of appointing a distributor as it falls under one of the
exceptions under R.A. No. 7042.
DISI is estopped from challenging Steelcases legal capacity to
sue
Regarding the second issue, Steelcase argues that assuming
arguendo that it had been "doing business" in the Philippines
without a license, DISI was nonetheless estopped from
challenging Steelcases capacity to sue in the Philippines.
Steelcase claims that since DISI was aware that it was doing
business in the Philippines without a license and had benefited
from such business, then DISI should be estopped from raising the
defense that Steelcase lacks the capacity to sue in the Philippines
by reason of its doing business without a license.
On the other hand, DISI argues that the doctrine of estoppel
cannot give Steelcase the license to do business in the Philippines
or permission to file suit in the Philippines. DISI claims that when
Steelcase entered into a dealership agreement with DISI in 1986,
it was not doing business in the Philippines. It was after such
dealership was put in place that it started to do business without
first obtaining the necessary license. Hence, estoppel cannot work
against it. Moreover, DISI claims that it suffered as a result of
Steelcases "doing business" and that it never benefited from the
dealership and, as such, it cannot be estopped from raising the
issue of lack of capacity to sue on the part of Steelcase.
The argument of Steelcase is meritorious.
If indeed Steelcase had been doing business in the Philippines
without a license, DISI would nonetheless be estopped from
challenging the formers legal capacity to sue.
It cannot be denied that DISI entered into a dealership agreement
with Steelcase and profited from it for 12 years from 1987 until
1999. DISI admits that it complied with its obligations under the
dealership agreement by exerting more effort and making
substantial investments in the promotion of Steelcase products. It
also claims that it was able to establish a very good reputation
and goodwill for Steelcase and its products, resulting in the
establishment and development of a strong market for Steelcase
products in the Philippines. Because of this, DISI was very proud
to be awarded the "Steelcase International Performance Award"
for meeting sales objectives, satisfying customer needs,
managing an effective company and making a profit. 21
Unquestionably, entering into a dealership agreement with
Steelcase charged DISI with the knowledge that Steelcase was not
licensed to engage in business activities in the Philippines. This
Court has carefully combed the records and found no proof that,
from the inception of the dealership agreement in 1986 until
September 1998, DISI even brought to Steelcases attention that
it was improperly doing business in the Philippines without a
license. It was only towards the latter part of 1998 that DISI
deemed it necessary to inform Steelcase of the impropriety of the
conduct of its business without the requisite Philippine license. It
should, however, be noted that DISI only raised the issue of the
absence of a license with Steelcase after it was informed that it
owed the latter US$600,000.00 for the sale and delivery of its
products under their special credit arrangement.
72
By acknowledging the corporate entity of Steelcase and entering
into a dealership agreement with it and even benefiting from it,
DISI is estopped from questioning Steelcases existence and
capacity to sue. This is consistent with the Courts ruling in
Communication Materials and Design, Inc. v. Court of
Appeals22 where it was written:
Notwithstanding such finding that ITEC is doing business in the
country, petitioner is nonetheless estopped from raising this fact to
bar ITEC from instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in
Philippine Courts although not authorized to do business here
against a Philippine citizen or entity who had contracted with and
benefited by said corporation. To put it in another way, a party is
estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the
doctrine of estoppel to deny corporate existence applies to a
foreign as well as to domestic corporations. One who has dealt with
a corporation of foreign origin as a corporate entity is estopped to
deny its corporate existence and capacity: The principle will be
applied to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes
chiefly in cases where such person has received the benefits of the
contract.
The rule is deeply rooted in the time-honored axiom of Commodum
ex injuria sua non habere debet no person ought to derive any
advantage of his own wrong. This is as it should be for as mandated
by law, "every person must in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."
Concededly, corporations act through agents, like directors and
officers. Corporate dealings must be characterized by utmost good
faith and fairness. Corporations cannot just feign ignorance of the
legal rules as in most cases, they are manned by sophisticated
officers with tried management skills and legal experts with
practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and,
thereby allow a reasonable proportion between benefits and
expected burdens. This is a norm which should be observed where
one or the other is a foreign entity venturing in a global market.
xxx
By entering into the "Representative Agreement" with ITEC,
petitioner is charged with knowledge that ITEC was not licensed to
engage in business activities in the country, and is thus estopped
from raising in defense such incapacity of ITEC, having chosen to
ignore or even presumptively take advantage of the
same.23 (Emphases supplied)
The case of Rimbunan Hijau Group of Companies v. Oriental Wood
Processing Corporation24 is likewise instructive:
Respondents unequivocal admission of the transaction which gave
rise to the complaint establishes the applicability of estoppel
against it. Rule 129, Section 4 of the Rules on Evidence provides
that a written admission made by a party in the course of the
proceedings in the same case does not require proof. We held in
the case of Elayda v. Court of Appeals, that an admission made in
the pleadings cannot be controverted by the party making such
admission and are conclusive as to him. Thus, our consistent
pronouncement, as held in cases such as Merril Lynch Futures v.
Court of Appeals, is apropos:
The rule is that a party is estopped to challenge the personality of
a corporation after having acknowledged the same by entering
into a contract with it. And the doctrine of estoppel to deny
corporate existence applies to foreign as well as to domestic
corporations; "one who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its existence and
capacity." The principle "will be applied to prevent a person
contracting with a foreign corporation from later taking advantage
of its noncompliance with the statutes, chiefly in cases where
such person has received the benefits of the contract . . ."
All things considered, respondent can no longer invoke
petitioners lack of capacity to sue in this
jurisdiction.1wphi1Considerations of fair play dictate that after
having contracted and benefitted from its business transaction
with Rimbunan, respondent should be barred from questioning the
latters lack of license to transact business in the Philippines.
In the case of Antam Consolidated, Inc. v. CA, this Court noted
that it is a common ploy of defaulting local companies which are
sued by unlicensed foreign corporations not engaged in business
in the Philippines to invoke the latters lack of capacity to sue.
This practice of domestic corporations is particularly
reprehensible considering that in requiring a license, the law
never intended to prevent foreign corporations from performing
single or isolated acts in this country, or to favor domestic
corporations who renege on their obligations to foreign firms
unwary enough to engage in solitary transactions with them.
Rather, the law was intended to bar foreign corporations from
acquiring a domicile for the purpose of business without first
taking the steps necessary to render them amenable to suits in
the local courts. It was to prevent the foreign companies from
enjoying the good while disregarding the bad.
As a matter of principle, this Court will not step in to shield
defaulting local companies from the repercussions of their
business dealings. While the doctrine of lack of capacity to sue
based on failure to first acquire a local license may be resorted to
in meritorious cases, it is not a magic incantation. It cannot be
called upon when no evidence exists to support its invocation or
the facts do not warrant its application. In this case, that the
respondent is estopped from challenging the petitioners capacity
to sue has been conclusively established, and the forthcoming
trial before the lower court should weigh instead on the other
defenses raised by the respondent.25 (Emphases supplied)
As shown in the previously cited cases, this Court has time and
again upheld the principle that a foreign corporation doing
business in the Philippines without a license may still sue before
the Philippine courts a Filipino or a Philippine entity that had
derived some benefit from their contractual arrangement because
the latter is considered to be estopped from challenging the
personality of a corporation after it had acknowledged the said
corporation by entering into a contract with it. 26
In Antam Consolidated, Inc. v. Court of Appeals,27 this Court had
the occasion to draw attention to the common ploy of invoking
the incapacity to sue of an unlicensed foreign corporation utilized
by defaulting domestic companies which seek to avoid the suit by
the former. The Court cannot allow this to continue by always
ruling in favor of local companies, despite the injustice to the
overseas corporation which is left with no available remedy.
During this period of financial difficulty, our nation greatly needs
to attract more foreign investments and encourage trade between
the Philippines and other countries in order to rebuild and
strengthen our economy. While it is essential to uphold the sound
73
public policy behind the rule that denies unlicensed foreign
corporations doing business in the Philippines access to our courts,
it must never be used to frustrate the ends of justice by becoming
an all-encompassing shield to protect unscrupulous domestic
enterprises from foreign entities seeking redress in our country. To
do otherwise could seriously jeopardize the desirability of the
Philippines as an investment site and would possibly have the
deleterious effect of hindering trade between Philippine companies
and international corporations.
WHEREFORE, the March 31, 2005 Decision of the Court of Appeals
and its March 23, 2006 Resolution are hereby REVERSED and SET
ASIDE. The dismissal order of the Regional Trial Court dated
November 15, 1999 is hereby set aside. Steelcases Amended
Complaint is hereby ordered REINSTATED and the case
is REMANDEDto the RTC for appropriate action.
16. G.R. No. 160016 February 27, 2006
ABACUS SECURITIES CORPORATION, Petitioner, vs. RUBEN U.
AMPIL, Respondent.
Stock market transactions affect the general public and the
national economy. The rise and fall of stock market indices reflect
to a considerable degree the state of the economy. Trends in stock
prices tend to herald changes in business conditions. Consequently,
securities transactions are impressed with public interest, and are
thus subject to public regulation. In particular, the laws and
regulations requiring payment of traded shares within specified
periods are meant to protect the economy from excessive stock
market speculations, and are thus mandatory.
In the present case, respondent cannot escape payment of stocks
validly traded by petitioner on his behalf. These transactions took
place before both parties violated the trading law and rules. Hence,
they fall outside the purview of the pari delicto rule.
The Case
Before the Court is a Petition for Review1 under Rule 45 of the Rules
of Court, challenging the March 21, 2003 Decision2 and the
September 19, 2003 Resolution3 of the Court of Appeals (CA) in CA-
GR CV No. 68273. The assailed Decision disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is
hereby DISMISSED. With costs."4
The CA denied reconsideration in its September 19, 2003
Resolution.
The Facts
The factual antecedents were summarized by the trial court (and
reproduced by the CA in its assailed Decision) in this wise:
"Evidence adduced by the [petitioner] has established the fact that
[petitioner] is engaged in business as a broker and dealer of
securities of listed companies at the Philippine Stock Exchange
Center.
"Sometime in April 1997, [respondent] opened a cash or regular
account with [petitioner] for the purpose of buying and selling
securities as evidenced by the Account Application Form. The
parties business relationship was governed by the terms and
conditions [stated therein] x x x.
"Since April 10, 1997, [respondent] actively traded his account, and
as a result of such trading activities, he accumulated an
outstanding obligation in favor of [petitioner] in the principal sum
of P6,617,036.22 as of April 30, 1997.
"Despite the lapse of the period within which to pay his account
as well as sufficient time given by [petitioner] for [respondent] to
comply with his proposal to settle his account, the latter failed to
do so. Such that [petitioner] thereafter sold [respondents]
securities to set off against his unsettled obligations.
"After the sale of [respondents] securities and application of the
proceeds thereof against his account, [respondents] remaining
unsettled obligation to [petitioner] was P3,364,313.56. [Petitioner]
then referred the matter to its legal counsel for collection
purposes.
"In a letter dated August 15, 1997, [petitioner] through counsel
demanded that [respondent] settle his obligation plus the agreed
penalty charges accruing thereon equivalent to the average 90-
day Treasury Bill rate plus 2% per annum (200 basis points).
"In a letter dated August [26], 1997, [respondent] acknowledged
receipt of [petitioners] demand [letter] and admitted his unpaid
obligation and at the same time request[ed] for 60 days to raise
funds to pay the same, which was granted by [petitioner].
"Despite said demand and the lapse of said requested extension,
[respondent] failed and/or refused to pay his accountabilities to
[petitioner].
"For his defense, [respondent] claims that he was induced to
trade in a stock security with [petitioner] because the latter
allowed offset settlements wherein he is not obliged to pay the
purchase price. Rather, it waits for the customer to sell. And if
there is a loss, [petitioner] only requires the payment of the
deficiency (i.e., the difference between the higher buying price
and the lower selling price). In addition, it charges a commission
for brokering the sale.
"However, if the customer sells and there is a profit, [petitioner]
deducts the purchase price and delivers only the surplus after
charging its commission.
"[respondent] further claims that all his trades with [petitioner]
were not paid in full in cash at anytime after purchase or within
the T+4 [4 days subsequent to trading] and none of these trades
was cancelled by [petitioner] as required in Exhibit A-1. Neither
did [petitioner] apply with either the Philippine Stock Exchange or
the SEC for an extension of time for the payment or settlement of
his cash purchases. This was not brought to his attention by his
broker and so with the requirement of collaterals in margin
account. Thus, his trade under an offset transaction with
[petitioner] is unlimited subject only to the discretion of the
broker. x x x [Had petitioner] followed the provision under par. 8
of Exh. A-1 which stipulated the liquidation within the T+3 [3
days subsequent to trading], his net deficit would only
be P1,601,369.59. [respondent] however affirmed that this is not
in accordance with RSA [Rule 25-1 par. C, which mandates that if
you do not pay for the first] order, you cannot subsequently make
any further order without depositing the cash price in full. So, if
RSA Rule 25-1, par. C, was applied, he was limited only to the first
transaction. That [petitioner] did not comply with the T+4
mandated in cash transaction. When [respondent] failed to
comply with the T+3, [petitioner] did not require him to put up a
deposit before it executed its subsequent orders. [Petitioner] did
not likewise apply for extension of the T+4 rule. Because of the
offset transaction, [respondent] was induced to [take a] risk which
resulted [in] the filing of the instant suit against him [because of
74
which] he suffered sleepless nights, lost appetite which if quantified
in money, would amount toP500,000.00 moral damages
and P100,000.00 exemplary damages."5
In its Decision6 dated June 26, 2000, the Regional Trial Court (RTC)
of Makati City (Branch 57) held that petitioner violated Sections 23
and 25 of the Revised Securities Act (RSA) and Rule 25-1 of the
Rules Implementing the Act (RSA Rules) when it failed to: 1) require
the respondent to pay for his stock purchases within three (T+3) or
four days (T+4) from trading; and 2) request from the appropriate
authority an extension of time for the payment of respondents
cash purchases. The trial court noted that despite respondents
non-payment within the required period, petitioner did not cancel
the purchases of respondent. Neither did it require him to deposit
cash payments before it executed the buy and/or sell orders
subsequent to the first unsettled transaction. According to the RTC,
by allowing respondent to trade his account actively without cash,
petitioner effectively induced him to purchase securities thereby
incurring excessive credits.
The trial court also found respondent to be equally at fault, by
incurring excessive credits and waiting to see how his investments
turned out before deciding to invoke the RSA. Thus, the RTC
concluded that petitioner and respondent were in pari delicto and
therefore without recourse against each other.
Ruling of the Court of Appeals
The CA upheld the lower courts finding that the parties were in pari
delicto. It castigated petitioner for allowing respondent to keep on
trading despite the latters failure to pay his outstanding
obligations. It explained that "the reason [behind petitioners act] is
elemental in its simplicity. And it is not exactly altruistic. Because
whether [respondents] trading transaction would result in a surplus
or deficit, he would still be liable to pay [petitioner] its commission.
[Petitioners] cash register will keep on ringing to the sound of
incoming money, no matter what happened to [respondent]." 7
The CA debunked petitioners contention that the trial court lacked
jurisdiction to determine violations of the RSA. The court a quo held
that petitioner was estopped from raising the question, because it
had actively and voluntarily participated in the assailed
proceedings.
Hence, this Petition. 8
Issues
Petitioner submits the following issues for our consideration:
"I. Whether or not the Court of Appeals ruling that petitioner and
respondent are in pari delicto which allegedly bars any recovery, is
in accord with law and applicable jurisprudence considering that
respondent was the first one who violated the terms of the Account
Opening Form, [which was the] agreement between the parties.
"II. Whether or not the Court of Appeals ruling that the petitioner
and respondent are in pari delicto is in accord with law and
applicable jurisprudence considering the Account Opening Form is a
valid agreement.
"III. Whether or not the Court of Appeals ruling that petitioner
cannot recover from respondent is in accord with law and
applicable jurisprudence since the evidence and admission of
respondent proves that he is liable to petitioner for his outstanding
obligations arising from the stock trading through petitioner.
"IV. Whether or not the Court of Appeals ruling on petitioners
alleged violation of the Revised Securities Act [is] in accord with
law and jurisprudence since the lower court has no jurisdiction
over violations of the Revised Securities Act." 9
Briefly, the issues are (1) whether the pari delicto rule is
applicable in the present case, and (2) whether the trial court had
jurisdiction over the case.
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Applicability of the
Pari Delicto Principle
In the present controversy, the following pertinent facts are
undisputed: (1) on April 8, 1997, respondent opened a cash
account with petitioner for his transactions in securities; 10 (2)
respondents purchases were consistently unpaid from April 10 to
30, 1997;11 (3) respondent failed to pay in full, or even just his
deficiency,12 for the transactions on April 10 and 11, 1997;13 (4)
despite respondents failure to cover his initial deficiency,
petitioner subsequently purchased and sold securities for
respondents account on April 25 and 29;14 (5) petitioner did not
cancel or liquidate a substantial amount of respondents stock
transactions until May 6, 1997.15
The provisions governing the above transactions are Sections 23
and 25 of the RSA16 and Rule 25-1 of the RSA Rules, which state
as follows:
"SEC. 23. Margin Requirements.
xxxxxxxxx
(b) It shall be unlawful for any member of an exchange or any
broker or dealer, directly or indirectly, to extend or maintain credit
or arrange for the extension or maintenance of credit to or for any
customer
(1) On any security other than an exempted security, in
contravention of the rules and regulations which the Commission
shall prescribe under subsection (a) of this Section;
(2) Without collateral or on any collateral other than securities,
except (i) to maintain a credit initially extended in conformity with
the rules and regulations of the Commission and (ii) in cases
where the extension or maintenance of credit is not for the
purpose of purchasing or carrying securities or of evading or
circumventing the provisions of subparagraph (1) of this
subsection.
x x x x x x x x x"
"SEC. 25. Enforcement of margin requirements and restrictions on
borrowings. To prevent indirect violations of the margin
requirements under Section 23 hereof, the broker or dealer shall
require the customer in nonmargin transactions to pay the price
of the security purchased for his account within such period as the
Commission may prescribe, which shall in no case exceed three
trading days; otherwise, the broker shall sell the security
purchased starting on the next trading day but not beyond ten
trading days following the last day for the customer to pay such
purchase price, unless such sale cannot be effected within said
75
period for justifiable reasons. The sale shall be without prejudice to
the right of the broker or dealer to recover any deficiency from the
customer. x x x."
"RSA RULE 25-1
"Purchases and Sales in Cash Account
"(a) Purchases by a customer in a cash account shall be paid in full
within three (3) business days after the trade date.
"(b) If full payment is not received within the required time period,
the broker or dealer shall cancel or otherwise liquidate the
transaction, or the unsettled portion thereof, starting on the next
business day but not beyond ten (10) business days following the
last day for the customer to pay, unless such sale cannot be
effected within said period for justifiable reasons.
"(c) If a transaction is cancelled or otherwise liquidated as a result
of non-payment by the customer, prior to any subsequent purchase
during the next ninety (90) days, the customer shall be required to
deposit sufficient funds in the account to cover each purchase
transaction prior to execution.
xxxxxxxxx
"(f) Written application for an extension of the period of time
required for payment under paragraph (a) be made by the broker
or dealer to the Philippine Stock Exchange, in the case of a member
of the Exchange, or to the Commission, in the case of a non-
member of the Exchange. Applications for the extension must be
based upon exceptional circumstances and must be filed and acted
upon before the expiration of the original payment period or the
expiration of any subsequent extension."
Section 23(b) above -- the alleged violation of petitioner which
provides the basis for respondents defense -- makes it unlawful for
a broker to extend or maintain credit on any securities other than in
conformity with the rules and regulations issued by Securities and
Exchange Commission (SEC). Section 25 lays down the rules to
prevent indirect violations of Section 23 by brokers or dealers. RSA
Rule 25-1 prescribes in detail the regulations governing cash
accounts.
The United States, from which our countrys security policies are
patterned,17 abound with authorities explaining the main purpose of
the above statute on margin18 requirements. This purpose is to
regulate the volume of credit flow, by way of speculative
transactions, into the securities market and redirect resources into
more productive uses. Specifically, the main objective of the law on
margins is explained in this wise:
"The main purpose of these margin provisions xxx is not to increase
the safety of security loans for lenders. Banks and brokers normally
require sufficient collateral to make themselves safe without the
help of law. Nor is the main purpose even protection of the small
speculator by making it impossible for him to spread himself too
thinly although such a result will be achieved as a byproduct of
the main purpose.
xxxxxxxxx
"The main purpose is to give a [g]overnment credit agency an
effective method of reducing the aggregate amount of the nations
credit resources which can be directed by speculation into the stock
market and out of other more desirable uses of commerce and
industry x x x."19
A related purpose of the governmental regulation of margins is
the stabilization of the economy.20 Restrictions on margin
percentages are imposed "in order to achieve the objectives of
the government with due regard for the promotion of the
economy and prevention of the use of excessive credit." 21
Otherwise stated, the margin requirements set out in the RSA are
primarily intended to achieve a macroeconomic purpose -- the
protection of the overall economy from excessive speculation in
securities. Their recognized secondary purpose is to protect small
investors.
The law places the burden of compliance with margin
requirements primarily upon the brokers and dealers. 22Sections 23
and 25 and Rule 25-1, otherwise known as the "mandatory close-
out rule,"23 clearly vest upon petitioner the obligation, not just the
right, to cancel or otherwise liquidate a customers order, if
payment is not received within three days from the date of
purchase. The word "shall" as opposed to the word "may," is
imperative and operates to impose a duty, which may be legally
enforced. For transactions subsequent to an unpaid order, the
broker should require its customer to deposit funds into the
account sufficient to cover each purchase transaction prior to its
execution. These duties are imposed upon the broker to ensure
faithful compliance with the margin requirements of the law,
which forbids a broker from extending undue credit to a customer.
It will be noted that trading on credit (or "margin trading") allows
investors to buy more securities than their cash position would
normally allow.24 Investors pay only a portion of the purchase
price of the securities; their broker advances for them the balance
of the purchase price and keeps the securities as collateral for the
advance or loan.25 Brokers take these securities/stocks to their
bank and borrow the "balance" on it, since they have to pay in full
for the traded stock. Hence, increasing margins 26 i.e., decreasing
the amounts which brokers may lend for the speculative purchase
and carrying of stocks is the most direct and effective method of
discouraging an abnormal attraction of funds into the stock
market and achieving a more balanced use of such resources.
"x x x [T]he x x x primary concern is the efficacy of security credit
controls in preventing speculative excesses that produce
dangerously large and rapid securities price rises and accelerated
declines in the prices of given securities issues and in the general
price level of securities. Losses to a given investor resulting from
price declines in thinly margined securities are not of serious
significance from a regulatory point of view. When forced sales
occur and put pressures on securities prices, however, they may
cause other forced sales and the resultant snowballing effect may
in turn have a general adverse effect upon the entire market." 27
The nature of the stock brokerage business enables brokers, not
the clients, to verify, at any time, the status of the clients
account.28 Brokers, therefore, are in the superior position to
prevent the unlawful extension of credit.29 Because of this
awareness, the law imposes upon them the primary obligation to
enforce the margin requirements.
Right is one thing; obligation is quite another. A right may not be
exercised; it may even be waived. An obligation, however, must
be performed; those who do not discharge it prudently must
necessarily face the consequence of their dereliction or
omission.30
Respondent Liable for the First,
But Not for the Subsequent Trades
76
Nonetheless, these margin requirements are applicable only to
transactions entered into by the present parties subsequent to the
initial trades of April 10 and 11, 1997. Thus, we hold that petitioner
can still collect from respondent to the extent of the difference
between the latters outstanding obligation as of April 11, 1997 less
the proceeds from the mandatory sell out of the shares pursuant to
the RSA Rules. Petitioners right to collect is justified under the
general law on obligations and contracts.31
Article 1236 (second paragraph) of the Civil Code, provides:
"Whoever pays for another may demand from the debtor what he
has paid, except that if he paid without the knowledge or against
the will of the debtor, he can recover only insofar as the payment
has been beneficial to the debtor." (Emphasis supplied)
Since a brokerage relationship is essentially a contract for the
employment of an agent, principles of contract law also govern the
broker-principal relationship.32
The right to collect cannot be denied to petitioner as the initial
transactions were entered pursuant to the instructions of
respondent. The obligation of respondent for stock transactions
made and entered into on April 10 and 11, 1997 remains
outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these
dates subsist. At that time, there was no violation of the RSA yet.
Petitioners fault arose only when it failed to: 1) liquidate the
transactions on the fourth day following the stock purchases, or on
April 14 and 15, 1997; and 2) complete its liquidation no later than
ten days thereafter, applying the proceeds thereof as payment for
respondents outstanding obligation.33
Elucidating further, since the buyer was not able to pay for the
transactions that took place on April 10 and 11, that is at T+4, the
broker was duty-bound to advance the payment to the settlement
banks without prejudice to the right of the broker to collect later
from the client.34
In securities trading, the brokers are essentially the counterparties
to the stock transactions at the Exchange. 35Since the principals of
the broker are generally undisclosed, the broker is personally liable
for the contracts thus made.36 Hence, petitioner had to advance the
payments for respondents trades. Brokers have a right to be
reimbursed for sums advanced by them with the express or implied
authorization of the principal,37 in this case, respondent.
It should be clear that Congress imposed the margin requirements
to protect the general economy, not to give the customer a free
ride at the expense of the broker. 38 Not to require respondent to
pay for his April 10 and 11 trades would put a premium on his
circumvention of the laws and would enable him to enrich himself
unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms
and conditions of its Agreement with respondent, specifically
paragraph 8 thereof, purportedly acting on the plea39 of respondent
to give him time to raise funds therefor. These stipulations, in
relation to paragraph 4,40 constituted faithful compliance with the
RSA. By failing to ensure respondents payment of his first
purchase transaction within the period prescribed by law, thereby
allowing him to make subsequent purchases, petitioner effectively
converted respondents cash account into a credit account.
However, extension or maintenance of credits on nonmargin
transactions, are specifically prohibited under Section 23(b). Thus,
petitioner was remiss in its duty and cannot be said to have come
to court with "clean hands" insofar as it intended to collect on
transactions subsequent to the initial trades of April 10 and 11,
1997.
Respondent Equally Guilty
for Subsequent Trades
On the other hand, we find respondent equally guilty in entering
into the transactions in violation of the RSA and RSA Rules. We
are not prepared to accept his self-serving assertions of being an
"innocent victim" in all the transactions. Clearly, he is not an
unsophisticated, small investor merely prodded by petitioner to
speculate on the market with the possibility of large profits with
low -- or no -- capital outlay, as he pictures himself to be. Rather,
he is an experienced and knowledgeable trader who is well versed
in the securities market and who made his own investment
decisions. In fact, in the Account Opening Form (AOF), he
indicated that he had excellent knowledge of stock investments;
had experience in stocks trading, considering that he had similar
accounts with other firms.41 Obviously, he knowingly speculated
on the market, by taking advantage of the "no-cash-out"
arrangement extended to him by petitioner.
We note that it was respondent who repeatedly asked for some
time to pay his obligations for his stock transactions. Petitioner
acceded to his requests. It is only when sued upon his
indebtedness that respondent raised as a defense the invalidity of
the transactions due to alleged violations of the RSA. It was
respondents privilege to gamble or speculate, as he apparently
did so by asking for extensions of time and refraining from giving
orders to his broker to sell, in the hope that the prices would rise.
Sustaining his argument now would amount to relieving him of the
risk and consequences of his own speculation and saddling them
on the petitioner after the result was known to be
unfavorable.42 Such contention finds no legal or even moral
justification and must necessarily be overruled. Respondents
conduct is precisely the behavior of an investor deplored by the
law.
In the final analysis, both parties acted in violation of the law and
did not come to court with clean hands with regard to transactions
subsequent to the initial trades made on April 10 and 11, 1997.
Thus, the peculiar facts of the present case bar the application of
the pari delicto rule -- expressed in the maxims "Ex dolo malo non
oritur action" and "In pari delicto potior est conditio defendentis"
-- to all the transactions entered into by the parties. The pari
delecto rule refuses legal remedy to either party to an illegal
agreement and leaves them where they were. 43In this case, the
pari delicto rule applies only to transactions entered into after the
initial trades made on April 10 and 11, 1997.
Since the initial trades are valid and subsisting obligations,
respondent is liable for them. Justice and good conscience require
all persons to satisfy their debts. Ours are courts of both law and
equity; they compel fair dealing; they do not abet clever attempts
to escape just obligations. Ineludibly, this Court would not
hesitate to grant relief in accordance with good faith and
conscience.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the
transaction (sold the stocks) on the fourth day following the
transaction (T+4) and completed its liquidation not later than ten
days following the last day for the customer to pay (effectively
T+14). Respondents outstanding obligation is therefore to be
determined by using the closing prices of the stocks purchased at
T+14 as basis.
77
We consider the foregoing formula to be just and fair under the
circumstances. When petitioner tolerated the subsequent
purchases of respondent without performing its obligation to
liquidate the first failed transaction, and without requiring
respondent to deposit cash before embarking on trading stocks any
further, petitioner, as the broker, violated the law at its own peril.
Hence, it cannot now complain for failing to obtain the full amount
of its claim for these latter transactions.
On the other hand, with respect to respondents counterclaim for
damages for having been allegedly induced by petitioner to
generate additional purchases despite his outstanding obligations,
we hold that he deserves no legal or equitable relief consistent with
our foregoing finding that he was not an innocent investor as he
presented himself to be.
Second Issue:
Jurisdiction
It is axiomatic that the allegations in the complaint, not the
defenses set up in the answer or in the motion to dismiss
determine which court has jurisdiction over an action.44 Were we to
be governed by the latter rule, the question of jurisdiction would
depend almost entirely upon the defendant.45
The instant controversy is an ordinary civil case seeking to enforce
rights arising from the Agreement (AOF) between petitioner and
respondent. It relates to acts committed by the parties in the
course of their business relationship. The purpose of the suit is to
collect respondents alleged outstanding debt to petitioner for stock
purchases.
To be sure, the RSA and its Rules are to be read into the Agreement
entered into between petitioner and respondent. Compliance with
the terms of the AOF necessarily means compliance with the laws.
Thus, to determine whether the parties fulfilled their obligations in
the AOF, this Court had to pass upon their compliance with the RSA
and its Rules. This, in no way, deprived the Securities and
Exchange Commission (SEC) of its authority to determine willful
violations of the RSA and impose appropriate sanctions therefor, as
provided under Sections 45 and 46 of the Act.
Moreover, we uphold the SEC in its Opinion, thus:
"As to the issue of jurisdiction, it is settled that a party cannot
invoke the jurisdiction of a court to secure affirmative relief against
his opponent and after obtaining or failing to obtain such relief,
repudiate or question that same jurisdiction.
"Indeed, after voluntarily submitting a cause and encountering an
adverse decision on the merits, it is too late for petitioner to
question the jurisdictional power of the court. It is not right for a
party who has affirmed and invoked the jurisdiction of a court in a
particular matter to secure an affirmative relief, to afterwards deny
that same jurisdiction to escape a penalty." 46
WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals are hereby MODIFIED. Respondent is ordered to pay
petitioner the difference between the formers outstanding
obligation as of April 11, 1997 less the proceeds from the
mandatory sell out of shares pursuant to the RSA Rules, with
interest thereon at the legal rate until fully paid.
The RTC of Makati, Branch 57 is hereby directed to make a
computation of respondents outstanding obligation using the
closing prices of the stocks at T+14 as basis -- counted from April
11, 1997 and to issue the proper order for payment if warranted.
It may hold trial and hear the parties to be able to make this
determination.
No finding as to costs in this instance.
17. G.R. No. 164197 January 25, 2012
SECURITIES AND EXCHANGE COMMISSION, Petitioner, vs.
PROSPERITY.COM, INC., Respondent.
This case involves the application of the Howey test in order to
determine if a particular transaction is an investment contract.
The Facts and the Case
Prosperity.Com, Inc. (PCI) sold computer software and hosted
websites without providing internet service. To make a profit, PCI
devised a scheme in which, for the price of US$234.00
(subsequently increased to US$294), a buyer could acquire from it
an internet website of a 15-Mega Byte (MB) capacity. At the same
time, by referring to PCI his own down-line buyers, a first-time
buyer could earn commissions, interest in real estate in the
Philippines and in the United States, and insurance coverage
worth P50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor
at least two other buyers as his own down-lines. These second tier
of buyers could in turn build up their own down-lines. For each
pair of down-lines, the buyer-sponsor received a US$92.00
commission. But referrals in a day by the buyer-sponsor should
not exceed 16 since the commissions due from excess referrals
inure to PCI, not to the buyer-sponsor.
Apparently, PCI patterned its scheme from that of Golconda
Ventures, Inc. (GVI), which company stopped operations after the
Securities and Exchange Commission (SEC) issued a cease and
desist order (CDO) against it. As it later on turned out, the same
persons who ran the affairs of GVI directed PCIs actual
operations.
In 2001, disgruntled elements of GVI filed a complaint with the
SEC against PCI, alleging that the latter had taken over GVIs
operations. After hearing,1 the SEC, through its Compliance and
Enforcement unit, issued a CDO against PCI. The SEC ruled that
PCIs scheme constitutes an Investment contract and, following
the Securities Regulations Code,2 it should have first registered
such contract or securities with the SEC.
Instead of asking the SEC to lift its CDO in accordance with
Section 64.3 of Republic Act (R.A.) 8799, PCI filed with the Court of
Appeals (CA) a petition for certiorari against the SEC with an
application for a temporary restraining order (TRO) and
preliminary injunction in CA-G.R. SP 62890. Because the CA did
not act promptly on this application for TRO, on January 31, 2001
PCI returned to the SEC and filed with it before the lapse of the
five-day period a request to lift the CDO. On the following day,
February 1, 2001, PCI moved to withdraw its petition before the
CA to avoid possible forum shopping violation.
During the pendency of PCIs action before the SEC, however, the
CA issued a TRO, enjoining the enforcement of the CDO. 3 In
response, the SEC filed with the CA a motion to dismiss the
petition on ground of forum shopping. In a Resolution, 4 the CA
initially dismissed the petition, finding PCI guilty of forum
shopping. But on PCIs motion, the CA reversed itself and
reinstated the petition.5
78
In a joint resolution,6 CA-G.R. SP 62890 was consolidated with CA-
G.R. SP 64487 that raised the same issues. On July 31, 2003 the CA
rendered a decision, granting PCIs petition and setting aside the
SEC-issued CDO.7The CA ruled that, following the Howey test, PCIs
scheme did not constitute an investment contract that needs
registration pursuant to R.A. 8799, hence, this petition.
The Issue Presented
The sole issue presented before the Court is whether or not PCIs
scheme constitutes an investment contract that requires
registration under R.A. 8799.
The Ruling of the Court
The Securities Regulation Code treats investment contracts as
"securities" that have to be registered with the SEC before they can
be distributed and sold. An investment contract is a contract,
transaction, or scheme where a person invests his money in a
common enterprise and is led to expect profits primarily from the
efforts of others.8
Apart from the definition, which the Implementing Rules and
Regulations provide, Philippine jurisprudence has so far not done
more to add to the same. Of course, the United States Supreme
Court, grappling with the problem, has on several occasions
discussed the nature of investment contracts. That courts rulings,
while not binding in the Philippines, enjoy some degree of
persuasiveness insofar as they are logical and consistent with the
countrys best interests.9
The United States Supreme Court held in Securities and Exchange
Commission v. W.J. Howey Co.10 that, for an investment contract to
exist, the following elements, referred to as the Howey test must
concur: (1) a contract, transaction, or scheme; (2) an investment of
money; (3) investment is made in a common enterprise; (4)
expectation of profits; and (5) profits arising primarily from the
efforts of others. 11 Thus, to sustain the SEC position in this case,
PCIs scheme or contract with its buyers must have all these
elements.
An example that comes to mind would be the long-term
commercial papers that large companies, like San Miguel
Corporation (SMC), offer to the public for raising funds that it needs
for expansion. When an investor buys these papers or securities, he
invests his money, together with others, in SMC with an
expectation of profits arising from the efforts of those who manage
and operate that company. SMC has to register these commercial
papers with the SEC before offering them to investors.1wphi1
Here, PCIs clients do not make such investments. They buy a
product of some value to them: an Internet website of a 15-MB
capacity. The client can use this website to enable people to have
internet access to what he has to offer to them, say, some skin
cream. The buyers of the website do not invest money in PCI that it
could use for running some business that would generate profits for
the investors. The price of US$234.00 is what the buyer pays for
the use of the website, a tangible asset that PCI creates, using its
computer facilities and technical skills.
Actually, PCI appears to be engaged in network marketing, a
scheme adopted by companies for getting people to buy their
products outside the usual retail system where products are bought
from the stores shelf. Under this scheme, adopted by most health
product distributors, the buyer can become a down-line seller. The
latter earns commissions from purchases made by new buyers
whom he refers to the person who sold the product to him. The
network goes down the line where the orders to buy come.
The commissions, interest in real estate, and insurance coverage
worth P50,000.00 are incentives to down-line sellers to bring in
other customers. These can hardly be regarded as profits from
investment of money under the Howey test.
The CA is right in ruling that the last requisite in the Howey test is
lacking in the marketing scheme that PCI has adopted. Evidently,
it is PCI that expects profit from the network marketing of its
products. PCI is correct in saying that the US$234 it gets from its
clients is merely a consideration for the sale of the websites that
it provides.
WHEREFORE, the Court DENIES the petition and AFFIRMS the
decision dated July 31, 2003 and the resolution dated June 18,
2004 of the Court of Appeals in CA-G.R. SP 62890.
18. G.R. No. 135808 October 6, 2008
SECURITIES AND EXCHANGE COMMISSION, petitioner, vs.
INTERPORT RESOURCES CORPORATION, MANUEL S. RECTO, RENE
S. VILLARICA, PELAGIO RICALDE, ANTONIO REINA, FRANCISCO
ANONUEVO, JOSEPH SY and SANTIAGO TANCHAN,
JR., respondents.
This is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the Decision,1 dated 20 August 1998,
rendered by the Court of Appeals in C.A.-G.R. SP No. 37036,
enjoining petitioner Securities and Exchange Commission (SEC)
from taking cognizance of or initiating any action against the
respondent corporation Interport Resources Corporation (IRC) and
members of its board of directors, respondents Manuel S. Recto,
Rene S. Villarica, Pelagio Ricalde, Antonio Reina, Francisco
Anonuevo, Joseph Sy and Santiago Tanchan, Jr., with respect to
Sections 8, 30 and 36 of the Revised Securities Act. In the same
Decision of the appellate court, all the proceedings taken against
the respondents, including the assailed SEC Omnibus Orders of 25
January 1995 and 30 March 1995, were declared void.
The antecedent facts of the present case are as follows.
On 6 August 1994, the Board of Directors of IRC approved a
Memorandum of Agreement with Ganda Holdings Berhad (GHB).
Under the Memorandum of Agreement, IRC acquired 100% or the
entire capital stock of Ganda Energy Holdings, Inc. (GEHI), 2 which
would own and operate a 102 megawatt (MW) gas turbine power-
generating barge. The agreement also stipulates that GEHI would
assume a five-year power purchase contract with National Power
Corporation. At that time, GEHI's power-generating barge was
97% complete and would go on-line by mid-September of 1994. In
exchange, IRC will issue to GHB 55% of the expanded capital
stock of IRC amounting to 40.88 billion shares which had a total
par value of P488.44 million.3
On the side, IRC would acquire 67% of the entire capital stock of
Philippine Racing Club, Inc. (PRCI). PRCI owns 25.724 hectares of
real estate property in Makati. Under the Agreement, GHB, a
member of the Westmont Group of Companies in Malaysia, shall
extend or arrange a loan required to pay for the proposed
acquisition by IRC of PRCI.4
IRC alleged that on 8 August 1994, a press release announcing
the approval of the agreement was sent through facsimile
transmission to the Philippine Stock Exchange and the SEC, but
that the facsimile machine of the SEC could not receive it. Upon
79
the advice of the SEC, the IRC sent the press release on the
morning of 9 August 1994.5
The SEC averred that it received reports that IRC failed to make
timely public disclosures of its negotiations with GHB and that
some of its directors, respondents herein, heavily traded IRC shares
utilizing this material insider information. On 16 August 1994, the
SEC Chairman issued a directive requiring IRC to submit to the SEC
a copy of its aforesaid Memorandum of Agreement with GHB. The
SEC Chairman further directed all principal officers of IRC to appear
at a hearing before the Brokers and Exchanges Department (BED)
of the SEC to explain IRC's failure to immediately disclose the
information as required by the Rules on Disclosure of Material
Facts.6
In compliance with the SEC Chairman's directive, the IRC sent a
letter dated 16 August 1994 to the SEC, attaching thereto copies of
the Memorandum of Agreement. Its directors, Manuel Recto, Rene
Villarica and Pelagio Ricalde, also appeared before the SEC on 22
August 1994 to explain IRC's alleged failure to immediately disclose
material information as required under the Rules on Disclosure of
Material Facts.7
On 19 September 1994, the SEC Chairman issued an Order finding
that IRC violated the Rules on Disclosure of Material Facts, in
connection with the Old Securities Act of 1936, when it failed to
make timely disclosure of its negotiations with GHB. In addition, the
SEC pronounced that some of the officers and directors of IRC
entered into transactions involving IRC shares in violation of
Section 30, in relation to Section 36, of the Revised Securities Act. 8
Respondents filed an Omnibus Motion, dated 21 September 1994,
which was superseded by an Amended Omnibus Motion, filed on 18
October 1994, alleging that the SEC had no authority to investigate
the subject matter, since under Section 8 of Presidential Decree No.
902-A,9 as amended by Presidential Decree No. 1758, jurisdiction
was conferred upon the Prosecution and Enforcement Department
(PED) of the SEC. Respondents also claimed that the SEC violated
their right to due process when it ordered that the respondents
appear before the SEC and "show cause why no administrative,
civil or criminal sanctions should be imposed on them," and, thus,
shifted the burden of proof to the respondents. Lastly, they sought
to have their cases tried jointly given the identical factual situations
surrounding the alleged violation committed by the respondents. 10
Respondents also filed a Motion for Continuance of Proceedings on
24 October 1994, wherein they moved for discontinuance of the
investigations and the proceedings before the SEC until the undue
publicity had abated and the investigating officials had become
reasonably free from prejudice and public pressure. 11
No formal hearings were conducted in connection with the
aforementioned motions, but on 25 January 1995, the SEC issued
an Omnibus Order which thus disposed of the same in this wise: 12
WHEREFORE, premised on the foregoing considerations, the
Commission resolves and hereby rules:
1. To create a special investigating panel to hear and decide the
instant case in accordance with the Rules of Practice and Procedure
Before the Prosecution and Enforcement Department (PED),
Securities and Exchange Commission, to be composed of Attys.
James K. Abugan, Medardo Devera (Prosecution and Enforcement
Department), and Jose Aquino (Brokers and Exchanges
Department), which is hereby directed to expeditiously resolve the
case by conducting continuous hearings, if possible.
2. To recall the show cause orders dated September 19, 1994
requiring the respondents to appear and show cause why no
administrative, civil or criminal sanctions should be imposed on
them.
3. To deny the Motion for Continuance for lack of merit.
Respondents filed an Omnibus Motion for Partial
Reconsideration,13 questioning the creation of the special
investigating panel to hear the case and the denial of the Motion
for Continuance. The SEC denied reconsideration in its Omnibus
Order dated 30 March 1995.14
The respondents filed a petition before the Court of Appeals
docketed as C.A.-G.R. SP No. 37036, questioning the Omnibus
Orders dated 25 January 1995 and 30 March 1995. 15 During the
proceedings before the Court of Appeals, respondents filed a
Supplemental Motion16 dated 16 May 1995, wherein they prayed
for the issuance of a writ of preliminary injunction enjoining the
SEC and its agents from investigating and proceeding with the
hearing of the case against respondents herein. On 5 May 1995,
the Court of Appeals granted their motion and issued a writ of
preliminary injunction, which effectively enjoined the SEC from
filing any criminal, civil or administrative case against the
respondents herein.17
On 23 October 1995, the SEC filed a Motion for Leave to Quash
SEC Omnibus Orders so that the case may be investigated by the
PED in accordance with the SEC Rules and Presidential Decree No.
902-A, and not by the special body whose creation the SEC had
earlier ordered.18
The Court of Appeals promulgated a Decision19 on 20 August
1998. It determined that there were no implementing rules and
regulations regarding disclosure, insider trading, or any of the
provisions of the Revised Securities Acts which the respondents
allegedly violated. The Court of Appeals likewise noted that it
found no statutory authority for the SEC to initiate and file any
suit for civil liability under Sections 8, 30 and 36 of the Revised
Securities Act. Thus, it ruled that no civil, criminal or
administrative proceedings may possibly be held against the
respondents without violating their rights to due process and
equal protection. It further resolved that absent any implementing
rules, the SEC cannot be allowed to quash the assailed Omnibus
Orders for the sole purpose of re-filing the same case against the
respondents.20
The Court of Appeals further decided that the Rules of Practice
and Procedure Before the PED, which took effect on 14 April 1990,
did not comply with the statutory requirements contained in the
Administrative Code of 1997. Section 8, Rule V of the Rules of
Practice and Procedure Before the PED affords a party the right to
be present but without the right to cross-examine witnesses
presented against him, in violation of Section 12(3), Chapter 3,
Book VII of the Administrative Code. 21
In the dispositive portion of its Decision, dated 20 August 1998,
the Court of Appeals ruled that22:
WHEREFORE, [herein petitioner SEC's] Motion for Leave to Quash
SEC Omnibus Orders is herebyDENIED. The petition for certiorari,
prohibition and mandamus is GRANTED. Consequently, all
proceedings taken against [herein respondents] in this case,
including the Omnibus Orders of January 25, 1995 and March 30,
1995 are declared null and void. The writ of preliminary injunction
is hereby made permanent and, accordingly, [SEC] is hereby
prohibited from taking cognizance or initiating any action, be they
80
civil, criminal, or administrative against [respondents] with respect
to Sections 8 (Procedure for Registration), 30 (Insider's duty to
disclose when trading) and 36 (Directors, Officers and Principal
Stockholders) in relation to Sections 46 (Administrative sanctions)
56 (Penalties) 44 (Liabilities of Controlling persons) and 45
(Investigations, injunctions and prosecution of offenses) of the
Revised Securities Act and Section 144 (Violations of the Code) of
the Corporation Code. (Emphasis provided.)
The SEC filed a Motion for Reconsideration, which the Court of
Appeals denied in a Resolution23 issued on 30 September 1998.
Hence, the present petition, which relies on the following grounds 24:
I THE COURT OF APPEALS ERRED WHEN IT DENIED PETITIONER'S
MOTION FOR LEAVE TO QUASH THE ASSAILED SEC OMNIBUS
ORDERS DATED JANUARY 25 AND MARCH 30, 1995.
II THE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS
NO STATUTORY AUTHORITY WHATSOEVER FOR PETITIONER SEC TO
INITIATE AND FILE ANY SUIT BE THEY CIVIL, CRIMINAL OR
ADMINISTRATIVE AGAINST RESPONDENT CORPORATION AND ITS
DIRECTORS WITH RESPECT TO SECTION 30 (INSIDER'S DUTY TO
DISCOLSED [sic] WHEN TRADING) AND 36 (DIRECTORS OFFICERS
AND PRINCIPAL STOCKHOLDERS) OF THE REVISED SECURITIES ACT;
AND
III THE COURT OF APPEALS ERRED WHEN IT RULED THAT RULES OF
PRACTICE AND PROSECUTION BEFORE THE PED AND THE SICD
RULES OF PROCEDURE ON ADMINISTRATIVE
ACTIONS/PROCEEDINGS25 ARE INVALID AS THEY FAIL TO COMPLY
WITH THE STATUTORY REQUIREMENTS CONTAINED IN THE
ADMINISTRATIVE CODE OF 1987.
The petition is impressed with merit.
Before discussing the merits of this case, it should be noted that
while this case was pending in this Court, Republic Act No. 8799,
otherwise known as the Securities Regulation Code, took effect on
8 August 2000. Section 8 of Presidential Decree No. 902-A, as
amended, which created the PED, was already repealed as
provided for in Section 76 of the Securities Regulation Code:
SEC. 76. Repealing Clause. - The Revised Securities Act (Batas
Pambansa Blg. 178), as amended, in its entirety, and Sections 2, 4
and 8 of Presidential Decree 902-A, as amended, are hereby
repealed. All other laws, orders, rules and regulations, or parts
thereof, inconsistent with any provision of this Code are hereby
repealed or modified accordingly.
Thus, under the new law, the PED has been abolished, and the
Securities Regulation Code has taken the place of the Revised
Securities Act.
The Court now proceeds with a discussion of the present case.
I. Sctions 8, 30 and 36 of the Revised Securities Act do not require
the enactment of implementing rules to make them binding and
effective.
The Court of Appeals ruled that absent any implementing rules for
Sections 8, 30 and 36 of the Revised Securities Act, no civil,
criminal or administrative actions can possibly be had against the
respondents without violating their right to due process and equal
protection, citing as its basis the case Yick Wo v. Hopkins.26 This is
untenable.
In the absence of any constitutional or statutory infirmity, which
may concern Sections 30 and 36 of the Revised Securities Act,
this Court upholds these provisions as legal and binding. It is well
settled that every law has in its favor the presumption of validity.
Unless and until a specific provision of the law is declared invalid
and unconstitutional, the same is valid and binding for all intents
and purposes.27 The mere absence of implementing rules cannot
effectively invalidate provisions of law, where a reasonable
construction that will support the law may be given. In People v.
Rosenthal,28 this Court ruled that:
In this connection we cannot pretermit reference to the rule that
"legislation should not be held invalid on the ground of
uncertainty if susceptible of any reasonable construction that will
support and give it effect. An Act will not be declared inoperative
and ineffectual on the ground that it furnishes no adequate means
to secure the purpose for which it is passed, if men of common
sense and reason can devise and provide the means, and all the
instrumentalities necessary for its execution are within the reach
of those intrusted therewith." (25 R.C.L., pp. 810, 811)
In Garcia v. Executive Secretary,29 the Court underlined the
importance of the presumption of validity of laws and the careful
consideration with which the judiciary strikes down as invalid acts
of the legislature:
The policy of the courts is to avoid ruling on constitutional
questions and to presume that the acts of the political
departments are valid in the absence of a clear and unmistakable
showing to the contrary. To doubt is to sustain. This presumption
is based on the doctrine of separation of powers which enjoins
upon each department a becoming respect for the acts of the
other departments. The theory is that as the joint act of Congress
and the President of the Philippines, a law has been carefully
studied and determined to be in accordance with the fundamental
law before it was finally enacted.
The necessity for vesting administrative authorities with power to
make rules and regulations is based on the impracticability of
lawmakers' providing general regulations for various and varying
details of management.30 To rule that the absence of
implementing rules can render ineffective an act of Congress,
such as the Revised Securities Act, would empower the
administrative bodies to defeat the legislative will by delaying the
implementing rules. To assert that a law is less than a law,
because it is made to depend on a future event or act, is to rob
the Legislature of the power to act wisely for the public welfare
whenever a law is passed relating to a state of affairs not yet
developed, or to things future and impossible to fully know. 31 It is
well established that administrative authorities have the power to
promulgate rules and regulations to implement a given statute
and to effectuate its policies, provided such rules and regulations
conform to the terms and standards prescribed by the statute as
well as purport to carry into effect its general policies.
Nevertheless, it is undisputable that the rules and regulations
cannot assert for themselves a more extensive prerogative or
deviate from the mandate of the statute. 32Moreover, where the
statute contains sufficient standards and an unmistakable intent,
as in the case of Sections 30 and 36 of the Revised Securities Act,
there should be no impediment to its implementation.
The reliance placed by the Court of Appeals in Yick Wo v.
Hopkins33 shows a glaring error. In the cited case, this Court found
unconstitutional an ordinance which gave the board of supervisors
authority to refuse permission to carry on laundries located in
buildings that were not made of brick and stone, because it
violated the equal protection clause and was highly discriminatory
81
and hostile to Chinese residents and not because the standards
provided therein were vague or ambiguous.
This Court does not discern any vagueness or ambiguity in Sections
30 and 36 of the Revised Securities Act, such that the acts
proscribed and/or required would not be understood by a person of
ordinary intelligence.
Section 30 of the Revised Securities Act
Section 30 of the Revised Securities Act reads:
Sec. 30. Insider's duty to disclose when trading. - (a) It shall be
unlawful for an insider to sell or buy a security of the issuer, if he
knows a fact of special significance with respect to the issuer or the
security that is not generally available, unless (1) the insider proves
that the fact is generally available or (2) if the other party to the
transaction (or his agent) is identified, (a) the insider proves that
the other party knows it, or (b) that other party in fact knows it
from the insider or otherwise.
(b) "Insider" means (1) the issuer, (2) a director or officer of, or a
person controlling, controlled by, or under common control with,
the issuer, (3) a person whose relationship or former relationship to
the issuer gives or gave him access to a fact of special significance
about the issuer or the security that is not generally available, or
(4) a person who learns such a fact from any of the foregoing
insiders as defined in this subsection, with knowledge that the
person from whom he learns the fact is such an insider.
(c) A fact is "of special significance" if (a) in addition to being
material it would be likely, on being made generally available, to
affect the market price of a security to a significant extent, or (b) a
reasonable person would consider it especially important under the
circumstances in determining his course of action in the light of
such factors as the degree of its specificity, the extent of its
difference from information generally available previously, and its
nature and reliability.
(d) This section shall apply to an insider as defined in subsection
(b) (3) hereof only to the extent that he knows of a fact of special
significance by virtue of his being an insider.
The provision explains in simple terms that the insider's misuse of
nonpublic and undisclosed information is the gravamen of illegal
conduct. The intent of the law is the protection of investors against
fraud, committed when an insider, using secret information, takes
advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from
trading the shares of his corporation. This duty to disclose or
abstain is based on two factors: first, the existence of a relationship
giving access, directly or indirectly, to information intended to be
available only for a corporate purpose and not for the personal
benefit of anyone; and second, the inherent unfairness involved
when a party takes advantage of such information knowing it is
unavailable to those with whom he is dealing.34
In the United States (U.S.), the obligation to disclose or abstain has
been traditionally imposed on corporate "insiders," particularly
officers, directors, or controlling stockholders, but that definition
has since been expanded.35 The term "insiders" now includes
persons whose relationship or former relationship to the issuer
gives or gave them access to a fact of special significance about
the issuer or the security that is not generally available, and one
who learns such a fact from an insider knowing that the person
from whom he learns the fact is such an insider. Insiders have the
duty to disclose material facts which are known to them by virtue
of their position but which are not known to persons with whom
they deal and which, if known, would affect their investment
judgment. In some cases, however, there may be valid corporate
reasons for the nondisclosure of material information. Where such
reasons exist, an issuer's decision not to make any public
disclosures is not ordinarily considered as a violation of insider
trading. At the same time, the undisclosed information should not
be improperly used for non-corporate purposes, particularly to
disadvantage other persons with whom an insider might transact,
and therefore the insider must abstain from entering into
transactions involving such securities.36
Respondents further aver that under Section 30 of the Revised
Securities Act, the SEC still needed to define the following
terms: "material fact," "reasonable person," "nature and
reliability" and "generally available." 37In determining whether or
not these terms are vague, these terms must be evaluated in the
context of Section 30 of the Revised Securties Act. To fully
understand how the terms were used in the aforementioned
provision, a discussion of what the law recognizes as a fact of
special significance is required, since the duty to disclose such
fact or to abstain from any transaction is imposed on the insider
only in connection with a fact of special significance.
Under the law, what is required to be disclosed is a fact of "special
significance" which may be (a) a material fact which would be
likely, on being made generally available, to affect the market
price of a security to a significant extent, or (b) one which a
reasonable person would consider especially important in
determining his course of action with regard to the shares of
stock.
(a) Material Fact - The concept of a "material fact" is not a new
one. As early as 1973, the Rules Requiring Disclosure of Material
Facts by Corporations Whose Securities Are Listed In Any Stock
Exchange or Registered/Licensed Under the Securities Act, issued
by the SEC on 29 January 1973, explained that "[a] fact is
material if it induces or tends to induce or otherwise affect the
sale or purchase of its securities." Thus, Section 30 of the Revised
Securities Act provides that if a fact affects the sale or purchase of
securities, as well as its price, then the insider would be required
to disclose such information to the other party to the transaction
involving the securities. This is the first definition given to a "fact
of special significance."
(b.1) Reasonable Person - The second definition given to a fact of
special significance involves the judgment of a "reasonable
person." Contrary to the allegations of the respondents, a
"reasonable person" is not a problematic legal concept that needs
to be clarified for the purpose of giving effect to a statute; rather,
it is the standard on which most of our legal doctrines stand. The
doctrine on negligence uses the discretion of the "reasonable
man" as the standard.38 A purchaser in good faith must also take
into account facts which put a "reasonable man" on his guard.39 In
addition, it is the belief of the reasonable and prudent man that
an offense was committed that sets the criteria for probable
cause for a warrant of arrest.40 This Court, in such cases,
differentiated the reasonable and prudent man from "a person
with training in the law such as a prosecutor or a judge," and
identified him as "the average man on the street," who weighs
facts and circumstances without resorting to the calibrations of
our technical rules of evidence of which his knowledge is nil.
Rather, he relies on the calculus of common sense of which all
reasonable men have in abundance.41 In the same vein, the U.S.
Supreme Court similarly determined its standards by the actual
significance in the deliberations of a "reasonable investor," when
it ruled in TSC Industries, Inc. v. Northway, Inc., 42 that the
82
determination of materiality "requires delicate assessments of the
inferences a reasonable shareholder' would draw from a given set
of facts and the significance of those inferences to him."
(b.2) Nature and Reliability - The factors affecting the second
definition of a "fact of special significance," which is of such
importance that it is expected to affect the judgment of a
reasonable man, were substantially lifted from a test of materiality
pronounced in the case In the Matter of Investors Management Co.,
Inc.43:
Among the factors to be considered in determining whether
information is material under this test are the degree of its
specificity, the extent to which it differs from information previously
publicly disseminated, and its reliability in light of its nature and
source and the circumstances under which it was received.
It can be deduced from the foregoing that the "nature and
reliability" of a significant fact in determining the course of action a
reasonable person takes regarding securities must be clearly
viewed in connection with the particular circumstances of a case.
To enumerate all circumstances that would render the "nature and
reliability" of a fact to be of special significance is close to
impossible. Nevertheless, the proper adjudicative body would
undoubtedly be able to determine if facts of a certain "nature and
reliability" can influence a reasonable person's decision to retain,
sell or buy securities, and thereafter explain and justify its factual
findings in its decision.
(c) Materiality Concept - A discussion of the "materiality concept"
would be relevant to both a material fact which would affect the
market price of a security to a significant extent and/or a fact which
a reasonable person would consider in determining his or her cause
of action with regard to the shares of stock. Significantly, what is
referred to in our laws as a fact of special significance is referred to
in the U.S. as the "materiality concept" and the latter is similarly
not provided with a precise definition. In Basic v. Levinson,44 the
U.S. Supreme Court cautioned against confining materiality to a
rigid formula, stating thus:
A bright-line rule indeed is easier to follow than a standard that
requires the exercise of judgment in the light of all the
circumstances. But ease of application alone is not an excuse for
ignoring the purposes of the Securities Act and Congress' policy
decisions. Any approach that designates a single fact or occurrence
as always determinative of an inherently fact-specific finding such
as materiality, must necessarily be overinclusive or underinclusive.
Moreover, materiality "will depend at any given time upon a
balancing of both the indicated probability that the event will occur
and the anticipated magnitude of the event in light of the totality of
the company activity." 45 In drafting the Securities Act of 1934, the
U.S. Congress put emphasis on the limitations to the definition of
materiality:
Although the Committee believes that ideally it would be desirable
to have absolute certainty in the application of the materiality
concept, it is its view that such a goal is illusory and unrealistic. The
materiality concept is judgmental in nature and it is not possible to
translate this into a numerical formula. The Committee's advice to
the [SEC] is to avoid this quest for certainty and to continue
consideration of materiality on a case-by-case basis as disclosure
problems are identified." House Committee on Interstate and
Foreign Commerce, Report of the Advisory Committee on Corporate
Disclosure to the Securities and Exchange Commission, 95th Cong.,
1st Sess., 327 (Comm.Print 1977). (Emphasis provided.) 46
(d) Generally Available - Section 30 of the Revised Securities Act
allows the insider the defense that in a transaction of securities,
where the insider is in possession of facts of special significance,
such information is "generally available" to the public. Whether
information found in a newspaper, a specialized magazine, or any
cyberspace media be sufficient for the term "generally available"
is a matter which may be adjudged given the particular
circumstances of the case. The standards cannot remain at a
standstill. A medium, which is widely used today was, at some
previous point in time, inaccessible to most. Furthermore, it would
be difficult to approximate how the rules may be applied to the
instant case, where investigation has not even been started.
Respondents failed to allege that the negotiations of their
agreement with GHB were made known to the public through any
form of media for there to be a proper appreciation of the issue
presented.
Section 36(a) of the Revised Securities Act
As regards Section 36(a) of the Revised Securities Act,
respondents claim that the term "beneficial ownership" is vague
and that it requires implementing rules to give effect to the law.
Section 36(a) of the Revised Securities Act is a straightforward
provision that imposes upon (1) a beneficial owner of more than
ten percent of any class of any equity security or (2) a director or
any officer of the issuer of such security, the obligation to submit
a statement indicating his or her ownership of the issuer's
securities and such changes in his or her ownership thereof. The
said provision reads:
Sec. 36. Directors, officers and principal stockholders. - (a) Every
person who is directly or indirectly the beneficial owner of more
than ten per centum of any [class] of any equity security which is
registered pursuant to this Act, or who is [a] director or an officer
of the issuer of such security, shall file, at the time of the
registration of such security on a securities exchange or by the
effective date of a registration statement or within ten days after
he becomes such a beneficial owner, director or officer, a
statement with the Commission and, if such security is registered
on a securities exchange, also with the exchange, of the amount
of all equity securities of such issuer of which he is the beneficial
owner, and within ten days after the close of each calendar month
thereafter, if there has been a change in such ownership during
such month, shall file with the Commission, and if such security is
registered on a securities exchange, shall also file with the
exchange, a statement indicating his ownership at the close of the
calendar month and such changes in his ownership as have
occurred during such calendar month. (Emphasis provided.)
Section 36(a) refers to the "beneficial owner." Beneficial
owner has been defined in the following manner:
[F]irst, to indicate the interest of a beneficiary in trust property
(also called "equitable ownership"); and second, to refer to the
power of a corporate shareholder to buy or sell the shares, though
the shareholder is not registered in the corporation's books as the
owner. Usually, beneficial ownership is distinguished from naked
ownership, which is the enjoyment of all the benefits and
privileges of ownership, as against possession of the bare title to
property.47
Even assuming that the term "beneficial ownership" was vague, it
would not affect respondents' case, where the respondents are
directors and/or officers of the corporation, who are specifically
required to comply with the reportorial requirements under
Section 36(a) of the Revised Securities Act. The validity of a
83
statute may be contested only by one who will sustain a direct
injury as a result of its enforcement.48
Sections 30 and 36 of the Revised Securities Act were enacted to
promote full disclosure in the securities market and prevent
unscrupulous individuals, who by their positions obtain non-public
information, from taking advantage of an uninformed public. No
individual would invest in a market which can be manipulated by a
limited number of corporate insiders. Such reaction would stifle, if
not stunt, the growth of the securities market. To avert the
occurrence of such an event, Section 30 of the Revised Securities
Act prevented the unfair use of non-public information in securities
transactions, while Section 36 allowed the SEC to monitor the
transactions entered into by corporate officers and directors as
regards the securities of their companies.
In the case In the Matter of Investor's Management Co.,49 it was
cautioned that "the broad language of the anti-fraud provisions,"
which include the provisions on insider trading, should not be
"circumscribed by fine distinctions and rigid classifications." The
ambit of anti-fraud provisions is necessarily broad so as to embrace
the infinite variety of deceptive conduct.50
In Tatad v. Secretary of Department of Energy,51 this Court brushed
aside a contention, similar to that made by the respondents in this
case, that certain words or phrases used in a statute do not set
determinate standards, declaring that:
Petitioners contend that the words "as far as practicable,"
"declining" and "stable" should have been defined in R.A. No. 8180
as they do not set determinate and determinable standards. This
stubborn submission deserves scant consideration. The dictionary
meanings of these words are well settled and cannot confuse men
of reasonable intelligence. x x x. The fear of petitioners that these
words will result in the exercise of executive discretion that will run
riot is thus groundless. To be sure, the Court has sustained the
validity of similar, if not more general standards in other cases.
Among the words or phrases that this Court upheld as valid
standards were "simplicity and dignity," 52 "public interest,"53 and
"interests of law and order." 54
The Revised Securities Act was approved on 23 February 1982. The
fact that the Full Disclosure Rules were promulgated by the SEC
only on 24 July 1996 does not render ineffective in the meantime
Section 36 of the Revised Securities Act. It is already unequivocal
that the Revised Securities Act requires full disclosure and the Full
Disclosure Rules were issued to make the enforcement of the law
more consistent, efficient and effective. It is equally reasonable to
state that the disclosure forms later provided by the SEC, do not, in
any way imply that no compliance was required before the forms
were provided. The effectivity of a statute which imposes
reportorial requirements cannot be suspended by the issuance of
specified forms, especially where compliance therewith may be
made even without such forms. The forms merely made more
efficient the processing of requirements already identified by the
statute.
For the same reason, the Court of Appeals made an evident
mistake when it ruled that no civil, criminal or administrative
actions can possibly be had against the respondents in connection
with Sections 8, 30 and 36 of the Revised Securities Act due to the
absence of implementing rules. These provisions are sufficiently
clear and complete by themselves. Their requirements are
specifically set out, and the acts which are enjoined are
determinable. In particular, Section 855 of the Revised Securities Act
is a straightforward enumeration of the procedure for the
registration of securities and the particular matters which need to
be reported in the registration statement thereof. The Decision,
dated 20 August 1998, provides no valid reason to exempt the
respondent IRC from such requirements. The lack of implementing
rules cannot suspend the effectivity of these provisions. Thus, this
Court cannot find any cogent reason to prevent the SEC from
exercising its authority to investigate respondents for violation of
Section 8 of the Revised Securities Act.
II. The right to cross-examination is not absolute and cannot be
demanded during investigative proceedings before the PED.
In its assailed Decision dated 20 August 1998, the Court of
Appeals pronounced that the PED Rules of Practice and Procedure
was invalid since Section 8, Rule V56 thereof failed to provide for
the parties' right to cross-examination, in violation of the
Administrative Code of 1987 particularly Section 12(3), Chapter 3,
Book VII thereof. This ruling is incorrect.
Firstly, Section 4, Rule I of the PED Rules of Practice and
Procedure, categorically stated that the proceedings before the
PED are summary in nature:
Section 4. Nature of Proceedings - Subject to the requirements of
due process, proceedings before the "PED" shall be summary in
nature not necessarily adhering to or following the technical rules
of evidence obtaining in the courts of law. The Rules of Court may
apply in said proceedings in suppletory character whenever
practicable.
Rule V of the PED Rules of Practice and Procedure further
specified that:
Section 5. Submission of Documents - During the preliminary
conference/hearing, or immediately thereafter, the Hearing Officer
may require the parties to simultaneously submit their respective
verified position papers accompanied by all supporting documents
and the affidavits of their witnesses, if any which shall take the
place of their direct testimony. The parties shall furnish each other
with copies of the position papers together with the supporting
affidavits and documents submitted by them.
Section 6. Determination of necessity of hearing. - Immediately
after the submission by the parties of their position papers and
supporting documents, the Hearing Officer shall determine
whether there is a need for a formal hearing. At this stage, he
may, in his discretion, and for the purpose of making such
determination, elicit pertinent facts or information, including
documentary evidence, if any, from any party or witness to
complete, as far as possible, the facts of the case. Facts or
information so elicited may serve as basis for his clarification or
simplifications of the issues in the case. Admissions and
stipulation of facts to abbreviate the proceedings shall be
encouraged.
Section 7. Disposition of Case. If the Hearing Officer finds no
necessity of further hearing after the parties have submitted their
position papers and supporting documents, he shall so inform the
parties stating the reasons therefor and shall ask them to
acknowledge the fact that they were so informed by signing the
minutes of the hearing and the case shall be deemed submitted
for resolution.
As such, the PED Rules provided that the Hearing Officer may
require the parties to submit their respective verified position
papers, together with all supporting documents and affidavits of
witnesses. A formal hearing was not mandatory; it was within the
84
discretion of the Hearing Officer to determine whether there was a
need for a formal hearing. Since, according to the foregoing rules,
the holding of a hearing before the PED is discretionary, then the
right to cross-examination could not have been demanded by
either party.
Secondly, it must be pointed out that Chapter 3, Book VII of the
Administrative Code, entitled "Adjudication," does not affect the
investigatory functions of the agencies. The law creating the PED,
Section 8 of Presidential Decree No. 902-A, as amended, defines
the authority granted to the PED, thus:
SEC. 8. The Prosecution and Enforcement Department shall have,
subject to the Commission's control and supervision, the exclusive
authority to investigate, on complaint or motu proprio, any act or
omission of the Board of Directors/Trustees of corporations, or of
partnerships, or of other associations, or of their stockholders,
officers or partners, including any fraudulent devices, schemes or
representations, in violation of any law or rules and regulations
administered and enforced by the Commission; to file and
prosecutein accordance with law and rules and regulations issued
by the Commission and in appropriate cases, the corresponding
criminal or civil case before the Commission or the proper court or
body upon prima facie finding of violation of any laws or rules and
regulations administered and enforced by the Commission; and to
perform such other powers and functions as may be provided by
law or duly delegated to it by the Commission. (Emphasis
provided.)
The law creating PED empowers it to investigate violations of the
rules and regulations promulgated by the SEC and to file and
prosecute such cases. It fails to mention any adjudicatory functions
insofar as the PED is concerned. Thus, the PED Rules of Practice
and Procedure need not comply with the provisions of the
Administrative Code on adjudication, particularly Section 12(3),
Chapter 3, Book VII.
In Cario v. Commission on Human Rights,57 this Court sets out the
distinction between investigative and adjudicative functions, thus:
"Investigate," commonly understood, means to examine, explore,
inquire or delve or probe into, research on, study. The dictionary
definition of "investigate" is "to observe or study closely; inquire
into systematically: "to search or inquire into" xx to subject to an
official probe xx: to conduct an official inquiry." The purpose of an
investigation, of course is to discover, to find out, to learn, obtain
information. Nowhere included or intimated is the notion of settling,
deciding or resolving a controversy involved in the facts inquired
into by application of the law to the facts established by the inquiry.
The legal meaning of "investigate" is essentially the same: "(t)o
follow up step by step by patient inquiry or observation. To trace or
track; to search into; to examine and inquire into with care and
accuracy; to find out by careful inquisition; examination; the taking
of evidence; a legal inquiry;" "to inquire; to make an investigation,"
"investigation" being in turn described as "(a)n administrative
function, the exercise of which ordinarily does not require a
hearing. 2 Am J2d Adm L Sec. 257; xx an inquiry, judicial or
otherwise, for the discovery and collection of facts concerning a
certain matter or matters."
"Adjudicate," commonly or popularly understood, means to
adjudge, arbitrate, judge, decide, determine, resolve, rule on,
settle. The dictionary defines the term as "to settle finally (the
rights and duties of parties to a court case) on the merits of issues
raised: xx to pass judgment on: settle judicially: xx act as judge."
And "adjudge" means "to decide or rule upon as a judge or with
judicial or quasi-judicial powers: xx to award or grant judicially in
a case of controversy x x x."
In a legal sense, "adjudicate" means: "To settle in the exercise of
judicial authority. To determine finally. Synonymous with adjudge
in its strictest sense;" and "adjudge" means: "To pass on judicially,
to decide, settle, or decree, or to sentence or condemn. x x x
Implies a judicial determination of a fact, and the entry of a
judgment."
There is no merit to the respondent's averment that the sections
under Chapter 3, Book VII of the Administrative Code, do not
distinguish between investigative and adjudicatory functions.
Chapter 3, Book VII of the Administrative Code, is unequivocally
entitled "Adjudication."
Respondents insist that the PED performs adjudicative functions,
as enumerated under Section 1(h) and (j), Rule II; and Section
2(4), Rule VII of the PED Rules of Practice and Procedure:
Section 1. Authority of the Prosecution and Enforcement
Department - Pursuant to Presidential Decree No. 902-A, as
amended by Presidential Decree No. 1758, the Prosecution and
Enforcement Department is primarily charged with the following:
xxxx
(h) Suspends or revokes, after proper notice and hearing in
accordance with these Rules, the franchise or certificate of
registration of corporations, partnerships or associations, upon
any of the following grounds:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation can do or
is doing to the great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which would amount
to a grave violation of its franchise;
xxxx
(j) Imposes charges, fines and fees, which by law, it is authorized
to collect;
xxxx
Section 2. Powers of the Hearing Officer. The Hearing Officer shall
have the following powers:
xxxx
4. To cite and/or declare any person in direct or indirect contempt
in accordance with pertinent provisions of the Rules of Court.
Even assuming that these are adjudicative functions, the PED, in
the instant case, exercised its investigative powers; thus,
respondents do not have the requisite standing to assail the
validity of the rules on adjudication. A valid source of a statute or
a rule can only be contested by one who will sustain a direct
injury as a result of its enforcement.58 In the instant case,
respondents are only being investigated by the PED for their
alleged failure to disclose their negotiations with GHB and the
transactions entered into by its directors involving IRC shares. The
respondents have not shown themselves to be under any
imminent danger of sustaining any personal injury attributable to
the exercise of adjudicative functions by the SEC. They are not
85
being or about to be subjected by the PED to charges, fees or fines;
to citations for contempt; or to the cancellation of their certificate
of registration under Section 1(h), Rule II of the PED Rules of
Practice and Procedure.
To repeat, the only powers which the PED was likely to exercise
over the respondents were investigative in nature, to wit:
Section 1. Authority of the Prosecution and Enforcement
Department - Pursuant to Presidential Decree No. 902-A, as
amended by Presidential Decree No. 1758, the Prosecution and
Enforcement Department is primarily charged with the following:
xxxx
b. Initiates proper investigation of corporations and partnerships or
persons, their books, records and other properties and assets,
involving their business transactions, in coordination with the
operating department involved;
xxxx
e. Files and prosecutes civil or criminal cases before the
Commission and other courts of justice involving violations of laws
and decrees enforced by the Commission and the rules and
regulations promulgated thereunder;
f. Prosecutes erring directors, officers and stockholders of
corporations and partnerships, commercial paper issuers or
persons in accordance with the pertinent rules on procedures;
The authority granted to the PED under Section 1(b), (e), and (f),
Rule II of the PED Rules of Practice and Procedure, need not comply
with Section 12, Chapter 3, Rule VII of the Administrative Code,
which affects only the adjudicatory functions of administrative
bodies. Thus, the PED would still be able to investigate the
respondents under its rules for their alleged failure to disclose their
negotiations with GHB and the transactions entered into by its
directors involving IRC shares.
This is not to say that administrative bodies performing
adjudicative functions are required to strictly comply with the
requirements of Chapter 3, Rule VII of the Administrative Code,
particularly, the right to cross-examination. It should be noted that
under Section 2.2 of Executive Order No. 26, issued on 7 October
1992, abbreviated proceedings are prescribed in the disposition of
administrative cases:
2. Abbreviation of Proceedings. All administrative agencies are
hereby directed to adopt and include in their respective Rules of
Procedure the following provisions:
xxxx
2.2 Rules adopting, unless otherwise provided by special laws and
without prejudice to Section 12, Chapter 3, Book VII of the
Administrative Code of 1987, the mandatory use of affidavits in lieu
of direct testimonies and the preferred use of depositions whenever
practicable and convenient.
As a consequence, in proceedings before administrative or quasi-
judicial bodies, such as the National Labor Relations Commission
and the Philippine Overseas Employment Agency, created under
laws which authorize summary proceedings, decisions may be
reached on the basis of position papers or other documentary
evidence only. They are not bound by technical rules of procedure
and evidence. 59 In fact, the hearings before such agencies do not
connote full adversarial proceedings.60 Thus, it is not necessary
for the rules to require affiants to appear and testify and to be
cross-examined by the counsel of the adverse party. To require
otherwise would negate the summary nature of the administrative
or quasi-judicial proceedings.61 In Atlas Consolidated Mining and
Development Corporation v. Factoran, Jr.,62 this Court stated that:
[I]t is sufficient that administrative findings of fact are supported
by evidence, or negatively stated, it is sufficient that findings of
fact are not shown to be unsupported by evidence. Substantial
evidence is all that is needed to support an administrative finding
of fact, and substantial evidence is "such relevant evidence as a
reasonable mind might accept as adequate to support a
conclusion."
In order to comply with the requirements of due process, what is
required, among other things, is that every litigant be given
reasonable opportunity to appear and defend his right and to
introduce relevant evidence in his favor.63
III. The Securities Regulations Code did not repeal Sections 8, 30
and 36 of the Revised Securities Act since said provisions were
reenacted in the new law.
The Securities Regulations Code absolutely repealed the Revised
Securities Act. While the absolute repeal of a law generally
deprives a court of its authority to penalize the person charged
with the violation of the old law prior to its appeal, an exception to
this rule comes about when the repealing law punishes the act
previously penalized under the old law. The Court, in Benedicto v.
Court of Appeals, sets down the rules in such instances:64
As a rule, an absolute repeal of a penal law has the effect of
depriving the court of its authority to punish a person charged
with violation of the old law prior to its repeal. This is because an
unqualified repeal of a penal law constitutes a legislative act of
rendering legal what had been previously declared as illegal, such
that the offense no longer exists and it is as if the person who
committed it never did so. There are, however, exceptions to the
rule. One is the inclusion of a saving clause in the repealing
statute that provides that the repeal shall have no effect on
pending actions. Another exception is where the repealing
act reenacts the former statute and punishes the act previously
penalized under the old law. In such instance, the act committed
before the reenactment continues to be an offense in the statute
books and pending cases are not affected, regardless of whether
the new penalty to be imposed is more favorable to the accused.
(Emphasis provided.)
In the present case, a criminal case may still be filed against the
respondents despite the repeal, since Sections
8,65 12,66 26,67 2768 and 2369 of the Securities Regulations Code
impose duties that are substantially similar to Sections 8, 30 and
36 of the repealed Revised Securities Act.
Section 8 of the Revised Securities Act, which previously provided
for the registration of securities and the information that needs to
be included in the registration statements, was expanded under
Section 12, in connection with Section 8 of the Securities
Regulations Code. Further details of the information required to be
disclosed by the registrant are explained in the Amended
Implementing Rules and Regulations of the Securities Regulations
Code, issued on 30 December 2003, particularly Sections 8 and
12 thereof.
Section 30 of the Revised Securities Act has been reenacted as
Section 27 of the Securities Regulations Code, still penalizing an
86
insider's misuse of material and non-public information about the
issuer, for the purpose of protecting public investors. Section 26 of
the Securities Regulations Code even widens the coverage of
punishable acts, which intend to defraud public investors through
various devices, misinformation and omissions.
Section 23 of the Securities Regulations Code was practically lifted
from Section 36(a) of the Revised Securities Act. Both provisions
impose upon (1) a beneficial owner of more than ten percent of any
class of any equity security or (2) a director or any officer of the
issuer of such security, the obligation to submit a statement
indicating his or her ownership of the issuer's securities and such
changes in his or her ownership thereof.
Clearly, the legislature had not intended to deprive the courts of
their authority to punish a person charged with violation of the old
law that was repealed; in this case, the Revised Securities Act.
IV. The SEC retained the jurisdiction to investigate violations of the
Revised Securities Act, reenacted in the Securities Regulations
Code, despite the abolition of the PED.
Section 53 of the Securities Regulations Code clearly provides that
criminal complaints for violations of rules and regulations enforced
or administered by the SEC shall be referred to the Department of
Justice (DOJ) for preliminary investigation, while the SEC
nevertheless retains limited investigatory powers. 70 Additionally,
the SEC may still impose the appropriate administrative sanctions
under Section 54 of the aforementioned law.71
In Morato v. Court of Appeals,72 the cases therein were still pending
before the PED for investigation and the SEC for resolution when
the Securities Regulations Code was enacted. The case before the
SEC involved an intra-corporate dispute, while the subject matter of
the other case investigated by the PED involved the schemes,
devices, and violations of pertinent rules and laws of the company's
board of directors. The enactment of the Securities Regulations
Code did not result in the dismissal of the cases; rather, this Court
ordered the transfer of one case to the proper regional trial court
and the SEC to continue with the investigation of the other case.
The case at bar is comparable to the aforecited case. In this case,
the SEC already commenced the investigative proceedings against
respondents as early as 1994. Respondents were called to appear
before the SEC and explain their failure to disclose pertinent
information on 14 August 1994. Thereafter, the SEC Chairman,
having already made initial findings that respondents failed to
make timely disclosures of their negotiations with GHB, ordered a
special investigating panel to hear the case. The investigative
proceedings were interrupted only by the writ of preliminary
injunction issued by the Court of Appeals, which became
permanent by virtue of the Decision, dated 20 August 1998, in C.A.-
G.R. SP No. 37036. During the pendency of this case, the Securities
Regulations Code repealed the Revised Securities Act. As in Morato
v. Court of Appeals, the repeal cannot deprive SEC of its jurisdiction
to continue investigating the case; or the regional trial court, to
hear any case which may later be filed against the respondents.
V. The instant case has not yet prescribed.
Respondents have taken the position that this case is moot and
academic, since any criminal complaint that may be filed against
them resulting from the SEC's investigation of this case has already
prescribed.73 They point out that the prescription period applicable
to offenses punished under special laws, such as violations of the
Revised Securities Act, is twelve years under Section 1 of Act No.
3326, as amended by Act No. 3585 and Act No. 3763, entitled "An
Act to Establish Periods of Prescription for Violations Penalized by
Special Acts and Municipal Ordinances and to Provide When
Prescription Shall Begin to Act." 74 Since the offense was
committed in 1994, they reasoned that prescription set in as early
as 2006 and rendered this case moot. Such position, however, is
incongruent with the factual circumstances of this case, as well as
the applicable laws and jurisprudence.
It is an established doctrine that a preliminary investigation
interrupts the prescription period.75 A preliminary investigation is
essentially a determination whether an offense has been
committed, and whether there is probable cause for the accused
to have committed an offense:
A preliminary investigation is merely inquisitorial, and it is often
the only means of discovering the persons who may be
reasonably charged with a crime, to enable the fiscal to prepare
the complaint or information. It is not a trial of the case on the
merits and has no purpose except that of determining whether a
crime has been committed or whether there is probable cause to
believe that the accused is guilty thereof.76
Under Section 45 of the Revised Securities Act, which is entitled
Investigations, Injunctions and Prosecution of Offenses, the
Securities Exchange Commission (SEC) has the authority to "make
such investigations as it deems necessary to determine whether
any person has violated or is about to violate any provision of this
Act XXX." After a finding that a person has violated the Revised
Securities Act, the SEC may refer the case to the DOJ for
preliminary investigation and prosecution.
While the SEC investigation serves the same purpose and entails
substantially similar duties as the preliminary investigation
conducted by the DOJ, this process cannot simply be disregarded.
In Baviera v. Paglinawan,77 this Court enunciated that a criminal
complaint is first filed with the SEC, which determines the
existence of probable cause, before a preliminary investigation
can be commenced by the DOJ. In the aforecited case, the
complaint filed directly with the DOJ was dismissed on the ground
that it should have been filed first with the SEC. Similarly, the
offense was a violation of the Securities Regulations Code,
wherein the procedure for criminal prosecution was reproduced
from Section 45 of the Revised Securities Act. 78 This Court
affirmed the dismissal, which it explained thus:
The Court of Appeals held that under the above provision, a
criminal complaint for violation of any law or rule administered by
the SEC must first be filed with the latter. If the Commission finds
that there is probable cause, then it should refer the case to the
DOJ. Since petitioner failed to comply with the foregoing
procedural requirement, the DOJ did not gravely abuse its
discretion in dismissing his complaint in I.S. No. 2004-229.
A criminal charge for violation of the Securities Regulation Code is
a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under
the doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise
of sound administrative discretion requiring the specialized
knowledge and expertise of said administrative tribunal to
determine technical and intricate matters of fact. The Securities
Regulation Code is a special law. Its enforcement is particularly
vested in the SEC. Hence, all complaints for any violation of the
Code and its implementing rules and regulations should be filed
with the SEC. Where the complaint is criminal in nature, the SEC
shall indorse the complaint to the DOJ for preliminary
87
investigation and prosecution as provided in Section 53.1 earlier
quoted.
We thus agree with the Court of Appeals that petitioner committed
a fatal procedural lapse when he filed his criminal complaint
directly with the DOJ. Verily, no grave abuse of discretion can be
ascribed to the DOJ in dismissing petitioner's complaint.
The said case puts in perspective the nature of the investigation
undertaken by the SEC, which is a requisite before a criminal case
may be referred to the DOJ. The Court declared that it is imperative
that the criminal prosecution be initiated before the SEC, the
administrative agency with the special competence.
It should be noted that the SEC started investigative proceedings
against the respondents as early as 1994. This investigation
effectively interrupted the prescription period. However, said
proceedings were disrupted by a preliminary injunction issued by
the Court of Appeals on 5 May 1995, which effectively enjoined the
SEC from filing any criminal, civil, or administrative case against
the respondents herein.79 Thereafter, on 20 August 1998, the
appellate court issued the assailed Decision in C.A. G.R. SP. No.
37036 ordering that the writ of injunction be made permanent and
prohibiting the SEC from taking cognizance of and initiating any
action against herein respondents. The SEC was bound to comply
with the aforementioned writ of preliminary injunction and writ of
injunction issued by the Court of Appeals enjoining it from
continuing with the investigation of respondents for 12 years. Any
deviation by the SEC from the injunctive writs would be sufficient
ground for contempt. Moreover, any step the SEC takes in defiance
of such orders will be considered void for having been taken
against an order issued by a court of competent jurisdiction.
An investigation of the case by any other administrative or judicial
body would likewise be impossible pending the injunctive writs
issued by the Court of Appeals. Given the ruling of this Court
in Baviera v. Paglinawan,80 the DOJ itself could not have taken
cognizance of the case and conducted its preliminary investigation
without a prior determination of probable cause by the SEC. Thus,
even presuming that the DOJ was not enjoined by the Court of
Appeals from conducting a preliminary investigation, any
preliminary investigation conducted by the DOJ would have been a
futile effort since the SEC had only started with its investigation
when respondents themselves applied for and were granted an
injunction by the Court of Appeals.
Moreover, the DOJ could not have conducted a preliminary
investigation or filed a criminal case against the respondents
during the time that issues on the effectivity of Sections 8, 30 and
36 of the Revised Securities Act and the PED Rules of Practice and
Procedure were still pending before the Court of Appeals. After the
Court of Appeals declared the aforementioned statutory and
regulatory provisions invalid and, thus, no civil, criminal or
administrative case may be filed against the respondents for
violations thereof, the DOJ would have been at a loss, as there was
no statutory provision which respondents could be accused of
violating.
Accordingly, it is only after this Court corrects the erroneous ruling
of the Court of Appeals in its Decision dated 20 August 1998 that
either the SEC or DOJ may properly conduct any kind of
investigation against the respondents for violations of Sections 8,
30 and 36 of the Revised Securities Act. Until then, the prescription
period is deemed interrupted.
To reiterate, the SEC must first conduct its investigations and make
a finding of probable cause in accordance with the doctrine
pronounced in Baviera v. Paglinawan.81 In this case, the DOJ was
precluded from initiating a preliminary investigation since the SEC
was halted by the Court of Appeals from continuing with its
investigation. Such a situation leaves the prosecution of the case
at a standstill, and neither the SEC nor the DOJ can conduct any
investigation against the respondents, who, in the first place,
sought the injunction to prevent their prosecution. All that the SEC
could do in order to break the impasse was to have the Decision
of the Court of Appeals overturned, as it had done at the earliest
opportunity in this case. Therefore, the period during which the
SEC was prevented from continuing with its investigation should
not be counted against it. The law on the prescription period was
never intended to put the prosecuting bodies in an impossible
bind in which the prosecution of a case would be placed way
beyond their control; for even if they avail themselves of the
proper remedy, they would still be barred from investigating and
prosecuting the case.
Indubitably, the prescription period is interrupted by commencing
the proceedings for the prosecution of the accused. In criminal
cases, this is accomplished by initiating the preliminary
investigation. The prosecution of offenses punishable under the
Revised Securities Act and the Securities Regulations Code is
initiated by the filing of a complaint with the SEC or by an
investigation conducted by the SEC motu proprio. Only after a
finding of probable cause is made by the SEC can the DOJ
instigate a preliminary investigation. Thus, the investigation that
was commenced by the SEC in 1995, soon after it discovered the
questionable acts of the respondents, effectively interrupted the
prescription period. Given the nature and purpose of the
investigation conducted by the SEC, which is equivalent to the
preliminary investigation conducted by the DOJ in criminal cases,
such investigation would surely interrupt the prescription period.
VI. The Court of Appeals was justified in denying SEC's Motion for
Leave to Quash SEC Omnibus Orders dated 23 October 1995.
The SEC avers that the Court of Appeals erred when it denied its
Motion for Leave to Quash SEC Omnibus Orders, dated 23 October
1995, in the light of its admission that the PED had the sole
authority to investigate the present case. On this matter, this
Court cannot agree with the SEC.
In the assailed decision, the Court of Appeals denied the SEC's
Motion for Leave to Quash SEC Omnibus Orders, since it found
other issues that were more important than whether or not the
PED was the proper body to investigate the matter. Its refusal was
premised on its earlier finding that no criminal, civil, or
administrative case may be filed against the respondents under
Sections 8, 30 and 36 of the Revised Securities Act, due to the
absence of any implementing rules and regulations. Moreover, the
validity of the PED Rules on Practice and Procedure was also
raised as an issue. The Court of Appeals, thus, reasoned that if the
quashal of the orders was granted, then it would be deprived of
the opportunity to determine the validity of the aforementioned
rules and statutory provisions. In addition, the SEC would merely
pursue the same case without the Court of Appeals having
determined whether or not it may do so in accordance with due
process requirements. Absent a determination of whether the SEC
may file a case against the respondents based on the assailed
provisions of the Revised Securities Act, it would have been
improper for the Court of Appeals to grant the SEC's Motion for
Leave to Quash SEC Omnibus Orders.
In all, this Court rules that no implementing rules were needed to
render effective Sections 8, 30 and 36 of the Revised Securities
Act; nor was the PED Rules of Practice and Procedure invalid, prior
88
to the enactment of the Securities Regulations Code, for failure to
provide parties with the right to cross-examine the witnesses
presented against them. Thus, the respondents may be
investigated by the appropriate authority under the proper rules of
procedure of the Securities Regulations Code for violations of
Sections 8, 30, and 36 of the Revised Securities Act. 82
IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This
Court hereby REVERSES the assailed Decision of the Court of
Appeals promulgated on 20 August 1998 in CA-G.R. SP No. 37036
and LIFTS the permanent injunction issued pursuant thereto. This
Court further DECLARES that the investigation of the respondents
for violations of Sections 8, 30 and 36 of the Revised Securities Act
may be undertaken by the proper authorities in accordance with
the Securities Regulations Code. No costs.
19. G.R. No. 180064 September 16, 2013
JOSE U. PUA and BENJAMIN HANBEN U. PUA, Petitioners, vs.
CITIBANK, N. A., Respondent.
Assailed in this petition for review on certiorari1 are the
Decision2 dated May 21, 2007 and Resolution3 dated October 16,
2007 of the Court of Appeals (CA) in CA-G.R. SP No. 79297, which
reversed and set aside the Orders dated May 14, 2003 4 and July 16,
20035 of the Regional Trial Court of Cauayan City, Isabela, Branch
19 (RTC), dismissing petitioners Jose(Jose) and Benjamin Hanben U.
Pua's (petitioners) complaint against respondent Citibank, N. A.
(respondent).
The Facts
On December 2, 2002, petitioners filed before the RTC a
Complaint6 for declaration of nullity of contract and sums of money
with damages against respondent,7 docketed as Civil Case No. 19-
1159.8 In their complaint, petitioners alleged that they had been
depositors of Citibank Binondo Branch (Citibank Binondo) since
1996. Sometime in 1999, Guada Ang, Citibank Binondos Branch
Manager, invited Jose to a dinner party at the Manila Hotel where
he was introduced to several officers and employees of Citibank
Hongkong Branch (Citibank Hongkong).9 A few months after,
Chingyee Yau (Yau), Vice-President of Citibank Hongkong, came to
the Philippines to sell securities to Jose. They averred that Yau
required Jose to open an account with Citibank Hongkong as it is
one of the conditions for the sale of the aforementioned
securities.10 After opening such account, Yau offered and sold to
petitioners numerous securities 11 issued by various public limited
companies established in Jersey, Channel I sands. The offer, sale,
and signing of the subscription agreements of said securities were
all made and perfected at Citibank Binondo in the presence of its
officers and employees.12 Later on, petitioners discovered that the
securities sold to them were not registered with the Securities and
Exchange Commission (SEC)and that the terms and conditions
covering the subscription were not likewise submitted to the SEC
for evaluation, approval, and registration.13 Asserting that
respondents actions are in violation of Republic Act No.8799,
entitled the "Securities Regulation Code" (SRC), they assailed the
validity of the subscription agreements and the terms and
conditions thereof for being contrary to law and/or public policy. 14
For its part, respondent filed a motion to dismiss 15 alleging, inter
alia, that petitioners complaint should be dismissed outright for
violation of the doctrine of primary jurisdiction. It pointed out that
the merits of the case would largely depend on the issue of
whether or not there was a violation of the SRC, in particular,
whether or not there was a sale of unregistered securities. In this
regard, respondent contended that the SRC conferred upon the SEC
jurisdiction to investigate compliance with its provisions and thus,
petitioners complaint should be first filed with the SEC and not
directly before the RTC.16
Petitioners opposed17 respondents motion to dismiss, maintaining
that the RTC has jurisdiction over their complaint. They asserted
that Section 63of the SRC expressly provides that the RTC has
exclusive jurisdiction to hear and decide all suits to recover
damages pursuant to Sections 56 to 61 of the same law. 18
The RTC Ruling
In an Order19 dated May 14, 2003, the RTC denied respondents
motion to dismiss. It noted that petitioners complaint is for
declaration of nullity of contract and sums of money with
damages and, as such, it has jurisdiction to hear and decide upon
the case even if it involves the alleged sale of securities. It
ratiocinated that the legal questions or issues arising from
petitioners causes of action against respondent are more
appropriate for the judiciary than for an administrative agency to
resolve.20
Respondent filed an omnibus motion21 praying, among others, for
there consideration of the aforesaid ruling, which petitioners, in
turn, opposed.22 In an Order23 dated July 16, 2003, the RTC denied
respondents omnibus motion with respect to its prayer for
reconsideration. Dissatisfied, respondent filed a petition for
certiorari before the CA.24
The CA Ruling
In a Decision25 dated May 21, 2007, the CA reversed and set aside
the RTCs Orders and dismissed petitioners complaint for violation
of the doctrine of primary jurisdiction. The CA agreed with
respondents contention that since the case would largely depend
on the issue of whether or not the latter violated the provisions of
the SRC, the matter is within the special competence or
knowledge of the SEC. Citing the case of Baviera v.
Paglinawan26(Baviera), the CA opined that all complaints involving
violations of the SRC should be first filed before the SEC. 27
Aggrieved, petitioners moved for reconsideration,28 which was,
however, denied by the CA in a Resolution29dated October 16,
2007.Hence, this petition.
The Issue Before the Court
The essential issue in this case is whether or not petitioners
action falls within the primary jurisdiction of the SEC.
Petitioners reiterate their original position that the SRC itself
provides that civil cases for damages arising from violations of the
same law fall within the exclusive jurisdiction of the regional trial
courts.30
On the contrary, respondent maintains that since petitioners
complaint would necessarily touch on the issue of whether or not
the former violated certain provisions of the SRC, then the said
complaint should have been first filed with the SEC which has the
technical competence to resolve such dispute. 31
The Courts Ruling
The petition is meritorious.
At the outset, the Court observes that respondent erroneously
relied on the Baviera ruling to support its position that all
complaints involving purported violations of the SRC should be
89
first referred to the SEC. A careful reading of the Baviera case
would reveal that the same involves a criminal prosecution of a
purported violator of the SRC, and not a civil suit such as the case
at bar. The pertinent portions of the Baviera ruling thus read:
A criminal charge for violation of the Securities Regulation Code is a
specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under
the doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise
of sound administrative discretion requiring the specialized
knowledge and expertise of said administrative tribunal to
determine technical and intricate matters of fact. The Securities
Regulation Code is a special law. Its enforcement is particularly
vested in the SEC.
Hence, all complaints for any violation of the Code and its
implementing rules and regulations should be filed with the SEC.
Where the complaint is criminal in nature, the SEC shall indorse the
complaint to the DOJ for preliminary investigation and prosecution
as provided in Section 53.1 earlier quoted.
We thus agree with the Court of Appeals that petitioner committed
a fatal procedural lapse when he filed his criminal complaint
directly with the DOJ. Verily, no grave abuse of discretion can be
ascribed to the DOJ in dismissing petitioners
complaint.32 (Emphases and underscoring supplied)
Records show that petitioners complaint constitutes a civil suit for
declaration of nullity of contract and sums of money with damages,
which stemmed from respondents alleged sale of unregistered
securities, in violation of the various provisions of the SRC and not
a criminal case such as that involved in Baviera.
In this light, when the Court ruled in Baviera that "all complaints for
any violation of the [SRC] x x x should be filed with the SEC," 33 it
should be construed as to apply only to criminal and not to civil
suits such as petitioners complaint.
Moreover, it is a fundamental rule in procedural law that jurisdiction
is conferred by law;34 it cannot be inferred but must be explicitly
stated therein. Thus, when Congress confers exclusive jurisdiction
to a judicial or quasi-judicial entity over certain matters by law,
this, absent any other indication to the contrary, evinces its intent
to exclude other bodies from exercising the same.
It is apparent that the SRC provisions governing criminal suits are
separate and distinct from those which pertain to civil suits. On the
one hand, Section 53 of the SRC governs criminal suits involving
violations of the said law, viz.:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses.
53.1. The Commission may, in its discretion, make such
investigations as it deems necessary to determine whether any
person has violated or is about to violate any provision of this Code,
any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency, other
self-regulatory organization, and may require or permit any person
to file with it a statement in writing, under oath or otherwise, as the
Commission shall determine, as to all facts and circumstances
concerning the matter to be investigated. The Commission may
publish information concerning any such violations, and to
investigate any fact, condition, practice or matter which it may
deem necessary or proper to aid in the enforcement of the
provisions of this Code, in the prescribing of rules and regulations
thereunder, or in securing information to serve as a basis for
recommending further legislation concerning the matters to which
this Code relates: Provided, however, That any person requested
or subpoenaed to produce documents or testify in any
investigation shall simultaneously be notified in writing of the
purpose of such investigation: Provided, further, That all criminal
complaints for violations of this Code, and the implementing rules
and regulations enforced or administered by the Commission shall
be referred to the Department of Justice for preliminary
investigation and prosecution before the proper court:
Provided, furthermore, That in instances where the law allows
independent civil or criminal proceedings of violations arising
from the same act, the Commission shall take appropriate action
to implement the same: Provided, finally, That the investigation,
prosecution, and trial of such cases shall be given priority.
On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of
the SRC pertain to civil suits involving violations of the same law.
Among these, the applicable provisions to this case are Sections
57.1 and 63.1 of the SRC which provide:
SEC. 57. Civil Liabilities Arising in Connection With Prospectus,
Communications and Reports.
57.1. Any person who:
(a) Offers to sell or sells a security in violation of Chapter III;
or
(b) Offers to sell or sells a security, whether or not exempted by
the provisions of this Code, by the use of any means or
instruments of transportation or communication, by means of a
prospectus or other written or oral communication, which includes
an untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading (the
purchaser not knowing of such untruth or omission), and who
shall fail in the burden of proof that he did not know, and in the
exercise of reasonable care could not have known, of such untruth
or omission, shall be liable to the person purchasing such security
from him, who may sue to recover the consideration paid for such
security with interest thereon, less the amount of any income
received thereon, upon the tender of such security, or for
damages if he no longer owns the security.
xxxx
SEC. 63. Amount of Damages to be Awarded. 63.1. All suits to
recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61
shall be brought before the Regional Trial Court which shall have
exclusive jurisdiction to hear and decide such suits. The Court is
hereby authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.
x x x x (Emphases and underscoring supplied)
Based on the foregoing, it is clear that cases falling under Section
57of the SRC, which pertain to civil liabilities arising from
violations of the requirements for offers to sell or the sale of
securities, as well as other civil suits under Sections 56, 58, 59,
60, and 61 of the SRC shall be exclusively brought before the
regional trial courts. It is a well-settled rule in statutory
construction that the term "shall" is a word of command, and one
which has always or which must be given a compulsory meaning,
and it is generally imperative or mandatory.35 Likewise, it is
90
equally revelatory that no SRC provision of similar import is found
in its sections governing criminal suits; quite the contrary, the SRC
states that criminal cases arising from violations of its provisions
should be first referred to the SEC.1wphi1
Therefore, based on these considerations, it stands to reason that
civil suits falling under the SRC are under the exclusive original
jurisdiction of the regional trial courts and hence, need not be first
filed before the SEC, unlike criminal cases wherein the latter body
exercises primary jurisdiction.
All told, petitioners' filing of a civil suit against respondent for
purported violations of the SRC was properly filed directly before
the RTC.
WHEREFORE, the petition is GRANTED. Accordingly, the Court of
Appeals' Decision dated May 21, 2007 and Resolution dated
October 16,2007 in CA-G.R. SP No. 79297 are hereby REVERSED
and SET ASIDE. Let Civil Case No. 19-1159 be REINSTATED and
REMANDED to the Regional Trial Court of Cauayan City, Isabela,
Branch 19 for further proceedings.
20. G.R. No. 157479 November 24, 2010
PHILIP TURNER and ELNORA TURNER, Petitioners, vs. LORENZO
SHIPPING CORPORATION, Respondent.
This case concerns the right of dissenting stockholders to demand
payment of the value of their shareholdings.
In the stockholders suit to recover the value of their shareholdings
from the corporation, the Regional Trial Court (RTC) upheld the
dissenting stockholders, herein petitioners, and ordered the
corporation, herein respondent, to pay. Execution was partially
carried out against the respondent. On the respondents petition for
certiorari, however, the Court of Appeals (CA) corrected the RTC
and dismissed the petitioners suit on the ground that their cause
of action for collection had not yet accrued due to the lack of
unrestricted retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the
CAs decision promulgated on March 4, 2003 in C.A.-G.R. SP No.
74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S.
Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a
domestic corporation engaged primarily in cargo shipping
activities. In June 1999, the respondent decided to amend its
articles of incorporation to remove the stockholders pre-emptive
rights to newly issued shares of stock. Feeling that the corporate
move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment
of their shares at the rate of P2.276/share based on the book value
of the shares, or a total of P2,298,760.00.
The respondent found the fair value of the shares demanded by the
petitioners unacceptable. It insisted that the market value on the
date before the action to remove the pre-emptive right was taken
should be the value, orP0.41/share (or a total of P414,100.00),
considering that its shares were listed in the Philippine Stock
Exchange, and that the payment could be made only if the
respondent had unrestricted retained earnings in its books to cover
the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to
constitute an appraisal committee pursuant to Section 82 of the
Corporation Code, each of them nominating a representative, who
together then nominated the third member who would be
chairman of the appraisal committee. Thus, the appraisal
committee came to be made up of Reynaldo Yatco, the
petitioners nominee; Atty. Antonio Acyatan, the respondents
nominee; and Leo Anoche of the Asian Appraisal Company, Inc.,
the third member/chairman.
On October 27, 2000, the appraisal committee reported its
valuation of P2.54/share, for an aggregate value ofP2,565,400.00
for the petitioners.2
Subsequently, the petitioners demanded payment based on the
valuation of the appraisal committee, plus 2%/month penalty from
the date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to
the appraisers.3
In its letter to the petitioners dated January 2, 2001, 4 the
respondent refused the petitioners demand, explaining that
pursuant to the Corporation Code, the dissenting stockholders
exercising their appraisal rights could be paid only when the
corporation had unrestricted retained earnings to cover the fair
value of the shares, but that it had no retained earnings at the
time of the petitioners demand, as borne out by its Financial
Statements for Fiscal Year 1999 showing a deficit
of P72,973,114.00 as of December 31, 1999.
Upon the respondents refusal to pay, the petitioners sued the
respondent for collection and damages in the RTC in Makati City
on January 22, 2001. The case, docketed as Civil Case No. 01-086,
was initially assigned to Branch 132.5
On June 26, 2002, the petitioners filed their motion for partial
summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained
earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of
the Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by
the Appraisal Committee is final, that the same cannot be
disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the
plaintiffs are entitled, as a matter of right, to a summary
judgment. xxx 6
The respondent opposed the motion for partial summary
judgment, stating that the determination of the unrestricted
retained earnings should be made at the end of the fiscal year of
the respondent, and that the petitioners did not have a cause of
action against the respondent.
During the pendency of the motion for partial summary judgment,
however, the Presiding Judge of Branch 133 transmitted the
records to the Clerk of Court for re-raffling to any of the RTCs
special commercial courts in Makati City due to the case being an
intra-corporate dispute. Hence, Civil Case No. 01-086 was re-
raffled to Branch 142.
Nevertheless, because the principal office of the respondent was
in Manila, Civil Case No. 01-086 was ultimately transferred to
91
Branch 46 of the RTC in Manila, presided by Judge Artemio
Tipon,7 pursuant to the Interim Rules of Procedure on Intra-
Corporate Controversies (Interim Rules) requiring intra-corporate
cases to be brought in the RTC exercising jurisdiction over the place
where the principal office of the corporation was found.
After the conference in Civil Case No. 01-086 set on October 23,
2002, which the petitioners counsel did not attend, Judge Tipon
issued an order,8 granting the petitioners motion for partial
summary judgment, stating:
As to the motion for partial summary judgment, there is no
question that the 3-man committee mandated to appraise the
shareholdings of plaintiff submitted its recommendation on October
27, 2000 fixing the fair value of the shares of stocks of the plaintiff
at P2.54 per share. Under Section 82 of the Corporation Code:
"The findings of the majority of the appraisers shall be final, and
the award shall be paid by the corporation within thirty (30) days
after the award is made."
"The only restriction imposed by the Corporation Code is"
"That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earning in its
books to cover such payment."
The evidence submitted by plaintiffs shows that in its quarterly
financial statement it submitted to the Securities and Exchange
Commission, the defendant has retained earnings of P11,975,490
as of March 21, 2002. This is not disputed by the defendant. Its
only argument against paying is that there must be unrestricted
retained earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a
stockholder. The law does not say that the unrestricted retained
earnings must exist at the time of the demand. Even if there are no
retained earnings at the time the demand is made if there are
retained earnings later, the fair value of such stocks must be paid.
The only restriction is that there must be sufficient funds to cover
the creditors after the dissenting stockholder is paid. No such
allegations have been made by the defendant.9
On November 12, 2002, the respondent filed a motion for
reconsideration.
On the scheduled hearing of the motion for reconsideration on
November 22, 2002, the petitioners filed a motion for immediate
execution and a motion to strike out motion for reconsideration. In
the latter motion, they pointed out that the motion for
reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied the
motion for reconsideration and granted the petitioners motion for
immediate execution. 10
Subsequently, on November 28, 2002, the RTC issued a writ of
execution.11
Aggrieved, the respondent commenced a special civil action for
certiorari in the CA to challenge the two aforecited orders of Judge
Tipon, claiming that:
A. JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING
SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE
TIME THE "COMPLAINT" WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT
VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT
REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY
RETAINED EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS
FILED ARE IRRELEVANT TO THE SPOUSES TURNERS RIGHT TO
RECOVER UNDER THE "COMPLAINT", BECAUSE THE WELL-
SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPONS
ATTENTION, IS "IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION
WAS COMMENCED THE SUIT CANNOT BE MAINTAINED, ALTHOUGH
SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.
B. JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND
ISSUED THE QUESTIONED "WRIT OF EXECUTION" DIRECTING THE
EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF
THE SPOUSES TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL
JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF
COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION
UNDER THE SUPREME COURTS CATEGORICAL HOLDING
IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.
Upon the respondents application, the CA issued a temporary
restraining order (TRO), enjoining the petitioners, and their agents
and representatives from enforcing the writ of execution. By then,
however, the writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary
injunction to prevent the execution. Thereupon, the sheriff
resumed the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4,
2003,12 pertinently holding:
However, it is clear from the foregoing that the Turners appraisal
right is subject to the legal condition that no payment shall be
made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment.
Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover the
shares is based on the trust fund doctrine which means that the
capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors.
The reason is that creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets. There can be
no distribution of assets among the stockholders without first
paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void. Creditors of a
corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not
use the assets of the corporation to purchase its own stock.
In the instant case, it was established that there were no
unrestricted retained earnings when the Turners filed their
Complaint. In a letter dated 20 August 2000, petitioner informed
the Turners that payment of their shares could only be made if it
had unrestricted earnings in its books to cover the same.
Petitioner reiterated this in a letter dated 2 January 2001 which
further informed the Turners that its Financial Statement for fiscal
year 1999 shows that its retained earnings ending December 31,
1999 was at a deficit in the amount of P72,973,114.00, a matter
which has not been disputed by private respondents. Hence, in
accordance with the second paragraph of sec. 82, BP 68 supra,
the Turners right to payment had not yet accrued when they filed
their Complaint on January 22, 2001, albeit their appraisal right
already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines,
Inc., the Supreme Court declared that:
92
Now, before an action can properly be commenced all the essential
elements of the cause of action must be in existence, that is, the
cause of action must be complete. All valid conditions precedent to
the institution of the particular action, whether prescribed by
statute, fixed by agreement of the parties or implied by law must
be performed or complied with before commencing the action,
unless the conduct of the adverse party has been such as to
prevent or waive performance or excuse non-performance of the
condition.
It bears restating that a right of action is the right to presently
enforce a cause of action, while a cause of action consists of the
operative facts which give rise to such right of action. The right of
action does not arise until the performance of all conditions
precedent to the action and may be taken away by the running of
the statute of limitations, through estoppel, or by other
circumstances which do not affect the cause of action. Performance
or fulfillment of all conditions precedent upon which a right of
action depends must be sufficiently alleged, considering that the
burden of proof to show that a party has a right of action is upon
the person initiating the suit.
The Turners right of action arose only when petitioner had already
retained earnings in the amount ofP11,975,490.00 on March 21,
2002; such right of action was inexistent on January 22, 2001 when
they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris,
the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided
by law, an action commenced before the cause of action has
accrued is prematurely brought and should be dismissed. The fact
that the cause of action accrues after the action is commenced and
while it is pending is of no moment. It is a rule of law to which there
is, perhaps, no exception, either at law or in equity, that to recover
at all there must be some cause of action at the commencement of
the suit. There are reasons of public policy why there should be no
needless haste in bringing up litigation, and why people who are in
no default and against whom there is as yet no cause of action
should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is
a groundless suit. Unless the plaintiff has a valid and subsisting
cause of action at the time his action iscommenced, the defect
cannot be cured or remedied by the acquisition or accrual of one
while the action is pending, and a supplemental complaint or an
amendment setting up such after-accrued cause of action is not
permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals
and Lao vs. Court of Appeals.
The Turners apprehension that their claim for payment may
prescribe if they wait for the petitioner to have unrestricted
retained earnings is misplaced. It is the legal possibility of bringing
the action that determines the starting point for the computation of
the period of prescription. Stated otherwise, the prescriptive period
is to be reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its
jurisdiction when it entertained the herein Complaint and issued
the assailed Orders. Excess of jurisdiction is the state of being
beyond or outside the limits of jurisdiction, and as distinguished
from the entire absence of jurisdiction, means that the act although
within the general power of the judge, is not authorized and
therefore void, with respect to the particular case, because the
conditions which authorize the exercise of his general power in that
particular case are wanting, and hence, the judicial power is not in
fact lawfully invoked.
We find no necessity to discuss the second ground raised in this
petition.
WHEREFORE, upon the premises, the petition is GRANTED. The
assailed Orders and the corresponding Writs of Garnishment are
NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED
without prejudice to refiling by the private respondents of the
action for enforcement of their right to payment as withdrawing
stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of
the CAs decision, submitting that:
I. THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN
THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND
ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN
GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND
IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
JUDGMENT;
II. THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN THE
PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF
THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY
JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF THE JUDGMENT;
III. THE HONORABLE COURT OF APPEALS HAS DECIDED
QUESTIONS OF SUBSTANCE NOT THEREFORE DETERMINED BY
THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN
ACCORD WITH LAW OR WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its
jurisdiction in entertaining the petitioners complaint in Civil Case
No. 01-086, and in rendering the summary judgment and issuing
writ of execution.
A.
Stockholders Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the
right to demand payment of the fair value of his or her shares.
This right, known as the right of appraisal, is expressly recognized
in Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a
corporation shall have the right to dissent and demand payment
of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
93
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property
and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders. It does not
vest unless objectionable corporate action is taken. 13 It serves the
purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation. 141avvphil
Under the common law, there were originally conflicting views on
whether a corporation had the power to acquire or purchase its
own stocks. In England, it was held invalid for a corporation to
purchase its issued stocks because such purchase was an indirect
method of reducing capital (which was statutorily restricted), aside
from being inconsistent with the privilege of limited liability to
creditors.15 Only a few American jurisdictions adopted by decision
or statute the strict English rule forbidding a corporation from
purchasing its own shares. In some American states where the
English rule used to be adopted, statutes granting authority to
purchase out of surplus funds were enacted, while in others, shares
might be purchased even out of capital provided the rights of
creditors were not prejudiced.16 The reason underlying the
limitation of share purchases sprang from the necessity of imposing
safeguards against the depletion by a corporation of its assets and
against the impairment of its capital needed for the protection of
creditors.17
Now, however, a corporation can purchase its own shares, provided
payment is made out of surplus profits and the acquisition is for a
legitimate corporate purpose.18 In the Philippines, this new rule is
embodied in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall
have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including but not limited
to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is
exercised, as well as the implications of the right of appraisal, as
follows:
1. The appraisal right is exercised by any stockholder who has
voted against the proposed corporate action by making a written
demand on the corporation within 30 days after the date on which
the vote was taken for the payment of the fair value of his shares.
The failure to make the demand within the period is deemed a
waiver of the appraisal right.19
2. If the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares within a period of 60 days from the
date the stockholders approved the corporate action, the fair value
shall be determined and appraised by three disinterested persons,
one of whom shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The findings
and award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is
made. Upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith transfer his or her
shares to the corporation.20
3. All rights accruing to the withdrawing stockholders shares,
including voting and dividend rights, shall be suspended from the
time of demand for the payment of the fair value of the shares
until either the abandonment of the corporate action involved or
the purchase of the shares by the corporation, except the right of
such stockholder to receive payment of the fair value of the
shares.21
4. Within 10 days after demanding payment for his or her shares,
a dissenting stockholder shall submit to the corporation the
certificates of stock representing his shares for notation thereon
that such shares are dissenting shares. A failure to do so shall, at
the option of the corporation, terminate his rights under this Title
X of the Corporation Code. If shares represented by the
certificates bearing such notation are transferred, and the
certificates are consequently canceled, the rights of the transferor
as a dissenting stockholder under this Title shall cease and the
transferee shall have all the rights of a regular stockholder; and
all dividend distributions that would have accrued on such shares
shall be paid to the transferee.22
5. If the proposed corporate action is implemented or effected,
the corporation shall pay to such stockholder, upon the surrender
of the certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in anticipation
of such corporate action.23
Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its
books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30
days after the award, his voting and dividend rights shall
immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted
retained earnings to fund the payment of the shares of stocks of
the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors, who are
preferred in the distribution of corporate assets. 24 The creditors of
a corporation have the right to assume that the board of directors
will not use the assets of the corporation to purchase its own
stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the
stockholders without first paying corporate debts. Thus, any
disposition of corporate funds and assets to the prejudice of
creditors is null and void.26
B.
Petitioners cause of action was premature
That the respondent had indisputably no unrestricted retained
earnings in its books at the time the petitioners commenced Civil
Case No. 01-086 on January 22, 2001 proved that the
respondents legal obligation to pay the value of the petitioners
94
shares did not yet arise. Thus, the CA did not err in holding that the
petitioners had no cause of action, and in ruling that the RTC did
not validly render the partial summary judgment.
A cause of action is the act or omission by which a party violates a
right of another.27 The essential elements of a cause of action are:
(a) the existence of a legal right in favor of the plaintiff; (b) a
correlative legal duty of the defendant to respect such right; and
(c) an act or omission by such defendant in violation of the right of
the plaintiff with a resulting injury or damage to the plaintiff for
which the latter may maintain an action for the recovery of relief
from the defendant.28 Although the first two elements may exist, a
cause of action arises only upon the occurrence of the last element,
giving the plaintiff the right to maintain an action in court for
recovery of damages or other appropriate relief. 29
Section 1, Rule 2, of the Rules of Court requires that every ordinary
civil action must be based on a cause of action. Accordingly, Civil
Case No. 01-086 was dismissible from the beginning for being
without any cause of action.
The RTC concluded that the respondents obligation to pay had
accrued by its having the unrestricted retained earnings after the
making of the demand by the petitioners. It based its conclusion on
the fact that the Corporation Code did not provide that the
unrestricted retained earnings must already exist at the time of the
demand.
The RTCs construal of the Corporation Code was unsustainable,
because it did not take into account the petitioners lack of a cause
of action against the respondent. In order to give rise to any
obligation to pay on the part of the respondent, the petitioners
should first make a valid demand that the respondent refused to
pay despite having unrestricted retained earnings. Otherwise, the
respondent could not be said to be guilty of any actionable
omission that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained
earnings after the filing of the complaint cure the lack of cause of
action in Civil Case No. 01-086. The petitioners right of action
could only spring from an existing cause of action. Thus, a
complaint whose cause of action has not yet accrued cannot be
cured by an amended or supplemental pleading alleging the
existence or accrual of a cause of action during the pendency of
the action.30For, only when there is an invasion of primary rights,
not before, does the adjective or remedial law become
operative.31 Verily, a premature invocation of the courts
intervention renders the complaint without a cause of action and
dismissible on such ground.32 In short, Civil Case No. 01-086, being
a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained
earnings more than sufficient to cover the petitioners claims on
June 26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the
time of the commencement of Civil Case No. 01-086. The motion
for partial summary judgment, being a mere application for relief
other than by a pleading,33 was not the same as the complaint in
Civil Case No. 01-086. Thereby, the petitioners did not meet the
requirement of the Rules of Court that a cause of action must exist
at the commencement of an action, which is "commenced by the
filing of the original complaint in court." 34
The petitioners claim that the respondents petition for certiorari
sought only the annulment of the assailed orders of the RTC (i.e.,
granting the motion for partial summary judgment and the motion
for immediate execution); hence, the CA had no right to direct the
dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondents petition for certiorari targeted only the
RTCs orders granting the motion for partial summary judgment
and the motion for immediate execution, the CAs directive for the
dismissal of Civil Case No. 01-086 was not an abuse of discretion,
least of all grave, because such dismissal was the only proper
thing to be done under the circumstances. According to Surigao
Mine Exploration Co., Inc. v. Harris:35
Subject to certain qualification, and except as otherwise provided
by law, an action commenced before the cause of action has
accrued is prematurely brought and should be dismissed. The fact
that the cause of action accrues after the action is commenced
and while the case is pending is of no moment. It is a rule of law
to which there is, perhaps no exception, either in law or in equity,
that to recover at all there must be some cause of action at the
commencement of the suit. There are reasons of public policy why
there should be no needless haste in bringing up litigation, and
why people who are in no default and against whom there is as
yet no cause of action should not be summoned before the public
tribunals to answer complaints which are groundless. An action
prematurely brought is a groundless suit. Unless the plaintiff has a
valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-
accrued cause of action is not permissible.
Lastly, the petitioners argue that the respondents recourse of a
special action for certiorari was the wrong remedy, in view of the
fact that the granting of the motion for partial summary judgment
constituted only an error of law correctible by appeal, not of
jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of
an error of jurisdiction, for it exceeded its jurisdiction by taking
cognizance of the complaint that was not based on an existing
cause of action.
WHEREFORE, the petition for review on certiorari is denied for
lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R.
SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon.
Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46
of the Regional Trial Court of Manila, et al.
Costs of suit to be paid by the petitioners.
21. G.R. No. 191995 August 3, 2011
PHILIPPINE VETERANS BANK, Petitioner, vs. JUSTINA CALLANGAN,
in her capacity as Director of the Corporation Finance Department
of the Securities and Exchange Commission and/or the
SECURITIES AND EXCHANGE COMMISSION,Respondent.
We resolve the motion for reconsideration1 filed by petitioner
Philippine Veterans Bank (the Bank) dated August 5, 2010,
addressing our June 16, 2010 Resolution that denied the Banks
petition for review on certiorari.
Factual Antecedents
95
On March 17, 2004, respondent Justina F. Callangan, the Director of
the Corporation Finance Department of the Securities and
Exchange Commission (SEC), sent the Bank a letter, informing it
that it qualifies as a "public company" under Section 17.2 of the
Securities Regulation Code (SRC) in relation with Rule 3(1)(m) of
the Amended Implementing Rules and Regulations of the SRC. The
Bank is thus required to comply with the reportorial requirements
set forth in Section 17.1 of the SRC.2
The Bank responded by explaining that it should not be considered
a "public company" because it is a private company whose shares
of stock are available only to a limited class or sector, i.e., to World
War II veterans, and not to the general public.3
In a letter dated April 20, 2004, Director Callangan rejected the
Banks explanation and assessed it a total penalty of One Million
Nine Hundred Thirty-Seven Thousand Two Hundred Sixty-Two and
80/100 Pesos (P1,937,262.80) for failing to comply with the SRC
reportorial requirements from 2001 to 2003. The Bank moved for
the reconsideration of the assessment, but Director Callangan
denied the motion in SEC-CFD Order No. 085, Series of 2005 dated
July 26, 2005.4 When the SEC En Banc also dismissed the Banks
appeal for lack of merit in its Order dated August 31, 2006,
prompting the Bank to file a petition for review with the Court of
Appeals (CA).5
On March 6, 2008, the CA dismissed the petition and affirmed the
assailed SEC ruling, with the modification that the assessment of
the penalty be recomputed from May 31, 2004. 6
The CA also denied the Banks motion for reconsideration,7 opening
the way for the Banks petition for review on certiorari filed with
this Court.8
On June 16, 2010, the Court denied the Banks petition for failure to
show any reversible error in the assailed CA decision and
resolution.9
The Motion for Reconsideration
The Bank reiterates that it is not a "public company" subject to the
reportorial requirements under Section 17.1 of the SRC because its
shares can be owned only by a specific group of people, namely,
World War II veterans and their widows, orphans and compulsory
heirs, and is not open to the investing public in general. The Bank
also asks the Court to take into consideration the financial impact
to the cause of "veteranism"; compliance with the reportorial
requirements under the SRC, if the Bank would be considered a
"public company," would compel the Bank to spend
approximately P40 million just to reproduce and mail the
"Information Statement" to its 400,000 shareholders nationwide.
The Courts Ruling
We DENY the motion for reconsideration for lack of merit.
To determine whether the Bank is a "public company" burdened
with the reportorial requirements ordered by the SEC, we look to
Subsections 17.1 and 17.2 of the SRC, which provide:
Section 17. Periodic and Other Reports of Issuers.
17.1. Every issuer satisfying the requirements in Subsection 17.2
hereof shall file with the Commission:
a) Within one hundred thirty-five (135) days, after the end of the
issuers fiscal year, or such other time as the Commission may
prescribe, an annual report which shall include, among others, a
balance sheet, profit and loss statement and statement of cash
flows, for such last fiscal year, certified by an independent
certified public accountant, and a management discussion and
analysis of results of operations; and
b) Such other periodical reports for interim fiscal periods and
current reports on significant developments of the issuer as the
Commission may prescribe as necessary to keep current
information on the operation of the business and financial
condition of the issuer.
17.2. The reportorial requirements of Subsection 17.1 shall apply
to the following:
xxxx
c) An issuer with assets of at least Fifty million pesos
(P50,000,000.00) or such other amount as the Commission shall
prescribe, and having two hundred (200) or more holders each
holding at least one hundred (100) shares of a class of its equity
securities: Provided, however, That the obligation of such issuer to
file reports shall be terminated ninety (90) days after notification
to the Commission by the issuer that the number of its holders
holding at least one hundred (100) shares is reduced to less than
one hundred (100). (emphases supplied)
We also cite Rule 3(1)(m) of the Amended Implementing Rules
and Regulations of the SRC, which defines a "public company" as
"any corporation with a class of equity securities listed on an
Exchange or with assets in excess of Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least
one hundred (100) shares of a class of its equity securities."
From these provisions, it is clear that a "public company," as
contemplated by the SRC, is not limited to a company whose
shares of stock are publicly listed; even companies like the Bank,
whose shares are offered only to a specific group of people, are
considered a public company, provided they meet the
requirements enumerated above.
The records establish, and the Bank does not dispute, that the
Bank has assets exceeding P50,000,000.00 and has 395,998
shareholders.10 It is thus considered a public company that must
comply with the reportorial requirements set forth in Section 17.1
of the SRC.
The Bank also argues that even assuming it is considered a
"public company" pursuant to Section 17 of the SRC, the Court
should interpret the pertinent SRC provisions in such a way that
no financial prejudice is done to the thousands of veterans who
are stockholders of the Bank. Given that the legislature intended
the SRC to apply only to publicly traded companies, the Court
should exempt the Bank from complying with the reportorial
requirements.
On this point, the Bank is apparently referring to the obligation set
forth in Subsections 17.5 and 17.6 of the SRC, which provide:
Section 17.5. Every issuer which has a class of equity securities
satisfying any of the requirements in Subsection 17.2 shall furnish
to each holder of such equity security an annual report in such
form and containing such information as the Commission shall
prescribe.
96
Section 17.6. Within such period as the Commission may prescribe
preceding the annual meeting of the holders of any equity security
of a class entitled to vote at such meeting, the issuer shall transmit
to such holders an annual report in conformity with Subsection
17.5. (emphases supplied)
In making this argument, the Bank ignores the fact that the first
and fundamental duty of the Court is to apply the
law.11 Construction and interpretation come only after a
demonstration that the application of the law is impossible or
inadequate unless interpretation is resorted to. 12 In this case, we
see the law to be very clear and free from any doubt or ambiguity;
thus, no room exists for construction or interpretation.
Additionally, and contrary to the Banks claim, the Banks obligation
to provide its stockholders with copies of its annual report is
actually for the benefit of the veterans-stockholders, as it gives
these stockholders access to information on the Banks financial
status and operations, resulting in greater transparency on the part
of the Bank. While compliance with this requirement will
undoubtedly cost the Bank money, the benefit provided to the
shareholders clearly outweighs the expense. For many
stockholders, these annual reports are the only means of keeping
in touch with the state of health of their investments; to them,
these are invaluable and continuing links with the Bank that
immeasurably contribute to the transparency in public companies
that the law envisions.
WHEREFORE, premises considered, petitioner Philippine Veterans
Banks motion for reconsideration is hereby DENIED with finality.
22. G.R. No. 168332 June 19, 2009
ANA MARIA A. KORUGA, Petitioner, vs. TEODORO O. ARCENAS, JR.,
ALBERT C. AGUIRRE, CESAR S. PAGUIO, FRANCISCO A. RIVERA, and
THE HONORABLE COURT OF APPEALS, THIRD
DIVISION, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 169053 June 19, 2009
TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR S. PAGUIO,
and FRANCISCO A. RIVERA,Petitioners,
vs. HON. SIXTO MARELLA, JR., Presiding Judge, Branch 138,
Regional Trial Court of Makati City, and ANA MARIA A.
KORUGA, Respondents.
Before this Court are two petitions that originated from a Complaint
filed by Ana Maria A. Koruga (Koruga) before the Regional Trial
Court (RTC) of Makati City against the Board of Directors of Banco
Filipino and the Members of the Monetary Board of the Bangko
Sentral ng Pilipinas (BSP) for violation of the Corporation Code, for
inspection of records of a corporation by a stockholder, for
receivership, and for the creation of a management committee.
G.R. No. 168332
The first is a Petition for Certiorari under Rule 65 of the Rules of
Court, docketed as G.R. No. 168332, praying for the annulment of
the Court of Appeals (CA) Resolution1 in CA-G.R. SP No. 88422
dated April 18, 2005 granting the prayer for a Writ of Preliminary
Injunction of therein petitioners Teodoro O. Arcenas, Jr., Albert C.
Aguirre, Cesar S. Paguio, and Francisco A. Rivera (Arcenas, et al.).
Koruga is a minority stockholder of Banco Filipino Savings and
Mortgage Bank. On August 20, 2003, she filed a complaint before
the Makati RTC which was raffled to Branch 138, presided over by
Judge Sixto Marella, Jr.2Korugas complaint alleged:
10. 1 Violation of Sections 31 to 34 of the Corporation Code
("Code") which prohibit self-dealing and conflicts of interest of
directors and officers, thus:
(a) For engaging in unsafe, unsound, and fraudulent banking
practices that have jeopardized the welfare of the Bank, its
shareholders, who includes among others, the Petitioner, and
depositors. (sic)
(b) For granting and approving loans and/or "loaned" sums of
money to six (6) "dummy" borrower corporations ("Borrower
Corporations") which, at the time of loan approval, had no
financial capacity to justify the loans. (sic)
(c) For approving and accepting a dacion en pago, or payment of
loans with property instead of cash, resulting to a diminished
future cumulative interest income by the Bank and a decline in its
liquidity position. (sic)
(d) For knowingly giving "favorable treatment" to the Borrower
Corporations in which some or most of them have interests, i.e.
interlocking directors/officers thereof, interlocking ownerships.
(sic)
(e) For employing their respective offices and functions as the
Banks officers and directors, or omitting to perform their
functions and duties, with negligence, unfaithfulness or abuse of
confidence of fiduciary duty, misappropriated or misapplied or
ratified by inaction the misappropriation or misappropriations, of
(sic) almost P1.6 Billion Pesos (sic) constituting the Banks funds
placed under their trust and administration, by unlawfully
releasing loans to the Borrower Corporations or refusing or failing
to impugn these, knowing before the loans were released or
thereafter that the Banks cash resources would be dissipated
thereby, to the prejudice of the Petitioner, other Banco Filipino
depositors, and the public.
10.2 Right of a stockholder to inspect the records of a corporation
(including financial statements) under Sections 74 and 75 of the
Code, as implemented by the Interim Rules;
(a) Unlawful refusal to allow the Petitioner from inspecting or
otherwise accessing the corporate records of the bank despite
repeated demand in writing, where she is a stockholder. (sic)
10.3 Receivership and Creation of a Management Committee
pursuant to:
(a) Rule 59 of the 1997 Rules of Civil Procedure ("Rules");
(b) Section 5.2 of R.A. No. 8799;
(c) Rule 1, Section 1(a)(1) of the Interim Rules;
(d) Rule 1, Section 1(a)(2) of the Interim Rules;
(e) Rule 7 of the Interim Rules;
(f) Rule 9 of the Interim Rules; and
(g) The General Banking Law of 2000 and the New Central Bank
Act.3
On September 12, 2003, Arcenas, et al. filed their Answer raising,
among others, the trial courts lack of jurisdiction to take
97
cognizance of the case. They also filed a Manifestation and Motion
seeking the dismissal of the case on the following grounds: (a) lack
of jurisdiction over the subject matter; (b) lack of jurisdiction over
the persons of the defendants; (c) forum-shopping; and (d) for
being a nuisance/harassment suit. They then moved that the trial
court rule on their affirmative defenses, dismiss the intra-corporate
case, and set the case for preliminary hearing.
In an Order dated October 18, 2004, the trial court denied the
Manifestation and Motion, ruling thus:
The result of the procedure sought by defendants Arcenas, et al.
(sic) is for the Court to conduct a preliminary hearing on the
affirmative defenses raised by them in their Answer. This [is]
proscribed by the Interim Rules of Procedure on Intracorporate (sic)
Controversies because when a preliminary hearing is conducted it
is "as if a Motion to Dismiss was filed" (Rule 16, Section 6, 1997
Rules of Civil Procedure). A Motion to Dismiss is a prohibited
pleading under the Interim Rules, for which reason, no favorable
consideration can be given to the Manifestation and Motion of
defendants, Arcenas, et al.
The Court finds no merit to (sic) the claim that the instant case is a
nuisance or harassment suit.
WHEREFORE, the Court defers resolution of the affirmative
defenses raised by the defendants Arcenas, et al. 4
Arcenas, et al. moved for reconsideration 5 but, on January 18, 2005,
the RTC denied the motion.6 This prompted Arcenas, et al. to file
before the CA a Petition for Certiorari and Prohibition under Rule 65
of the Rules of Court with a prayer for the issuance of a writ of
preliminary injunction and a temporary retraining order (TRO). 7
On February 9, 2005, the CA issued a 60-day TRO enjoining Judge
Marella from conducting further proceedings in the case. 8
On February 22, 2005, the RTC issued a Notice of Pre-trial9 setting
the case for pre-trial on June 2 and 9, 2005. Arcenas, et al. filed a
Manifestation and Motion10 before the CA, reiterating their
application for a writ of preliminary injunction. Thus, on April 18,
2005, the CA issued the assailed Resolution, which reads in part:
(C)onsidering that the Temporary Restraining Order issued by this
Court on February 9, 2005 expired on April 10, 2005, it is necessary
that a writ of preliminary injunction be issued in order not to render
ineffectual whatever final resolution this Court may render in this
case, after the petitioners shall have posted a bond in the amount
of FIVE HUNDRED THOUSAND (P500,000.00) PESOS.
SO ORDERED.11
Dissatisfied, Koruga filed this Petition for Certiorari under Rule 65 of
the Rules of Court. Koruga alleged that the CA effectively gave due
course to Arcenas, et al.s petition when it issued a writ of
preliminary injunction without factual or legal basis, either in the
April 18, 2005 Resolution itself or in the records of the case. She
prayed that this Court restrain the CA from implementing the writ
of preliminary injunction and, after due proceedings, make the
injunction against the assailed CA Resolution permanent.12
In their Comment, Arcenas, et al. raised several procedural and
substantive issues. They alleged that the Verification and
Certification against Forum-Shopping attached to the Petition was
not executed in the manner prescribed by Philippine law since, as
admitted by Korugas counsel himself, the same was only a
facsimile.
They also averred that Koruga had admitted in the Petition that
she never asked for reconsideration of the CAs April 18, 2005
Resolution, contending that the Petition did not raise pure
questions of law as to constitute an exception to the requirement
of filing a Motion for Reconsideration before a Petition for
Certiorari is filed.
They, likewise, alleged that the Petition may have already been
rendered moot and academic by the July 20, 2005 CA
Decision,13 which denied their Petition, and held that the RTC did
not commit grave abuse of discretion in issuing the assailed
orders, and thus ordered the RTC to proceed with the trial of the
case.
Meanwhile, on March 13, 2006, this Court issued a Resolution
granting the prayer for a TRO and enjoining the Presiding Judge of
Makati RTC, Branch 138, from proceeding with the hearing of the
case upon the filing by Arcenas, et al. of a P50,000.00 bond.
Koruga filed a motion to lift the TRO, which this Court denied on
July 5, 2006.
On the other hand, respondents Dr. Conrado P. Banzon and Gen.
Ramon Montao also filed their Comment on Korugas Petition,
raising substantially the same arguments as Arcenas, et al.
G.R. No. 169053
G.R. No. 169053 is a Petition for Review on Certiorari under Rule
45 of the Rules of Court, with prayer for the issuance of a TRO and
a writ of preliminary injunction filed by Arcenas, et al.
In their Petition, Arcenas, et al. asked the Court to set aside the
Decision14 dated July 20, 2005 of the CA in CA-G.R. SP No. 88422,
which denied their petition, having found no grave abuse of
discretion on the part of the Makati RTC. The CA said that the RTC
Orders were interlocutory in nature and, thus, may be assailed by
certiorari or prohibition only when it is shown that the court acted
without or in excess of jurisdiction or with grave abuse of
discretion. It added that the Supreme Court frowns upon resort to
remedial measures against interlocutory orders.
Arcenas, et al. anchored their prayer on the following grounds:
that, in their Answer before the RTC, they had raised the issue of
failure of the court to acquire jurisdiction over them due to
improper service of summons; that the Koruga action is a
nuisance or harassment suit; that there is another case involving
the same parties for the same cause pending before the Monetary
Board of the BSP, and this constituted forum-shopping; and that
jurisdiction over the subject matter of the case is vested by law in
the BSP.15
Arcenas, et al. assign the following errors:
I. THE COURT OF APPEALS, IN "FINDING NO GRAVE ABUSE OF
DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL
TRIAL COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED
ORDERS," FAILED TO CONSIDER AND MERELY GLOSSED OVER THE
MORE TRANSCENDENT ISSUES OF THE LACK OF JURISDICTION ON
THE PART OF SAID PUBLIC RESPONDENT OVER THE SUBJECT
MATTER OF THE CASE BEFORE IT, LITIS PENDENTIA AND FORUM
SHOPPING, AND THE CASE BELOW BEING A NUISANCE OR
HARASSMENT SUIT, EITHER ONE AND ALL OF WHICH GOES/GO TO
RENDER THE ISSUANCE BY PUBLIC RESPONDENT OF THE
ASSAILED ORDERS A GRAVE ABUSE OF DISCRETION.
II. THE FINDING OF THE COURT OF APPEALS OF "NO GRAVE ABUSE
OF DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL
98
TRIAL COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED
ORDERS," IS NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE
DECISIONS OF THIS HONORABLE COURT.16
Meanwhile, in a Manifestation and Motion filed on August 31, 2005,
Koruga prayed for, among others, the consolidation of her Petition
with the Petition for Review on Certiorari under Rule 45 filed by
Arcenas, et al., docketed as G.R. No. 169053. The motion was
granted by this Court in a Resolution dated September 26, 2005.
Our Ruling
Initially, we will discuss the procedural issue.
Arcenas, et al. argue that Korugas petition should be dismissed for
its defective Verification and Certification Against Forum-Shopping,
since only a facsimile of the same was attached to the Petition.
They also claim that the Verification and Certification Against
Forum-Shopping, allegedly executed in Seattle, Washington, was
not authenticated in the manner prescribed by Philippine law and
not certified by the Philippine Consulate in the United States.
This contention deserves scant consideration.
On the last page of the Petition in G.R. No. 168332, Korugas
counsel executed an Undertaking, which reads as follows:
In view of that fact that the Petitioner is currently in the United
States, undersigned counsel is attaching a facsimile copy of the
Verification and Certification Against Forum-Shopping duly signed
by the Petitioner and notarized by Stephanie N. Goggin, a Notary
Public for the Sate (sic) of Washington. Upon arrival of the original
copy of the Verification and Certification as certified by the Office of
the Philippine Consul, the undersigned counsel shall immediately
provide duplicate copies thereof to the Honorable Court. 17
Thus, in a Compliance18 filed with the Court on September 5, 2005,
petitioner submitted the original copy of the duly notarized and
authenticated Verification and Certification Against Forum-Shopping
she had executed.19 This Court noted and considered the
Compliance satisfactory in its Resolution dated November 16, 2005.
There is, therefore, no need to further belabor this issue.
We now discuss the substantive issues in this case.
First, we resolve the prayer to nullify the CAs April 18, 2005
Resolution.
We hold that the Petition in G.R. No. 168332 has become moot and
academic. The writ of preliminary injunction being questioned had
effectively been dissolved by the CAs July 20, 2005 Decision. The
dispositive portion of the Decision reads in part:
The case is REMANDED to the court a quo for further proceedings
and to resolve with deliberate dispatch the intra-corporate
controversies and determine whether there was actually a valid
service of summons. If, after hearing, such service is found to have
been improper, then new summons should be served forthwith. 20
Accordingly, there is no necessity to restrain the implementation of
the writ of preliminary injunction issued by the CA on April 18,
2005, since it no longer exists.
However, this Court finds that the CA erred in upholding the
jurisdiction of, and remanding the case to, the RTC.
The resolution of these petitions rests mainly on the
determination of one fundamental issue: Which body has
jurisdiction over the Koruga Complaint, the RTC or the BSP?
We hold that it is the BSP that has jurisdiction over the case.
A reexamination of the Complaint is in order.
Korugas Complaint charged defendants with violation of Sections
31 to 34 of the Corporation Code, prohibiting self-dealing and
conflict of interest of directors and officers; invoked her right to
inspect the corporations records under Sections 74 and 75 of the
Corporation Code; and prayed for Receivership and Creation of a
Management Committee, pursuant to Rule 59 of the Rules of Civil
Procedure, the Securities Regulation Code, the Interim Rules of
Procedure Governing Intra-Corporate Controversies, the General
Banking Law of 2000, and the New Central Bank Act. She accused
the directors and officers of Banco Filipino of engaging in unsafe,
unsound, and fraudulent banking practices, more particularly,
acts that violate the prohibition on self-dealing.
It is clear that the acts complained of pertain to the conduct of
Banco Filipinos banking business. A bank, as defined in the
General Banking Law,21 refers to an entity engaged in the lending
of funds obtained in the form of deposits.22 The banking business
is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal
affairs of the people and the revenues of the state. Banks are
affected with public interest because they receive funds from the
general public in the form of deposits. It is the Governments
responsibility to see to it that the financial interests of those who
deal with banks and banking institutions, as depositors or
otherwise, are protected. In this country, that task is delegated to
the BSP, which pursuant to its Charter, is authorized to administer
the monetary, banking, and credit system of the Philippines. It is
further authorized to take the necessary steps against any
banking institution if its continued operation would cause
prejudice to its depositors, creditors and the general public as
well.23
The law vests in the BSP the supervision over operations and
activities of banks. The New Central Bank Act provides:
Section 25. Supervision and Examination. - The Bangko Sentral
shall have supervision over, and conduct periodic or special
examinations of, banking institutions and quasi-banks, including
their subsidiaries and affiliates engaged in allied activities. 24
Specifically, the BSPs supervisory and regulatory powers include:
4.1 The issuance of rules of conduct or the establishment of
standards of operation for uniform application to all institutions or
functions covered, taking into consideration the distinctive
character of the operations of institutions and the substantive
similarities of specific functions to which such rules, modes or
standards are to be applied;
4.2 The conduct of examination to determine compliance with
laws and regulations if the circumstances so warrant as
determined by the Monetary Board;
4.3 Overseeing to ascertain that laws and Regulations are
complied with;
4.4 Regular investigation which shall not be oftener than once a
year from the last date of examination to determine whether an
institution is conducting its business on a safe or sound
99
basis: Provided, That the deficiencies/irregularities found by or
discovered by an audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D);
or
4.6 Enforcing prompt corrective action.25
Koruga alleges that "the dispute in the trial court involves the
manner with which the Directors (sic) have handled the Banks
affairs, specifically the fraudulent loans and dacion en pago
authorized by the Directors in favor of several dummy corporations
known to have close ties and are indirectly controlled by the
Directors."26 Her allegations, then, call for the examination of the
allegedly questionable loans. Whether these loans are covered by
the prohibition on self-dealing is a matter for the BSP to determine.
These are not ordinary intra-corporate matters; rather, they involve
banking activities which are, by law, regulated and supervised by
the BSP. As the Court has previously held:
It is well-settled in both law and jurisprudence that the Central
Monetary Authority, through the Monetary Board, is vested with
exclusive authority to assess, evaluate and determine the condition
of any bank, and finding such condition to be one of insolvency, or
that its continuance in business would involve a probable loss to its
depositors or creditors, forbid bank or non-bank financial institution
to do business in the Philippines; and shall designate an official of
the BSP or other competent person as receiver to immediately take
charge of its assets and liabilities. 27
Correlatively, the General Banking Law of 2000 specifically deals
with loans contracted by bank directors or officers, thus:
SECTION 36. Restriction on Bank Exposure to Directors, Officers,
Stockholders and Their Related Interests. No director or officer of
any bank shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall
he become a guarantor, indorser or surety for loans from such bank
to others, or in any manner be an obligor or incur any contractual
liability to the bank except with the written approval of the majority
of all the directors of the bank, excluding the director concerned:
Provided, That such written approval shall not be required for loans,
other credit accommodations and advances granted to officers
under a fringe benefit plan approved by the Bangko Sentral. The
required approval shall be entered upon the records of the bank
and a copy of such entry shall be transmitted forthwith to the
appropriate supervising and examining department of the Bangko
Sentral.
Dealings of a bank with any of its directors, officers or stockholders
and their related interests shall be upon terms not less favorable to
the bank than those offered to others.
After due notice to the board of directors of the bank, the office of
any bank director or officer who violates the provisions of this
Section may be declared vacant and the director or officer shall be
subject to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit
accommodations and guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers, stockholders and their
related interests, as well as investments of such bank in enterprises
owned or controlled by said directors, officers, stockholders and
their related interests. However, the outstanding loans, credit
accommodations and guarantees which a bank may extend to each
of its stockholders, directors, or officers and their related interests,
shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit
accommodations and guarantees secured by assets considered as
non-risk by the Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit accommodations and
advances to officers in the form of fringe benefits granted in
accordance with rules as may be prescribed by the Monetary
Board shall not be subject to the individual limit.
The Monetary Board shall define the term "related interests."
The limit on loans, credit accommodations and guarantees
prescribed herein shall not apply to loans, credit accommodations
and guarantees extended by a cooperative bank to its
cooperative shareholders.28
Furthermore, the authority to determine whether a bank is
conducting business in an unsafe or unsound manner is also
vested in the Monetary Board. The General Banking Law of 2000
provides:
SECTION 56. Conducting Business in an Unsafe or Unsound
Manner. In determining whether a particular act or omission,
which is not otherwise prohibited by any law, rule or regulation
affecting banks, quasi-banks or trust entities, may be deemed as
conducting business in an unsafe or unsound manner for
purposes of this Section, the Monetary Board shall consider any of
the following circumstances:
56.1. The act or omission has resulted or may result in material
loss or damage, or abnormal risk or danger to the safety, stability,
liquidity or solvency of the institution;
56.2. The act or omission has resulted or may result in material
loss or damage or abnormal risk to the institution's depositors,
creditors, investors, stockholders or to the Bangko Sentral or to
the public in general;
56.3. The act or omission has caused any undue injury, or has
given any unwarranted benefits, advantage or preference to the
bank or any party in the discharge by the director or officer of his
duties and responsibilities through manifest partiality, evident bad
faith or gross inexcusable negligence; or
56.4. The act or omission involves entering into any contract or
transaction manifestly and grossly disadvantageous to the bank,
quasi-bank or trust entity, whether or not the director or officer
profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in
conducting its business in an unsafe or unsound manner, the
Monetary Board may, without prejudice to the administrative
sanctions provided in Section 37 of the New Central Bank Act,
take action under Section 30 of the same Act and/or immediately
exclude the erring bank from clearing, the provisions of law to the
contrary notwithstanding.
Finally, the New Central Bank Act grants the Monetary Board the
power to impose administrative sanctions on the erring bank:
Section 37. Administrative Sanctions on Banks and Quasi-banks. -
Without prejudice to the criminal sanctions against the culpable
persons provided in Sections 34, 35, and 36 of this Act, the
Monetary Board may, at its discretion, impose upon any bank or
quasi-bank, their directors and/or officers, for any willful violation
of its charter or by-laws, willful delay in the submission of reports
or publications thereof as required by law, rules and regulations;
100
any refusal to permit examination into the affairs of the institution;
any willful making of a false or misleading statement to the Board
or the appropriate supervising and examining department or its
examiners; any willful failure or refusal to comply with, or violation
of, any banking law or any order, instruction or regulation issued by
the Monetary Board, or any order, instruction or ruling by the
Governor; or any commission of irregularities, and/or conducting
business in an unsafe or unsound manner as may be determined by
the Monetary Board, the following administrative sanctions,
whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board
to be appropriate, but in no case to exceed Thirty thousand pesos
(P30,000) a day for each violation, taking into consideration the
attendant circumstances, such as the nature and gravity of the
violation or irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to Bangko
Sentral credit facilities;
(c) suspension of lending or foreign exchange operations or
authority to accept new deposits or make new investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such
director or officer from administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances,
preventively suspend any director or officer of a bank or quasi-bank
pending an investigation: Provided, That should the case be not
finally decided by the Bangko Sentral within a period of one
hundred twenty (120) days after the date of suspension, said
director or officer shall be reinstated in his position: Provided,
further, That when the delay in the disposition of the case is due to
the fault, negligence or petition of the director or officer, the period
of delay shall not be counted in computing the period of suspension
herein provided.
The above administrative sanctions need not be applied in the
order of their severity.
Whether or not there is an administrative proceeding, if the
institution and/or the directors and/or officers concerned continue
with or otherwise persist in the commission of the indicated
practice or violation, the Monetary Board may issue an order
requiring the institution and/or the directors and/or officers
concerned to cease and desist from the indicated practice or
violation, and may further order that immediate action be taken to
correct the conditions resulting from such practice or violation. The
cease and desist order shall be immediately effective upon service
on the respondents.
The respondents shall be afforded an opportunity to defend their
action in a hearing before the Monetary Board or any committee
chaired by any Monetary Board member created for the purpose,
upon request made by the respondents within five (5) days from
their receipt of the order. If no such hearing is requested within said
period, the order shall be final. If a hearing is conducted, all issues
shall be determined on the basis of records, after which the
Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose
upon banking institutions, for any failure to comply with the
requirements of law, Monetary Board regulations and policies,
and/or instructions issued by the Monetary Board or by the
Governor, fines not in excess of Ten thousand pesos (P10,000) a
day for each violation, the imposition of which shall be final and
executory until reversed, modified or lifted by the Monetary Board
on appeal.29
Koruga also accused Arcenas, et al. of violation of the Corporation
Codes provisions on self-dealing and conflict of interest. She
invoked Section 31 of the Corporation Code, which defines the
liability of directors, trustees, or officers of a corporation for,
among others, acquiring any personal or pecuniary interest in
conflict with their duty as directors or trustees, and Section 32,
which prescribes the conditions under which a contract of the
corporation with one or more of its directors or trustees the so-
called "self-dealing directors"30 would be valid. She also alleged
that Banco Filipinos directors violated Sections 33 and 34 in
approving the loans of corporations with interlocking ownerships,
i.e., owned, directed, or managed by close associates of Albert C.
Aguirre.
Sections 31 to 34 of the Corporation Code provide:
Section 31. Liability of directors, trustees or officers. - Directors or
trustees who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires,
in violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise
would have accrued to the corporation.
Section 32. Dealings of directors, trustees or officers with the
corporation. - A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
101
Section 33. Contracts between corporations with interlocking
directors. - Except in cases of fraud, and provided the contract is
fair and reasonable under the circumstances, a contract between
two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of
the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal,
he shall be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
Section 34. Disloyalty of a director. - Where a director, by virtue of
his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice
of such corporation, he must account to the latter for all such
profits by refunding the same, unless his act has been ratified by a
vote of the stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his own
funds in the venture.
Korugas invocation of the provisions of the Corporation Code is
misplaced. In an earlier case with similar antecedents, we ruled
that:
The Corporation Code, however, is a general law applying to all
types of corporations, while the New Central Bank Act regulates
specifically banks and other financial institutions, including the
dissolution and liquidation thereof. As between a general and
special law, the latter shall prevail generalia specialibus non
derogant.31
Consequently, it is not the Interim Rules of Procedure on Intra-
Corporate Controversies,32 or Rule 59 of the Rules of Civil Procedure
on Receivership, that would apply to this case. Instead, Sections 29
and 30 of the New Central Bank Act should be followed, viz.:
Section 29. Appointment of Conservator. - Whenever, on the basis
of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a quasi-bank
is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of
depositors and creditors, the Monetary Board may appoint a
conservator with such powers as the Monetary Board shall deem
necessary to take charge of the assets, liabilities, and the
management thereof, reorganize the management, collect all
monies and debts due said institution, and exercise all powers
necessary to restore its viability. The conservator shall report and
be responsible to the Monetary Board and shall have the power to
overrule or revoke the actions of the previous management and
board of directors of the bank or quasi-bank.
xxxx
The Monetary Board shall terminate the conservatorship when it is
satisfied that the institution can continue to operate on its own and
the conservatorship is no longer necessary. The conservatorship
shall likewise be terminated should the Monetary Board, on the
basis of the report of the conservator or of its own findings,
determine that the continuance in business of the institution would
involve probable loss to its depositors or creditors, in which case
the provisions of Section 30 shall apply.
Section 30. Proceedings in Receivership and Liquidation. -
Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank or
quasi-bank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution; in
which cases, the Monetary Board may summarily and without
need for prior hearing forbid the institution from doing business in
the Philippines and designate the Philippine Deposit Insurance
Corporation as receiver of the banking institution.
xxxx
The actions of the Monetary Board taken under this section or
under Section 29 of this Act shall be final and executory, and may
not be restrained or set aside by the court except on petition for
certiorari on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction. The petition for certiorari may only
be filed by the stockholders of record representing the majority of
the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership,
liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or
the appointment of a receiver under this section shall be vested
exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the
designation of a receiver.33
On the strength of these provisions, it is the Monetary Board that
exercises exclusive jurisdiction over proceedings for receivership
of banks.
Crystal clear in Section 30 is the provision that says the
"appointment of a receiver under this section shall be vested
exclusively with the Monetary Board." The term "exclusively"
connotes that only the Monetary Board can resolve the issue of
whether a bank is to be placed under receivership and, upon an
affirmative finding, it also has authority to appoint a receiver. This
is further affirmed by the fact that the law allows the Monetary
Board to take action "summarily and without need for prior
hearing."
And, as a clincher, the law explicitly provides that "actions of the
Monetary Board taken under this section or under Section 29 of
this Act shall be final and executory, and may not be restrained or
set aside by the court except on a petition for certiorari on the
ground that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of
jurisdiction."1avvphi1
102
From the foregoing disquisition, there is no doubt that the RTC has
no jurisdiction to hear and decide a suit that seeks to place Banco
Filipino under receivership.
Koruga herself recognizes the BSPs power over the allegedly
unlawful acts of Banco Filipinos directors. The records of this case
bear out that Koruga, through her legal counsel, wrote the
Monetary Board34 on April 21, 2003 to bring to its attention the acts
she had enumerated in her complaint before the RTC. The letter
reads in part:
Banco Filipino and the current members of its Board of Directors
should be placed under investigation for violations of banking laws,
the commission of irregularities, and for conducting business in an
unsafe or unsound manner. They should likewise be placed under
preventive suspension by virtue of the powers granted to the
Monetary Board under Section 37 of the Central Bank Act. These
blatant violations of banking laws should not go by without penalty.
They have put Banco Filipino, its depositors and stockholders, and
the entire banking system (sic) in jeopardy.
xxxx
We urge you to look into the matter in your capacity as regulators.
Our clients, a minority stockholders, (sic) and many depositors of
Banco Filipino are prejudiced by a failure to regulate, and taxpayers
are prejudiced by accommodations granted by the BSP to Banco
Filipino35
In a letter dated May 6, 2003, BSP Supervision and Examination
Department III Director Candon B. Guerrero referred Korugas letter
to Arcenas for comment.36 On June 6, 2003, Banco Filipinos then
Executive Vice President and Corporate Secretary Francisco A.
Rivera submitted the banks comments essentially arguing that
Korugas accusations lacked legal and factual bases. 37
On the other hand, the BSP, in its Answer before the RTC, said that
it had been looking into Banco Filipinos activities. An October 2002
Report of Examination (ROE) prepared by the Supervision and
Examination Department (SED) noted certain dacion payments,
out-of-the-ordinary expenses, among other dealings. On July 24,
2003, the Monetary Board passed Resolution No. 1034 furnishing
Banco Filipino a copy of the ROE with instructions for the bank to
file its comment or explanation within 30 to 90 days under threat of
being fined or of being subjected to other remedial actions. The
ROE, the BSP said, covers substantially the same matters raised in
Korugas complaint. At the time of the filing of Korugas complaint
on August 20, 2003, the period for Banco Filipino to submit its
explanation had not yet expired. 38
Thus, the courts jurisdiction could only have been invoked after the
Monetary Board had taken action on the matter and only on the
ground that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of
jurisdiction.
Finally, there is one other reason why Korugas complaint before
the RTC cannot prosper. Given her own admission and the same is
likewise supported by evidence that she is merely a minority
stockholder of Banco Filipino, she would not have the standing to
question the Monetary Boards action. Section 30 of the New
Central Bank Act provides:
The petition for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock within ten (10)
days from receipt by the board of directors of the institution of the
order directing receivership, liquidation or conservatorship.
All the foregoing discussion yields the inevitable conclusion that
the CA erred in upholding the jurisdiction of, and remanding the
case to, the RTC. Given that the RTC does not have jurisdiction
over the subject matter of the case, its refusal to dismiss the case
on that ground amounted to grave abuse of discretion.
WHEREFORE, the foregoing premises considered, the Petition in
G.R. No. 168332 is DISMISSED, while the Petition in G.R. No.
169053 is GRANTED. The Decision of the Court of Appeals dated
July 20, 2005 in CA-G.R. SP No. 88422 is hereby SET ASIDE. The
Temporary Restraining Order issued by this Court on March 13,
2006 is made PERMANENT. Consequently, Civil Case No. 03-985,
pending before the Regional Trial Court of Makati City, is
DISMISSED.
23. G.R. No. 184778 October 2, 2009
BANGKO SENTRAL NG PILIPINAS MONETARY BOARD and CHUCHI
FONACIER, Petitioners, vs. HON. NINA G. ANTONIO-VALENZUELA,
in her capacity as Regional Trial Court Judge of Manila, Branch 28;
RURAL BANK OF PARAAQUE, INC.; RURAL BANK OF SAN JOSE
(BATANGAS), INC.; RURAL BANK OF CARMEN (CEBU), INC.;
PILIPINO RURAL BANK, INC.; PHILIPPINE COUNTRYSIDE RURAL
BANK, INC.; RURAL BANK OF CALATAGAN (BATANGAS), INC. (now
DYNAMIC RURAL BANK); RURAL BANK OF DARBCI, INC.; RURAL
BANK OF KANANGA (LEYTE), INC. (now FIRST INTERSTATE RURAL
BANK); RURAL BANK OF BISAYAS MINGLANILLA (now BANK OF
EAST ASIA); and SAN PABLO CITY DEVELOPMENT BANK,
INC., Respondents.
The Case
This is a Petition for Review on Certiorari under Rule 45 with
Prayer for Issuance of a Temporary Restraining Order (TRO)/Writ of
Preliminary Injunction, questioning the Decision dated September
30, 20081 of the Court of Appeals (CA) in CA-G.R. SP No. 103935.
The CA Decision upheld the Order2 dated June 4, 2008 of the
Regional Trial Court (RTC), Branch 28 in Manila, issuing writs of
preliminary injunction in Civil Case Nos. 08-119243, 08-119244,
08-119245, 08-119246, 08-119247, 08-119248, 08-119249, 08-
119250, 08-119251, and 08-119273, and the Order dated May 21,
2008 that consolidated the civil cases.
The Facts
In September of 2007, the Supervision and Examination
Department (SED) of the Bangko Sentral ng Pilipinas (BSP)
conducted examinations of the books of the following banks: Rural
Bank of Paraaque, Inc. (RBPI), Rural Bank of San Jose (Batangas),
Inc., Rural Bank of Carmen (Cebu), Inc., Pilipino Rural Bank, Inc.,
Philippine Countryside Rural Bank, Inc., Rural Bank of Calatagan
(Batangas), Inc. (now Dynamic Rural Bank), Rural Bank of Darbci,
Inc., Rural Bank of Kananga (Leyte), Inc. (now First Interstate Rural
Bank), Rural Bank de Bisayas Minglanilla (now Bank of East Asia),
and San Pablo City Development Bank, Inc.
After the examinations, exit conferences were held with the
officers or representatives of the banks wherein the SED
examiners provided them with copies of Lists of
Findings/Exceptions containing the deficiencies discovered during
the examinations. These banks were then required to comment
and to undertake the remedial measures stated in these lists
within 30 days from their receipt of the lists, which remedial
measures included the infusion of additional capital. Though the
banks claimed that they made the additional capital infusions,
petitioner Chuchi Fonacier, officer-in-charge of the SED, sent
separate letters to the Board of Directors of each bank, informing
103
them that the SED found that the banks failed to carry out the
required remedial measures. In response, the banks requested that
they be given time to obtain BSP approval to amend their Articles
of Incorporation, that they have an opportunity to seek investors.
They requested as well that the basis for the capital infusion figures
be disclosed, and noted that none of them had received the Report
of Examination (ROE) which finalizes the audit findings. They also
requested meetings with the BSP audit teams to reconcile audit
figures. In response, Fonacier reiterated the banks failure to
comply with the directive for additional capital infusions.
On May 12, 2008, the RBPI filed a complaint for nullification of the
BSP ROE with application for a TRO and writ of preliminary
injunction before the RTC docketed as Civil Case No. 08-119243
against Fonacier, the BSP, Amado M. Tetangco, Jr., Romulo L. Neri,
Vicente B. Valdepenas, Jr., Raul A. Boncan, Juanita D. Amatong,
Alfredo C. Antonio, and Nelly F. Villafuerte. RBPI prayed that
Fonacier, her subordinates, agents, or any other person acting in
her behalf be enjoined from submitting the ROE or any similar
report to the Monetary Board (MB), or if the ROE had already been
submitted, the MB be enjoined from acting on the basis of said
ROE, on the allegation that the failure to furnish the bank with a
copy of the ROE violated its right to due process.
The Rural Bank of San Jose (Batangas), Inc., Rural Bank of Carmen
(Cebu), Inc., Pilipino Rural Bank, Inc., Philippine Countryside Rural
Bank, Inc., Rural Bank of Calatagan (Batangas), Inc., Rural Bank of
Darbci, Inc., Rural Bank of Kananga (Leyte), Inc., and Rural Bank de
Bisayas Minglanilla followed suit, filing complaints with the RTC
substantially similar to that of RBPI, including the reliefs prayed for,
which were raffled to different branches and docketed as Civil
Cases Nos. 08-119244, 08-119245, 08-119246, 08-119247, 08-
119248, 08-119249, 08-119250, and 08-119251, respectively.
On May 13, 2008, the RTC denied the prayer for a TRO of Pilipino
Rural Bank, Inc. The bank filed a motion for reconsideration the
next day.
On May 14, 2008, Fonacier and the BSP filed their opposition to the
application for a TRO and writ of preliminary injunction in Civil Case
No. 08-119243 with the RTC. Respondent Judge Nina Antonio-
Valenzuela of Branch 28 granted RBPIs prayer for the issuance of a
TRO.
The other banks separately filed motions for consolidation of their
cases in Branch 28, which motions were granted. Judge Valenzuela
set the complaint of Rural Bank of San Jose (Batangas), Inc. for
hearing on May 15, 2008. Petitioners assailed the validity of the
consolidation of the nine cases before the RTC, alleging that the
court had already prejudged the case by the earlier issuance of a
TRO in Civil Case No. 08-119243, and moved for the inhibition of
respondent judge. Petitioners filed a motion for reconsideration
regarding the consolidation of the subject cases.
On May 16, 2008, San Pablo City Development Bank, Inc. filed a
similar complaint against the same defendants with the RTC, and
this was docketed as Civil Case No. 08-119273 that was later on
consolidated with Civil Case No. 08-119243. Petitioners filed an
Urgent Motion to Lift/Dissolve the TRO and an Opposition to the
earlier motion for reconsideration of Pilipino Rural Bank, Inc.
On May 19, 2008, Judge Valenzuela issued an Order granting the
prayer for the issuance of TROs for the other seven cases
consolidated with Civil Case No. 08-119243. On May 21, 2008,
Judge Valenzuela issued an Order denying petitioners motion for
reconsideration regarding the consolidation of cases in Branch 28.
On May 22, 2008, Judge Valenzuela granted the urgent motion for
reconsideration of Pilipino Rural Bank, Inc. and issued a TRO
similar to the ones earlier issued.
On May 26, 2008, petitioners filed a Motion to Dismiss against all
the complaints (except that of the San Pablo City Development
Bank, Inc.), on the grounds that the complaints stated no cause of
action and that a condition precedent for filing the cases had not
been complied with. On May 29, 2008, a hearing was conducted
on the application for a TRO and for a writ of preliminary
injunction of San Pablo City Development Bank, Inc.
The Ruling of the RTC
After the parties filed their respective memoranda, the RTC, on
June 4, 2008, ruled that the banks were entitled to the writs of
preliminary injunction prayed for. It held that it had been the
practice of the SED to provide the ROEs to the banks before
submission to the MB. It further held that as the banks are the
subjects of examinations, they are entitled to copies of the ROEs.
The denial by petitioners of the banks requests for copies of the
ROEs was held to be a denial of the banks right to due process.
The dispositive portion of the RTCs order reads:
WHEREFORE, the Court rules as follows:
1) Re: Civil Case No. 08-119243. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Rural Bank of Paranaque
Inc. is directed to post a bond executed to the defendants, in the
amount of P500,000.00 to the effect that the plaintiff will pay to
the defendants all damages which they may sustain by reason of
the injunction if the Court should finally decide that the plaintiff
was not entitled thereto. After posting of the bond and approval
thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection
with the examination conducted on the plaintiff, to the Monetary
Board. In case such a Report on Examination [sic] or any other
similar report prepared in connection with the examination
conducted on the plaintiff has been submitted to the Monetary
Board, the latter and its members (i.e. defendants Tetangco, Neri,
Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are
enjoined and restrained from acting on the basis of said report.
2) Re: Civil Case No. 08-119244. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Rural Bank of San Jose
(Batangas), Inc. is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the
plaintiff will pay to the defendants all damages which they may
sustain by reason of the injunction if the Court should finally
decide that the plaintiff was not entitled thereto. After posting of
the bond and approval thereof, let a writ of preliminary injunction
be issued to enjoin and restrain the defendants from submitting
the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the
Monetary Board. In case such a Report on Examination [sic] or
any other similar report prepared in connection with the
examination conducted on the plaintiff has been submitted to the
Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and
Villafuerte) are enjoined and restrained from acting on the basis of
said report.
3) Re: Civil Case No. 08-119245. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Rural Bank of Carmen
(Cebu), Inc. is directed to post a bond executed to the defendants,
in the amount of P500,000.00 to the effect that the plaintiff will
104
pay to the defendants all damages which they may sustain by
reason of the injunction if the Court should finally decide that the
plaintiff was not entitled thereto. After posting of the bond and
approval thereof, let a writ of preliminary injunction be issued to
enjoin and restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection with
the examination conducted on the plaintiff, to the Monetary Board.
In case such a Report on Examination [sic] or any other similar
report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter
and its members (i.e. defendants Tetangco, Neri, Valdepenas,
Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.
4) Re: Civil Case No. 08-119246. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Pilipino Rural Bank Inc. is
directed to post a bond executed to the defendants, in the amount
of P500,000.00 to the effect that the plaintiff will pay to the
defendants all damages which they may sustain by reason of the
injunction if the Court should finally decide that the plaintiff was not
entitled thereto. After posting of the bond and approval thereof, let
a writ of preliminary injunction be issued to enjoin and restrain the
defendants from submitting the Report of Examination or any other
similar report prepared in connection with the examination
conducted on the plaintiff, to the Monetary Board. In case such a
Report on Examination [sic] or any other similar report prepared in
connection with the examination conducted on the plaintiff has
been submitted to the Monetary Board, the latter and its members
(i.e. defendants Tetangco, Neri, Valdepenas, Boncan, Amatong,
Antonio, and Villafuerte) are enjoined and restrained from acting on
the basis of said report.
5) Re: Civil Case No. 08-119247. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Philippine Countryside Rural
Bank Inc. is directed to post a bond executed to the defendants, in
the amount of P500,000.00 to the effect that the plaintiff will pay to
the defendants all damages which they may sustain by reason of
the injunction if the Court should finally decide that the plaintiff was
not entitled thereto. After posting of the bond and approval thereof,
let a writ of preliminary injunction be issued to enjoin and restrain
the defendants from submitting the Report of Examination or any
other similar report prepared in connection with the examination
conducted on the plaintiff, to the Monetary Board. In case such a
Report on Examination [sic] or any other similar report prepared in
connection with the examination conducted on the plaintiff has
been submitted to the Monetary Board, the latter and its members
(i.e. defendants Tetangco, Neri, Valdepenas, Boncan, Amatong,
Antonio, and Villafuerte) are enjoined and restrained from acting on
the basis of said report.
6) Re: Civil Case No. 08-119248. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Dynamic Bank Inc. (Rural
Bank of Calatagan) is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the
plaintiff will pay to the defendants all damages which they may
sustain by reason of the injunction if the Court should finally decide
that the plaintiff was not entitled thereto. After posting of the bond
and approval thereof, let a writ of preliminary injunction be issued
to enjoin and restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection with
the examination conducted on the plaintiff, to the Monetary Board.
In case such a Report on Examination [sic] or any other similar
report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter
and its members (i.e. defendants Tetangco, Neri, Valdepenas,
Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.
7) Re: Civil Case No. 08-119249. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Rural Bank of DARBCI, Inc.
is directed to post a bond executed to the defendants, in the
amount of P500,000.00 to the effect that the plaintiff will pay to
the defendants all damages which they may sustain by reason of
the injunction if the Court should finally decide that the plaintiff
was not entitled thereto. After posting of the bond and approval
thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of
Examination or any other similar report prepared in connection
with the examination conducted on the plaintiff, to the Monetary
Board. In case such a Report on Examination [sic] or any other
similar report prepared in connection with the examination
conducted on the plaintiff has been submitted to the Monetary
Board, the latter and its members (i.e. defendants Tetangco, Neri,
Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are
enjoined and restrained from acting on the basis of said report.
8) Re: Civil Case No. 08-119250. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Rural Bank of Kananga Inc.
(First Intestate Bank), is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the
plaintiff will pay to the defendants all damages which they may
sustain by reason of the injunction if the Court should finally
decide that the plaintiff was not entitled thereto. After posting of
the bond and approval thereof, let a writ of preliminary injunction
be issued to enjoin and restrain the defendants from submitting
the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the
Monetary Board. In case such a Report on Examination [sic] or
any other similar report prepared in connection with the
examination conducted on the plaintiff has been submitted to the
Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and
Villafuerte) are enjoined and restrained from acting on the basis of
said report.
9) Re: Civil Case No. 08-119251. Pursuant to Rule 58, Section 4(b)
of the Revised Rules of Court, plaintiff Banco Rural De Bisayas
Minglanilla (Cebu) Inc. (Bank of East Asia) is directed to post a
bond executed to the defendants, in the amount of P500,000.00
to the effect that the plaintiff will pay to the defendants all
damages which they may sustain by reason of the injunction if the
Court should finally decide that the plaintiff was not entitled
thereto. After posting of the bond and approval thereof, let a writ
of preliminary injunction be issued to enjoin and restrain the
defendants from submitting the Report of Examination or any
other similar report prepared in connection with the examination
conducted on the plaintiff, to the Monetary Board. In case such a
Report on Examination [sic] or any other similar report prepared
in connection with the examination conducted on the plaintiff has
been submitted to the Monetary Board, the latter and its
members (i.e. defendants Tetangco, Neri, Valdepenas, Boncan,
Amatong, Antonio, and Villafuerte) are enjoined and restrained
from acting on the basis of said report.
10) Re: Civil Case No. 08-119273. Pursuant to Rule 58, Section
4(b) of the Revised Rules of Court, plaintiff San Pablo City
Development Bank, Inc. is directed to post a bond executed to the
defendants, in the amount of P500,000.00 to the effect that the
plaintiff will pay to the defendants all damages which they may
sustain by reason of the injunction if the Court should finally
decide that the plaintiff was not entitled thereto. After posting of
the bond and approval thereof, let a writ of preliminary injunction
be issued to enjoin and restrain the defendants from submitting
the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the
105
Monetary Board. In case such a Report on Examination [sic] or any
other similar report prepared in connection with the examination
conducted on the plaintiff has been submitted to the Monetary
Board, the latter and its members (i.e. defendants Tetangco, Neri,
Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are
enjoined and restrained from acting on the basis of said report. 3
The Ruling of the CA
Petitioners then brought the matter to the CA via a petition for
certiorari under Rule 65 claiming grave abuse of discretion on the
part of Judge Valenzuela when she issued the orders dated May 21,
2008 and June 4, 2008.
The CA ruled that the RTC committed no grave abuse of discretion
when it ordered the issuance of a writ of preliminary injunction and
when it ordered the consolidation of the 10 cases.
It held that petitioners should have first filed a motion for
reconsideration of the assailed orders, and failed to justify why they
resorted to a special civil action of certiorari instead.
The CA also found that aside from the technical aspect, there was
no grave abuse of discretion on the part of the RTC, and if there
was a mistake in the assessment of evidence by the trial court, that
should be characterized as an error of judgment, and should be
correctable via appeal.
The CA held that the principles of fairness and transparency dictate
that the respondent banks are entitled to copies of the ROE.
Regarding the consolidation of the 10 cases, the CA found that
there was a similarity of facts, reliefs sought, issues raised,
defendants, and that plaintiffs and defendants were represented by
the same sets of counsels. It found that the joint trial of these cases
would prejudice any substantial right of petitioners.
Finding that no grave abuse of discretion attended the issuance of
the orders by the RTC, the CA denied the petition.
On November 24, 2008, a TRO was issued by this Court, restraining
the CA, RTC, and respondents from implementing and enforcing the
CA Decision dated September 30, 2008 in CA-G.R. SP No. 103935. 4
By reason of the TRO issued by this Court, the SED was able to
submit their ROEs to the MB. The MB then prohibited the
respondent banks from transacting business and placed them
under receivership under Section 53 of Republic Act No. (RA)
87915 and Sec. 30 of RA
76536 through MB Resolution No. 1616 dated December 9, 2008;
Resolution Nos. 1637 and 1638 dated December 11, 2008;
Resolution Nos. 1647, 1648, and 1649 dated December 12, 2008;
Resolution Nos. 1652 and 1653 dated December 16, 2008; and
Resolution Nos. 1692 and 1695 dated December 19, 2008, with the
Philippine Deposit Insurance Corporation as the appointed receiver.
Now we resolve the main petition.
Grounds in Support of Petition
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT
FINDING THAT THE INJUNCTION ISSUED BY THE REGIONAL TRIAL
COURT VIOLATED SECTION 25 OF THE NEW CENTRAL BANK ACT
AND EFFECTIVELY HANDCUFFED THE BANGKO SENTRAL FROM
DISCHARGING ITS FUNCTIONS TO THE GREAT AND IRREPARABLE
DAMAGE OF THE COUNTRYS BANKING SYSTEM;
II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
FINDING THAT RESPONDENTS ARE ENTITLED TO BE FURNISHED
COPIES OF THEIR RESPECTIVE ROEs BEFORE THE SAME IS
SUBMITTED TO THE MONETARY BOARD IN VIEW OF THE
PRINCIPLES OF FAIRNESS AND TRANSPARENCY DESPITE LACK OF
EXPRESS PROVISION IN THE NEW CENTRAL BANK ACT REQUIRING
BSP TO DO THE SAME
III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
DEPARTING FROM WELL-ESTABLISHED PRECEPTS OF LAW AND
JURISPRUDENCE
A. THE EXCEPTIONS CITED BY PETITIONER JUSTIFIED RESORT TO
PETITION FOR CERTIORARI UNDER RULE 65 INSTEAD OF FIRST
FILING A MOTION FOR RECONSIDERATION
B. RESPONDENT BANKS ACT OF RESORTING IMMEDIATELY TO THE
COURT WAS PREMATURE SINCE IT WAS MADE IN UTTER
DISREGARD OF THE PRINCIPLE OF PRIMARY JURISDICTION AND
EXHAUSTION OF ADMINISTRATIVE REMEDY
C. THE ISSUANCE OF A WRIT OF PRELIMINARY INJUNCTION BY THE
REGIONAL TRIAL COURT WAS NOT ONLY IMPROPER BUT
AMOUNTED TO GRAVE ABUSE OF DISCRETION7
Our Ruling
The petition is meritorious.
In Lim v. Court of Appeals it was stated:
The requisites for preliminary injunctive relief are: (a) the invasion
of right sought to be protected is material and substantial; (b) the
right of the complainant is clear and unmistakable; and (c) there
is an urgent and paramount necessity for the writ to prevent
serious damage.
As such, a writ of preliminary injunction may be issued only upon
clear showing of an actual existing right to be protected during
the pendency of the principal action. The twin requirements of a
valid injunction are the existence of a right and its actual or
threatened violations. Thus, to be entitled to an injunctive writ,
the right to be protected and the violation against that right must
be shown.8
These requirements are absent in the present case.
In granting the writs of preliminary injunction, the trial court held
that the submission of the ROEs to the MB before the respondent
banks would violate the right to due process of said banks.
This is erroneous.
The respondent banks have failed to show that they are entitled
to copies of the ROEs. They can point to no provision of law, no
section in the procedures of the BSP that shows that the BSP is
required to give them copies of the ROEs. Sec. 28 of RA 7653, or
the New Central Bank Act, which governs examinations of banking
institutions, provides that the ROE shall be submitted to the MB;
the bank examined is not mentioned as a recipient of the ROE.
The respondent banks cannot claim a violation of their right to
due process if they are not provided with copies of the ROEs. The
same ROEs are based on the lists of findings/exceptions
containing the deficiencies found by the SED examiners when
they examined the books of the respondent banks. As found by
the RTC, these lists of findings/exceptions were furnished to the
officers or representatives of the respondent banks, and the
106
respondent banks were required to comment and to undertake
remedial measures stated in said lists. Despite these instructions,
respondent banks failed to comply with the SEDs directive.
Respondent banks are already aware of what is required of them by
the BSP, and cannot claim violation of their right to due process
simply because they are not furnished with copies of the ROEs.
Respondent banks were held by the CA to be entitled to copies of
the ROEs prior to or simultaneously with their submission to the
MB, on the principles of fairness and transparency. Further, the CA
held that if the contents of the ROEs are essentially the same as
those of the lists of findings/exceptions provided to said banks,
there is no reason not to give copies of the ROEs to the banks. This
is a flawed conclusion, since if the banks are already aware of the
contents of the ROEs, they cannot say that fairness and
transparency are not present. If sanctions are to be imposed upon
the respondent banks, they are already well aware of the reasons
for the sanctions, having been informed via the lists of
findings/exceptions, demolishing that particular argument. The
ROEs would then be superfluities to the respondent banks, and
should not be the basis for a writ of preliminary injunction. Also, the
reliance of the RTC on Banco Filipino v. Monetary Board 9 is
misplaced. The petitioner in that case was held to be entitled to
annexes of the Supervision and Examination Sectors reports, as it
already had a copy of the reports themselves. It was not the
subject of the case whether or not the petitioner was entitled to a
copy of the reports. And the ruling was made after the petitioner
bank was ordered closed, and it was allowed to be supplied with
annexes of the reports in order to better prepare its defense. In this
instance, at the time the respondent banks requested copies of the
ROEs, no action had yet been taken by the MB with regard to
imposing sanctions upon said banks.
The issuance by the RTC of writs of preliminary injunction is an
unwarranted interference with the powers of the MB. Secs. 29 and
30 of RA 765310 refer to the appointment of a conservator or a
receiver for a bank, which is a power of the MB for which they need
the ROEs done by the supervising or examining department. The
writs of preliminary injunction issued by the trial court hinder the
MB from fulfilling its function under the law. The actions of the MB
under Secs. 29 and 30 of RA 7653 "may not be restrained or set
aside by the court except on petition for certiorari on the ground
that the action taken was in excess of jurisdiction or with such
grave abuse of discretion as to amount to lack or excess of
jurisdiction." The writs of preliminary injunction order are precisely
what cannot be done under the law by preventing the MB from
taking action under either Sec. 29 or Sec. 30 of RA 7653.
As to the third requirement, the respondent banks have shown no
necessity for the writ of preliminary injunction to prevent serious
damage. The serious damage contemplated by the trial court was
the possibility of the imposition of sanctions upon respondent
banks, even the sanction of closure. Under the law, the sanction of
closure could be imposed upon a bank by the BSP even without
notice and hearing. The apparent lack of procedural due process
would not result in the invalidity of action by the MB. This was the
ruling in Central Bank of the Philippines v. Court of Appeals.11 This
"close now, hear later" scheme is grounded on practical and legal
considerations to prevent unwarranted dissipation of the banks
assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders, and the general public. The writ
of preliminary injunction cannot, thus, prevent the MB from taking
action, by preventing the submission of the ROEs and worse, by
preventing the MB from acting on such ROEs.
The trial court required the MB to respect the respondent banks
right to due process by allowing the respondent banks to view the
ROEs and act upon them to forestall any sanctions the MB might
impose. Such procedure has no basis in law and does in fact
violate the "close now, hear later" doctrine. We held in Rural Bank
of San Miguel, Inc. v. Monetary Board, Bangko Sentral ng Pilipinas:
It is well-settled that the closure of a bank may be considered as
an exercise of police power. The action of the MB on this matter is
final and executory. Such exercise may nonetheless be subject to
judicial inquiry and can be set aside if found to be in excess of
jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction.12
The respondent banks cannotthrough seeking a writ of
preliminary injunction by appealing to lack of due process, in a
roundabout manner prevent their closure by the MB. Their
remedy, as stated, is a subsequent one, which will determine
whether the closure of the bank was attended by grave abuse of
discretion. Judicial review enters the picture only after the MB has
taken action; it cannot prevent such action by the MB. The threat
of the imposition of sanctions, even that of closure, does not
violate their right to due process, and cannot be the basis for a
writ of preliminary injunction.
The "close now, hear later" doctrine has already been justified as
a measure for the protection of the public interest. Swift action is
called for on the part of the BSP when it finds that a bank is in dire
straits. Unless adequate and determined efforts are taken by the
government against distressed and mismanaged banks, public
faith in the banking system is certain to deteriorate to the
prejudice of the national economy itself, not to mention the losses
suffered by the bank depositors, creditors, and stockholders, who
all deserve the protection of the government. 13
The respondent banks have failed to show their entitlement to the
writ of preliminary injunction. It must be emphasized that an
application for injunctive relief is construed strictly against the
pleader.14 The respondent banks cannot rely on a simple appeal to
procedural due process to prove entitlement. The requirements
for the issuance of the writ have not been proved. No invasion of
the rights of respondent banks has been shown, nor is their right
to copies of the ROEs clear and unmistakable. There is also no
necessity for the writ to prevent serious damage. Indeed the
issuance of the writ of preliminary injunction tramples upon the
powers of the MB and prevents it from fulfilling its functions.
There is no right that the writ of preliminary injunction would
protect in this particular case. In the absence of a clear legal right,
the issuance of the injunctive writ constitutes grave abuse of
discretion.15 In the absence of proof of a legal right and the injury
sustained by the plaintiff, an order for the issuance of a writ of
preliminary injunction will be nullified.16
Courts are hereby reminded to take greater care in issuing
injunctive relief to litigants, that it would not violate any law. The
grant of a preliminary injunction in a case rests on the sound
discretion of the court with the caveat that it should be made with
great caution.17 Thus, the issuance of the writ of preliminary
injunction must have basis in and be in accordance with law. All
told, while the grant or denial of an injunction generally rests on
the sound discretion of the lower court, this Court may and should
intervene in a clear case of abuse.18
WHEREFORE, the petition is hereby GRANTED. The assailed CA
Decision dated September 30, 2008 in CA-G.R. SP No. 103935 is
hereby REVERSED. The assailed order and writ of preliminary
injunction of respondent Judge Valenzuela in Civil Case Nos. 08-
119243, 08-119244, 08-119245, 08-119246, 08-119247, 08-
107
119248, 08-119249, 08-119250, 08-119251, and 08-119273 are
hereby declared NULL and VOID.
24. G.R. No. 169334 September 8, 2006
LETICIA G. MIRANDA, petitioner, vs. PHILIPPINE DEPOSIT
INSURANCE CORPORATION, BANGKO SENTRAL NG PILIPINAS and
PRIME SAVINGS BANK, Respondents.
This Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeks a reversal of the Decision1 of the Court of Appeals
dated February 23, 2005 in CA-G.R. CV No. 77556 which reversed
and set aside the Decision2of the Regional Trial Court of Santiago
City, Branch 35, in Civil Case No. 35-2844 and the July 7, 2005
Resolution denying petitioner's Motion for Reconsideration. 3
Petitioner Leticia G. Miranda was a depositor of Prime Savings
Bank, Santiago City Branch. On June 3, 1999, she withdrew
substantial amounts from her account, but instead of cash she
opted to be issued a crossed cashier's check. She was thus issued
cashier's check no. 0000000518 in the sum of P2,500,000.00 and
cashier's check no. 0000000514 in the amount of P3,002,000.00. 4
Petitioner deposited the two checks into her account in another
bank on the same day, however, Bangko Sentral ng Pilipinas (BSP)
suspended the clearing privileges of Prime Savings Bank effective
2:00 p.m. of June 3, 1999. The two checks of petitioner were
returned to her unpaid.5
On June 4, 1999, Prime Savings Bank declared a bank holiday. On
January 7, 2000, the BSP placed Prime Savings Bank under the
receivership of the Philippine Deposit Insurance Corporation
(PDIC).6
Petitioner filed a civil action for sum of money in the Regional Trial
Court of Santiago City, Isabela to recover the funds from her unpaid
checks against Prime Savings Bank, PDIC and the BSP. Judgment on
the pleadings was rendered on March 1, 2001, the dispositive
portion of which reads:
WHEREFORE, judgment is rendered against defendants namely:
Philippine Deposit Insurance Corporation, Bangko Sentral ng
Pilipinas and Prime Bank, to pay jointly and solidarily the amount of
P5,502,000.00 to the plaintiff.
SO ORDERED.7
On appeal, the Court of Appeals reversed the trial court and ruled
in favor of the PDIC and BSP, dismissing the case against them,
without prejudice to the right of petitioner to file her claim before
the court designated to adjudicate on claims against Prime Savings
Bank. The dispositive portion of the appellate court's decision dated
February 23, 2005 thus reads:
WHEREFORE, the appeal is GRANTED and the decision appealed
from is REVERSED and SET ASIDE and the case is DISMISSED,
without prejudice to the right of Miranda to file her claim before the
court designated to adjudicate on claims against Prime Savings
Bank.
SO ORDERED.8
Petitioner's motion for reconsideration was denied, 9 hence, this
petition.
The issues presented by the petitioner before this Court can be
summarized as follows: (1) Whether the two cashier's checks
operate as an assignment of funds in the hands of the petitioner;
(2) Whether the claim lodged by the petitioner is a disputed claim
under Section 30 of Republic Act (R.A.) No. 7653, otherwise known
as the New Central Bank Act, and therefore, under the jurisdiction
of the liquidation court; and (3) Whether the respondents are
solidarily liable to the petitioner.
Petitioner contends that she ceased to be a depositor upon
withdrawal of her deposit and the issuance of the two cashier's
checks to her. As a holder in due course of the cashier's checks as
defined under Sections 52 and 191 of the Negotiable Instruments
Law, she is an assignee of the funds of Prime Savings Bank as
drawer thereof and entitled to its immediate payment. 10
Petitioner next argues that the present claim is not a disputed
claim in contemplation of Section 30 of the New Central Bank Act.
Since disputed claims refer to all claims, whether they be against
the assets of the insolvent bank, for specific performance, breach
of contract, or damages, it is manifest that petitioner's claim
cannot fall within the purview of a disputed claim because she is
recovering assigned funds which are segregated monies of Prime
Savings Bank.11
Petitioner further states that by the mere issuance of the cashier's
check, the funds represented by the check are transferred from
the credit of the maker to that of the payee or holder. Hence,
petitioner alleges that she cannot be placed on the same footing
with the ordinary creditors of the bank because Section 30 of R.A.
No. 7653 is for equality among creditors. She avers that she is not
a creditor thus is entitled to the immediate payment of her claim,
pursuant to Section 189 of the Negotiable Instruments Law and
existing jurisprudence. She argues that putting her on equal
footing with ordinary creditors, would contravene the provisions of
the Negotiable Instruments Law and would greatly diminish her
rights as a holder in due course of said two cashier's checks. 12
Petitioner also argues that respondents PDIC and BSP contrary to
Sections 185 and 189 of the Negotiable Instruments Law have
caused damage to the petitioner and should be held solidarily
liable by indemnifying the petitioner for the value of the two
cashier's checks.13
Respondents, on the other hand, state that the mere issuance of
the cashier's checks did not operate as assignment of funds in
favor of the petitioner. They argue that even prior to the issuance
of the cashier's checks, the bank was already cash-strapped,
which negates petitioner's claim that there was an assignment of
funds in her favor.14 There can be no assignment of funds when
there is no funds to speak of in the first place.
They likewise argue that the cashier's checks issued to petitioner
were not certified but crossed, hence, there was no assignment of
funds made by the cashier or manager of respondent Prime
Savings Bank-Santiago City Branch as it had insufficient funds to
meet the said checks either in its cash vault or with respondent
BSP to clear the said checks.15
Respondents argue that the instant case involves a disputed claim
of sum of money against a closed financial institution. Sections 30
and 31 of R.A. No. 7653, exclusively vests the authority to assess,
evaluate and determine the condition of any bank with the BSP,
while the PDIC has the primary responsibility of acting as receiver
or liquidator of the closed financial institution. 16 Since the
relationship between petitioner and Prime Savings Bank is one of
creditor and debtor, petitioner should file her claim with the
liquidation court constituted precisely for purposes of adjudicating
claims against the bank in accordance with the rules on
concurrence and preference of credits.17
108
Respondent PDIC alleges that it was impleaded in its representative
capacity as the receiver/liquidator of the closed institution,
therefore, it has no direct, personal and solidary liability for the
payment of the two cashier's checks. Its involvement came about
only because a bank under receivership or liquidation cannot sue or
be sued except through its receiver or liquidator. 18
Respondent BSP also insists that not being a party to the said
checks nor for imposing sanctions on co-respondent Prime Savings
Bank, is not liable on the said crossed cashier's checks. 19
Anent the first issue, the two cashier's checks issued by Prime
Savings Bank do not constitute an assignment of funds in the
hands of the petitioner as there were no funds to speak of in the
first place. The bank was financially insolvent for sometime, even
before the issuance of the checks on June 3, 1999. As the Court of
Appeals correctly ruled, the issuance of the cashier's checks to
petitioner did not constitute an assignment of funds, of which there
was practically none at the time these were issued, as the bank
was in dire financial straits for some time.20
As regards the second issue, the claim lodged by the petitioner
qualifies as a disputed claim subject to the jurisdiction of the
liquidation court. Regular courts do not have jurisdiction over
actions filed by claimants against an insolvent bank, unless there is
a clear showing that the action taken by the BSP, through the
Monetary Board in the closure of financial institutions was in excess
of jurisdiction, or with grave abuse of discretion.
The power and authority of the Monetary Board to close banks and
liquidate them thereafter when public interest so requires is an
exercise of the police power of the State. Police power, however, is
subject to judicial inquiry. It may not be exercised arbitrarily or
unreasonably and could be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust, or is tantamount to a
denial of due process and equal protection clauses of the
Constitution.21
"Disputed claims" refer to all claims, whether they be against the
assets of the insolvent bank, for specific performance, breach of
contract, damages, or whatever. 22 Petitioner's claim which involved
the payment of the two cashier's checks that were not honored by
Prime Savings Bank due to its closure falls within the ambit of a
claim against the assets of the insolvent bank. The issuance of the
cashier's checks by Prime Savings Bank to the petitioner created a
debtor/creditor relationship between them. This disputed claim
should therefore be lodged in the liquidation proceedings by the
petitioner as creditor, since the closure of Prime Savings Bank has
rendered all claims subsisting at that time moot which can best be
threshed out by the liquidation court and not the regular courts.
It is well-settled in both law and jurisprudence that the Central
Monetary Authority, through the Monetary Board, is vested with
exclusive authority to assess, evaluate and determine the condition
of any bank, and finding such condition to be one of insolvency, or
that its continuance in business would involve a probable loss to its
depositors or creditors, forbid bank or non-bank financial institution
to do business in the Philippines; and shall designate an official of
the BSP or other competent person as receiver to immediately take
charge of its assets and liabilities. 23
In Central Bank of the Philippines v. De la Cruz,24 we held that the
actions of the Monetary Board in proceedings on insolvency are
explicitly declared by law to be "final and executory." They may not
be set aside, or restrained, or enjoined by the courts, except upon
"convincing proof that the action is plainly arbitrary and made in
bad faith.
Hence, as clearly laid down in Ong v. Court of Appeals,25 the
rationale behind judicial liquidation is intended to prevent
multiplicity of actions against the insolvent bank. It is a pragmatic
arrangement designed to establish due process and orderliness in
the liquidation of the bank, to obviate the proliferation of
litigations and to avoid injustice and arbitrariness. The lawmaking
body contemplated that for convenience, only one court, if
possible, should pass upon the claims against the insolvent bank
and that the liquidation court should assist the Superintendent of
Banks and regulate his operations.
Regarding the third issue, it is only Prime Savings Bank that is
liable to pay for the amount of the two cashier's checks. Solidary
liability cannot attach to the BSP, in its capacity as government
regulator of banks, and the PDIC as statutory receiver under R.A.
No. 7653, because they are the principal government agencies
mandated by law to determine the financial viability of banks and
quasi-banks, and facilitate receivership and liquidation of closed
financial institutions, upon a factual determination of the latter's
insolvency.
As correctly pointed out by the Court of Appeals, the BSP should
not be held liable on the crossed cashier's checks for it was not a
party to the issuance of the same; nor can it be held liable for
imposing the sanctions on Prime Savings Bank which indirectly
affected Miranda, since it is mandated under Sec. 37 of R.A. No.
7653 to act accordingly.26 The BSP, through the Monetary Board
was well within its discretion to exercise this power granted by
law to issue a resolution suspending the interbank clearing
privileges of Prime Savings Bank, having made a factual
determination that the bank had deficient cash reserves
deposited before the BSP. There is no showing that the BSP
abused this discretionary power conferred upon it by law.
In addition, co-respondent PDIC was impleaded as a party-litigant
only in its representative capacity as the receiver/liquidator of
Prime Savings Bank. Both BSP and PDIC cannot therefore be held
directly and solidarily liable for the payment of the two cashier's
checks. Sole liability rests with Prime Savings Bank.
In the absence of fraud, the purchase of a cashier's check, like the
purchase of a draft on a correspondent bank, creates the relation
of creditor and debtor, not that of principal and agent, with the
result that the purchaser or holder thereof is not entitled to a
preference over general creditors in the assets of the bank issuing
the check, when it fails before payment of the check. However, in
a situation involving the element of fraud, where a cashier's
check is purchased from a bank at a time when it is insolvent, as
its officers know or are bound to know by the exercise of
reasonable diligence, it has been held that the purchase is
entitled to a preference in the assets of the bank on its liquidation
before the check is paid.27
As correctly found by the Court of Appeals:
Prime Savings as a bank did not collapse overnight but was
hemorrhaging and in financial extremis for some time, a fact
which could not have gone unnoticed by the bank officers. They
could not have issued in good faith checks for the total sum of
P5,502,000.00 knowing that the bank's coffers could not meet
this.28
Clearly, there was fraud or the intent to deceive when the two
cashier's checks dated June 3, 1999 were issued by Prime Savings
Bank to the petitioner.
109
In the distribution of assets of Prime Savings Bank, Section 31 of
the New Central Bank Act which provides that "[i]n case of
liquidation of a bank or quasi-bank, after payment of the cost of
proceedings, including reasonable expenses and fees of the
receiver to be allowed by the court, the receiver shall pay the debts
of such institution, under order of the court, in accordance with the
rules on concurrence and preference of credit as provided in the
Civil Code," should apply.
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals dated February 23, 2005 and the Resolution dated July 7,
2005, in CA-G.R. CV No. 77556, are AFFIRMED with
the MODIFICATION that petitioner Leticia G. Miranda is entitled to a
preference in the assets of Prime Savings Bank in its liquidation for
the amounts of P3,002,000.00 and P2,500,000.00, respectively
stated in Cashier's Check No. 0000000514 and 0000000518 dated
June 3, 1999 in the proceedings before the liquidation court
designated to adjudicate on all claims against Prime Savings Bank,
in accordance with the rules on concurrence and preference of
credits as provided in the Civil Code.
25. G.R. No. 168644 February 16, 2010
BSB GROUP, INC., represented by its President, Mr. RICARDO
BANGAYAN, Petitioner, vs. SALLY GO a.k.a. SALLY GO-
BANGAYAN, Respondent.
This is a Petition for Review under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals in CA-G.R. SP No.
876001 dated April 20, 2005, which reversed and set aside the
September 13, 20042 and November 5, 20043 Orders issued by the
Regional Trial Court of Manila, Branch 364 in Criminal Case No. 02-
202158 for qualified theft. The said orders, in turn, respectively
denied the motion filed by herein respondent Sally Go for the
suppression of the testimonial and documentary evidence relative
to a Security Bank account, and denied reconsideration.
The basic antecedents are no longer disputed.
Petitioner, the BSB Group, Inc., is a duly organized domestic
corporation presided by its herein representative, Ricardo
Bangayan (Bangayan). Respondent Sally Go, alternatively referred
to as Sally Sia Go and Sally Go-Bangayan, is Bangayans wife, who
was employed in the company as a cashier, and was engaged,
among others, to receive and account for the payments made by
the various customers of the company.
In 2002, Bangayan filed with the Manila Prosecutors Office a
complaint for estafa and/or qualified theft 5 against respondent,
alleging that several checks 6 representing the aggregate amount
of P1,534,135.50 issued by the companys customers in payment
of their obligation were, instead of being turned over to the
companys coffers, indorsed by respondent who deposited the
same to her personal banking account maintained at Security Bank
and Trust Company (Security Bank) in Divisoria, Manila
Branch.7 Upon a finding that the evidence adduced was
uncontroverted, the assistant city prosecutor recommended the
filing of the Information for qualified theft against respondent.8
Accordingly, respondent was charged before the Regional Trial
Court of Manila, Branch 36, in an Information, the inculpatory
portion of which reads:
That in or about or sometime during the period comprised (sic)
between January 1988 [and] October 1989, inclusive, in the City of
Manila, Philippines, the said accused did then and there willfully,
unlawfully and feloniously with intent [to] gain and without the
knowledge and consent of the owner thereof, take, steal and carry
away cash money in the total amount of P1,534,135.50 belonging
to BSB GROUP OF COMPANIES represented by RICARDO
BANGAYAN, to the damage and prejudice of said owner in the
aforesaid amount of P1,534,135.50, Philippine currency.
That in the commission of the said offense, said accused acted
with grave abuse of confidence, being then employed as cashier
by said complainant at the time of the commission of the said
offense and as such she was entrusted with the said amount of
money.
Contrary to law.9
Respondent entered a negative plea when arraigned.10 The trial
ensued. On the premise that respondent had allegedly encashed
the subject checks and deposited the corresponding amounts
thereof to her personal banking account, the prosecution moved
for the issuance of subpoena duces tecum /ad testificandum
against the respective managers or records custodians of Security
Banks Divisoria Branch, as well as of the Asian Savings Bank
(now Metropolitan Bank & Trust Co. [Metrobank]), in Jose Abad
Santos, Tondo, Manila Branch.11 The trial court granted the motion
and issued the corresponding subpoena.12
Respondent filed a motion to quash the subpoena dated
November 4, 2003, addressed to Metrobank, noting to the court
that in the complaint-affidavit filed with the prosecutor, there was
no mention made of the said bank account, to which respondent,
in addition to the Security Bank account identified as Account No.
01-14-006, allegedly deposited the proceeds of the supposed
checks. Interestingly, while respondent characterized the
Metrobank account as irrelevant to the case, she, in the same
motion, nevertheless waived her objection to the irrelevancy of
the Security Bank account mentioned in the same complaint-
affidavit, inasmuch as she was admittedly willing to address the
allegations with respect thereto. 13
Petitioner, opposing respondents move, argued for the relevancy
of the Metrobank account on the ground that the complaint-
affidavit showed that there were two checks which respondent
allegedly deposited in an account with the said bank. 14 To this,
respondent filed a supplemental motion to quash, invoking the
absolutely confidential nature of the Metrobank account under the
provisions of Republic Act (R.A.) No. 1405.15 The trial court did not
sustain respondent; hence, it denied the motion to quash for lack
of merit.16
Meanwhile, the prosecution was able to present in court the
testimony of Elenita Marasigan (Marasigan), the representative of
Security Bank. In a nutshell, Marasigans testimony sought to
prove that between 1988 and 1989, respondent, while engaged
as cashier at the BSB Group, Inc., was able to run away with the
checks issued to the company by its customers, endorse the
same, and credit the corresponding amounts to her personal
deposit account with Security Bank. In the course of the
testimony, the subject checks were presented to Marasigan for
identification and marking as the same checks received by
respondent, endorsed, and then deposited in her personal
account with Security Bank.17 But before the testimony could be
completed, respondent filed a Motion to Suppress,18 seeking the
exclusion of Marasigans testimony and accompanying documents
thus far received, bearing on the subject Security Bank account.
This time respondent invokes, in addition to irrelevancy, the
privilege of confidentiality under R.A. No. 1405.
110
The trial court, nevertheless, denied the motion in its September
13, 2004 Order.19 A motion for reconsideration was subsequently
filed, but it was also denied in the Order dated November 5,
2004.20 These two orders are the subject of the instant case.
Aggrieved, and believing that the trial court gravely abused its
discretion in acting the way it did, respondent elevated the matter
to the Court of Appeals via a petition for certiorari under Rule 65.
Finding merit in the petition, the Court of Appeals reversed and set
aside the assailed orders of the trial court in its April 20, 2005
Decision.21The decision reads:
WHEREFORE, the petition is hereby GRANTED. The assailed orders
dated September 13, 2004 and November 5, 2004 are REVERSED
and SET ASIDE. The testimony of the SBTC representative is
ordered stricken from the records.
SO ORDERED.22
With the denial of its motion for reconsideration, 23 petitioner is now
before the Court pleading the same issues as those raised before
the lower courts.
In this Petition24 under Rule 45, petitioner averred in the main that
the Court of Appeals had seriously erred in reversing the assailed
orders of the trial court, and in effect striking out Marasigans
testimony dealing with respondents deposit account with Security
Bank.25 It asserted that apart from the fact that the said evidence
had a direct relation to the subject matter of the case for qualified
theft and, hence, brings the case under one of the exceptions to
the coverage of confidentiality under R.A. 1405.26 Petitioner
believed that what constituted the subject matter in litigation was
to be determined by the allegations in the information and, in this
respect, it alluded to the assailed November 5, 2004 Order of the
trial court, which declared to be erroneous the limitation of the
present inquiry merely to what was contained in the information. 27
For her part, respondent claimed that the money represented by
the Security Bank account was neither relevant nor material to the
case, because nothing in the criminal information suggested that
the money therein deposited was the subject matter of the case.
She invited particular attention to that portion of the criminal
Information which averred that she has stolen and carried away
cash money in the total amount of P1,534,135.50. She advanced
the notion that the term "cash money" stated in the Information
was not synonymous with the checks she was purported to have
stolen from petitioner and deposited in her personal banking
account. Thus, the checks which the prosecution had Marasigan
identify, as well as the testimony itself of Marasigan, should be
suppressed by the trial court at least for violating respondents
right to due process.28 More in point, respondent opined that
admitting the testimony of Marasigan, as well as the evidence
pertaining to the Security Bank account, would violate the secrecy
rule under R.A. No. 1405.29
In its reply, petitioner asserted the sufficiency of the allegations in
the criminal Information for qualified theft, as the same has
sufficiently alleged the elements of the offense charged. It posits
that through Marasigans testimony, the Court would be able to
establish that the checks involved, copies of which were attached
to the complaint-affidavit filed with the prosecutor, had indeed
been received by respondent as cashier, but were, thereafter,
deposited by the latter to her personal account with Security Bank.
Petitioner held that the checks represented the cash money stolen
by respondent and, hence, the subject matter in this case is not
only the cash amount represented by the checks supposedly stolen
by respondent, but also the checks themselves. 30
We derive from the conflicting advocacies of the parties that the
issue for resolution is whether the testimony of Marasigan and the
accompanying documents are irrelevant to the case, and whether
they are also violative of the absolutely confidential nature of
bank deposits and, hence, excluded by operation of R.A. No. 1405.
The question of admissibility of the evidence thus comes to the
fore. And the Court, after deliberative estimation, finds the subject
evidence to be indeed inadmissible.
Prefatorily, fundamental is the precept in all criminal prosecutions,
that the constitutive acts of the offense must be established with
unwavering exactitude and moral certainty because this is the
critical and only requisite to a finding of guilt. 31 Theft is present
when a person, with intent to gain but without violence against or
intimidation of persons or force upon things, takes the personal
property of another without the latters consent. It is qualified
when, among others, and as alleged in the instant case, it is
committed with abuse of confidence.32 The prosecution of this
offense necessarily focuses on the existence of the following
elements: (a) there was taking of personal property belonging to
another; (b) the taking was done with intent to gain; (c) the taking
was done without the consent of the owner; (d) the taking was
done without violence against or intimidation of persons or force
upon things; and (e) it was done with abuse of confidence. 33 In
turn, whether these elements concur in a way that overcomes the
presumption of guiltlessness, is a question that must pass the test
of relevancy and competency in accordance with Section 334 Rule
128 of the Rules of Court.
Thus, whether these pieces of evidence sought to be suppressed
in this case the testimony of Marasigan, as well as the checks
purported to have been stolen and deposited in respondents
Security Bank account are relevant, is to be addressed by
considering whether they have such direct relation to the fact in
issue as to induce belief in its existence or non-existence; or
whether they relate collaterally to a fact from which, by process of
logic, an inference may be made as to the existence or non-
existence of the fact in issue.35
The fact in issue appears to be that respondent has taken away
cash in the amount of P1,534,135.50 from the coffers of
petitioner. In support of this allegation, petitioner seeks to
establish the existence of the elemental act of taking by adducing
evidence that respondent, at several times between 1988 and
1989, deposited some of its checks to her personal account with
Security Bank. Petitioner addresses the incongruence between the
allegation of theft of cash in the Information, on the one hand,
and the evidence that respondent had first stolen the checks and
deposited the same in her banking account, on the other hand, by
impressing upon the Court that there obtains no difference
between cash and check for purposes of prosecuting respondent
for theft of cash. Petitioner is mistaken.
In theft, the act of unlawful taking connotes deprivation of
personal property of one by another with intent to gain, and it is
immaterial that the offender is able or unable to freely dispose of
the property stolen because the deprivation relative to the
offended party has already ensued from such act of
execution.36 The allegation of theft of money, hence, necessitates
that evidence presented must have a tendency to prove that the
offender has unlawfully taken money belonging to another.
Interestingly, petitioner has taken pains in attempting to draw a
connection between the evidence subject of the instant review,
and the allegation of theft in the Information by claiming that
respondent had fraudulently deposited the checks in her own
name. But this line of argument works more prejudice than favor,
111
because it in effect, seeks to establish the commission, not of theft,
but rather of some other crime probably estafa.
Moreover, that there is no difference between cash and check is
true in other instances. In estafa by conversion, for instance,
whether the thing converted is cash or check, is immaterial in
relation to the formal allegation in an information for that offense; a
check, after all, while not regarded as legal tender, is normally
accepted under commercial usage as a substitute for cash, and the
credit it represents in stated monetary value is properly capable of
appropriation. And it is in this respect that what the offender does
with the check subsequent to the act of unlawfully taking it
becomes material inasmuch as this offense is a continuing one.37 In
other words, in pursuing a case for this offense, the prosecution
may establish its cause by the presentation of the checks involved.
These checks would then constitute the best evidence to establish
their contents and to prove the elemental act of conversion in
support of the proposition that the offender has indeed indorsed
the same in his own name.38
Theft, however, is not of such character. Thus, for our purposes, as
the Information in this case accuses respondent of having stolen
cash, proof tending to establish that respondent has actualized her
criminal intent by indorsing the checks and depositing the proceeds
thereof in her personal account, becomes not only irrelevant but
also immaterial and, on that score, inadmissible in evidence.
We now address the issue of whether the admission of Marasigans
testimony on the particulars of respondents account with Security
Bank, as well as of the corresponding evidence of the checks
allegedly deposited in said account, constitutes an unallowable
inquiry under R.A. 1405.
It is conceded that while the fundamental law has not bothered
with the triviality of specifically addressing privacy rights relative to
banking accounts, there, nevertheless, exists in our jurisdiction a
legitimate expectation of privacy governing such accounts. The
source of this right of expectation is statutory, and it is found in
R.A. No. 1405,39otherwise known as the Bank Secrecy Act of
1955. 40
R.A. No. 1405 has two allied purposes. It hopes to discourage
private hoarding and at the same time encourage the people to
deposit their money in banking institutions, so that it may be
utilized by way of authorized loans and thereby assist in economic
development.41 Owing to this piece of legislation, the confidentiality
of bank deposits remains to be a basic state policy in the
Philippines.42 Section 2 of the law institutionalized this policy by
characterizing as absolutely confidential in general all deposits of
whatever nature with banks and other financial institutions in the
country. It declares:
Section 2. All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued
by the Government of the Philippines, its political subdivisions and
its instrumentalities, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or looked
into by any person, government official, bureau or office, except
upon written permission of the depositor, or in cases of
impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where
the money deposited or invested is the subject matter of the
litigation.1avvphi1
Subsequent statutory enactments43 have expanded the list of
exceptions to this policy yet the secrecy of bank deposits still lies
as the general rule, falling as it does within the legally recognized
zones of privacy.44 There is, in fact, much disfavor to construing
these primary and supplemental exceptions in a manner that
would authorize unbridled discretion, whether governmental or
otherwise, in utilizing these exceptions as authority for
unwarranted inquiry into bank accounts. It is then perceivable
that the present legal order is obliged to conserve the absolutely
confidential nature of bank deposits.45
The measure of protection afforded by the law has been explained
in China Banking Corporation v. Ortega.46That case principally
addressed the issue of whether the prohibition against an
examination of bank deposits precludes garnishment in
satisfaction of a judgment. Ruling on that issue in the negative,
the Court found guidance in the relevant portions of the
legislative deliberations on Senate Bill No. 351 and House Bill No.
3977, which later became the Bank Secrecy Act, and it held that
the absolute confidentiality rule in R.A. No. 1405 actually aims at
protection from unwarranted inquiry or investigation if the
purpose of such inquiry or investigation is merely to determine
the existence and nature, as well as the amount of the deposit in
any given bank account. Thus,
x x x The lower court did not order an examination of or inquiry
into the deposit of B&B Forest Development Corporation, as
contemplated in the law. It merely required Tan Kim Liong to
inform the court whether or not the defendant B&B Forest
Development Corporation had a deposit in the China Banking
Corporation only for purposes of the garnishment issued by it, so
that the bank would hold the same intact and not allow any
withdrawal until further order. It will be noted from the discussion
of the conference committee report on Senate Bill No. 351 and
House Bill No. 3977which later became Republic Act No. 1405,
that it was not the intention of the lawmakers to place banks
deposits beyond the reach of execution to satisfy a final
judgmentThus:
x x x Mr. Marcos: Now, for purposes of the record, I should like the
Chairman of the Committee on Ways and Means to clarify this
further. Suppose an individual has a tax case. He is being held
liable by the Bureau of Internal Revenue [(BIR)] or, say, P1,000.00
worth of tax liability, and because of this the deposit of this
individual [has been] attached by the [BIR].
Mr. Ramos: The attachment will only apply after the court has
pronounced sentence declaring the liability of such person. But
where the primary aim is to determine whether he has a bank
deposit in order to bring about a proper assessment by the [BIR],
such inquiry is not allowed by this proposed law.
Mr. Marcos: But under our rules of procedure and under the Civil
Code, the attachment or garnishment of money deposited is
allowed. Let us assume for instance that there is a preliminary
attachment which is for garnishment or for holding liable all
moneys deposited belonging to a certain individual, but such
attachment or garnishment will bring out into the open the value
of such deposit. Is that prohibited by... the law?
Mr. Ramos: It is only prohibited to the extent that the inquiry... is
made only for the purpose of satisfying a tax liability already
declared for the protection of the right in favor of the government;
but when the object is merely to inquire whether he has a deposit
or not for purposes of taxation, then this is fully covered by the
law. x x x
Mr. Marcos: The law prohibits a mere investigation into the
existence and the amount of the deposit.
112
Mr. Ramos: Into the very nature of such deposit. x x x47
In taking exclusion from the coverage of the confidentiality rule,
petitioner in the instant case posits that the account maintained by
respondent with Security Bank contains the proceeds of the checks
that she has fraudulently appropriated to herself and, thus, falls
under one of the exceptions in Section 2 of R.A. No. 1405 that the
money kept in said account is the subject matter in litigation. To
highlight this thesis, petitioner avers, citing Mathay v. Consolidated
Bank and Trust Co., 48 that the subject matter of the action refers to
the physical facts; the things real or personal; the money, lands,
chattels and the like, in relation to which the suit is prosecuted,
which in the instant case should refer to the money deposited in
the Security Bank account.49 On the surface, however, it seems that
petitioners theory is valid to a point, yet a deeper treatment tends
to show that it has argued quite off-tangentially. This, because,
while Mathay did explain what the subject matter of an action is, it
nevertheless did so only to determine whether the class suit in that
case was properly brought to the court.
What indeed constitutes the subject matter in litigation in relation
to Section 2 of R.A. No. 1405 has been pointedly and amply
addressed in Union Bank of the Philippines v. Court of Appeals, 50 in
which the Court noted that the inquiry into bank deposits allowable
under R.A. No. 1405 must be premised on the fact that the money
deposited in the account is itself the subject of the action. 51 Given
this perspective, we deduce that the subject matter of the action in
the case at bar is to be determined from the indictment that
charges respondent with the offense, and not from the evidence
sought by the prosecution to be admitted into the records. In the
criminal Information filed with the trial court, respondent,
unqualifiedly and in plain language, is charged with qualified theft
by abusing petitioners trust and confidence and stealing cash in
the amount of P1,534,135.50. The said Information makes no
factual allegation that in some material way involves the checks
subject of the testimonial and documentary evidence sought to be
suppressed. Neither do the allegations in said Information make
mention of the supposed bank account in which the funds
represented by the checks have allegedly been kept.
In other words, it can hardly be inferred from the indictment itself
that the Security Bank account is the ostensible subject of the
prosecutions inquiry. Without needlessly expanding the scope of
what is plainly alleged in the Information, the subject matter of the
action in this case is the money amounting to P1,534,135.50
alleged to have been stolen by respondent, and not the money
equivalent of the checks which are sought to be admitted in
evidence. Thus, it is that, which the prosecution is bound to prove
with its evidence, and no other.
It comes clear that the admission of testimonial and documentary
evidence relative to respondents Security Bank account serves no
other purpose than to establish the existence of such account, its
nature and the amount kept in it. It constitutes an attempt by the
prosecution at an impermissible inquiry into a bank deposit account
the privacy and confidentiality of which is protected by law. On this
score alone, the objection posed by respondent in her motion to
suppress should have indeed put an end to the controversy at the
very first instance it was raised before the trial court.
In sum, we hold that the testimony of Marasigan on the particulars
of respondents supposed bank account with Security Bank and the
documentary evidence represented by the checks adduced in
support thereof, are not only incompetent for being excluded by
operation of R.A. No. 1405. They are likewise irrelevant to the case,
inasmuch as they do not appear to have any logical and reasonable
connection to the prosecution of respondent for qualified theft. We
find full merit in and affirm respondents objection to the evidence
of the prosecution. The Court of Appeals was, therefore, correct in
reversing the assailed orders of the trial court.
A final note. In any given jurisdiction where the right of privacy
extends its scope to include an individuals financial privacy rights
and personal financial matters, there is an intermediate or
heightened scrutiny given by courts and legislators to laws
infringing such rights.52 Should there be doubts in upholding the
absolutely confidential nature of bank deposits against affirming
the authority to inquire into such accounts, then such doubts
must be resolved in favor of the former. This attitude persists
unless congress lifts its finger to reverse the general state policy
respecting the absolutely confidential nature of bank deposits.53
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. SP No. 87600 dated April 20, 2005, reversing
the September 13, 2004 and November 5, 2004 Orders of the
Regional Trial Court of Manila, Branch 36 in Criminal Case No. 02-
202158, is AFFIRMED.
26. G.R. No. 174134 July 30, 2008
FIRST PLANTERS PAWNSHOP, INC., Petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, Respondent.
First Planters Pawnshop, Inc. (petitioner) contests the deficiency
value-added and documentary stamp taxes imposed upon it by
the Bureau of Internal Revenue (BIR) for the year 2000. The core
of petitioner's argument is that it is not a lending investor within
the purview of Section 108(A) of the National Internal Revenue
Code (NIRC), as amended, and therefore not subject to value-
added tax (VAT). Petitioner also contends that a pawn ticket is not
subject to documentary stamp tax (DST) because it is not proof of
the pledge transaction, and even assuming that it is so, still, it is
not subject to tax since a documentary stamp tax is levied on the
document issued and not on the transaction.
The facts:
In a Pre-Assessment Notice dated July 7, 2003, petitioner was
informed by the BIR that it has an existing tax deficiency on its
VAT and DST liabilities for the year 2000. The deficiency
assessment was at P541,102.79 for VAT and P23,646.33 for
DST.1 Petitioner protested the assessment for lack of legal and
factual bases.2
Petitioner subsequently received a Formal Assessment Notice on
December 29, 2003, directing payment of VAT deficiency in the
amount of P541,102.79 and DST deficiency in the amount
of P24,747.13, inclusive of surcharge and interest. 3 Petitioner filed
a protest,4 which was denied by Acting Regional Director Anselmo
G. Adriano per Final Decision on Disputed Assessment dated
January 29, 2004.5
Petitioner then filed a petition for review with the Court of Tax
Appeals (CTA).6 In a Decision dated May 9, 2005, the 2nd Division
of the CTA upheld the deficiency assessment.7 Petitioner filed a
motion for reconsideration8which was denied in a Resolution
dated October 7, 2005.9
Petitioner appealed to the CTA En Banc which rendered a Decision
dated June 7, 2006, the dispositive portion of which reads as
follows:
WHEREFORE, premises considered, the Petition for Review is
hereby DENIED for lack of merit. The assailed Decision dated May
113
9, 2005 and Resolution dated October 7, 2005 are hereby
AFFIRMED.
SO ORDERED.10
Petitioner sought reconsideration but this was denied by the
CTA En Banc per Resolution dated August 14, 2006.11
Hence, the present petition for review under Rule 45 of the Rules of
Court based on the following grounds:
I THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY
ERRED IN FINDING PETITIONER LIABLE FOR VAT.
II THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY
ERRED IN RULING THAT PETITIONER IS LIABLE FOR DST ON PAWN
TICKETS.12
The determination of petitioner's tax liability depends on the tax
treatment of a pawnshop business. Oddly, there has not been any
definitive declaration in this regard despite the fact that pawnshops
have long been in existence. All that has been stated is what
pawnshops are not, but not what pawnshops are.
The BIR itself has maintained an ambivalent stance on this issue.
Initially, in Revenue Memorandum Order No. 15-91 issued on March
11, 1991, a pawnshop business was considered as "akin to lending
investors business activity" and subject to 5% percentage tax
beginning January 1, 1991, under Section 116 of the Tax Code of
1977, as amended by E.O. No. 273.13
With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in
1994,14 the BIR abandoned its earlier position and maintained that
pawnshops are subject to 10% VAT, as implemented by Revenue
Regulations No. 7-95. This was complemented by Revenue
Memorandum Circular No. 45-01 dated October 12, 2001, which
provided that pawnshop operators are liable to the 10% VAT based
on gross receipts beginning January 1, 1996, while pawnshops
whose gross annual receipts do not exceed P550,000.00 are liable
for percentage tax, pursuant to Section 109(z) of the Tax Code of
1997.
CTA decisions affirmed the BIR's position that pawnshops are
subject to VAT. In H. Tambunting Pawnshop, Inc. v. Commissioner of
Internal Revenue,15 the CTA ruled that the petitioner therein was
subject to 10% VAT under Section 108 of the Tax Code of
1997. Antam Pawnshop Corporation v. Commissioner of Internal
Revenue16reiterates said ruling. It was the CTA's view that the
services rendered by pawnshops fall under the general definition of
"sale or exchange of services" under Section 108(A) of the Tax
Code of 1997.
On July 15, 2003, the Court rendered Commissioner of Internal
Revenue v. Michel J. Lhuillier Pawnshop, Inc. 17 in which it was
categorically ruled that while pawnshops are engaged in the
business of lending money, they are not considered "lending
investors" for the purpose of imposing percentage taxes. 18 The
Court gave the following reasons: first, under the 1997 Tax Code,
pawnshops and lending investors were subjected to different tax
treatments; second, Congress never intended pawnshops to be
treated in the same way as lending investors; third, Section 116 of
the NIRC of 1977 subjects to percentage tax dealers in securities
and lending investors only; and lastly, the BIR had ruled several
times prior to the issuance of RMO No. 15-91 and RMC 43-91 that
pawnshops were not subject to the 5% percentage tax on lending
investors imposed by Section 116 of the NIRC of 1977, as amended
by Executive Order No. 273.
In view of said ruling, the BIR issued Revenue Memorandum
Circular No. 36-2004 dated June 16, 2004, canceling the previous
lending investor's tax assessments on pawnshops. Said Circular
stated, inter alia:
In view of the said Supreme Court decision, all assessments on
pawnshops for percentage taxes as lending investors are hereby
cancelled. This Circular is being issued for the sole purpose of
resolving the tax liability of pawnshops to the 5% lending
investors tax provided under the then Section 116 of the NIRC of
1977, as amended, and shall not cover issues relating to their
other tax liabilities. All internal revenue officials are enjoined from
issuing assessments on pawnshops for percentage taxes on
lending investors, under the then Section 116 of the NIRC of 1977,
as amended.
For purposes of the gross receipt tax provided for under Republic
Act No. 9294, the pawnshops are now subject thereof. This shall
however, be covered by another issuance. 19
Revenue Memorandum Circular No. 37-2004 was issued on the
same date whereby pawnshop businesses were allowed to settle
their VAT liabilities for the tax years 1996-2002 pursuant to a
memorandum of agreement entered into by the Commissioner of
Internal Revenue and the Chambers of Pawnbrokers of the
Philippines, Inc. The Circular likewise instructed all revenue
officers to ensure that "all VAT due from pawnshops beginning
January 1, 2003, including increments thereto, if any, are
assessed and collected from pawnshops under its jurisdiction."
In the interim, however, Congress passed Republic Act (R.A.) No.
9238 on February 5, 2004 entitled, "An Act Amending Certain
Sections of the National Internal Revenue Code of 1997, as
amended, by Excluding Several Services from the Coverage of the
Value-added Tax and Re-imposing the Gross Receipts Tax on
Banks and Non-bank Financial Intermediaries Performing Quasi-
banking Functions and Other Non-bank Financial Intermediaries
beginning January 01, 2004."20
Pending publication of R.A. No. 9238, the BIR issued Bank Bulletin
No. 2004-01 on February 10, 2004 advising all banks and non-
bank financial intermediaries that they shall remain liable under
the VAT system.
When R.A. No. 9238 took effect on February 16, 2004, the
Department of Finance issued Revenue Regulations No. 10-
2004 dated October 18, 2004, classifying pawnshops as Other
Non-bank Financial Intermediaries. The BIR then issued Revenue
Memorandum Circular No. 73-2004 on November 25, 2004,
prescribing the guidelines and policies on the assessment and
collection of 10% VAT for gross annual sales/receipts
exceeding P550,000.00 or 3% percentage tax for gross annual
sales/receipts not exceeding P550,000.00 of pawnshops prior to
January 1, 2005.
In fine, prior to the EVAT Law, pawnshops were treated as lending
investors subject to lending investor's tax. Subsequently, with the
Court's ruling in Lhuillier, pawnshops were then treated as VAT-
able enterprises under the general classification of "sale or
exchange of services" under Section 108(A) of the Tax Code of
1997, as amended. R.A. No. 9238 finally classified pawnshops as
Other Non-bank Financial Intermediaries.
The Court finds that pawnshops should have been treated as non-
bank financial intermediaries from the very beginning, subject to
the appropriate taxes provided by law, thus
114
 Under the National Internal Revenue Code of 1977,21 pawnshops
should have been levied the 5% percentage tax on gross receipts
imposed on bank and non-bank financial intermediaries under
Section 119 (now Section 121 of the Tax Code of 1997);
With the imposition of the VAT under R.A. No. 7716 or the EVAT
Law,22 pawnshops should have been subjected to the 10% VAT
imposed on banks and non-bank financial intermediaries and
financial institutions under Section 102 of the Tax Code of 1977
(now Section 108 of the Tax Code of 1997);23
This was restated by R.A. No. 8241,24 which amended R.A. No.
7716, although the levy, collection and assessment of the 10% VAT
on services rendered by banks, non-bank financial intermediaries,
finance companies, and other financial intermediaries not
performing quasi-banking functions, were made effective January 1,
1998;25
R.A. No. 8424 or the Tax Reform Act of 199726 likewise imposed a
10% VAT under Section 108 but the levy, collection and assessment
thereof were again deferred until December 31, 1999;27
The levy, collection and assessment of the 10% VAT was further
deferred by R.A. No. 8761 until December 31, 2000, and by R.A. No.
9010, until December 31, 2002;
With no further deferments given by law, the levy, collection and
assessment of the 10% VAT on banks, non-bank financial
intermediaries, finance companies, and other financial
intermediaries not performing quasi-banking functions were finally
made effective beginning January 1, 2003;
Finally, with the enactment of R.A. No. 9238, the services of
banks, non-bank financial intermediaries, finance companies, and
other financial intermediaries not performing quasi-banking
functions were specifically exempted from VAT, 28 and the 0% to 5%
percentage tax on gross receipts on other non-bank financial
intermediaries was reimposed under Section 122 of the Tax Code of
1997.29
At the time of the disputed assessment, that is, for the year 2000,
pawnshops were not subject to 10% VAT under the general
provision on "sale or exchange of services" as defined under
Section 108(A) of the Tax Code of 1997, which states: "'sale or
exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or
consideration x x x." Instead, due to the specific nature of its
business, pawnshops were then subject to 10% VAT under the
category of non-bank financial intermediaries, as provided in the
same Section 108(A), which reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase "sale or exchange of services" means the performance
of all kinds or services in the Philippines for others for a fee,
remuneration or consideration, including x x x services of banks,
non-bank financial intermediaries and finance companies; and non-
life insurance companies (except their crop insurances), including
surety, fidelity, indemnity and bonding companies; and similar
services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties. The
phrase 'sale or exchange of services' shall likewise include: x x x
(Emphasis and underscoring supplied)
The tax treatment of pawnshops as non-bank financial
intermediaries is not without basis.
R.A. No. 337, as amended, or the General Banking Act
characterizes the terms banking institution and bank as
synonymous and interchangeable and specifically include
commercial banks, savings bank, mortgage banks, development
banks, rural banks, stock savings and loan associations, and
branches and agencies in the Philippines of foreign banks.30 R.A.
No. 8791 or the General Banking Law of 2000, meanwhile,
provided thatbanks shall refer to entities engaged in the lending
of funds obtained in the form of deposits.31 R.A. No. 8791 also
included cooperative banks, Islamic banks and other banks as
determined by the Monetary Board of the Bangko Sentral ng
Pilipinas in the classification of banks.32lavvphi1
Financial intermediaries, on the other hand, are defined as
"persons or entities whose principal functions include the lending,
investing or placement of funds or evidences of indebtedness or
equity deposited with them, acquired by them, or otherwise
coursed through them, either for their own account or for the
account of others."33
It need not be elaborated that pawnshops are non-banks/banking
institutions. Moreover, the nature of their business activities
partakes that of a financial intermediary in that its principal
function is lending.
A pawnshop's business and operations are governed by
Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act
and Central Bank Circular No. 374 (Rules and Regulations for
Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as "a
person or entity engaged in the business of lending money on
personal property delivered as security for loans and shall be
synonymous, and may be used interchangeably, with pawnbroker
or pawn brokerage."
That pawnshops are to be treated as non-bank financial
intermediaries is further bolstered by the fact that pawnshops are
under the regulatory supervision of the Bangko Sentral ng
Pilipinas and covered by its Manual of Regulations for Non-Bank
Financial Institutions. The Manual includes pawnshops in the list of
non-bank financial intermediaries, viz.:
4101Q.1 Financial Intermediaries
xxx
Non-bank financial intermediaries shall include the following:
(1) A person or entity licensed and/or registered with any
government regulatory body as a non-bank financial intermediary,
such as investment house, investment company, financing
company, securities dealer/broker, lending investor, pawnshop,
money broker x x x. (Emphasis supplied)
Revenue Regulations No. 10-2004, in fact, recognized these
bases, to wit:
SEC. 2. BASES OF QUALIFYING PAWNSHOPS AS NON-BANK
FINANCIAL INTERMEDIARIES. - Whereas, in relation to Sec. 2.3 of
Rev. Regs No. 9-2004 defining "Non-bank Financial Intermediaries,
the term "pawnshop" as defined under Presidential Decree No.
114 which authorized its creation, to be a person or entity
115
engaged in the business of lending money, all fall within the
classification of Non-bank Financial Intermediaries and therefore,
covered by Sec. 4 of R.A. No. 9238.
This classification is equally supported by Subsection 4101Q.1 of
the BSP Manual of Regulations for Non-Bank Financial
Intermediaries and reiterated in BSP Circular No. 204-99, classifying
pawnshops as one of Non-bank Financial Intermediaries within the
supervision of the Bangko Sentral ng Pilipinas.
Ultimately, R.A. No. 9238 categorically confirmed the classification
of pawnshops as non-bank financial intermediaries.
Coming now to the issue at hand - Since petitioner is a non-bank
financial intermediary, it is subject to 10% VAT for the tax years
1996 to 2002; however, with the levy, assessment and collection of
VAT from non-bank financial intermediaries being specifically
deferred by law,34 then petitioner is not liable for VAT during these
tax years. But with the full implementation of the VAT system on
non-bank financial intermediaries starting January 1, 2003,
petitioner is liable for 10% VAT for said tax year. And beginning
2004 up to the present, by virtue of R.A. No. 9238, petitioner is no
longer liable for VAT but it is subject to percentage tax on gross
receipts from 0% to 5 %, as the case may be.
Lastly, petitioner is liable for documentary stamp taxes.
The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc.
v. Commissioner of Internal Revenue,35 in which it was ruled that
the subject of DST is not limited to the document alone. Pledge,
which is an exercise of a privilege to transfer obligations, rights or
properties incident thereto, is also subject to DST, thus
x x x the subject of a DST is not limited to the document
embodying the enumerated transactions. A DST is an excise tax on
the exercise of a right or privilege to transfer obligations, rights or
properties incident thereto. In Philippine Home Assurance
Corporation v. Court of Appeals, it was held that:
xxxx
Pledge is among the privileges, the exercise of which is subject to
DST. A pledge may be defined as an accessory, real and unilateral
contract by virtue of which the debtor or a third person delivers to
the creditor or to a third person movable property as security for
the performance of the principal obligation, upon the fulfillment of
which the thing pledged, with all its accessions and accessories,
shall be returned to the debtor or to the third person. This is
essentially the business of pawnshops which are defined under
Section 3 of Presidential Decree No. 114, or the Pawnshop
Regulation Act, as persons or entities engaged in lending money on
personal property delivered as security for loans.
Section 12 of the Pawnshop Regulation Act and Section 21 of the
Rules and Regulations For Pawnshops issued by the Central Bank to
implement the Act, require every pawnshop or pawnbroker to issue,
at the time of every such loan or pledge, a memorandum or ticket
signed by the pawnbroker and containing the following details: (1)
name and residence of the pawner; (2) date the loan is granted; (3)
amount of principal loan; (4) interest rate in percent; (5) period of
maturity; (6) description of pawn; (7) signature of pawnbroker or
his authorized agent; (8) signature or thumb mark of pawner or his
authorized agent; and (9) such other terms and conditions as may
be agreed upon between the pawnbroker and the pawner. In
addition, Central Bank Circular No. 445, prescribed a standard form
of pawn tickets with entries for the required details on its face and
the mandated terms and conditions of the pledge at the dorsal
portion thereof.
Section 3 of the Pawnshop Regulation Act defines a pawn ticket as
follows:
xxxx
True, the law does not consider said ticket as an evidence of
security or indebtedness. However, for purposes of taxation, the
same pawn ticket is proof of an exercise of a taxable privilege of
concluding a contract of pledge. At any rate, it is not said ticket
that creates the pawnshops obligation to pay DST but the
exercise of the privilege to enter into a contract of pledge. There
is therefore no basis in petitioners assertion that a DST is literally
a tax on a document and that no tax may be imposed on a pawn
ticket.
The settled rule is that tax laws must be construed in favor of the
taxpayer and strictly against the government; and that a tax
cannot be imposed without clear and express words for that
purpose. Taking our bearing from the foregoing doctrines, we
scrutinized Section 195 of the NIRC, but there is no way that said
provision may be interpreted in favor of petitioner. Section 195
unqualifiedly subjects all pledges to DST. It states that "[o]n every
x x x pledge x x x there shall be collected a documentary stamp
tax x x x." It is clear, categorical, and needs no further
interpretation or construction. The explicit tenor thereof requires
hardly anything than a simple application.
xxxx
In the instant case, there is no law specifically and expressly
exempting pledges entered into by pawnshops from the payment
of DST. Section 199 of the NIRC enumerated certain documents
which are not subject to stamp tax; but a pawnshop ticket is not
one of them. Hence, petitioners nebulous claim that it is not
subject to DST is without merit. It cannot be over-emphasized that
tax exemption represents a loss of revenue to the government
and must, therefore, not rest on vague inference. Exemption from
taxation is never presumed. For tax exemption to be recognized,
the grant must be clear and express; it cannot be made to rest on
doubtful implications.
Under the principle of stare decisis et non quieta movere (follow
past precedents and do not disturb what has been settled), once a
case has been decided one way, any other case involving exactly
the same point at issue, as in the case at bar, should be decided
in the same manner.36
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision
dated June 7, 2006 and Resolution dated August 14, 2006 of the
Court of Tax Appeals En Banc is MODIFIED to the effect that the
Bureau of Internal Revenue assessment for VAT deficiency in the
amount of P541,102.79 for the year 2000 is REVERSED and SET
ASIDE, while its assessment for DST deficiency in the amount
of P24,747.13, inclusive of surcharge and interest, is UPHELD.
27. [G.R. No. 138569. September 11, 2003]
THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner,
vs. COURT OF APPEALS and L.C. DIAZ and COMPANY,
CPAs, respondents.
The Case
116
Before us is a petition for review of the Decision[1] of the Court of
Appeals dated 27 October 1998 and its Resolution dated 11 May
1999. The assailed decision reversed the Decision[2]of the Regional
Trial Court of Manila, Branch 8, absolving petitioner Consolidated
Bank and Trust Corporation, now known as Solidbank Corporation
(Solidbank), of any liability. The questioned resolution of the
appellate court denied the motion for reconsideration of Solidbank
but modified the decision by deleting the award of exemplary
damages, attorneys fees, expenses of litigation and cost of suit.
The Facts
Solidbank is a domestic banking corporation organized and existing
under Philippine laws. Private respondent L.C. Diaz and Company,
CPAs (L.C. Diaz), is a professional partnership engaged in the
practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with
Solidbank, designated as Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes
Macaraya (Macaraya), filled up a savings (cash) deposit slip
for P990 and a savings (checks) deposit slip for P50.Macaraya
instructed the messenger of L.C. Diaz, Ismael Calapre (Calapre), to
deposit the money with Solidbank. Macaraya also gave Calapre the
Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two
deposit slips and the passbook. The teller acknowledged receipt of
the deposit by returning to Calapre the duplicate copies of the two
deposit slips. Teller No. 6 stamped the deposit slips with the words
DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since
the transaction took time and Calapre had to make another deposit
for L.C. Diaz with Allied Bank, he left the passbook with
Solidbank. Calapre then went to Allied Bank. When Calapre
returned to Solidbank to retrieve the passbook, Teller No. 6
informed him that somebody got the passbook. [3] Calapre went
back to L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies
with a check of P200,000. Macaraya, together with Calapre, went to
Solidbank and presented to Teller No. 6 the deposit slip and
check. The teller stamped the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the
deposit slip. When Macaraya asked for the passbook, Teller No. 6
told Macaraya that someone got the passbook but she could not
remember to whom she gave the passbook. When Macaraya asked
Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that
someone shorter than Calapre got the passbook. Calapre was then
standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August
1991 for the deposit of a check for P90,000 drawn on Philippine
Banking Corporation (PBC). This PBC check of L.C. Diaz was a check
that it had long closed.[4] PBC subsequently dishonored the check
because of insufficient funds and because the signature in the
check differed from PBCs specimen signature. Failing to get back
the passbook, Macaraya went back to her office and reported the
matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief
Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to stop
any transaction using the same passbook until L.C. Diaz could open
a new account.[5] On the same day, Diaz formally wrote Solidbank
to make the same request. It was also on the same day that L.C.
Diaz learned of the unauthorized withdrawal the day before, 14
August 1991, of P300,000 from its savings account. The withdrawal
slip for the P300,000 bore the signatures of the authorized
signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The
signatories, however, denied signing the withdrawal slip. A certain
Noel Tamayo received the P300,000.
In an Information[6] dated 5 September 1991, L.C. Diaz charged its
messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola
with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after
the City Prosecutor filed a Motion to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from
Solidbank the return of its money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint [7] for Recovery of a
Sum of Money against Solidbank with the Regional Trial Court of
Manila, Branch 8. After trial, the trial court rendered on 28
December 1994 a decision absolving Solidbank and dismissing
the complaint.
L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October
1998, the Court of Appeals issued its Decision reversing the
decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution
denying the motion for reconsideration of Solidbank. The
appellate court, however, modified its decision by deleting the
award of exemplary damages and attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the rules on savings
account written on the passbook. The rules state that possession
of this book shall raise the presumption of ownership and any
payment or payments made by the bank upon the production of
the said book and entry therein of the withdrawal shall have the
same effect as if made to the depositor personally. [9]
At the time of the withdrawal, a certain Noel Tamayo was not only
in possession of the passbook, he also presented a withdrawal slip
with the signatures of the authorized signatories of L.C. Diaz. The
specimen signatures of these persons were in the signature
cards. The teller stamped the withdrawal slip with the words
Saving Teller No. 5. The teller then passed on the withdrawal slip
to Genere Manuel (Manuel) for authentication. Manuel verified the
signatures on the withdrawal slip. The withdrawal slip was then
given to another officer who compared the signatures on the
withdrawal slip with the specimen on the signature cards. The trial
court concluded that Solidbank acted with care and observed the
rules on savings account when it allowed the withdrawal
of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to
L.C. Diaz to prove that the signatures on the withdrawal slip were
forged. The trial court admonished L.C. Diaz for not offering in
evidence the National Bureau of Investigation (NBI) report on the
authenticity of the signatures on the withdrawal slip
for P300,000. The trial court believed that L.C. Diaz did not offer
this evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the
depositor must keep the passbook under lock and key. [10] When
another person presents the passbook for withdrawal prior to
Solidbanks receipt of the notice of loss of the passbook, that
person is considered as the owner of the passbook. The trial court
ruled that the passbook presented during the questioned
117
transaction was now out of the lock and key and presumptively
ready for a business transaction.[11]
Solidbank did not have any participation in the custody and care of
the passbook. The trial court believed that Solidbanks act of
allowing the withdrawal of P300,000 was not the direct and
proximate cause of the loss. The trial court held that L.C. Diazs
negligence caused the unauthorized withdrawal. Three facts
establish L.C. Diazs negligence: (1) the possession of the passbook
by a person other than the depositor L.C. Diaz; (2) the presentation
of a signed withdrawal receipt by an unauthorized person; and (3)
the possession by an unauthorized person of a PBC check long
closed by L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did
not follow the precautionary procedures observed by the two
parties whenever L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must accompany
withdrawals of more than P20,000. The letter must request
Solidbank to allow the withdrawal and convert the amount to a
managers check. The bearer must also have a letter authorizing
him to withdraw the same amount. Another person driving a car
must accompany the bearer so that he would not walk from
Solidbank to the office in making the withdrawal. The trial court
pointed out that L.C. Diaz disregarded these precautions in its past
withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without
any separate letter of authorization or any communication with
Solidbank that the money be converted into a managers check.
The trial court further justified the dismissal of the complaint by
holding that the case was a last ditch effort of L.C. Diaz to
recover P300,000 after the dismissal of the criminal case against
Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered
DISMISSING the complaint.
The Court further renders judgment in favor of defendant bank
pursuant to its counterclaim the amount of Thirty Thousand Pesos
(P30,000.00) as attorneys fees.
With costs against plaintiff.
SO ORDERED.[12]
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbanks negligence was the
proximate cause of the unauthorized withdrawal of P300,000 from
the savings account of L.C. Diaz. The appellate court reached this
conclusion after applying the provision of the Civil Code on quasi-
delict, to wit:
Article 2176. Whoever by act or omission causes damage to
another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called a quasi-delict and
is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict
are present in this case, namely: (a) damages suffered by the
plaintiff; (b) fault or negligence of the defendant, or some other
person for whose acts he must respond; and (c) the connection of
cause and effect between the fault or negligence of the defendant
and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who
received the withdrawal slip for P300,000 allowed the withdrawal
without making the necessary inquiry. The appellate court stated
that the teller, who was not presented by Solidbank during trial,
should have called up the depositor because the money to be
withdrawn was a significant amount. Had the teller called up L.C.
Diaz, Solidbank would have known that the withdrawal was
unauthorized. The teller did not even verify the identity of the
impostor who made the withdrawal. Thus, the appellate court
found Solidbank liable for its negligence in the selection and
supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent
in entrusting its deposits to its messenger and its messenger in
leaving the passbook with the teller, Solidbank could not escape
liability because of the doctrine of last clear chance. Solidbank
could have averted the injury suffered by L.C. Diaz had it called
up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required
from Solidbank is more than that of a good father of a family. The
business and functions of banks are affected with public interest.
Banks are obligated to treat the accounts of their depositors with
meticulous care, always having in mind the fiduciary nature of
their relationship with their clients. The Court of Appeals found
Solidbank remiss in its duty, violating its fiduciary relationship
with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, premises considered, the decision appealed from is
hereby REVERSED and a new one entered.
1. Ordering defendant-appellee Consolidated Bank and Trust
Corporation to pay plaintiff-appellant the sum of Three Hundred
Thousand Pesos (P300,000.00), with interest thereon at the rate
of 12% per annum from the date of filing of the complaint until
paid, the sum of P20,000.00 as exemplary damages,
and P20,000.00 as attorneys fees and expenses of litigation as
well as the cost of suit; and
2. Ordering the dismissal of defendant-appellees counterclaim in
the amount of P30,000.00 as attorneys fees.
SO ORDERED.[13]
Acting on the motion for reconsideration of Solidbank, the
appellate court affirmed its decision but modified the award of
damages. The appellate court deleted the award of exemplary
damages and attorneys fees. Invoking Article 2231[14] of the Civil
Code, the appellate court ruled that exemplary damages could be
granted if the defendant acted with gross negligence. Since
Solidbank was guilty of simple negligence only, the award of
exemplary damages was not justified. Consequently, the award of
attorneys fees was also disallowed pursuant to Article 2208 of the
Civil Code. The expenses of litigation and cost of suit were also
not imposed on Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October
27, 1998 is affirmed with modification by deleting the award of
118
exemplary damages and attorneys fees, expenses of litigation and
cost of suit.
SO ORDERED.[15]
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and resolution of the
Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD
HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE
IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS
MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT
BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS
ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES
THAT A BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR
BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF
LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS
TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE
WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO
SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE
GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY
PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN
THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO
ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER
FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT
TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO
RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE
DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197
OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT
PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY. [16]
The Ruling of the Court
The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of Appeals conflict on
the application of the law. The trial court pinned the liability on L.C.
Diaz based on the provisions of the rules on savings account, a
recognition of the contractual relationship between Solidbank and
L.C. Diaz, the latter being a depositor of the former. On the other
hand, the Court of Appeals applied the law on quasi-delict to
determine who between the two parties was ultimately
negligent. The law on quasi-delict or culpa aquiliana is generally
applicable when there is no pre-existing contractual relationship
between the parties.
We hold that Solidbank is liable for breach of contract due to
negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan.[17] Article 1980 of the
Civil Code expressly provides that x x x savings x x x deposits of
money in banks and similar institutions shall be governed by the
provisions concerning simple loan. There is a debtor-creditor
relationship between the bank and its depositor.The bank is the
debtor and the depositor is the creditor. The depositor lends the
bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and
the depositor is the contract that determines the rights and
obligations of the parties.
The law imposes on banks high standards in view of the fiduciary
nature of banking. Section 2 of Republic Act No. 8791 (RA 8791),
[18]
which took effect on 13 June 2000, declares that the State
recognizes the fiduciary nature of banking that requires high
standards of integrity and performance.[19] This new provision in
the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990
case of Simex International v. Court of Appeals,[20] holding that the
bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature
of their relationship.[21]
This fiduciary relationship means that the banks obligation to
observe high standards of integrity and performance is deemed
written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to
assume a degree of diligence higher than that of a good father of
a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or
contract, and absent such stipulation then the diligence of a good
father of a family.[22] Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must observe high
standards of integrity and performance in servicing their
depositors. Although RA 8791 took effect almost nine years after
the unauthorized withdrawal of the P300,000 from L.C. Diazs
savings account, jurisprudence[23] at the time of the withdrawal
already imposed on banks the same high standard of diligence
required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship
does not convert the contract between the bank and its
depositors from a simple loan to a trust agreement, whether
express or implied. Failure by the bank to pay the depositor is
failure to pay a simple loan, and not a breach of trust. [24] The law
simply imposes on the bank a higher standard of integrity and
performance in complying with its obligations under the contract
of simple loan, beyond those required of non-bank debtors under
a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan
into a trust agreement because banks do not accept deposits to
enrich depositors but to earn money for themselves. The law
allows banks to offer the lowest possible interest rate to
depositors while charging the highest possible interest rate on
their own borrowers. The interest spread or differential belongs to
the bank and not to the depositors who are not cestui que trust of
banks. If depositors are cestui que trust of banks, then the
interest spread or income belongs to the depositors, a situation
that Congress certainly did not intend in enacting Section 2 of RA
8791.
Solidbanks Breach of its Contractual Obligation
Article 1172 of the Civil Code provides that responsibility arising
from negligence in the performance of every kind of obligation is
demandable. For breach of the savings deposit agreement due to
negligence, or culpa contractual, the bank is liable to its depositor.
119
Calapre left the passbook with Solidbank because the transaction
took time and he had to go to Allied Bank for another
transaction. The passbook was still in the hands of the employees
of Solidbank for the processing of the deposit when Calapre left
Solidbank. Solidbanks rules on savings account require that the
deposit book should be carefully guarded by the depositor and kept
under lock and key, if possible. When the passbook is in the
possession of Solidbanks tellers during withdrawals, the law
imposes on Solidbank and its tellers an even higher degree of
diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of
diligence in insuring that they return the passbook only to the
depositor or his authorized representative. The tellers know, or
should know, that the rules on savings account provide that any
person in possession of the passbook is presumptively its owner. If
the tellers give the passbook to the wrong person, they would be
clothing that person presumptive ownership of the passbook,
facilitating unauthorized withdrawals by that person. For failing to
return the passbook to Calapre, the authorized representative of
L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to
observe such high degree of diligence in safeguarding the
passbook, and in insuring its return to the party authorized to
receive the same.
In culpa contractual, once the plaintiff proves a breach of contract,
there is a presumption that the defendant was at fault or
negligent. The burden is on the defendant to prove that he was not
at fault or negligent. In contrast, in culpa aquiliana the plaintiff has
the burden of proving that the defendant was negligent. In the
present case, L.C. Diaz has established that Solidbank breached its
contractual obligation to return the passbook only to the authorized
representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning
the passbook to Calapre. The burden was on Solidbank to prove
that there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present
to the trial court Teller No. 6, the teller with whom Calapre left the
passbook and who was supposed to return the passbook to
him. The record does not indicate that Teller No. 6 verified the
identity of the person who retrieved the passbook. Solidbank also
failed to adduce in evidence its standard procedure in verifying the
identity of the person retrieving the passbook, if there is such a
procedure, and that Teller No. 6 implemented this procedure in the
present case.
Solidbank is bound by the negligence of its employees under the
principle of respondeat superior or command responsibility. The
defense of exercising the required diligence in the selection and
supervision of employees is not a complete defense in culpa
contractual, unlike in culpa aquiliana.[25]
The bank must not only exercise high standards of integrity and
performance, it must also insure that its employees do likewise
because this is the only way to insure that the bank will comply
with its fiduciary duty. Solidbank failed to present the teller who
had the duty to return to Calapre the passbook, and thus failed to
prove that this teller exercised the high standards of integrity and
performance required of Solidbanks employees.
Proximate Cause of the Unauthorized Withdrawal
Another point of disagreement between the trial and appellate
courts is the proximate cause of the unauthorized withdrawal. The
trial court believed that L.C. Diazs negligence in not securing its
passbook under lock and key was the proximate cause that allowed
the impostor to withdraw the P300,000. For the appellate court,
the proximate cause was the tellers negligence in processing the
withdrawal without first verifying with L.C. Diaz. We do not agree
with either court.
Proximate cause is that cause which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces
the injury and without which the result would not have occurred.
[26]
Proximate cause is determined by the facts of each case upon
mixed considerations of logic, common sense, policy and
precedent.[27]
L.C. Diaz was not at fault that the passbook landed in the hands of
the impostor. Solidbank was in possession of the passbook while it
was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook
only to Calapre, the authorized representative of L.C.
Diaz. Solidbank failed to fulfill its contractual obligation because it
gave the passbook to another person.
Solidbanks failure to return the passbook to Calapre made
possible the withdrawal of the P300,000 by the impostor who took
possession of the passbook. Under Solidbanks rules on savings
account, mere possession of the passbook raises the presumption
of ownership. It was the negligent act of Solidbanks Teller No. 6
that gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands of the
impostor, the loss of P300,000 would not have happened. Thus,
the proximate cause of the unauthorized withdrawal was
Solidbanks negligence in not returning the passbook to Calapre.
We do not subscribe to the appellate courts theory that the
proximate cause of the unauthorized withdrawal was the tellers
failure to call up L.C. Diaz to verify the withdrawal. Solidbank did
not have the duty to call up L.C. Diaz to confirm the withdrawal.
There is no arrangement between Solidbank and L.C. Diaz to this
effect. Even the agreement between Solidbank and L.C. Diaz
pertaining to measures that the parties must observe whenever
withdrawals of large amounts are made does not direct Solidbank
to call up L.C. Diaz.
There is no law mandating banks to call up their clients whenever
their representatives withdraw significant amounts from their
accounts. L.C. Diaz therefore had the burden to prove that it is the
usual practice of Solidbank to call up its clients to verify a
withdrawal of a large amount of money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been
put on guard to verify the withdrawal. Prior to the withdrawal
of P300,000, the impostor deposited with Teller No. 6 theP90,000
PBC check, which later bounced. The impostor apparently
deposited a large amount of money to deflect suspicion from the
withdrawal of a much bigger amount of money. The appellate
court thus erred when it imposed on Solidbank the duty to call up
L.C. Diaz to confirm the withdrawal when no law requires this from
banks and when the teller had no reason to be suspicious of the
transaction.
Solidbank continues to foist the defense that Ilagan made the
withdrawal. Solidbank claims that since Ilagan was also a
messenger of L.C. Diaz, he was familiar with its teller so that there
was no more need for the teller to verify the withdrawal.
Solidbank relies on the following statements in the Booking and
Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged
check of PBC and indicated the amount of P90,000 which he
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deposited in favor of L.C. Diaz and Company. After successfully
withdrawing this large sum of money, accused Ilagan gave alias
Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab
in the amount of P1,000 to transport him (Ilagan) to his home
province at Bauan, Batangas.Ilagan extravagantly and lavishly
spent his money but a big part of his loot was wasted in cockfight
and horse racing. Ilagan was apprehended and meekly admitted his
guilt.[28] (Emphasis supplied.)
L.C. Diaz refutes Solidbanks contention by pointing out that the
person who withdrew the P300,000 was a certain Noel
Tamayo. Both the trial and appellate courts stated that this Noel
Tamayo presented the passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a
certain Noel Tamayo withdrew the P300,000. The Court is not a trier
of facts. We find no justifiable reason to reverse the factual finding
of the trial court and the Court of Appeals. The tellers who
processed the deposit of the P90,000 check and the withdrawal of
the P300,000 were not presented during trial to substantiate
Solidbanks claim that Ilagan deposited the check and made the
questioned withdrawal. Moreover, the entry quoted by Solidbank
does not categorically state that Ilagan presented the withdrawal
slip and the passbook.
Doctrine of Last Clear Chance
The doctrine of last clear chance states that where both parties are
negligent but the negligent act of one is appreciably later than that
of the other, or where it is impossible to determine whose fault or
negligence caused the loss, the one who had the last clear
opportunity to avoid the loss but failed to do so, is chargeable with
the loss.[29] Stated differently, the antecedent negligence of the
plaintiff does not preclude him from recovering damages caused by
the supervening negligence of the defendant, who had the last fair
chance to prevent the impending harm by the exercise of due
diligence.[30]
We do not apply the doctrine of last clear chance to the present
case. Solidbank is liable for breach of contract due to negligence in
the performance of its contractual obligation to L.C. Diaz. This is a
case of culpa contractual, where neither the contributory
negligence of the plaintiff nor his last clear chance to avoid the
loss, would exonerate the defendant from liability. [31]Such
contributory negligence or last clear chance by the plaintiff merely
serves to reduce the recovery of damages by the plaintiff but does
not exculpate the defendant from his breach of contract. [32]
Mitigated Damages
Under Article 1172, liability (for culpa contractual) may be
regulated by the courts, according to the circumstances. This
means that if the defendant exercised the proper diligence in the
selection and supervision of its employee, or if the plaintiff was
guilty of contributory negligence, then the courts may reduce the
award of damages. In this case, L.C. Diaz was guilty of contributory
negligence in allowing a withdrawal slip signed by its authorized
signatories to fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,[33] where the
Court held the depositor guilty of contributory negligence, we
allocated the damages between the depositor and the bank on a
40-60 ratio. Applying the same ruling to this case, we hold that L.C.
Diaz must shoulder 40% of the actual damages awarded by the
appellate court. Solidbank must pay the other 60% of the actual
damages.
WHEREFORE, the decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation
shall pay private respondent L.C. Diaz and Company, CPAs only
60% of the actual damages awarded by the Court of Appeals. The
remaining 40% of the actual damages shall be borne by private
respondent L.C. Diaz and Company, CPAs.Proportionate costs.
28. G.R. No. 192371 January 15, 2014
LAND BANK OF THE PHILIPPINES, Petitioner, vs. EMMANUEL
OATE, Respondent.
This Petition for Review on Certiorari1 assails the December 18,
2009 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No.
89346, which affirmed with modification the May 31, 2006
Decision3 of the Regional Trial Court (RTC), Branch 141 Makati City.
The RTC dismissed the Complaint4 for Sum of Money, which
petitioner Land Bank of the Philippines (Land Bank) filed against
respondent Emmanuel C. Oate (Oate), and ordered Land Bank
to return the amount of P1,471,416.52 it unilaterally debited from
his accounts. On separate appeals by both parties, the CA
affirmed the RTC Decision with modification that Land Bank was
further ordered to pay Oate the sums ofP60,663,488.11 and
US$3,210,222.85 representing the undocumented withdrawals
and drawings from his trust accounts with 12% per annum
interest compounded annually from June 21, 1991 until fully paid.
Also assailed is the CAs May 27, 2010 Resolution 5 denying Land
Banks Motion for Reconsideration.6
Factual Antecedents
Land Bank is a government financial institution created under
Republic Act No. 3844.7 From 1978 to 1980, Oate opened and
maintained seven trust accounts with Land Bank, more
particularly described as follows:
Date Opened Beginning Balance
09.07.78 P250,000.008
11.16.78 1,312,896.009
02.23.79 900,000.0010
10.08.79 500,000.0011
10.25.79 200,001.0012
03.18.80 43.9813
03.13.80 188,161.0014
Each trust account was covered by an Investment Management
Account (IMA) with Full Discretion15 and has a corresponding
passbook where deposits and withdrawals were recorded.
Pertinent portions common to the IMAs read:
You [Land Bank] are appointed as my agent with full powers and
discretion, subject only to the following provisions:
1. You are authorized to hold, invest and reinvest the Fund and
keep the same invested, in your sole discretion, without
121
distinction between principal and income, in any assets which you
deem advisable, without being restricted to those of the character
authorized for fiduciaries under any present or future law.
2. You shall have full power and authority:
(a) to treat all the Fund as one aggregate amount for purposes of
investment, and to deposit all or any part thereof with a reputable
bank including your own commercial banking department;
(b) to pay all costs, expenses and charges incurred in connection
with the administration, preservation, maintenance and protection
of the Fund and to charge the same to the Fund;
(c) to vote in person or by proxy on any stocks, bonds or other
securities held by you, for my/our account;
(d) to borrow money for the Fund (from your banking department or
from others) with or without giving securities from the Fund;
(e) to cause any asset of the Fund to be issued, held or registered
in your name or in the name of your nominee, or in such form that
title will pass by delivery, provided your records shall indicate the
true ownership of such assets;
(f) to hold the Fund in cash and to invest the same in fixed income
placements traded and sold by your own Money Market Division;
and
(g) to sign all documents pertinent to the transaction which you will
make in behalf of this Account.
3. All actions taken by you hereunder shall be for my account and
risk. Except for willful default or gross misconduct, you shall not be
liable for any loss or depreciation in the value of the assets of the
Fund arising from any cause whatsoever.
4. You shall maintain accurate records of all investments, receipts,
disbursements and other transactions of the Account. Records
relating thereto shall be open at all reasonable times to inspection
and audit by me either personally or through duly authorized
representatives. Statements consisting of a balance sheet, portfolio
analysis, statement of income and expenses, and summary of
investment changes are to be sent to me/us quarterly.
I/We shall approve such accounting by delivering in writing to you a
statement to that effect or by failure to express objection to such
accounting in writing delivered to you within thirty (30) days from
my receipt of the accounting.
Upon your receipt of a written approval of the accounting, or upon
the passage of said period of time within which objections may be
filed, without written objections having been delivered to you, such
accounting shall be deemed to be approved, and you shall be
released and discharged as to all items, matters and things set
forth in such accounting as if such accounting had been settled and
allowed by a decree of a court of competent jurisdiction, in an
action or proceeding in which you and I were parties. 16 (Emphasis
supplied)
In a letter 17 dated October 8, 1981, however, Land Bank demanded
from Oate the return ofP4 million it claimed to have been
inadvertently deposited to Trust Account No. 01-125 as his
additional funds but actually represents the total amount of the
checks issued to Land Bank by its corporate borrowers as payment
for their pre-terminated loans. Oate refused. To settle the matter,
a meeting was held, but the parties failed to reach an agreement.
Since then, the issue of "miscrediting" remained unsettled. Then
on June 21, 1991, Land Bank unilaterally applied the outstanding
balance in all of Oates trust accounts against his resulting
indebtedness by reason of the "miscrediting" of funds. Although it
exhausted the funds in all of Oates trust accounts, Land Bank
was able to debit the amount of P1,528,583.48 only.18
Proceedings before the Regional Trial Court
To recoup the remaining balance of Oates indebtedness, Land
Bank filed a Complaint19 for Sum of Money seeking to recover the
amount of P8,222,687.8920 plus interest at the legal rate of 12%
per annum computed from May 15, 1992 until fully paid. Pertinent
portions of Land Banks Complaint reads:
5. By virtue of the Deeds of Revocable Trust executed on January
9, 198921 [sic] and February 5, 198922[sic] by Philippine Virginia
Tobacco Administration (PVTA) and Philippine Virginia Tobacco
Board (PVTB), LANDBANK likewise became a Trustee of certain
funds belonging to PVTA and PVTB.
6. As authorized under the [Deeds] of Revocable Trust, on October
10, 1980, LANDBANK invested P4 Million of the trust accounts of
PVTA and PVTB, through a direct lending scheme to the following
companies:
(a) Republic Telephone Company, Inc. (RETELCO), under
Promissory Note No. 1145 dated October 10, 1980,
for P1,021,250.00 with maturity date on November 24, 1980,
subject to automatic roll-over up to October 10, 1981 at 17%
interest per annum.
(b) Philippine Blooming Mills Company, Inc. (PBM), under
Promissory Note (unnumbered) dated October 10, 1980,
for P1,021,250.00, with maturity date on November 24, 1980,
subject to automatic roll-over up to October 10, 1981, at 17%
interest per annum;
(c) Cheng Ban Yek (CBY), under Promissory Note (unnumbered)
dated October 10, 1980, forP1,023,138.89, with maturity date on
November 28, 1980, subject to automatic roll-over up to October
10, 1981, at 17% interest per annum;
(d) Philippine Tobacco Filters Corporation (PHILTOFIL), under
Promissory Note (unnumbered) dated October 10, 1980,
for P1,021,250.00, with maturity date on November 24, 1980,
subject to automatic roll-over up to October 10, 1981, at 17%
interest per annum.
xxxx
7. Pursuant to such direct loan transactions granted to the
aforementioned companies, LANDBANK issued four (4) cashiers
checks for P1 Million each payable to RETELCO, PBM, CBY, and
PHILTOFIL x x x
8. On or about November 24 and 28, 1980, the aforesaid
borrowers (RETELCO, PBM, CBY, AND PHILTOFIL), pre-terminated
their corresponding loans and paid their respective obligations in
the form of checks payable to LANDBANK and delivered by
[Oates] representative, Mr. Eduardo Polonio.
9. When the checks were delivered, [Oate] fraudulently
misrepresented to LANDBANK that they were [Oates] additional
capital contribution to his personal trust account. On the basis of
this misrepresentation, LANDBANK credited the payments made
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by the aforementioned corporate borrowers to [Oates] Trust
Account No. 01-125.
10. After the payments were credited to his personal trust account,
Oate proceeded to withdraw the same, to the damage and
prejudice of LANDBANK as the owner thereof. 23
In his Answer (With Compulsory Counterclaim), 24 Oate asserted
that the setoff was without legal and factual bases. He specifically
denied any knowledge or involvement in the transaction between
Land Bank and its clients Philippine Virginia Tobacco Administration
(PVTA) and Philippine Virginia Tobacco Board (PVTB). He also denied
that he made fraudulent misrepresentation to induce the bank to
deposit to his Trust Account No. 01-125 as his additional capital the
payments allegedly tendered by the banks corporate borrowers.
He maintained that all the funds in his accounts came from
legitimate sources and that he was totally unaware of and had
nothing to do with the alleged "miscrediting." While Oate admitted
having received the October 8, 1981 demand letter, he argued that
he did not acquiesce thereto and, in fact, disputed the same during
a meeting with an officer of Land Bank. He also refuted Land Banks
claim that it formally demanded for the return of the disputed
amount as the September 3, 1991 letter 25 it alluded to is not a
demand letter. It was sent in response to his counsels letter
requesting for an accounting of his trust accounts.
By way of compulsory counterclaim, Oate pointed out that per
Balance Sheets26 as of June 30, 1982 the funds in his trust accounts
already totaled P35,555,464.78. And as of January 1993, the
accumulated balance of his accounts reached P229,222,160.25 and
$3,472,683.94 computed as follows:
With interest at the rate of eighteen percent (18%) compounded
every ninety (90) days from the third quarter of 1982 to January,
1993, the trustors equity of P35,555,464.78 has earned interest in
the amount ofP193,666,695.47. Adding the trustors equity to the
aforesaid accrued interest thereon, [Oates] peso deposits [in] his
trust accounts with plaintiff bank have an accumulated balance
of P229,222,160.25 as of January 1993 .
But that is not all. [Oates] dollar deposits to Trust Account No. 01-
014 (which is for an "Undisclosed Principal") from the period July-
September, 1980 alone, already amounted to $1,690,943.78. x x x
With interest at the rate of six percent (6%) compounded every
ninety (90) days from the first quarter of 1981, the said dollar
deposits have earned interest of $1,781,740.16 up to January,
1993. Thus, [Oates] dollar deposits [in] Trust Account No. 01-014
have an aggregate balance of $3,472,683.94 as of January 1993. 27
Hence, even if the amount of P8,222,687.89 as of May 15, 1992 is
deducted from the outstanding balance of his trust accounts as of
January 1993, the bank still owes him P220,999,472.36 on top of
his dollar deposits amounting to $3,472,683.94.
Oate prayed that a judgment be issued dismissing the Complaint
and ordering Land Bank to pay him:
i) The sum of P220,999,472.36, representing the outstanding
balance on the peso deposits [of Oates] various trust accounts as
of January 1993, with interest thereon from said date at the rate of
eighteen percent (18%) compounded every ninety (90) days, until
the said amount is fully paid;
ii) The sum of $3,472,683.94, representing the aggregate balance
as of January 1993 on [Oates] dollar deposits [in] Trust Account
No. 01-014, with interest thereon from said date at the rate of six
percent (6%) compounded every ninety (90) days, until the said
amount is fully paid;
iii) The sum of P100,000,000.00 as and by way of moral damages;
iv) The sum of P50,000,000.00 as and by way of exemplary
damages; and
v) The sum of P15,000,000.00, or 20% of all sums collected,
whichever is higher, as and for attorney's fees, the further sum
of P3,000.00 as appearance fee for each hearing attended, and
such other sums that may be proved during the trial as litigation
expenses.28
Upon Oates motion, the RTC issued an Order29 dated May 27,
1994, creating a Board of Commissioners (the Board) for the
purpose of examining the records of Oates seven trust
accounts, as well as to determine the total amount of deposits,
withdrawals, funds invested, earnings, and expenses incurred. It
was composed of Atty. Engracio M. Escasinas, the Clerk of Court of
the RTC of Makati City, as the Chairman; and, Atty. Ma. Cristina C.
Malab and Ms. Adeliza M. Jaranilla representing Land Bank and
Oate, respectively, as members.
Initially, the Board submitted three reports. 30 But for clarity, the
trial court ordered31 the Board to reconvene and to submit a
consolidated report furnishing copies of the same to both parties,
who were given 10 days from receipt thereof to file their
respective comments thereto. The Board complied and on August
16, 2004 submitted its consolidated report.32 As summarized by
the RTC, the said consolidated report revealed that there were
undocumented and over withdrawals and drawings33 from Oates
trust accounts:
Thus, the Commissioners Report showed that the total amount of
drawings and withdrawals from each account without withdrawal
slips are as follows:
In Trust Account No. 01-014, there was a total withdrawals [sic]
without withdrawal slips but reflected in the passbook in the
amount of P45,103,297.33 and this account showed a negative
balance of P40,367,342.34. On the dollar deposit under the same
trust account, there was a total [withdrawal] without withdrawal
slips but reflected in the passbook in the amount of
$3,210,222.85.
In Trust Account No. 01-017, there was a total withdrawal without
withdrawal slips in the amount of P2,682,088.58 and there was an
over withdrawal of P11,738,470.53 and $30,000.00.
In Trust Account No. 01-024, there was a total withdrawal without
withdrawal slips of P900,000.00 and over withdrawal
of P13,310,328.01.
In Trust Account No. 01-075, there was a total withdrawal
of P500,000.00 without withdrawal slips and there was a negative
balance of P33,342,132.64 and $286,399.34 on the dollar
account.
In Trust Account No. 01-082, the total amount of withdrawal
without withdrawal slips but reflected in the passbook
was P1,782,741.86 and there was an over withdrawal
of P14,031.63.
In Trust Account No. 01-089, there was a total withdrawal without
withdrawal slips in the amount of P5,054,809.00 but the report
indicated that there was a negative balance of P1,296,441.92.
123
In Trust Account No. 01-125, there was a total withdrawal without
withdrawal slips in the amount of P4,640,551.34 and there was a
negative balance of P58,327,459.23.34
On even date, the Board also submitted a Manifestation 35 informing
the RTC that its findings as to the outstanding balance of each trust
account may not be accurate considering that it was not given
ample opportunity to collate and sort out the documents related to
each trust account and that there may have been double take up of
accounts since the documents previously reviewed may have been
considered again in subsequent reports.
In his Comment,36 Oate asserted that the undocumented
withdrawals mentioned in the consolidated report should not be
considered as cash outflows. Rather, they should be treated as
unauthorized transactions and the amounts subject thereof must
be credited back to his accounts.
Land Bank did not file any comment or objection to the Boards
consolidated comment.
During the pre-trial conference, the parties agreed that they would
submit the case for decision based on the reports of the Board after
they have submitted their respective memoranda. They also
stipulated on the following issues for resolution of the RTC:
1. Whether x x x Oate could claim on Trust Account Nos. 01-014
and 01-017 which were opened for an undisclosed principal;
2. Whether x x x the undocumented withdrawals and drawings are
considered valid and regular and, conversely, if in the negative,
whether x x x such amounts shall be credited [back] to the
accounts.37
In his Memorandum38 filed on July 12, 2005, Oate reiterated that
Land Bank should be held liable for the undocumented withdrawals
and drawings. For its part, Land Bank posited, inter alia, that Trust
Account Nos. 01-014 and 01-017 should be excluded from the
computation of Oates counterclaim considering his allegation that
said accounts are owned by an undisclosed principal whom/which
he failed to join as indispensable party. Land Bank further theorized
that Oate must answer for the negative balances as revealed by
the Boards reports.39
Thereafter, the case was submitted for decision.
Ruling of the Regional Trial Court
On May 31, 2006, the RTC rendered a Decision40 dismissing Land
Banks Complaint for its failure to establish that the amount
of P4,086,888.89 allegedly "miscredited" to Oates Trust Account
No. 01-125 actually came from the investments of PVTA and PVTB.
Hence, the RTC ordered Land Bank to restore the total amount
of P1,471,416.52 which the bank unilaterally debited from Oates
five trust accounts.41
With regard to Oates counterclaim for the recovery
of P220,999,472.36, as well as the alleged US$3,472,683.94
balance of his dollar deposits in Trust Account No. 01-014, the RTC
ruled that under the IMAs, Land Bank had the authority to withdraw
funds (as in fact it was at all times in possession of the passbooks)
from Oates accounts even without a letter of instruction or
withdrawal slip coming from Oate. It thus gave weight to the
entries in the passbooks since the same were made in the ordinary
course of business. The RTC also ruled that Oate is deemed to
have approved the entries in the statements of account that were
sent to him as he never interposed any objection thereto within
the period given him to do so.
Anent Land Banks claim for the negative balances, the RTC
likewise denied the same for Land Bank never sought them in its
Complaint. Moreover, being the manager of the funds and keeper
of the records, the RTC held that Land Bank should not have
allowed further withdrawals if there were no more funds.
The RTC likewise debunked Land Banks argument that Oates
counterclaim with respect to Trust Account Nos. 01-014 and 01-
017 should be dismissed for his failure to join his undisclosed
principal. According to the RTC, Land Bank should have earlier
invoked such defense when it filed its answer to the counterclaim.
Also, if it is true that said accounts are not owned by Oate, then
the bank had no right to apply the funds in said accounts as
payment for the alleged personal indebtedness of Oate.
The dispositive portion of the RTCs Decision reads:
WHEREFORE, in view of all the foregoing, decision is hereby
rendered dismissing the complaint and ordering [Land Bank] to
pay [Oate] the total amount of P1,471,416.52 representing the
total amount of funds debited from the five (5) trust accounts of
the defendant with legal rate of interest of 12% per annum,
compounded yearly, effective on 21 June 1991 until fully paid.
No pronouncement as to costs.
SO ORDERED.42
Land Bank filed a Motion for Reconsideration.43 In an Order44 dated
July 11, 2006, however, the RTC denied the same.
Both parties appealed to the CA.
Ruling of the Court of Appeals
In its December 18, 2009 Decision,45 the CA denied Land Banks
appeal and granted that of Oate. The CA affirmed the RTCs
ruling that Land Bank failed to establish the source of the funds it
claimed to have been erroneously credited to Oates account.
With respect to Oates appeal, the CA agreed that he is entitled
to the unaccounted withdrawals which, as found by the Board,
stood at P60,663,488.11 and $3,210,222.85.46 The CAs ruling is
anchored on the banks failure to observe Sections X401 and
X425 of the Bangko Sentral ng Pilipinas Manual of Regulation for
Banks (MORB) requiring it to give full disclosure of the services it
offered and conduct its dealings with transparency, as well as to
render reports that would sufficiently apprise its clients of the
significant developments in the administration of their accounts.
Aside from allowing undocumented withdrawals, the CA likewise
noted that Land Bank failed to keep an accurate record and
render an accounting of Oates accounts. For the CA, the entries
in the passbooks are not sufficient because they do not specify
where the funds withdrawn from Oates accounts were invested.
The dispositive portion of the CAs Decision reads:
WHEREFORE, the appeal of plaintiff-appellant Land Bank is
DENIED.
The appeal of defendant-appellant Emmanuel Oate is hereby
partially GRANTED. Accordingly, the May 31, 2006 Decision of the
Regional Trial Court, Branch 141, Makati City is hereby MODIFIED
in that, in addition to the previous grant of P1,471,416.52
representing the total amount of funds debited from defendant-
124
appellant Oates trust accounts, plaintiff-appellant Land Bank is
hereby ordered to pay defendant-appellant Oate the sum
ofP60,663,488.11 and $3,210,222.85 representing the
undocumented withdrawals it debited from the latters trust
account with interest at the rate of 12% per annum, compounded
yearly from June 21, 1991 until fully paid.
SO ORDERED.47
Land Bank filed a Motion for Reconsideration.48 In a
Resolution49 dated May 27, 2010, however, the CA denied its
motion. Hence, Land Bank filed the instant Petition for Review on
Certiorari based on the following issues:
Issues
1. WHETHER X X X THE ENTRIES IN THE PASSBOOK ISSUED BY LBP
IN OATES TRUST ACCOUNT (EXPRESS TRUST) COVERED BY AN
INVESTMENT MANAGEMENT AGREEMENT (IMA) WITH FULL
DISCRETION ARE SUFFICIENT TO MEET THE "RULE ON
PRESUMPTION OF REGULARITY OF ENTRIES IN THE COURSE OF
BUSINESS" PROVIDED FOR UNDER SECTION 43, RULE 130 OF THE
RULES OF COURT.
2. WHETHER X X X OATE IS ENTITLED TO CLAIM
FOR P1,471,416.52 WHICH IS NOT PLEADED AS COUNTERCLAIM IN
HIS ANSWER PURSUANT TO SECTION 2, RULE 9 OF THE RULES OF
COURT.
3. WHETHER X X X OATE IS ENTITLED TO THE AWARD
OF P60,663,488.11 AND $3,210,222.85 REPRESENTING THE
ALLEGED UNDOCUMENTED WITHDRAWALS DEBITED FROM HIS
TRUST ACCOUNTS ON THE GROUND OF LBPS ALLEGED FAILURE TO
MEET THE STANDARDS SET FORTH UNDER THE 2008 MANUAL ON
REGULATIONS FOR BANKS (MORB) ISSUED BY BSP.
4. WHETHER X X X OATE MAY SUE [ON] TRUST ACCOUNT NOS. 01-
014 AND 01-017 OPENED FOR AN UNDISCLOSED PRINCIPAL
WITHOUT JOINING HIS UNDISCLOSED PRINCIPAL.
5. WHETHER X X X THE AWARD OF INTEREST TO OATE AT THE
RATE OF TWELVE PERCENT (12%) PER ANNUM, COMPOUNDED
YEARLY FROM JUNE 21, 1991 UNTIL FULLY PAID, IS VIOLATIVE OF
ARTICLE 1959 OF THE CIVIL CODE.50
Land Banks Arguments
Land Bank disputes the ruling of both lower courts that it failed to
prove the fact of "miscrediting" the amount ofP4,086,888.89 to
Oates Trust Account No. 01-125 as the deposit slips pertaining
thereto were not presented. Land Bank maintains that in trust
accounts the passbooks are always in the banks possession so that
it can record the cash inflows and outflows even without the
corresponding deposit or withdrawal slips. Citing Section 43, Rule
130 of the Rules of Court, it asserts that the entries in the
passbooks must be accepted as proof of the regularity of the
transactions reflected in the trust accounts, including the
"miscrediting" of P4,086,888.89, for they were made in the regular
course of business. In addition, said entries are supported by
demand letters dated October 8, 198151 and September 3,
1991,52 as well as a Statement of Account53 as of May 15, 1992.
Land Bank avers that Oate never questioned the statements of
account and the reports it presented to him and, hence, he is
deemed to have approved all of them.
Land Bank also imputes error on the lower courts in ordering the
restoration of the amount of P1,471,416.52 it debited from
Oates five trust accounts because he never sought it in his
Answer.
Petitioner bank vigorously argues that Oate is not entitled to the
undocumented withdrawals amounting toP60,663,488.11 and
$3,210,222.85. According to Land Bank, in holding it liable for the
said amounts, the CA erroneously relied on the 2008 MORB which
was not yet in existence at the time the transactions subject of
this case were made or even at the time when Land Bank filed its
Complaint. In any case, Land Bank insists that it made proper
accounting and apprised Oate of the status of his investments in
accordance with the terms of the IMAs. In its demand
letter54 dated September 3, 1991 Land Bank made a full
disclosure that the total outstanding balance of all the trust
accounts amounted to P1,471,416.52, but that the same was
setoff to recoup the "miscredited" funds. It faults Oate for not
interposing any objection as his silence constitutes as his
approval after 30 days from receipt thereof. Land Bank
asseverates that Oate could have also inspected and audited the
records of his accounts at any reasonable time. But he never did.
Land Bank likewise faults the CA in treating the undocumented
withdrawals as unauthorized transactions as the Boards reports
do not state anything to that effect. It claims that the CAs
reliance on the consolidated report in awarding the extremely
huge amounts of P60,663,488.11 and $3,210,222.85 is a grievous
mistake because the Board itself already manifested that said
report "may not be accurate." Consequently too, Land Bank
asserts that the reports of the Board cannot prevail over the
entries in the passbooks which were made in the regular course of
business.
Land Bank further states that as computed by the Board, the
amount of negative balances in Oates accounts
reached P131,747,487.02 and $818,674.71.55 It thus proposes
that if the CA awarded to Oate the undocumented withdrawals
on the basis of the Boards reports, then it should have also
awarded to Land Bank said negative balances or over withdrawals
as reflected in the same reports. After all, Oate admitted in his
Answer that all withdrawals from his trust accounts were done in
the ordinary course of business.
Furthermore, Land Bank claims that it argued before the CA that
Oate cannot sue on Trust Account Nos. 01-014 and 01-017. While
Oate alleged that said accounts were opened for an undisclosed
principal, he did not, however, join as an indispensable party said
principal in violation of Section 3, Rule 3 of the Rules of
Court.56Unfortunately, the CA sidestepped the issue and
proceeded to grant Oate the unaccounted withdrawals from said
accounts in the aggregate amounts of P47,785,385.91 and
$3,210,222.85. Following Quilatan v. Heirs of Lorenzo
Quilatan,57 Land Bank insists that this case should be remanded to
the trial court even if the issue of failure to implead an
indispensable party was raised for the first time in a Motion for
Reconsideration of the trial courts Decision.
Finally, Land Bank questions the ruling of the CA imposing 12%
per annum rate of interest. It contends that trust accounts are in
the nature of "Express Trust" and not in the nature of a regular
deposit account where a debtor-creditor relationship exists
between the bank and its depositor. It was not indebted to Oate
but merely held and managed his funds. There being no loan or
forbearance of money involved, in the absence of stipulation, the
applicable rate of interest is only 6% per annum. Land Bank
125
claims that the CA further erred when it compounded the 12%
interest even in the absence of any such stipulation.
Oates Arguments
In opposing the Petition, Oate argues that the issues raised by
Land Bank involve factual matters not proper in a petition for
review on certiorari. He posits that the Petition does not fall under
any of the exceptions where this Court could review factual issues.
As to Land Banks allegation that he cannot claim the funds without
divulging and impleading as an indispensable party his undisclosed
principal, Oate points out that in his Answer (With Compulsory
Counterclaim) he alleged that Trust Account Nos. 01-014 and 01-
017 were opened for an "undisclosed principal." Yet Land Bank did
not controvert his allegation. It is, therefore, too late in the day for
Land Bank to invoke non-joinder of principal as an indispensable
party. Besides, when he executed the IMAs, he was acting for
himself and on behalf of an undisclosed principal. Hence, he could
claim and recover the amounts owing not only to himself but also
to his undisclosed principal.
Oate likewise asserts that Land Bank, as uniformly found by both
lower courts, failed to prove by preponderance of evidence the fact
of "miscrediting." As to the demand letters adverted to by Land
Bank, Oate asserts that the lower courts did not consider the
same because they were not formally offered. Land Bank also failed
to present competent and sufficient evidence that he admitted his
indebtedness on account of the "miscrediting" of funds. Since Land
Bank failed to prove the fact of "miscrediting" it had no right to
debit any amount from his accounts and must restore whatever
funds it had debited therefrom. Oate also denies having failed to
seek the return of the funds debited from his account.
Oate further claims that in 1982 his peso trust accounts had a
total balance of P35,555,464.78 while the dollar trust accounts had
a balance of US$1,690,943.78. Since then, however, he never
received any report or update regarding his accounts until the bank
sent him financial reports dated June 30, 1991 indicating that the
balances of his trust accounts had been unilaterally setoff.
According to Oate, Land Banks failure to keep an accurate record
of his accounts and to make proper accounting violate several
circulars of the Central Bank.58 Hence, it is only proper to require
the bank to return the undocumented withdrawals which, as found
by the Board, amount toP60,663,488.11 and $3,210,222.82. In
addition, Oate points out Land Banks failure to keep an accurate
record of his accounts as shown by the huge amounts of
unsupported withdrawals and drawings which constitutes willful
default if not gross misconduct in violation of the IMAs which, in
turn, makes the bank liable for its actions.
Anent Land Banks invocation that the entries in the passbook
made in the ordinary course of business are presumed correct and
regular, Oate argues that such presumption does not relieve the
trustee, Land Bank in this case, from presenting evidence that the
undocumented withdrawals and drawings were authorized. In any
case, the presumption invoked by Land Bank does not lie as one of
its elements that the entrant must be deceased or unable to
testify is lacking. Land Bank cannot also excuse itself for failing to
regularly submit to him accounting reports as, anyway, he was free
to inspect the records at any reasonable day. Oate emphasizes
that it is the duty of the bank to keep him updated with significant
developments in his accounts.
In refutation of Land Banks claim to negative balances and over
withdrawals, Oate posits that the bank cannot benefit from its own
negligence in mismanaging the trust accounts.
Lastly, Oate defends the CAs grant of 12% per annum rate of
interest as under BSP Circular No. 416, said rate shall be applied
in cases where money is transferred from one person to another
and the obligation to return the same or a portion thereof is
adjudged. In any event, Land Bank is estopped from disputing
said rate for Land Bank itself applied the same 12% per annum
rate of interest when it sought to recover the amount allegedly
"miscredited" to his account. As to the compounding of interest,
Oate claims that the parties intended that interest income shall
be capitalized and shall form part of the principal.
Our Ruling
We deny the Petition.
The issues raised are factual and do not
involve questions of law.
From the very start the issues involved in this case are factual
the very reason why the RTC created a Board of Commissioners to
assist it in examining the records pertaining to Oates accounts
and determine the respective cash inflows and outflows in said
accounts. Thereafter, the parties agreed to submit the case based
on the Boards reports. And when the controversy reached the CA,
the appellate court basically conducted an "assiduous assessment
of the evidentiary records."59 No question of law was ever raised
for determination of the lower courts. Now, Land Bank practically
beseeches us to assess the probative weight of the documentary
evidence on record to resolve the same basic issues of (i) whether
Land Bank "miscredited" P4,086,888.89 to Trust Account No. 01-
125 and (ii) "whether x x x the undocumented withdrawals and
drawings are considered valid and regular and, conversely, if in
the negative, whether x x x such amounts shall be credited to the
accounts."60
These issues could be resolved by consulting the evidence extant
on records, such as the IMAs, the passbooks, the letters of
instructions, withdrawal and deposit slips, statements of account,
and the Boards reports. Land Banks heavy reliance on Section
43, Rule 130 of the Rules of Court61 also attests to the factual
nature of the issues involved in this case. "Well-settled is the rule
that in petitions for review on certiorari under Rule 45, only
questions of law can be raised."62 In Velayo-Fong v. Spouses
Velayo,63 we defined a question of law as distinguished from a
question of fact:
A question of law arises when there is doubt as to what the law is
on a certain state of facts, while there is a question of fact when
the doubt arises as to the truth or falsity of the alleged facts.
For a question to be one of law, the same must not involve an
examination of the probative value of the evidence presented by
the litigants or any of them. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances.
Once it is clear that the issue invites a review of the evidence
presented, the question posed is one of fact. Thus, the test of
whether a question is one of law or of fact is not the appellation
given to such question by the party raising the same; rather, it is
whether the appellate court can determine the issue raised
without reviewing or evaluating the evidence, in which case, it is a
question of law; otherwise, it is a question of fact. (Italics
supplied)
While there are recognized exceptions 64 to this rule, none exists in
this case.
126
Anent Land Banks contention that the determination of whether
the CA erred in retroactively applying the 2008 MORB poses a legal
question, the same deserves scant consideration. True, the CA
included in its ratio decidendi a discussion on the 2008 MORB to
give emphasis to the duties of banks to keep an accurate record
and regularly apprise their clients of the status of their accounts.
But the issue of whether Land Bank failed to comply with those
duties can be resolved even without the MORB as the same duties
are also imposed on Land Bank by the IMAs, the contract that
primarily governs the parties in this case. "As a general rule, a
contract is the law between the parties. Thus, from the moment
the contract is perfected, the parties are bound not only to the
fulfilment of what has been expressly stipulated but also to all
consequences which, according to their nature, may be in keeping
with good faith, usage and law. Also, the stipulations of the
contract being the law between the parties, courts have no
alternative but to enforce them as they were agreed [upon] and
written x x x."65
Based on the factual milieu of this case even without touching on
the MORB, we found that Land Bank still failed to perform its
bounden duties to keep accurate records and render regular
accounting. We also found no cogent reason to disturb the other
factual findings of the CA.
Land Bank failed to prove that the
"miscredited" funds came from the
proceeds of the pre-terminated loans of
its corporate borrowers.
Land Bank argues that the entries in the passbooks were made in
the regular course of business and should be accepted as prima
facie evidence of the facts stated therein. But before entries made
in the course of business may qualify under the exception to the
hearsay rule and given weight, the party offering them must
establish that: (1) the person who made those entries is dead,
outside the country, or unable to testify; (2) the entries were made
at, or near the time of the transaction to which they refer; (3) the
entrant was in a position to know the facts stated therein; (4) the
entries were made in the professional capacity or in the course of
duty of the entrant; and, (5) the entries were made in the ordinary
or regular course of business or duty. 66
Land Bank did not also bother to explain how Oate or his
representative, Eduardo Polonio (Polonio), obtained possession of
the checks when, according to it, the corporate borrowers issued
the checks in its name as payment for their loans.69 Under
paragraph 8 of its Complaint, Land Bank alleged that its corporate
borrowers "paid their respective obligations in the form of checks
payable to LANDBANK x x x".70 If it is true, then why were the
checks credited to Oates account? Unless subsequently
endorsed to Oate, said checks can only be deposited in the
account of the payee appearing therein. We cannot thus lend
credence to Land Banks excuse that the proximate cause of the
alleged "miscrediting" was the fraudulent representation of
Polonio, for assuming that the latter indeed employed fraudulent
machinations, with the degree of prudence expected of banks,
Land Bank and its tellers could have easily detected that Oate
was not the intended payee. In Traders Royal Bank v. Radio
Philippines Network, Inc.,71 we held that petitioner bank was
remiss in its duty and obligation for accepting and paying a check
to a person other than the payee appearing on the face of the
check sans valid endorsement. Consequently, it was made liable
for its own negligence and in disregarding established banking
rules and procedures.
We are also groping in the dark as to the number of checks
allegedly deposited by Polonio to Oates Trust Account No. 01-
125. According to Land Bank, the entire amount of P4,086,888.89
represents the proceeds of the pre-terminated loans of four of its
clients, namely, RETELCO, PBM, CBY and PHILTOFIL. But it could
only point to two entries made on two separate dates in the
passbook as reproduced below:
WITHDRAWAL DEPOSIT BALANCE
xxx P250,704.6
159,000.00 409,704.60
3,063,750.00CK 3,473,454.6
42,000.00 3,431,454.6

Here, Land Bank has neither identified the persons who made the
entries in the passbooks nor established that they are already dead 275,923.75 CK 3,707,378.3
or unable to testify as required by Section 43,67 Rule 130 of the
Rules of Court. Also, and as correctly opined by the CA, "[w]hile the
1,235,962.00 2,471,416.3
deposit entries in the banks passbook enjoy a certain degree of
presumption of regularity x x x," the same do "not indicate or
explain the source of the funds being deposited or withdrawn from 193,800.00 CK 2,665,216.3
an individual account."68 They are mere prima facie proof of what
are stated therein the dates of the transactions, the amounts
250,000.00 CK 2,915,216.3
deposited or withdrawn, and the outstanding balances. They do not
establish that the total amount of P4,086,888.89 deposited in
Oates Trust Account No. 01-125 in November 1980 came from the 2,915,216.3
proceeds of the pre-terminated loans of Land Banks corporate
borrowers. It would be too presumptuous to immediately conclude
2,915,216.3
that said amount came from the checks paid to Land Bank by its
corporate borrowers just because the maturity dates of the loans
coincided with the dates said total amount was deposited. There 321,188.38 CK 3,236,404.7
must be proof showing an unbroken link between the proceeds of
the pre-terminated loans and the amount allegedly "miscredited" to
1,373,167.00 1,863,237.7
Oates Trust Account No. 01-125. As a bank and custodian of
records, Land Bank could have easily produced documents showing
that its borrowers pre-terminated their loans, the checks they 1,021,250.00 CK 2,884,487.7
issued as payment for such loans, and the deposit slips used in
depositing those checks. But it did not.

127
 70,833.33 CK
919,300.00
1,023,138.89 CK
Were there only two checks issued as payment for the separate
loans of these four different entities? These hanging questions only
confirm the correctness of the lower courts uniform conclusion that
Land Bank failed to prove that the amount allegedly "miscredited"
to Oates account came from the proceeds of the pre-terminated
loans of its clients. It is worth emphasizing that in civil cases, the
party making the allegations has the burden of proving them by
73
preponderance of evidence. Mere allegation is not sufficient.
As a consequence of its failure to prove
the source of the claimed "miscredited"
funds, Land Bank had no right to debit
the total amount of P1,471,416.52 and
must, therefore, restore the same.
In view of the above, Land Banks argument that the lower courts
erred in ordering the return of the amount ofP1,471,416.52 it
debited from Oates five trust accounts since he did not seek such
relief in his Answer as a counterclaim, falls flat on its face. The
order to restore the debited amount is consistent with the lower
courts ruling that Land Bank failed to prove that the amount
of P4,086,888.89 was "miscredited" to Oates account and, hence,
it had no right to seek reimbursement or debit any amount from his
accounts in payment therefor.
Without such right, Land Bank should return the amount
of P1,471,416.52 it debited from Oates accounts in its attempt to
recoup what it allegedly lost due to "miscrediting." Moreover,
contrary to Land Banks assertion, Oate contested the banks
application of the balance of his trust accounts in payment for the
allegedly "miscredited" amount in his Answer (With Compulsory
Counterclaim) for being "without any factual and legal [bases]." 74
Land Bank was remiss in performing
its duties under the IMAs and as a
banking institution.
The contractual relation between Land Bank and Oate in this case
is primarily governed by the IMAs. Paragraph 4 thereof expressly
imposed on Land Bank the duty to maintain accurate records of all
his investments, receipts, disbursements and other transactions
relating to his accounts. It also obliged Land Bank to provide Oate
with quarterly balance sheets, statements of income and expenses,
summary of investments, etc. Thus:
4. You shall maintain accurate records of all investments, receipts,
disbursements and other transactions of the Account. Records
relating thereto shall be open at all reasonable times to inspection
and audit by me either personally or through duly authorized
representatives.
Statements consisting of a balance sheet, portfolio analysis,
statement of income and expenses, and summary of investment
changes are to be sent to me/us quarterly.
I/We shall approve such accounting by delivering in writing to you a
statement to that effect or by failure to express objections to such
accounting in writing delivered to you within thirty (30) days from
my receipt of the accounting.
Upon your receipt of a written approval of the accounting, or upon
2,955,321.06
the passage of said period of time within which objections may be
filed, without written objections having been delivered to you,
2,036,021.06
such accounting shall be deemed to be approved, and you shall
be released and discharged as to all items, matters and things set
forth in such accounting as if such accounting had been settled
3,059,159.95
and allowed by a decree of a court of competent jurisdiction, in an
action or proceeding in which you and I were parties. 75 (Emphasis
supplied)
These are the obligations of Land Bank which it should have
faithfully complied with in good faith.76 Unfortunately, Land Bank
failed in its contractual duties to maintain accurate records of all
investments and to regularly furnish Oate with financial
statements relating to his accounts. Had Land Bank kept an
accurate record there would have been no need for the creation of
a Board of Commissioners or at least the latters work would have
been a lot easier and more accurate. But because of Land Banks
inefficient record keeping, the Board performed the tedious task
of trying to reconcile messy and incomplete records. The
lackadaisical attitude of Land Bank in keeping an updated record
of Oates accounts is aggravated by its reluctance to accord the
Board full and unrestricted access to the records when it was
conducting a review of the accounts upon the orders of the trial
court. Thus, in its Manifestation 77 dated August 16, 2004, the
Board informed the trial court that its report pertaining to
outstanding balances may not be accurate because "the
documents were then in the custody of Land Bank and the
documents to be reviewed by the Board at a designated hearing
depended on what was released by the then handling lawyer of
Land Bank." They were "not given the opportunity to collate/sort-
out the documents related to each trust account" 78 and "the
folders being reviewed contained documents related to different
trust accounts."79 As a result, "[t]here may have been double take
up of accounts since the documents previously reviewed may
have been repeatedly considered in the reports."80
For its failure to faithfully comply with
its obligations under the IMAs and for
having agreed to submit the case on the
basis of the reports of the Board of
Commissioners, the latters findings are
binding on Land Bank.
Because of Land Banks failure to keep an updated and accurate
record of Oates account, it would have been difficult, if not
impossible, to determine with some degree of accuracy the
outstanding balances in Oates accounts. Indeed, the creation of
a Board of Commissioners was a significant development in this
case as it facilitated the examination of the records and helped in
the determination of the balances in each of Oates accounts. In
a span of four years, the Board held 60 meetings and scoured the
voluminous and scattered records of subject accounts. In the
course thereof, it found several undocumented withdrawals and
over withdrawals. Thereafter, the Board submitted its
consolidated report, to which Land Bank did not file its comment
despite having been given the opportunity to do so. It did not
question the result of the examinations conducted by the Board,
particularly the Boards computation of the outstanding balance in
each account, the existence of undocumented and over
withdrawals, and how often the bank sent Oate statements of
account. In fact, during the pre-trial conference, Land Bank
agreed to submit the case based on the reports of the Board.
Consequently, we found no cogent reason to deviate from the
same course taken by the CA give weight to the consolidated
report of the Board and treat it as competent and sufficient
128
evidence of what are stated therein. After all, the dearth of
evidentiary documents that could have shed light on the alleged
unintended crediting and unexplained withdrawals was brought
about by Land Banks failure to maintain accurate records as
required by the IMAs. In Simex International (Manila), Inc. v. Court
of Appeals,81 we elucidated on the nature of banking business and
the responsibility of banks:
The banking system is an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and
commerce, banks have become an ubiquitous presence among the
people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble
wage-earner has not hesitated to entrust his lifes savings to the
bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with
equal faith, usually maintains a modest checking account for
security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. As for business entities like the
petitioner, the bank is a trusted and active associate that can help
in the running of their affairs, not only in the form of loans when
needed but more often in the conduct of their day-to-day
transactions like the issuance or encashment of checks.
In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo and as
promptly as possible. This has to be done if the account is to reflect
at any given time the amount of money the depositor can dispose
of as he sees fit, confident that the bank will deliver it as and to
whomever he directs. x x x
The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligations
to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. x x x
(Emphasis supplied)
As to the conceded inaccuracies in the reports, we cannot allow
Land Bank to benefit therefrom. Time and again, we have
cautioned banks to spare no effort in ensuring the integrity of the
records of its clients.82 And in Philippine National Bank v. Court of
Appeals,83 we held that "as between parties where negligence is
imputable to one and not to the other, the former must perforce
bear the consequences of its neglect." In this case, the Board could
have submitted a more accurate report had Land Bank faithfully
complied with its duty of maintaining a complete and accurate
record of Oates accounts. But the Board could not find and
present the corresponding slips for the withdrawals reflected in the
passbooks. In addition, and as earlier mentioned, Land Bank was
less than cooperative when the Board was examining the records of
Oates accounts. It did not give the Board enough leeway to go
over the records systematically or in orderly fashion. Hence, we
cannot allow Land Bank to benefit from possible inaccuracies in the
reports.
Neither does Oates failure to exercise his rights to inspect the
records and audit his accounts excuse the bank from sending the
required notices, for under the IMAs it behooved upon Land Bank to
keep him fully informed of the status of his investments by sending
him regular reports and statements. Oates failure to inspect the
record of his accounts should neither be construed as his waiver to
be furnished with updates on his accounts nor authority for the
bank to make undocumented withdrawals. As aptly opined by the
CA:
x x x The least that Land Bank could have done was to keep a
detailed quarterly report on [its] file. In this case, Land Bank did
away with this procedure that made [its] records a complete mess
of voluminous and meaningless records of numerous folders
containing more than 7,600 leaves/pages and some 90
passbooks, with 1,355 leaves/pages of entries, corresponding to
the seven (7) Trust Accounts.
The passbook entries alone are insufficient compliance with Land
Banks duty to keep "accurate records of all investments, receipts,
disbursements and other transactions of the Account." These
passbooks do not inform what investments were made on the
funds withdrawn. Moreover, these passbook entries do not show if
the amounts purported to have been invested were indeed
received by the concerned entity, facility, or borrower. From these
entries alone, Oate would have no way of knowing where his
money went.84
But Land Bank next postulates that if Oate is entitled to the
undocumented withdrawals on the basis of the reports of the
Board, then it should also be entitled to the negative balances or
over withdrawals as reflected in the same reports.
We cannot agree for a number of reasons. First, as earlier
discussed, Land Bank is guilty of negligence while Oate (at least
insofar as over withdrawals are concerned) is not. Had Land Bank
maintained an accurate record, it would have readily detected
and prevented over withdrawals. But without any qualms, Land
Bank asks for the negative balances, unmindful that such claim is
actually detrimental to its cause because it amounts to an
admission that it allowed over withdrawals. As aptly observed by
the CA:
Corollarily, the Court cannot allow Land Bank to recover the
negative balances from Oates trust accounts. Examining the
Commissioners Report, the Court notes that the funds of Oates
trust accounts became seriously depleted due to the unaccounted
withdrawals that Land Bank charged against his accounts. At any
rate, those negative balances on Oates accounts show Land
Banks inefficient performance in managing his trust accounts.
Reasonable bank practice and prudence [dictate] that Land Bank
should not have authorized the withdrawal of various sums from
Oates accounts if it would result to overwithdrawals. x x x85
Second, Land Bank never prayed for the recovery of the negative
balances in its Complaint.
It is settled that courts cannot grant a relief not prayed for in the
pleadings or in excess of what is being sought by the party. x x x
Due process considerations require that judgments must conform
to and be supported by the pleadings and evidence presented in
court. In Development Bank of the Philippines v. Teston, 86 this
Court expounded that:
Due process considerations justify this requirement. It is improper
to enter an order which exceeds the scope of relief sought by the
pleadings, absent notice which affords the opposing party an
opportunity to be heard with respect to the proposed relief. The
fundamental purpose of the requirement that allegations of a
complaint must provide the measure of recovery is to prevent
surprise to the defendant.87
Last, during the pre-trial conference, the issue of the validity of
undocumented withdrawals was properly put into issue. The
129
parties also agreed, as a collateral issue, that should it appear that to manifest his objection thereto within 30 days from receipt
the bank was not authorized to make the undocumented thereof, it should be recalled that from the time the alleged
withdrawals, the next issue for consideration would be whether the "miscrediting" occurred in November 1980, the first
amount subject thereof should be credited back to Oates communication coming from Land Bank was its letter dated
accounts.88 The case of negative balances as alluded to by Land October 8, 1981.93 This, however, was the subject of a failed
Bank, however, is different. It was never put into issue during the negotiation between the parties. Besides, said letter can hardly be
pre-trial conference. In Caltex (Philippines), Inc. v. Court of considered as an statement that would apprise Oate of the
Appeals,89 we held that "to obviate the element of surprise, parties status of his investments. It is not "a balance sheet, portfolio
are expected to disclose at a pre-trial conference all issues of law analysis, statement of income and expenses or a summary of
and fact which they intend to raise at the trial, except such as may investment changes" as contemplated in paragraph 4 of the IMAs.
involve privileged or impeaching matters. The determination of It is a demand letter seeking the return of the alleged
issues at a pre-trial conference bars the consideration of other "miscredited" amount. The same goes true with Land Banks
questions on appeal." Land Bank interposed its claim to the letter dated September 3, 1991. As can be readily seen from its
negative balances for the first time only when it filed its opening paragraph, said letter is in response to Oates "demand"
Memorandum with the RTC. for information regarding the offsetting,94 which Oate protested
and is now one of the issues involved in this case. In fine, it
Land Bank knew from the start and cannot be said that Oate approved and adopted the outstanding
admitted during trial that Trust balances in his accounts for his failure to object to the contents of
Account Nos. 01-014 and 01-017 do not those letters within the 30-day period allotted to him under the
belong to Oate; hence, it should not IMAs.
have debited any amount therefrom to
compensate for the alleged personal From what is available on the voluminous records of this case and
indebtedness of Oate. as borne out by the Boards consolidated report dated August 16,
2004, the statements which Land Bank sent to Oate are only the
Land Bank claims that Oate cannot sue on Trust Account Nos. 01- following:
014 and 01-017 without joining as an indispensable party his
undisclosed principal. Based on the Annexes 95 attached to Oates Answer (With
Compulsory Counterclaim)
But if anyone in this case is guilty of failing to join an indispensable
party, it is Land Bank that first committed a violation. The IMAs Balance Sheet Total Liabilities and Trustors E
covering Trust Account Nos. 01-014 and 01-017 attached as As of
Annexes "A"90 and "B,"91respectively, of Land Banks Complaint
clearly state that Oate signed the same "FOR: UNDISCLOSED
PRINCIPAL." As party to the said IMAs, Land Bank knew and ought June 30, 1982 P1,909,349.80
not to forget that Oate is merely an agent and not the owner of
the funds in said accounts. Yet Land Bank garnished the total June 30, 1982 6,003,616.35
amount of P792,595.25 from Trust Account Nos. 01-014 and 01-017
to answer for the alleged personal indebtedness of Oate. Worse,
when Land Bank filed its Complaint for Sum of Money, it did not June 30, 1982 551,267.24
implead said undisclosed principal or inform the trial court thereof.
Now that Oate is seeking the restoration of the amounts debited June 30, 1982 1,915.28
and withdrawn without withdrawal slips from said accounts, Land
Bank is invoking the defense of failure to implead an indispensable
party. We cannot allow Land Bank to do this. As aptly observed by June 30, 1982 12,113,262.95
the trial court:
June 30, 1982 13,595,271.16
Under the circumstances obtaining, it is highly unfair, unjust and
iniquitous, to dismiss the suit with respect to the two Trust
Accounts after [Land Bank] had garnished the balances of said June 30, 1982 1,131,854.20
accounts to pay the alleged indebtedness of [Oate] allegedly
incurred by the erroneous crediting of P4 million to x x x Trust Based on the Consolidated Report
Account No. 01-125 which does not appear to be owned by an
undisclosed principal. Trust Account No. 01-125 is [Oates] Report Details Last Date Balances
personal trust account with plaintiff. Stated differently, [Land Bank] of Report
having now recognized and admitted that Trust Account Nos. 01-
014 and 01-017 were not owned by [Oate], it has perforce no
Schedule of Money Market Placement
right, nay unlawful for it, to apply the funds in said accounts to pay 03.31.82 P453,140.6
the alleged indebtedness of [Oates] personal account. Equity and
justice so demand that the funds be restored to Trust Account Nos.
Statement of Income and Expenses Balance 03.31.90 0.00
01-014 and 01-017.92 Sheet 03.31.90 1,207,501.

Oate protested the contents of the

statements of account at the earliest Schedule of Money Market Placement 06.30.91 14,767.20
opportunity. Statement of Income and Expenses Balance 06.31.91 3,267.19
Sheet 06.31.91 20,673.58
As to Land Banks insistence that Oate is deemed to have
accepted the contents of the statements of account for his failure

130
Schedule of Investment 06.30.91
Statement of Income and Expenses Balance 06.30.91
Sheet 06.30.91
Statement of Income and Expenses Balance 06.30.91
Sheet 06.30.91
Schedule of Investment 06.30.91
Statement of Income and Expenses Balance 06.30.91
Sheet 06.30.91
The patent wide gap between the time Land Bank furnished Oate
with Balance Sheets as of June 30, 1982 and the date it sent him an
Statement of Income and Expenses, as well as a Balance Sheet, on
March 31, 1990 is a clear and gross violation of the IMAs requiring
it to furnish him with balance sheet, portfolio analysis, statement of
income and expenses and the like, quarterly. As to the reports
dated June 30, 1991 and letters subsequent thereto, it should be
noted that during those times Oate had already interposed his
96
objections to the outstanding balances of his accounts.
The proper rate of legal interest.
Land Banks argument that the lower courts erred in imposing 12%
per annum rate of interest is likewise devoid of merit. The unilateral
offsetting of funds without legal justification and the undocumented
withdrawals are tantamount to forbearance of money. In the
analogous case of Estores v. Supangan,97 we held that "[the]
unwarranted withholding of the money which rightfully pertains to
[another] amounts to forbearance of money which can be
considered as an involuntary loan." Following Eastern Shipping
Lines, Inc. v. Court of Appeals,98therefore, the applicable rate of
interest in this case is 12% per annum. Besides, Land Bank is
estopped from assailing the award of 12% per annum rate of
interest. In its Complaint, Land Bank arrived at P8,222,687.89 as
the outstanding indebtedness of Oate by using the same 12% per
annum rate of interest. It was only after the lower courts rendered
unfavorable decisions that Land Bank started to insist that the
applicable rate of interest is 6% per annum.
Of equal importance is the determination of when the said 12% per
annum rate of interest should commence.1wphi1Recall that both
the RTC and the CA reckoned the running of the 12% per annum
rate of interest from June 21, 1991, or the day Land Bank
unilaterally applied the outstanding balance in all of Oates trust
accounts, until fully paid. The compounding of interest, on the
other hand, was based on the provision of the IMAs granting Land
Bank "to hold, invest and reinvest the Fund and keep the same
invested, in your sole discretion, without distinction between
principal and income."
While we find sufficient basis for the compounding of interest, we
find it necessary however to modify the commencement date. In
Eastern Shipping,99 it was observed that the commencement of
when the legal interest should start to run varies depending on the
factual circumstances obtaining in each case. 100 As a rule of thumb,
it was suggested that "where the demand is established with
reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made101 (at which time the
quantification of damages may be deemed to have been
reasonably ascertained)."102
In the case at bench, while Oate protested the setting off, no
38,502.06
proof was presented that he formally demanded for the return of
10,437.22
the amount so debited prior to the filing of the Complaint. Quite
39,659.56
understandably so because at that time he could not determine
with some degree of certainty the outstanding balances of his
59.75 accounts as Land Bank neglected on its duty to keep him updated
70.28 on the status of his accounts. Land Bank even undertook to
furnish him with "the exact computation" 103 of what remains in his
accounts after the set off. But this never happened until Land
44,055.72
Bank initiated the Complaint on September 7, 1992. Oate, on the
10,079.16
other hand, filed his Answer (With Compulsory Counterclaim) on
60,920.42
May 26, 1993. In other words, we cannot reckon the running of
the interest prior to the filing of the Complaint or Oates
Counterclaim as no demand prior thereto was made. Neither
could the interest commence to run at the time of filing of any of
aforesaid pleadings (as to constitute judicial demand) since the
undocumented withdrawals in the sums of P60,663,488.11 and
US$3,210,222.85, as well as the amount actually debited from all
of Oates accounts, were determined only after the Board
submitted its consolidated report on August 16, 2004 or more
than 10 years after Land Bank and Oate filed their Complaint
and Answer, respectively. Note too that while Oate sought to
recover the amount of undocumented withdrawals before the
RTC,104 the same was denied in the latters May 31, 2006 Decision.
The RTC granted Oate only the total amount of funds debited
from his trust accounts. It was only when the CA rendered its
December 18, 2009 Decision that Oate was awarded the
undocumented withdrawals. Hence, we find it just and proper to
reckon the running of the interest of 12% per annum,
compounded yearly, for the debited amount and undocumented
withdrawals on different dates. The debited amount
of P1,471,416.52, shall earn interest beginning May 31, 2006 or
the day the RTC rendered its Decision granting said amount to
Oate. As to the undocumented withdrawals ofP60,663,488.11
and US 3,210,222.85, the legal rate of interest should start to run
the day the CA promulgated its Decision on December 18, 2009.
During the pendency of this case, however, the Monetary Board
issued Resolution No. 796 dated May 16, 2013, stating that in the
absence of express stipulation between the parties, the rate of
interest in loan or forbearance of any money, goods or credits and
the rate allowed in judgments shall be 6% per annum. Said
Resolution is embodied in Bangko Sentral ng Pilipinas Circular No.
799, Series of2013, which took effect on July 1, 2013. Hence, the
12% annual interest mentioned above shall apply only up to June
30, 2013. Thereafter, or starting July 1, 2013, the applicable rate
of interest for both the debited amount and undocumented
withdrawals shall be 6% per annum compounded annually, until
fully paid.
WHEREFORE, the Petition is hereby DENIED and the December 18,
2009 Decision of the Court of Appeals in CA-G.R. CV No. 89346 is
AFFIRMED with modification in that the interest of 12% per annum
compounded annually, for the debited amount of P1,471,416.52
shall commence to run on May 31, 2006, while the same rate of
interest shall apply to the undocumented withdrawals in the
amounts of P60,663,488.11 and US 3,210,222.85 starting
December 18 2009. Beginning July 1, 2013, however, the
applicable rate of interest on all amounts awarded shall earn
interest at the rate of 6% per annum compounded yearly, until
fully paid.
29. G.R. No. 175490 September 17, 2009
ILEANA DR. MACALINAO, Petitioner, vs. BANK OF THE PHILIPPINE
ISLANDS, Respondent.
131
The Case per month and an additional penalty fee equivalent to another 3%
per month. Particularly:
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court seeking to reverse and set aside the June 30, 2006 8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a
Decision1 of the Court of Appeals (CA) and its November 21, 2006 monthly Statement of Account (SOA) and the Cardholder agrees
Resolution2 denying petitioners motion for reconsideration. that all charges made through the use of the CARD shall be paid
by the Cardholder as stated in the SOA on or before the last day
The Facts for payment, which is twenty (20) days from the date of the said
SOA, and such payment due date may be changed to an earlier
Petitioner Ileana Macalinao was an approved cardholder of BPI date if the Cardholders account is considered overdue and/or
Mastercard, one of the credit card facilities of respondent Bank of with balances in excess of the approved credit limit, or to such
the Philippine Islands (BPI).3 Petitioner Macalinao made some other date as may be deemed proper by the CARD issuer with
purchases through the use of the said credit card and defaulted in notice to the Cardholder on the same monthly SOA. If the last day
paying for said purchases. She subsequently received a letter fall on a Saturday, Sunday or a holiday, the last day for the
dated January 5, 2004 from respondent BPI, demanding payment of payment automatically becomes the last working day prior to said
the amount of one hundred forty-one thousand five hundred payment date. However, notwithstanding the absence or lack of
eighteen pesos and thirty-four centavos (PhP 141,518.34), as proof of service of the SOA of the Cardholder, the latter shall pay
follows: any and all charges made through the use of the CARD within
thirty (30) days from date or dates thereof. Failure of the
Purchases Cardholder to pay the charges made through the CARD within the
Statement Date Previous Balance payment period as stated in the SOA or within thirty (30) days
(Payments)
from actual date or dates of purchase whichever occur earlier,
shall render him in default without the necessity of demand from
10/27/2002 94,843.70 BCC, which the Cardholder expressly waives. The charges or
balance thereof remaining unpaid after the payment due date
11/27/2002 98,465.41 (15,000) indicated on the monthly Statement of Accounts shall bear
interest at the rate of 3% per month for BPI Express Credit, BPI
Gold Mastercard and an additional penalty fee equivalent to
12/31/2002 86,351.02 30,308.80 another 3% of the amount due for every month or a fraction of a
months delay. PROVIDED that if there occurs any change on the
1/27/2003 119,752.28 prevailing market rates, BCC shall have the option to adjust the
rate of interest and/or penalty fee due on the outstanding
obligation with prior notice to the cardholder. The Cardholder
2/27/2003 124,234.58 hereby authorizes BCC to correspondingly increase the rate of
such interest [in] the event of changes in the prevailing market
3/27/2003 129,263.13 (18,000.00) rates, and to charge additional service fees as may be deemed
necessary in order to maintain its service to the Cardholder. A
CARD with outstanding balance unpaid after thirty (30) days from
4/27/2003 115,177.90
original billing statement date shall automatically be suspended,
and those with accounts unpaid after ninety (90) days from said
5/27/2003 119,565.44 (10,000.00) original billing/statement date shall automatically be cancel (sic),
without prejudice to BCCs right to suspend or cancel any card
anytime and for whatever reason. In case of default in his
6/29/2003 113,540.10 8,362.50 (7,000.00)
obligation as provided herein, Cardholder shall surrender his/her
card to BCC and in addition to the interest and penalty charges
7/27/2003 118,833.49 aforementioned , pay the following liquidated damages and/or
fees (a) a collection fee of 25% of the amount due if the account
is referred to a collection agency or attorney; (b) service fee for
8/27/2003 123,375.65
every dishonored check issued by the cardholder in payment of
his account without prejudice, however, to BCCs right of
9/28/2003 128,435.56 considering Cardholders account, and (c) a final fee equivalent to
25% of the unpaid balance, exclusive of litigation expenses and
judicial cost, if the payment of the account is enforced though
10/28/2003
court action. Venue of all civil suits to enforce this Agreement or
any other suit directly or indirectly arising from the relationship
11/28/2003 between the parties as established herein, whether arising from
crimes, negligence or breach thereof, shall be in the process of
courts of the City of Makati or in other courts at the option of
12/28/2003
BCC.4 (Emphasis supplied.)1avvphi1

1/27/2004 141,518.34 For failure of petitioner Macalinao to settle her obligations,

Under the Terms and Conditions Governing the Issuance and Use of
the BPI Credit and BPI Mastercard, the charges or balance thereof
remaining unpaid after the payment due date indicated on the
monthly Statement of Accounts shall bear interest at the rate of 3%
respondent BPI filed with the Metropolitan Trial Court (MeTC) of
Makati City a complaint for a sum of money against her and her
husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of
the MeTC and was docketed as Civil Case No. 84462 entitled Bank
of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and
Danilo SJ. Macalinao.5

132
In said complaint, respondent BPI prayed for the payment of the
amount of one hundred fifty-four thousand six hundred eight pesos
and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance
charges and late payment charges equivalent to 6% of the amount
due from February 29, 2004 and an amount equivalent to 25% of
the total amount due as attorneys fees, and of the cost of suit. 6
After the summons and a copy of the complaint were served upon
petitioner Macalinao and her husband, they failed to file their
Answer.7 Thus, respondent BPI moved that judgment be rendered in
accordance with Section 6 of the Rule on Summary Procedure. 8 This
was granted in an Order dated June 16, 2004.9 Thereafter,
respondent BPI submitted its documentary evidence. 101avvphi1
In its Decision dated August 2, 2004, the MeTC ruled in favor of
respondent BPI and ordered petitioner Macalinao and her husband
to pay the amount of PhP 141,518.34 plus interest and penalty
charges of 2% per month, to wit:
WHEREFORE, finding merit in the allegations of the complaint
supported by documentary evidence, judgment is hereby rendered
in favor of the plaintiff, Bank of the Philippine Islands and against
defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by
ordering the latter to pay the former jointly and severally the
following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND
FIVE HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest
and penalty charges of 2% per month from January 05, 2004 until
fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of suit.
SO ORDERED.11
Only petitioner Macalinao and her husband appealed to the
Regional Trial Court (RTC) of Makati City, their recourse docketed as
Civil Case No. 04-1153. In its Decision dated October 14, 2004, the
RTC affirmed in toto the decision of the MeTC and held:
In any event, the sum of P141,518.34 adjudged by the trial court
appeared to be the result of a recomputation at the reduced rate of
2% per month. Note that the total amount sought by the plaintiff-
appellee was P154,608.75 exclusive of finance charge of 3.25% per
month and late payment charge of 6% per month.
WHEREFORE, the appealed decision is hereby affirmed in toto.
No pronouncement as to costs.
SO ORDERED.12
Unconvinced, petitioner Macalinao filed a petition for review with
the CA, which was docketed as CA-G.R. SP No. 92031. The CA
affirmed with modification the Decision of the RTC:
WHEREFORE, the appealed decision is AFFIRMED but MODIFIED
with respect to the total amount due and interest rate. Accordingly,
petitioners are jointly and severally ordered to pay respondent
Bank of the Philippine Islands the following:
1. The amount of One Hundred Twenty Six Thousand Seven
Hundred Six Pesos and Seventy Centavos plus interest and penalty
charges of 3% per month from January 5, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of Suit.
SO ORDERED.13
Although sued jointly with her husband, petitioner Macalinao was
the only one who filed the petition before the CA since her
husband already passed away on October 18, 2005.14
In its assailed decision, the CA held that the amount of PhP
141,518.34 (the amount sought to be satisfied in the demand
letter of respondent BPI) is clearly not the result of the re-
computation at the reduced interest rate as previous higher
interest rates were already incorporated in the said amount. Thus,
the said amount should not be made as basis in computing the
total obligation of petitioner Macalinao. Further, the CA also
emphasized that respondent BPI should not compound the
interest in the instant case absent a stipulation to that effect. The
CA also held, however, that the MeTC erred in modifying the
amount of interest rate from 3% monthly to only 2% considering
that petitioner Macalinao freely availed herself of the credit card
facility offered by respondent BPI to the general public. It
explained that contracts of adhesion are not invalid per se and are
not entirely prohibited.
Petitioner Macalinaos motion for reconsideration was denied by
the CA in its Resolution dated November 21, 2006. Hence,
petitioner Macalinao is now before this Court with the following
assigned errors:
I. THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%,
SHOULD BE UPHELD SINCE THE STIPULATED RATE OF INTEREST
WAS UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.
II. THE COURT OF APPEALS ARBITRARILY MODIFIED THE
REDUCED RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO
THE TENOR OF ITS OWN DECISION.
III. THE COURT A QUO, INSTEAD OF PROCEEDING WITH A
RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR
FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT
OF PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE,
REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT
BPI TO PRESENT PROOF OF THE CORRECT AMOUNT THEREOF.
Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per
Annum Should Be Reduced to 2% Per Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the interest
and penalty charges at the rate of 9.25% per month or 111% per
annum. This was declared as unconscionable by the lower courts
for being clearly excessive, and was thus reduced to 2% per
month or 24% per annum. On appeal, the CA modified the rate of
interest and penalty charge and increased them to 3% per month
or 36% per annum based on the Terms and Conditions Governing
the Issuance and Use of the BPI Credit Card, which governs the
transaction between petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest rate and
penalty charge of 3% per month imposed by the CA is iniquitous
as the same translates to 36% per annum or thrice the legal rate
of interest.15 On the other hand, respondent BPI asserts that said
interest rate and penalty charge are reasonable as the same are
133
based on the Terms and Conditions Governing the Issuance and Use
of the BPI Credit Card.16
We find for petitioner. We are of the opinion that the interest rate
and penalty charge of 3% per month should be equitably reduced
to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and
Use of the BPI Credit Card, there was a stipulation on the 3%
interest rate. Nevertheless, it should be noted that this is not the
first time that this Court has considered the interest rate of 36%
per annum as excessive and unconscionable. We held in Chua vs.
Timan:17
The stipulated interest rates of 7% and 5% per month imposed on
respondents loans must be equitably reduced to 1% per month or
12% per annum. We need not unsettle the principle we had
affirmed in a plethora of cases that stipulated interest rates of 3%
per month and higher are excessive, iniquitous, unconscionable
and exorbitant. Such stipulations are void for being contrary to
morals, if not against the law. While C.B. Circular No. 905-82, which
took effect on January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans, regardless of
maturity, nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to
levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets. (Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if there was
no express contract thereon. Hence, courts may reduce the interest
rate as reason and equity demand.18
The same is true with respect to the penalty charge. Notably, under
the Terms and Conditions Governing the Issuance and Use of the
BPI Credit Card, it was also stated therein that respondent BPI shall
impose an additional penalty charge of 3% per month. Pertinently,
Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or
unconscionable.
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of each
case since what may be iniquitous and unconscionable in one may
be totally just and equitable in another.19
In the instant case, the records would reveal that petitioner
Macalinao made partial payments to respondent BPI, as indicated
in her Billing Statements.20 Further, the stipulated penalty charge of
3% per month or 36% per annum, in addition to regular interests, is
indeed iniquitous and unconscionable.
Thus, under the circumstances, the Court finds it equitable to
reduce the interest rate pegged by the CA at 1.5% monthly to 1%
monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with
the prevailing jurisprudence and in accordance with Art. 1229 of
the Civil Code.
There Is No Basis for the Dismissal of the Case,
Much Less a Remand of the Same for Further Reception of Evidence
Petitioner Macalinao claims that the basis of the re-computation of
the CA, that is, the amount of PhP 94,843.70 stated on the
October 27, 2002 Statement of Account, was not the amount of
the principal obligation. Thus, this allegedly necessitates a re-
examination of the evidence presented by the parties. For this
reason, petitioner Macalinao further contends that the dismissal of
the case or its remand to the lower court would be a more
appropriate disposition of the case.
Such contention is untenable. Based on the records, the summons
and a copy of the complaint were served upon petitioner
Macalinao and her husband on May 4, 2004. Nevertheless, they
failed to file their Answer despite such service. Thus, respondent
BPI moved that judgment be rendered
accordingly.21 Consequently, a decision was rendered by the MeTC
on the basis of the evidence submitted by respondent BPI. This is
in consonance with Sec. 6 of the Revised Rule on Summary
Procedure, which states:
Sec. 6. Effect of failure to answer. Should the defendant fail to
answer the complaint within the period above provided, the court,
motu proprio, or on motion of the plaintiff, shall render judgment
as may be warranted by the facts alleged in the complaint and
limited to what is prayed for therein: Provided, however, that the
court may in its discretion reduce the amount of damages and
attorneys fees claimed for being excessive or otherwise
unconscionable. This is without prejudice to the applicability of
Section 3(c), Rule 10 of the Rules of Court, if there are two or
more defendants. (As amended by the 1997 Rules of Civil
Procedure; emphasis supplied.)
Considering the foregoing rule, respondent BPI should not be
made to suffer for petitioner Macalinaos failure to file an answer
and concomitantly, to allow the latter to submit additional
evidence by dismissing or remanding the case for further
reception of evidence. Significantly, petitioner Macalinao herself
admitted the existence of her obligation to respondent BPI, albeit
with reservation as to the principal amount. Thus, a dismissal of
the case would cause great injustice to respondent BPI. Similarly,
a remand of the case for further reception of evidence would
unduly prolong the proceedings of the instant case and render
inutile the proceedings conducted before the lower courts.
Significantly, the CA correctly used the beginning balance of PhP
94,843.70 as basis for the re-computation of the interest
considering that this was the first amount which appeared on the
Statement of Account of petitioner Macalinao. There is no other
amount on which the re-computation could be based, as can be
gathered from the evidence on record. Furthermore, barring a
showing that the factual findings complained of are totally devoid
of support in the record or that they are so glaringly erroneous as
to constitute serious abuse of discretion, such findings must
stand, for this Court is not expected or required to examine or
contrast the evidence submitted by the parties.22
In view of the ruling that only 1% monthly interest and 1% penalty
charge can be applied to the beginning balance of PhP 94,843.70,
this Court finds the following computation more appropriate:
Statement Previous Purchases
Balance
Date Balance (Payments)
10/27/2002 94,843.70 94,843.70
134
 11/27/2002 94,843.70 (15,000) 79,843.70 their related interests cannot be allowed to interpose the
fraudulent nature of the loan as a defense to escape culpability
for their circumvention of Section 83 of Republic Act (RA) No.
12/31/2002 79,843.70 30,308.80 110,152.50 337.3

Before us is a Petition for Review on Certiorari4 under Rule 45 of

1/27/2003 110,152.50 110,152.50
the Rules of Court, assailing the September 26, 2003
Decision5 and the February 5, 2004 Resolution6 of the Court of
2/27/2003 110,152.50 110,152.50 Appeals (CA) in CA-G.R. SP No. 67657. The challenged Decision
disposed as follows:
3/27/2003 110,152.50 (18,000.00) 92,152.50
WHEREFORE, premises considered, the instant petition for
certiorari is hereby DENIED.7
4/27/2003 92,152.50 92,152.50
Factual Antecedents

5/27/2003 92,152.50 (10,000.00) 82,152.50

Sometime in 2000, the Office of Special Investigation (OSI) of
the Bangko Sentral ng Pilipinas (BSP), through its
8,362.50 officers,8 transmitted a letter9 dated March 27, 2000 to Jovencito
6/29/2003 82,152.50 83,515.00
(7,000.00) Zuo, Chief State Prosecutor of the Department of Justice
(DOJ). The letter attached as annexes five affidavits, 10 which
would allegedly serve as bases for filing criminal charges for
7/27/2003 83,515.00 83,515.00
Estafa thru Falsification of Commercial Documents, in relation to
Presidential Decree (PD) No. 1689,11 and for Violation of Section
8/27/2003 83,515.00 83,515.00 83 of RA 337, as amended by PD 1795,12 against, inter
alia, petitioner herein Hilario P. Soriano. These five affidavits,
along with other documents, stated that spouses Enrico and
9/28/2003 83,515.00 83,515.00
Amalia Carlos appeared to have an outstanding loan of P8 million
with the Rural Bank of San Miguel (Bulacan), Inc. (RBSM), but had
10/28/2003 83,515.00 83,515.00 never applied for nor received such loan; that it was petitioner,
who was then president of RBSM, who had ordered, facilitated,
and received the proceeds of the loan; and that the P8 million
11/28/2003 83,515.00 83,515.00
loan had never been authorized by RBSM's Board of Directors and
no report thereof had ever been submitted to the Department of
12/28/2003 83,515.00 83,515.00 Rural Banks, Supervision and Examination Sector of the BSP. The
letter of the OSI, which was not subscribed under oath, ended
with a request that a preliminary investigation be conducted and
1/27/2004 83,515.00 83,515.00
the corresponding criminal charges be filed against petitioner at
his last known address.
TOTAL 83,515.00
Acting on the letter-request and its annexes, State Prosecutor
WHEREFORE, the petition is PARTLY GRANTED. The CA Decision Albert R. Fonacier proceeded with the preliminary investigation.
dated June 30, 2006 in CA-G.R. SP No. 92031 is hereby MODIFIED He issued a subpoena with the witnesses affidavits and
with respect to the total amount due, interest rate, and penalty supporting documents attached, and required petitioner to file his
charge. Accordingly, petitioner Macalinao is ordered to pay counter-affidavit. In due course, the investigating officer issued a
respondent BPI the following: Resolution finding probable cause and correspondingly filed two
separate informations against petitioner before the Regional Trial
(1) The amount of one hundred twelve thousand three hundred Court (RTC) of Malolos, Bulacan.13
nine pesos and fifty-two centavos (PhP 112,309.52) plus interest
and penalty charges of 2% per month from January 5, 2004 until The first Information,14 dated November 14, 2000 and docketed as
fully paid; Criminal Case No. 237-M-2001, was for estafa through falsification
of commercial documents, under Article 315, paragraph 1(b), of
(2) PhP 10,000 as and by way of attorneys fees; and the Revised Penal Code (RPC), in relation to Article 172 of the RPC
and PD 1689. It basically alleged that petitioner and his co-
(3) Cost of suit. accused, in abuse of the confidence reposed in them as RBSM
officers, caused the falsification of a number of loan documents,
30. G.R. No. 162336 February 1, 2010 making it appear that one Enrico Carlos filled up the same, and
thereby succeeded in securing a loan and converting the loan
HILARIO P. SORIANO, Petitioner, vs. PEOPLE OF THE PHILIPPINES, proceeds for their personal gain and benefit.15 The information
BANGKO SENTRAL NG PILIPINAS (BSP), PHILIPPINE DEPOSIT reads:
INSURANCE CORPORATION (PDIC), PUBLIC PROSECUTOR ANTONIO
C.BUAN, and STATE PROSECUTOR ALBERTO R. That in or about the month of April, 1997, and thereafter, in San
FONACIER, Respondents. Miguel, Bulacan, and within the jurisdiction of this Honorable
Court, the said accused HILARIO P. SORIANO and ROSALINDA
A bank officer violates the DOSRI2 law when he acquires bank funds ILAGAN, as principals by direct participation, with unfaithfulness
for his personal benefit, even if such acquisition was facilitated by a or abuse of confidence and taking advantage of their position as
fraudulent loan application. Directors, officers, stockholders, and President of the Rural Bank of San Miguel (Bulacan), Inc. and

135
Branch Manager of the Rural Bank of San Miguel San Miguel
Branch [sic], a duly organized banking institution under Philippine
Laws, conspiring, confederating and mutually helping one another,
did then and there, willfully and feloniously falsify loan documents
consisting of undated loan application/information sheet, credit
proposal dated April 14, 1997, credit proposal dated April 22, 1997,
credit investigation report dated April 15, 1997, promissory note
dated April 23, 1997, disclosure statement on loan/credit
transaction dated April 23, 1997, and other related documents, by
making it appear that one Enrico Carlos filled up the
application/information sheet and filed the aforementioned loan
documents when in truth and in fact Enrico Carlos did not
participate in the execution of said loan documents and that by
virtue of said falsification and with deceit and intent to cause
damage, the accused succeeded in securing a loan in the amount
of eight million pesos (PhP8,000,000.00) from the Rural Bank of San
Miguel San Ildefonso branch in the name of Enrico Carlos which
amount of PhP8 million representing the loan proceeds the accused
thereafter converted the same amount to their own personal gain
and benefit, to the damage and prejudice of the Rural Bank of San
Miguel San Ildefonso branch, its creditors, the Bangko Sentral ng
Pilipinas, and the Philippine Deposit Insurance Corporation.
CONTRARY TO LAW.16
The other Information17 dated November 10, 2000 and docketed as
Criminal Case No. 238-M-2001, was for violation of Section 83 of RA
337, as amended by PD 1795. The said provision refers to the
prohibition against the so-called DOSRI loans. The information
alleged that, in his capacity as President of RBSM, petitioner
indirectly secured an P8 million loan with RBSM, for his personal
use and benefit, without the written consent and approval of the
bank's Board of Directors, without entering the said transaction in
the bank's records, and without transmitting a copy of the
transaction to the supervising department of the bank. His ruse
was facilitated by placing the loan in the name of an unsuspecting
RBSM depositor, one Enrico Carlos.18 The information reads:
That in or about the month of April, 1997, and thereafter, and
within the jurisdiction of this Honorable Court, the said accused, in
his capacity as President of the Rural Bank of San Miguel (Bulacan),
Inc., did then and there, willfully and feloniously indirectly borrow or
secure a loan with the Rural Bank of San Miguel San Ildefonso
branch, a domestic rural banking institution created, organized and
existing under Philippine laws, amounting to eight million pesos
(PhP8,000,000.00), knowing fully well that the same has been done
by him without the written consent and approval of the majority of
the board of directors of the said bank, and which consent and
approval the said accused deliberately failed to obtain and enter
the same upon the records of said banking institution and to
transmit a copy thereof to the supervising department of the said
bank, as required by the General Banking Act, by using the name of
one depositor Enrico Carlos of San Miguel, Bulacan, the latter
having no knowledge of the said loan, and one in possession of the
said amount of eight million pesos (PhP8,000,000.00), accused
converted the same to his own personal use and benefit, in flagrant
violation of the said law.
CONTRARY TO LAW.19
Both cases were raffled to Branch 79 of the RTC of Malolos,
Bulacan.20
On June 8, 2001, petitioner moved to quash21 these informations on
two grounds: that the court had no jurisdiction over the offense
charged, and that the facts charged do not constitute an offense.
On the first ground, petitioner argued that the letter transmitted
by the BSP to the DOJ constituted the complaint and hence was
defective for failure to comply with the mandatory requirements
of Section 3(a), Rule 112 of the Rules of Court, such as the
statement of address of petitioner and oath and
subscription.22 Moreover, petitioner argued that the officers of
OSI, who were the signatories to the "letter-complaint," were not
authorized by the BSP Governor, much less by the Monetary
Board, to file the complaint. According to petitioner, this alleged
fatal oversight violated Section 18, pars. (c) and (d) of the New
Central Bank Act (RA 7653).
On the second ground, petitioner contended that the commission
of estafa under paragraph 1(b) of Article 315 of the RPC is
inherently incompatible with the violation of DOSRI law (as set out
in Section 8323 of RA 337, as amended by PD 1795),24 hence a
person cannot be charged for both offenses. He argued that a
violation of DOSRI law requires the offender to obtain a loan from
his bank, without complying with procedural, reportorial, or ceiling
requirements. On the other hand, estafa under par. 1(b), Article
315 of the RPC requires the offender to misappropriate or convert
something that he holds in trust, or on commission, or for
administration, or under any other obligation involving the duty to
return the same.25
Essentially, the petitioner theorized that the characterization of
possession is different in the two offenses. If petitioner acquired
the loan as DOSRI, he owned the loaned money and therefore,
cannot misappropriate or convert it as contemplated in the
offense of estafa. Conversely, if petitioner committed estafa, then
he merely held the money in trust for someone else and
therefore, did not acquire a loan in violation of DOSRI rules.
Ruling of the Regional Trial Court
In an Order26 dated August 8, 2001, the trial court denied
petitioner's Motion to Quash for lack of merit. The lower court
agreed with the prosecution that the assailed OSI letter
was not the complaint-affidavit itself; thus, it need not comply
with the requirements under the Rules of Court. The trial court
held that the affidavits, which were attached to the OSI letter,
comprised the complaint-affidavit in the case. Since these
affidavits were duly subscribed and sworn to before a notary
public, there was adequate compliance with the Rules. The trial
court further held that the two offenses were separate and
distinct violations, hence the prosecution of one did not pose a
bar to the other.27
Petitioners Motion for Reconsideration was likewise denied in an
Order dated September 5, 2001.28
Aggrieved, petitioner filed a Petition for Certiorari29 with the CA,
reiterating his arguments before the trial court.
Ruling of the Court of Appeals
The CA denied the petition on both issues presented by petitioner.
On the first issue, the CA determined that the BSP letter, which
petitioner characterized to be a fatally infirm complaint, was not
actually a complaint, but a transmittal or cover letter only. This
transmittal letter merely contained a summary of the affidavits
which were attached to it. It did not contain any averment of
personal knowledge of the events and transactions that constitute
the elements of the offenses charged. Being a mere transmittal
letter, it need not comply with the requirements of Section 3(a) of
Rule 112 of the Rules of Court.30
136
The CA further determined that the five affidavits attached to the
transmittal letter should be considered as the complaint-affidavits
that charged petitioner with violation of Section 83 of RA 337 and
for Estafa thru Falsification of Commercial Documents. These
complaint-affidavits complied with the mandatory requirements set
out in the Rules of Court they were subscribed and sworn to
before a notary public and subsequently certified by State
Prosecutor Fonacier, who personally examined the affiants and was
convinced that the affiants fully understood their sworn
statements.31
Anent the second ground, the CA found no merit in petitioner's
argument that the violation of the DOSRI law and the commission
of estafa thru falsification of commercial documents are inherently
inconsistent with each other. It explained that the test in
considering a motion to quash on the ground that the facts charged
do not constitute an offense, is whether the facts alleged, when
hypothetically admitted, constitute the elements of the offense
charged. The appellate court held that this test was sufficiently met
because the allegations in the assailed informations, when
hypothetically admitted, clearly constitute the elements of Estafa
thru Falsification of Commercial Documents and Violation of DOSRI
law.32
Petitioners Motion for Reconsideration33 was likewise denied for
lack of merit.
Hence, this petition.
Issues
Restated, petitioner raises the following issues34 for our
consideration:
I Whether the complaint complied with the mandatory
requirements provided under Section 3(a), Rule 112 of the Rules of
Court and Section 18, paragraphs (c) and (d) of RA 7653.
II Whether a loan transaction within the ambit of the DOSRI law
(violation of Section 83 of RA 337, as amended) could also be the
subject of Estafa under Article 315 (1) (b) of the Revised Penal
Code.
III Is a petition for certiorari under Rule 65 the proper remedy
against an Order denying a Motion to Quash?
IV Whether petitioner is entitled to a writ of injunction.
Our Ruling
The petition lacks merit.
First Issue:
Whether the complaint complied with the mandatory requirements
provided under Section 3(a), Rule 112 of the Rules of Court and
Section 18, paragraphs (c) and (d) of
Republic Act No. 7653
Petitioner moved to withdraw the first issue from the instant
petition
35
On March 5, 2007, the Court noted petitioner's Manifestation and
Motion for Partial Withdrawal of the Petition 36dated February 7,
2007. In the said motion, petitioner informed the Court of the
promulgation of a Decision entitled Soriano v. Hon.
Casanova,37 which also involved petitioner and similar BSP letters
to the DOJ. According to petitioner, the said Decision allegedly
ruled squarely on the nature of the BSP letters and the validity of
the sworn affidavits attached thereto. For this reason, petitioner
moved for the partial withdrawal of the instant petition insofar as
it involved the issue of "whether or not a court can legally acquire
jurisdiction over a complaint which failed to comply with the
mandatory requirements provided under Section 3(a), Rule 112 of
the Rules of Court and Section 18, paragraphs (c) and (d) of RA
7653".38
Given that the case had already been submitted for resolution of
the Court when petitioner filed his latest motion, and that all
respondents had presented their positions and arguments on the
first issue, the Court deems it proper to rule on the same.
In Soriano v. Hon. Casanova, the Court held that the affidavits
attached to the BSP transmittal letter complied with the
mandatory requirements under the Rules of Court.
To be sure, the BSP letters involved in Soriano v. Hon.
Casanova39 are not the same as the BSP letter involved in the
instant case. However, the BSP letters in Soriano v. Hon.
Casanova and the BSP letter subject of this case are similar in the
sense that they are all signed by the OSI officers of the BSP, they
were not sworn to by the said officers, they all contained
summaries of their attached affidavits, and they all requested the
conduct of a preliminary investigation and the filing of
corresponding criminal charges against petitioner Soriano. Thus,
the principle of stare decisis dictates that the ruling in Soriano v.
Hon. Casanova be applied in the instant case once a question of
law has been examined and decided, it should be deemed settled
and closed to further argument.40
We held in Soriano v. Hon. Casanova, after a close scrutiny of the
letters transmitted by the BSP to the DOJ, that these were not
intended to be the complaint, as envisioned under the Rules. They
did not contain averments of personal knowledge of the events
and transactions constitutive of any offense. The letters merely
transmitted for preliminary investigation the affidavits of people
who had personal knowledge of the acts of petitioner. We ruled
that these affidavits, not the letters transmitting them, initiated
the preliminary investigation. Since these affidavits were
subscribed under oath by the witnesses who executed them
before a notary public, then there was substantial compliance
with Section 3(a), Rule 112 of the Rules of Court.
Anent the contention that there was no authority from the BSP
Governor or the Monetary Board to file a criminal case against
Soriano, we held that the requirements of Section 18, paragraphs
(c) and (d) of RA 7653 did not apply because the BSP did not
institute the complaint but merely transmitted the affidavits of the
complainants to the DOJ.
We further held that since the offenses for which Soriano was
charged were public crimes, authority holds that it can be
initiated by "any competent person" with personal knowledge of
the acts committed by the offender. Thus, the witnesses who
executed the affidavits clearly fell within the purview of "any
competent person" who may institute the complaint for a public
crime.
The ruling in Soriano v. Hon. Casanova has been adopted and
elaborated upon in the recent case of Santos-Concio v.
Department of Justice.41 Instead of a transmittal letter from the
BSP, the Court in Santos-Concio was faced with an NBI-NCR
Report, likewise with affidavits of witnesses as attachments.
137
Ruling on the validity of the witnesses sworn affidavits as bases for
a preliminary investigation, we held:
The Court is not unaware of the practice of incorporating all
allegations in one document denominated as "complaint-affidavit."
It does not pronounce strict adherence to only one approach,
however, for there are cases where the extent of ones personal
knowledge may not cover the entire gamut of details material to
the alleged offense. The private offended party or relative of the
deceased may not even have witnessed the fatality, in which case
the peace officer or law enforcer has to rely chiefly on affidavits of
witnesses. The Rules do not in fact preclude the attachment of a
referral or transmittal letter similar to that of the NBI-NCR. Thus,
in Soriano v. Casanova, the Court held:
A close scrutiny of the letters transmitted by the BSP and PDIC to
the DOJ shows that these were not intended to be the complaint
envisioned under the Rules. It may be clearly inferred from the
tenor of the letters that the officers merely intended to transmit the
affidavits of the bank employees to the DOJ. Nowhere in the
transmittal letters is there any averment on the part of the BSP and
PDIC officers of personal knowledge of the events and transactions
constitutive of the criminal violations alleged to have been made
by the accused. In fact, the letters clearly stated that what the OSI
of the BSP and the LIS of the PDIC did was to respectfully transmit
to the DOJ for preliminary investigation the affidavits and personal
knowledge of the acts of the petitioner. These affidavits were
subscribed under oath by the witnesses who executed them before
a notary public. Since the affidavits, not the letters transmitting
them, were intended to initiate the preliminary investigation, we
hold that Section 3(a), Rule 112 of the Rules of Court was
substantially complied with.
Citing the ruling of this Court in Ebarle v. Sucaldito, the Court of
Appeals correctly held that a complaint for purposes of preliminary
investigation by the fiscal need not be filed by the offended party.
The rule has been that,unless the offense subject thereof is one
that cannot be prosecuted de oficio, the same may be filed, for
preliminary investigation purposes, by any competent person. The
crime of estafa is a public crime which can be initiated by "any
competent person." The witnesses who executed the affidavits
based on their personal knowledge of the acts committed by the
petitioner fall within the purview of "any competent person" who
may institute the complaint for a public crime. x x x (Emphasis and
italics supplied)
A preliminary investigation can thus validly proceed on the basis of
an affidavit of any competent person, without the referral
document, like the NBI-NCR Report, having been sworn to by the
law enforcer as the nominal complainant. To require otherwise is a
needless exercise. The cited case of Oporto, Jr. v. Judge
Monserate does not appear to dent this proposition. After all, what
is required is to reduce the evidence into affidavits, for while
reports and even raw information may justify the initiation of an
investigation, the preliminary investigation stage can be held only
after sufficient evidence has been gathered and evaluated which
may warrant the eventual prosecution of the case in court. 42
Following the foregoing rulings in Soriano v. Hon. Casanova and
Santos-Concio v. Department of Justice, we hold that the BSP letter,
taken together with the affidavits attached thereto, comply with the
requirements provided under Section 3(a), Rule 112 of the Rules of
Court and Section 18, paragraphs (c) and (d) of RA 7653.
Second Issue:
Whether a loan transaction within the ambit of the DOSRI law
(violation of Section 83 of RA 337, as amended) could be the
subject of Estafa under Article 315 (1) (b) of the
Revised Penal Code
The second issue was raised by petitioner in the context of his
Motion to Quash Information on the ground that the facts charged
do not constitute an offense.43 It is settled that in considering a
motion to quash on such ground, the test is "whether the facts
alleged, if hypothetically admitted, would establish the essential
elements of the offense charged as defined by law. The trial court
may not consider a situation contrary to that set forth in the
criminal complaint or information. Facts that constitute the
defense of the petitioner[s] against the charge under the
information must be proved by [him] during trial. Such facts or
circumstances do not constitute proper grounds for a motion to
quash the information on the ground that the material averments
do not constitute the offense". 44
We have examined the two informations against petitioner and we
find that they contain allegations which, if hypothetically
admitted, would establish the essential elements of the crime of
DOSRI violation and estafa thru falsification of commercial
documents.
In Criminal Case No. 238-M-2001 for violation of DOSRI rules, the
information alleged that petitioner Soriano was the president of
RBSM; that he was able to indirectly obtain a loan from RBSM by
putting the loan in the name of depositor Enrico Carlos; and that
he did this without complying with the requisite board approval,
reportorial, and ceiling requirements.
In Criminal Case No. 237-M-2001 for estafa thru falsification of
commercial documents, the information alleged that petitioner,
by taking advantage of his position as president of RBSM, falsified
various loan documents to make it appear that an Enrico Carlos
secured a loan of P8 million from RBSM; that petitioner succeeded
in obtaining the loan proceeds; that he later converted the loan
proceeds to his own personal gain and benefit; and that his action
caused damage and prejudice to RBSM, its creditors, the BSP, and
the PDIC.
Significantly, this is not the first occasion that we adjudge the
sufficiency of similarly worded informations. In Soriano v.
People,45 involving the same petitioner in this case (but different
transactions), we also reviewed the sufficiency of informations for
DOSRI violation and estafa thru falsification of commercial
documents, which were almost identical, mutatis mutandis, with
the subject informations herein. We held in Soriano v. People that
there is no basis for the quashal of the informations as "they
contain material allegations charging Soriano with violation of
DOSRI rules and estafa thru falsification of commercial
documents".
Petitioner raises the theory that he could not possibly be held
liable for estafa in concurrence with the charge for DOSRI
violation. According to him, the DOSRI charge presupposes that
he acquired a loan, which would make the loan proceeds
his own money and which he could neither possibly
misappropriate nor convert to the prejudice of another, as
required by the statutory definition of estafa. 46 On the other hand,
if petitioner did not acquire any loan, there can be no DOSRI
violation to speak of. Thus, petitioner posits that the two offenses
cannot co-exist. This theory does not persuade us.
138
Petitioners theory is based on the false premises that the loan was
extended to him by the bank in his own name, and that he became
the owner of the loan proceeds. Both premises are wrong.
The bank money (amounting to P8 million) which came to the
possession of petitioner was money held in trust or administration
by him for the bank, in his
fiduciary capacity as the President of said bank. 47 It is not accurate
to say that petitioner became the owner of theP8 million because it
was the proceeds of a loan. That would have been correct if the
bank knowingly extended the loan to petitioner himself. But that is
not the case here. According to the information for estafa, the loan
was supposed to be for another person, a certain "Enrico Carlos";
petitioner, through falsification, made it appear that said "Enrico
Carlos" applied for the loan when in fact he ("Enrico Carlos") did
not. Through such fraudulent device, petitioner obtained the loan
proceeds and converted the same. Under these circumstances, it
cannot be said that petitioner became the legal owner of the P8
million. Thus, petitioner remained the banks fiduciary with respect
to that money, which makes it capable of misappropriation or
conversion in his hands.
The next question is whether there can also be, at the same time, a
charge for DOSRI violation in such a situation wherein the accused
bank officer did not secure a loan in his own name, but was alleged
to have used the name of another person in order to indirectly
secure a loan from the bank. We answer this in the affirmative.
Section 83 of RA 337 reads:
Section 83. No director or officer of any banking institution shall,
either directly or indirectly, for himself or as the representative or
agent of others, borrow any of the deposits of funds of such
bank, nor shall he become a guarantor, indorser, or surety for loans
from such bank to others, or in any manner be an obligor for
moneys borrowed from the bank or loaned by it, except with the
written approval of the majority of the directors of the bank,
excluding the director concerned. Any such approval shall be
entered upon the records of the corporation and a copy of such
entry shall be transmitted forthwith to the Superintendent of
Banks. The office of any director or officer of a bank who violates
the provisions of this section shall immediately become vacant and
the director or officer shall be punished by imprisonment of not less
than one year nor more than ten years and by a fine of not less
than one thousand nor more than ten thousand pesos. x x x
The prohibition in Section 83 is broad enough to cover various
modes of borrowing.[48] It covers loans by a bank director or
officer (like herein petitioner) which are made either: (1) directly,
(2) indirectly, (3) for himself, (4) or as the representative or agent
of others. It applies even if the director or officer is a mere
guarantor, indorser or surety for someone else's loan or is in any
manner an obligor for money borrowed from the bank or loaned by
it. The covered transactions are prohibited unless the approval,
reportorial and ceiling requirements under Section 83 are complied
with. The prohibition is intended to protect the public, especially
the depositors,[49] from the overborrowing of bank funds by bank
officers, directors, stockholders and related interests, as such
overborrowing may lead to bank failures.[50] It has been said that
"banking institutions are not created for the benefit of the directors
[or officers]. While directors have great powers as directors, they
have no special privileges as individuals. They cannot use the
assets of the bank for their own benefit except as permitted by law.
Stringent restrictions are placed about them so that when acting
both for the bank and for one of themselves at the same time, they
must keep within certain prescribed lines regarded by the
legislature as essential to safety in the banking business". 51
A direct borrowing is obviously one that is made in the name of
the DOSRI himself or where the DOSRI is a named party, while an
indirect borrowing includes one that is made by a third party, but
the DOSRI has a stake in the transaction.52 The latter type
indirect borrowing applies here. The information in Criminal Case
238-M-2001 alleges that petitioner "in his capacity as President of
Rural Bank of San Miguel San Ildefonso branch x x x
indirectly borrow[ed] or secure[d] a loan with [RBSM] x x x
knowing fully well that the same has been done by him without
the written consent and approval of the majority of the board of
directors x x x, and which consent and approval the said accused
deliberately failed to obtain and enter the same upon the records
of said banking institution and to transmit a copy thereof to the
supervising department of the said bank x x x by using the name
of one depositor Enrico Carlos x x x, the latter having no
knowledge of the said loan, and once in possession of the said
amount of eight million pesos (P8 million), [petitioner] converted
the same to his own personal use and benefit".53
The foregoing information describes the manner of securing the
loan as indirect; names petitioner as the benefactor of the indirect
loan; and states that the requirements of the law were not
complied with. It contains all the required elements 54 for a
violation of Section 83, even if petitioner did not secure the loan
in his own name.
The broad interpretation of the prohibition in Section 83 is
justified by the fact that it even expressly covers loans to third
parties where the third parties are aware of the transaction (such
as principals represented by the DOSRI), and where the DOSRIs
interest does not appear to be beneficial but even burdensome
(such as in cases when the DOSRI acts as a mere guarantor or
surety). If the law finds it necessary to protect the bank and the
banking system in such situations, it will surely be illogical for it to
exclude a case like this where the DOSRI acted for his own
benefit, using the name of an unsuspecting person. A contrary
interpretation will effectively allow a DOSRI to use dummies to
circumvent the requirements of the law.
In sum, the informations filed against petitioner do not negate
each other.
Third Issue:
Is a Rule 65 petition for certiorari the proper remedy against an
Order denying a Motion to Quash?
This issue may be speedily resolved by adopting our ruling in
Soriano v. People,55 where we held:
In fine, the Court has consistently held that a special civil action
for certiorari is not the proper remedy to assail the denial of a
motion to quash an information. The proper procedure in such a
case is for the accused to enter a plea, go to trial without
prejudice on his part to present the special defenses he had
invoked in his motion to quash and if after trial on the merits, an
adverse decision is rendered, to appeal therefrom in the manner
authorized by law. Thus, petitioners should not have forthwith
filed a special civil action for certiorari with the CA and instead,
they should have gone to trial and reiterated the special defenses
contained in their motion to quash. There are no special or
exceptional circumstances in the present case that would justify
immediate resort to a filing of a petition for certiorari. Clearly, the
CA did not commit any reversible error, much less, grave abuse of
discretion in dismissing the petition.56
Fourth Issue:
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Whether petitioner is entitled to a writ of injunction

The requisites to justify an injunctive relief are: (1) the right of the
complainant is clear and unmistakable; (2) the invasion of the right
sought to be protected is material and substantial; and (3) there is
an urgent and paramount necessity for the writ to prevent serious
damage. A clear legal right means one clearly founded in or
granted by law or is "enforceable as a matter of law." Absent any
clear and unquestioned legal right, the issuance of an injunctive
writ would constitute grave abuse of discretion. 57 Caution and
prudence must, at all times, attend the issuance of an injunctive
writ because it effectively disposes of the main case without trial
and/or due process.58In Olalia v. Hizon,59 the Court held as follows:

It has been consistently held that there is no power the exercise of

which is more delicate, which requires greater caution, deliberation
and sound discretion, or more dangerous in a doubtful case, than
the issuance of an injunction. It is the strong arm of equity that
should never be extended unless to cases of great injury, where
courts of law cannot afford an adequate or commensurate remedy
in damages.

Every court should remember that an injunction is a limitation upon

the freedom of action of the [complainant] and should not be
granted lightly or precipitately. It should be granted only when the
court is fully satisfied that the law permits it and the emergency
demands it.

Given this Court's findings in the earlier issues of the instant case,
we find no compelling reason to grant the injunctive relief sought
by petitioner.

WHEREFORE, the petition is DENIED. The assailed September 26,

2003 Decision as well as the February 5, 2004 Resolution of the
Court of Appeals in CA-G.R. SP No. 67657 are AFFIRMED. Costs
against petitioner.

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