[G.R. No. 131394.
March 28, 2005] in the articles of incorporation for the purpose of electing a new
1. JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES
and ARIEL REYES, petitioners, vs. COURT OF APPEALS,
SECURITIES AND EXCHANGE COMMISSION, DOLORES
ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III,
ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE
MERCHANT MARINE SCHOOL, INC., respondents.
DECISION
TINGA, J.:
Presented in the case at bar is the apparently straight-forward but
complicated question: What should be the basis of quorum for a
stockholders meetingthe outstanding capital stock as indicated in
the articles of incorporation or that contained in the companys
stock and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R.
SP No. 41473[1] promulgated on 18 August 1997, affirming the
SEC Order dated 20 June 1996, and the Resolution[2] of the Court
of Appeals dated 31 October 1997 which denied petitioners
motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders shares and
seventy-six (76) common shares as its initial capital stock
subscription reflected in the articles of incorporation. However,
private respondents and their predecessors who were in control
of PMMSI registered the companys stock and transfer book for
the first time in 1978, recording thirty-three (33) common shares
as the only issued and outstanding shares of PMMSI. Sometime in
1979, a special stockholders meeting was called and held on the
basis of what was considered as a quorum of twenty-seven (27)
common shares, representing more than two-thirds (2/3) of the
common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan
Acayan, filed a petition with the Securities and Exchange
Commission (SEC) for the registration of their property rights over
one hundred (120) founders shares and twelve (12) common
shares owned by their father. The SEC hearing officer held that
the heirs of Acayan were entitled to the claimed shares and called
for a special stockholders meeting to elect a new set of officers.[3]
The SEC En Banc affirmed the decision. As a result, the shares of
Acayan were recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect
a new set of directors. Private respondents thereafter filed a
petition with the SEC questioning the validity of the 06 May 1992
stockholders meeting, alleging that the quorum for the said
meeting should not be based on the 165 issued and outstanding
shares as per the stock and transfer book, but on the initial
subscribed capital stock of seven hundred seventy-six (776) shares,
as reflected in the 1952 Articles of Incorporation. The petition was
dismissed.[4] Appeal was made to the SEC En Banc, which granted
said appeal, holding that the shares of the deceased incorporators
should be duly represented by their respective administrators or
heirs concerned. The SEC directed the parties to call for a
stockholders meeting on the basis of the stockholdings reflected
set of officers for the corporation.[5]
Petitioners, who are PMMSI stockholders, filed a petition for
review with the Court of Appeals.[6] Rebecca Acayan, Jayne O.
Abuid, Willie O. Abuid and Renato Cervantes, stockholders and
directors of PMMSI, earlier filed another petition for review of the
same SEC En Bancs orders. The petitions were thereafter
consolidated.[7] The consolidated petitions essentially raised the
following issues, viz: (a) whether the basis the outstanding capital
stock and accordingly also for determining the quorum at
stockholders meetings it should be the 1978 stock and transfer
book or if it should be the 1952 articles of incorporation; and (b)
whether the Court of Appeals gravely erred in applying the Espejo
Decision to the benefit of respondents.[8] The Espejo Decision is
the decision of the SEC en banc in SEC Case No. 2289 which
ordered the recording of the shares of Jose Acayan in the stock
and transfer book.
The Court of Appeals held that for purposes of transacting
business, the quorum should be based on the outstanding capital
stock as found in the articles of incorporation.[9] As to the second
issue, the Court of Appeals held that the ruling in the Acayan case
would ipso facto benefit the private respondents, since to require
a separate judicial declaration to recognize the shares of the
original incorporators would entail unnecessary delay and
expense. Besides, the Court of Appeals added, the incorporators
have already proved their stockholdings through the provisions of
the articles of incorporation.[10]
In the instant petition, petitioners claim that the 1992
stockholders meeting was valid and legal. They submit that
reliance on the 1952 articles of incorporation for determining the
quorum negates the existence and validity of the stock and
transfer book which private respondents themselves prepared. In
addition, they posit that private respondents cannot avail of the
benefits secured by the heirs of Acayan, as private respondents
must show and prove entitlement to the founders and common
shares in a separate and independent action/proceeding.
In private respondents Memorandum[11] dated 08 March 2000,
they point out that the instant petition raises the same facts and
issues as those raised in G.R. No. 131315[12], which was denied
by the First Division of this Court on 18 January 1999 for failure to
show that the Court of Appeals committed any reversible error.
They add that as a logical consequence, the instant petition
should be dismissed on the ground of res judicata. Furthermore,
private respondents claim that in view of the applicability of the
rule on res judicata, petitioners counsel should be cited for
contempt for violating the rule against forum-shopping.[13]
For their part, petitioners claim that the principle of res judicata
does not apply to the instant case. They argue that the instant
petition is separate and distinct from G.R. No. 131315, there being
no identity of parties, and more importantly, the parties in the
two petitions have their own distinct rights and interests in
relation to the subject matter in litigation. For the same reasons,
they claim that counsel for petitioners cannot be found guilty of
forum-shopping.[14]
In their Manifestation and Motion[15] dated 22 September 2004,
private respondents moved for the dismissal of the instant
petition in view of the dismissal of G.R. No. 131315. Attached to
Page 1 of 111
the said manifestation is a copy of the Entry of Judgment[16]
issued by the First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the
ground that like the petition in G.R. No. 131315 it fails to impute
reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in the case at bar.
Res judicata means a matter adjudged, a thing judicially acted
upon or decided; a thing or matter settled by judgment.[17] The
doctrine of res judicata provides that a final judgment, on the
merits rendered by a court of competent jurisdiction is conclusive
as to the rights of the parties and their privies and constitutes an
absolute bar to subsequent actions involving the same claim,
demand, or cause of action.[18] The elements of res judicata are
(a) identity of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted and relief
prayed for, the relief being founded on the same facts; and (c) the
identity in the two (2) particulars is such that any judgment which
may be rendered in the other action will, regardless of which
party is successful, amount to res judicata in the action under
consideration.[19]
There is no dispute as to the identity of subject matter since the
crucial point in both cases is the propriety of including the still
unproven shares of respondents for purposes of determining the
quorum. Petitioners, however, deny that there is identity of
parties and causes of actions between the two petitions.
The test often used in determining whether causes of action are
identical is to ascertain whether the same facts or evidence would
support and establish the former and present causes of action.[20]
More significantly, there is identity of causes of action when the
judgment sought will be inconsistent with the prior judgment.[21]
In both petitions, petitioners assert that the Court of Appeals
Decision effectively negates the existence and validity of the stock
and transfer book, as well as automatically grants private
respondents shares of stocks which they do not own, or the
ownership of which remains to be unproved. Petitioners in the
two petitions rely on the entries in the stock and transfer book as
the proper basis for computing the quorum, and consequently
determine the degree of control one has over the company.
Essentially, the affirmance of the SEC Order had the effect of
diminishing their control and interests in the company, as it
allowed the participation of the individual private respondents in
the election of officers of the corporation.
Absolute identity of parties is not a condition sine qua non for res
judicata to applya shared identity of interest is sufficient to invoke
the coverage of the principle.[22] However, there is no identity of
parties between the two cases. The parties in the two petitions
have their own rights and interests in relation to the subject
matter in litigation. As stated by petitioners in their Reply to
Respondents Memorandum,[23] there are no two separate
actions filed, but rather, two separate petitions for review on
certiorari filed by two distinct parties with the Court and
represented by their own counsels, arising from an adverse
consolidated decision promulgated by the Court of Appeals in one
action or proceeding.[24] As such, res judicata is not present in
the instant case.
Likewise, there is no basis for declaring petitioners or their
counsel guilty of violating the rules against forum-shopping. In the
Verification/Certification[25] portion of the petition, petitioners
clearly stated that there was then a pending motion for
reconsideration of the 18 August 1997 Decision of the Court of
Appeals in the consolidated cases (CA-G.R. SP No. 41473 and CA-
G.R. SP No. 41403) filed by the Abuids, as well as a motion for
clarification. Moreover, the records indicate that petitioners filed
their Manifestation[26] dated 20 January 1998, informing the
Court of their receipt of the petition in G.R. No. 131315 in
compliance with their duty to inform the Court of the pendency of
another similar petition. The Court finds that petitioners
substantially complied with the rules against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially
the same issues and arguments as those in G.R. No. 131315 which
the First Division has long denied with finality. The First Division
found the petition before it inadequate in failing to raise any
reversible error on the part of the Court of Appeals. We reach a
similar conclusion as regards the present petition.
The crucial issue in this case is whether it is the companys stock
and transfer book, or its 1952 Articles of Incorporation, which
determines stockholders shareholdings, and provides the basis for
computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that
defines the charter of the corporation and the contractual
relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its
stockholders.[27] When PMMSI was incorporated, the prevailing
law was Act No. 1459, otherwise known as The Corporation Law.
Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of
whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes by filing with the
Securities and Exchange Commission articles of incorporation duly
executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in
lawful money of the Philippines, and the number of shares into
which it is divided, and if such stock be in whole or in part without
par value then such fact shall be stated; Provided, however, That
as to stock without par value the articles of incorporation need
only state the number of shares into which said capital stock is
divided.
(8) If it be a stock corporation, the amount of capital stock or
number of shares of no-par stock actually subscribed, the amount
or number of shares of no-par stock subscribed by each and the
sum paid by each on his subscription. . . .[28]
A review of PMMSIs articles of incorporation[29] shows that the
corporation complied with the requirements laid down by Act No.
1459. It provides in part:
Page 2 of 111
7. That the capital stock of the said corporation is NINETY
THOUSAND PESOS (P90,000.00) divided into two classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P
90,000.00
....
8. That the amount of the entire capital stock which has been
actually subscribed is TWENTY ONE THOUSAND SIX HUNDRED
PESOS (P21,600.00) and the following persons have subscribed for
the number of shares and amount of capital stock set out after
their respective names:
Xxxxxx
There is no gainsaying that the contents of the articles of
incorporation are binding, not only on the corporation, but also
on its shareholders. In the instant case, the articles of
incorporation indicate that at the time of incorporation, the
incorporators were bona fide stockholders of seven hundred (700)
founders shares and seventy-six (76) common shares. Hence, at
that time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which
records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for
which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock
made, the date thereof and by and to whom made; and such
other entries as may be prescribed by law.[31] A stock and
transfer book is necessary as a measure of precaution, expediency
and convenience since it provides the only certain and accurate
method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like
matters.[32] However, a stock and transfer book, like other
corporate books and records, is not in any sense a public record,
and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein.[33] In fact, it is
generally held that the records and minutes of a corporation are
not conclusive even against the corporation but are prima facie
evidence only,[34] and may be impeached or even contradicted
by other competent evidence.[35] Thus, parol evidence may be
admitted to supply omissions in the records or explain ambiguities,
or to contradict such records.[36]
In 1980, Batas Pambansa Blg. 68, otherwise known as The
Corporation Code of the Philippines supplanted Act No. 1459. BP
Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of
directors or trustees, there must be present, either in person or
by representative authorized to act by written proxy, the owners
of a majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in
this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital
stock or majority of the members in the case of non-stock
corporation.
Outstanding capital stock, on the other hand, is defined by the
Code as:
Sec. 137. Outstanding capital stock defined. The term outstanding
capital stock as used in this code, means the total shares of stock
issued to subscribers or stockholders whether or not fully or
partially paid (as long as there is binding subscription agreement)
except treasury shares.
Thus, quorum is based on the totality of the shares which have
been subscribed and issued, whether it be founders shares or
common shares.[37] In the instant case, two figures are being
pitted against each other those contained in the articles of
incorporation, and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously
deficient, if not inaccurate stock and transfer book, and
completely disregarding the issued and outstanding shares as
indicated in the articles of incorporation would work injustice to
the owners and/or successors in interest of the said shares. This
case is one instance where resort to documents other than the
stock and transfer books is necessary. The stock and transfer book
of PMMSI cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares which have
been subscribed, more so when the articles of incorporation show
a significantly larger amount of shares issued and outstanding as
compared to that listed in the stock and transfer book. As aptly
stated by the SEC in its Order dated 15 July 1996:[38]
It is to be explained, that if at the onset of incorporation a
corporation has 771 shares subscribed, the Stock and Transfer
Book should likewise reflect 771 shares. Any sale, disposition or
even reacquisition of the company of its own shares, in which it
becomes treasury shares, would not affect the total number of
shares in the Stock and Transfer Book. All that will change are the
entries as to the owners of the shares but not as to the amount of
shares already subscribed.
This is precisely the reason why the Stock and Transfer Book was
not given probative value. Did the shares, which were not
recorded in the Stock and Transfer Book, but were recorded in the
Articles of Iincorporation just vanish into thin air? . . . .[39]
As shown above, at the time the corporation was set-up, there
were already seven hundred seventy-six (776) issued and
outstanding shares as reflected in the articles of incorporation. No
proof was adduced as to any transaction effected on these shares
from the time PMMSI was incorporated up to the time the instant
petition was filed, except for the thirty-three (33) shares which
were recorded in the stock and transfer book in 1978, and the
additional one hundred thirty-two (132) in 1982. But obviously,
the shares so ordered recorded in the stock and transfer book are
among the shares reflected in the articles of incorporation as the
shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to
vote by the corporation merely because the corporate officers
failed to keep its records accurately.[40] A corporations records
are not the only evidence of the ownership of stock in a
corporation.[41] In an American case,[42] persons claiming
shareholders status in a professional corporation were listed as
stockholders in the amendment to the articles of incorporation.
On that basis, they were in all respects treated as shareholders. In
Page 3 of 111
fact, the acts and conduct of the parties may even constitute
sufficient evidence of ones status as a shareholder or member.[43]
In the instant case, no less than the articles of incorporation
declare the incorporators to have in their name the founders and
several common shares. Thus, to disregard the contents of the
articles of incorporation would be to pretend that the basic
document which legally triggered the creation of the corporation
does not exist and accordingly to allow great injustice to be
caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals gravely erred in
applying the Espejo decision to the benefit of respondents. The
Court believes that the more precise statement of the issue is
whether in its assailed Decision, the Court of Appeals can declare
private respondents as the heirs of the incorporators, and
consequently register the founders shares in their name. However,
this issue as recast is not actually determinative of the present
controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals
unilaterally divested them of their shares in PMMSI as recorded in
the stock and transfer book and instantly created inexistent
shares in favor of private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial
declaration to recognize the shares of the original incorporators
would entail unnecessary delay and expense on the part of the
litigants, considering that the incorporators had already proved
ownership of such shares as shown in the articles of
incorporation.[44] There was no declaration of who the individual
owners of these shares were on the date of the promulgation of
the Decision. As properly stated by the SEC in its Order dated 20
June 1996, to which the appellate courts Decision should be
related, if at all, the ownership of these shares should only be
subjected to the proper judicial (probate) or extrajudicial
proceedings in order to determine the respective shares of the
legal heirs of the deceased incorporators.[45]
WHEREFORE, the petition is DENIED and the assailed Decision is
AFFIRMED. Costs against petitioners.
SO ORDERED.
2. 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.
RESOLUTION
CORONA, J.:
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
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.
Page 4 of 111
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.
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
Page 5 of 111
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:
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
Page 6 of 111
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
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
Page 7 of 111
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 the parties 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. Assuming arguendo 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.
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
Page 8 of 111
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.
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:
Page 9 of 111

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.
SO ORDERED.
3. VALLE VERDE COUNTRY CLUB, INC., v AFRICA
BRION, J.:
In this petition for review on certiorari,[1] the parties raise a legal
question on corporate governance: Can the members of a
corporations board of directors elect another director to fill in a
vacancy caused by the resignation of a hold-over director?
Page 10 of 111

THE FACTUAL ANTECEDENTS
On February 27, 1996, during the Annual Stockholders Meeting of
petitioner Valle Verde Country Club, Inc. (VVCC), the following
were elected as members of the VVCC Board of Directors: Ernesto
Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
(Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago,
Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.[2] In the
years 1997, 1998, 1999, 2000, and 2001, however, the requisite
quorum for the holding of the stockholders meeting could not be
obtained. Consequently, the above-named directors continued to
serve in the VVCC Board in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position as
member of the VVCC Board. In a meeting held on October 6, 1998,
the remaining directors, still constituting a quorum of VVCCs nine-
member board, elected Eric Roxas (Roxas) to fill in the vacancy
created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also resigned
as member of the VVCC Board. He was replaced by Jose Ramirez
(Ramirez), who was elected by the remaining members of the
VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the
election of Roxas and Ramirez as members of the VVCC Board
with the Securities and Exchange Commission (SEC) and the
Regional Trial Court (RTC), respectively. The SEC case questioning
the validity of Roxas appointment was docketed as SEC Case No.
01-99-6177. The RTC case questioning the validity of Ramirez
appointment was docketed as Civil Case No. 68726.
In his nullification complaint[3] before the RTC, Africa alleged that
the election of Roxas was contrary to Section 29, in relation to
Section 23, of the Corporation Code of the Philippines
(Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any
vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessor in office. xxx. [Emphasis
supplied.]
Africa claimed that a year after Makalintals election as member of
the VVCC Board in 1996, his [Makalintals] term as well as those of
the other members of the VVCC Board should be considered to
have already expired. Thus, according to Africa, the resulting
vacancy should have been filled by the stockholders in a regular or
special meeting called for that purpose, and not by the remaining
members of the VVCC Board, as was done in this case.
Africa additionally contends that for the members to exercise the
authority to fill in vacancies in the board of directors, Section 29
requires, among others, that there should be an unexpired term
during which the successor-member shall serve. Since Makalintals
term had already expired with the lapse of the one-year term
provided in Section 23, there is no more unexpired term during
which Ramirez could serve.
Through a partial decision[4] promulgated on January 23, 2002,
the RTC ruled in favor of Africa and declared the election of
Ramirez, as Makalintals replacement, to the VVCC Board as null
and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003,
nullifying the election of Roxas as member of the VVCC Board,
vice hold-over director Dinglasan. While VVCC manifested its
intent to appeal from the SECs ruling, no petition was actually
filed with the Court of Appeals; thus, the appellate court
considered the case closed and terminated and the SECs ruling
final and executory.[5]
THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23,
2002 partial decision for being contrary to law and jurisprudence.
VVCC made a direct resort to the Court via a petition for review
Page 11 of 111
on certiorari, claiming that the sole issue in the present case
involves a purely legal question.
As framed by VVCC, the issue for resolution is whether the
remaining directors of the corporations Board, still constituting a
quorum, can elect another director to fill in a vacancy caused by
the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in
a vacancy created by the resignation of a hold-over director is
expressly granted to the remaining members of the corporations
board of directors.
Under the above-quoted Section 29 of the Corporation Code, a
vacancy occurring in the board of directors caused by the
expiration of a members term shall be filled by the corporations
stockholders. Correlating Section 29 with Section 23 of the same
law, VVCC alleges that a members term shall be for one year and
until his successor is elected and qualified; otherwise stated, a
members term expires only when his successor to the Board is
elected and qualified. Thus, until such time as [a successor is]
elected or qualified in an annual election where a quorum is
present, VVCC contends that the term of [a member] of the board
of directors has yet not expired.
As the vacancy in this case was caused by Makalintals resignation,
not by the expiration of his term, VVCC insists that the board
rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Courts ruling in the
1927 El Hogar[6] case which states:
Owing to the failure of a quorum at most of the general meetings
since the respondent has been in existence, it has been the
practice of the directors to fill in vacancies in the directorate by
choosing suitable persons from among the stockholders. This
custom finds its sanction in Article 71 of the By-Laws, which reads
as follows:
Art. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate
naturally holds over and continues to function until another
directorate is chosen and qualified. Unless the law or the charter
of a corporation expressly provides that an office shall become
vacant at the expiration of the term of office for which the officer
was elected, the general rule is to allow the officer to hold over
until his successor is duly qualified. Mere failure of a corporation
to elect officers does not terminate the terms of existing officers
nor dissolve the corporation. The doctrine above stated finds
expression in article 66 of the by-laws of the respondent which
declares in so many words that directors shall hold office "for the
term of one year or until their successors shall have been elected
and taken possession of their offices." xxx.
It results that the practice of the directorate of filling vacancies by
the action of the directors themselves is valid. Nor can any
exception be taken to the personality of the individuals chosen by
the directors to fill vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same arguments
that he did before the trial court.
THE COURTS RULING
We are not persuaded by VVCCs arguments and, thus, find its
petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the
remaining directors of a corporations Board, still constituting a
quorum, can elect another director to fill in a vacancy caused by
the resignation of a hold-over director. The resolution of this legal
issue is significantly hinged on the determination of what
constitutes a directors term of office.
The holdover period is not part of the term of office of a member
of the board of directors
The word term has acquired a definite meaning in jurisprudence.
In several cases, we have defined term as the time during which
the officer may claim to hold the office as of right, and fixes the
interval after which the several incumbents shall succeed one
another.[7] The term of office is not affected by the holdover.[8]
The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the
incumbent holds over in office beyond the end of the term due to
Page 12 of 111
the fact that a successor has not been elected and has failed to
qualify.
Term is distinguished from tenure in that an officers tenure
represents the term during which the incumbent actually holds
office. The tenure may be shorter (or, in case of holdover, longer)
than the term for reasons within or beyond the power of the
incumbent.
Based on the above discussion, when Section 23[9] of the
Corporation Code declares that the board of directorsshall hold
office for one (1) year until their successors are elected and
qualified, we construe the provision to mean that the term of the
members of the board of directors shall be only for one year; their
term expires one year after election to the office. The holdover
period that time from the lapse of one year from a members
election to the Board and until his successors election and
qualification is not part of the directors original term of office, nor
is it a new term; the holdover period, however, constitutes part of
his tenure. Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies that
the office has a fixed term, which has expired, and the incumbent
is holding the succeeding term.[10]
After the lapse of one year from his election as member of the
VVCC Board in 1996, Makalintals term of office is deemed to have
already expired. That he continued to serve in the VVCC Board in
a holdover capacity cannot be considered as extending his term.
To be precise, Makalintals term of office began in 1996 and
expired in 1997, but, by virtue of the holdover doctrine in Section
23 of the Corporation Code, he continued to hold office until his
resignation on November 10, 1998. This holdover period, however,
is not to be considered as part of his term, which, as declared, had
already expired.
With the expiration of Makalintals term of office, a vacancy
resulted which, by the terms of Section 29[11] of the Corporation
Code, must be filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To assume as VVCC does
that the vacancy is caused by Makalintals resignation in 1998, not
by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the
expiration of Makalintals term had been created long before his
resignation.
The powers of the corporations board of directors emanate from
its stockholders
VVCCs construction of Section 29 of the Corporation Code on the
authority to fill up vacancies in the board of directors, in relation
to Section 23 thereof, effectively weakens the stockholders power
to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is
the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and
direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the stockholders,
in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate
affairs.[12]
The underlying policy of the Corporation Code is that the business
and affairs of a corporation must be governed by a board of
directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to
shareholders, and the legitimacy of their decisions that bind the
corporation's stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.[13]
This theory of delegated power of the board of directors similarly
explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporations board of directors is
caused not by the expiration of a members term, the successor so
elected to fill in a vacancy shall be elected only for the unexpired
term of the his predecessor in office. The law has authorized the
remaining members of the board to fill in a vacancy only in
specified instances, so as not to retard or impair the corporations
operations; yet, in recognition of the stockholders right to elect
the members of the board, it limited the period during which the
successor shall serve only to the unexpired term of his
predecessor in office.
While the Court in El Hogar approved of the practice of the
directors to fill vacancies in the directorate, we point out that this
ruling was made before the present Corporation Code was
enacted[14] and before its Section 29 limited the instances when
the remaining directors can fill in vacancies in the board, i.e.,
when the remaining directors still constitute a quorum and when
the vacancy is caused for reasons other than by removal by the
stockholders or by expiration of the term.
It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term of
office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations stockholders
who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.
As correctly pointed out by the RTC, when remaining members of
the VVCC Board elected Ramirez to replace Makalintal, there was
no more unexpired term to speak of, as Makalintals one-year
term had already expired. Pursuant to law, the authority to fill in
Page 13 of 111
the vacancy caused by Makalintals leaving lies with the VVCCs
stockholders, not the remaining members of its board of directors.
WHEREFORE, we DENY the petitioners petition for review on
certiorari, and AFFIRM the partial decision of the Regional Trial
Court, Branch 152, Manila, promulgated on January 23, 2002, in
Civil Case No. 68726. Costs against the petitioners.
SO ORDERED.
CONTINUED CASES:
4. G.R. No. 63201 May 27, 1992
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI,
PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK
@ BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG
TY @ VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS
OF RIZAL, PASIG, METRO MANILA AND/OR HIS DEPUTIES AND
AGENTS, respondents.
MEDIALDEA, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court
seeking to annul and set aside the orders of respondent Court of
First Instance of Rizal, Pasig, Branch 21 (now Regional Trial Court)
dated April 22, 1982, September 14, 1982 and January 12, 1983 in
LRC Case No. R-2744 on the ground that they had been issued
without or in excess of jurisdiction and with grave abuse of
discretion.
The antecedent facts of this case are as follows:
Private respondents are the registered owners of three parcels of
land in Pasig, Metro Manila covered by OCT No. 853, TCT Nos.
32843 and 32897 of the Registry of Deeds of Rizal.
On March 1, 1954, private respondents entered into a contract of
lease with Philippine Blooming Mills, Co., Inc., (PBM for brevity)
whereby the letter shall lease the aforementioned parcels of land
as factory site. PBM was duly organized and incorporated on
January 19, 1952 with a corporate term of twenty-five (25) years.
This leasehold right of PBM covering the parcels of land was duly
annotated at the back of the above stated certificates of title as
Entry No. 9367/T-No. 32843.
The contract of lease provides that the term of the lease is for
twenty years beginning from the date of the contract and "is
extendable for another term of twenty years at the option of the
LESSEE should its term of existence be extended in accordance
with law." (p. 76, Rollo). The contract also states that the lessee
agrees to "use the property as factory site and for that purpose to
construct whatever buildings or improvements may be necessary
or convenient and/or . . . for any purpose it may deem fit; and
before the termination of the lease to remove all such buildings
and improvements" (pp. 76-77 Rollo).
In accordance with the contract, PBM introduced on the land,
buildings, machineries and other useful improvements. These
constructions and improvements were registered with the
Registry of Deeds of Rizal and annotated at the back of the
respondents' certificates of title as Entry No. 85213/T-No. 43338.
On October 11, 1963, PBM executed in favor of Philippine
National Bank (PNB for brevity), petitioner herein, a deed of
assignment, conveying and transferring all its rights and interests
under the contract of lease which it executed with private
respondents. The assignment was for and in consideration of the
loans granted by PNB to PBM. The deed of assignment was
registered and annotated at the back of the private respondents'
certificates of title as Entry No. 85215/T-No. 32843.
On November 6, 1963 and December 23, 1963 respectively, PBM
executed in favor of PNB a real estate mortgage for a loan of
P100,000.00 and an addendum to real estate mortgage for
another loan of P1,590,000.00, covering all the improvements
constructed by PBM on the leased premises. These mortgages
were registered and annotated at the back of respondents'
certificates as Entry No. 85214/T-No. 43338 and Entry No.
870971/T-No. 32843, respectively.
PBM filed a petition for registration of improvements in the titles
of real property owned by private respondents docketed as Case
No. 6530.
On October 7, 1981, private respondents filed a motion in the
same proceedings which was given a different case number to
wit, LRC Case No.
R-2744, because of the payment of filing fees for the motion. The
motion sought to cancel the annotations on respondents'
certificates of title pertaining to the assignment by PBM to PNB of
the former's leasehold rights, inclusion of improvements and the
real estate mortgages made by PBM in favor of PNB, on the
ground that the contract of lease entered into between PBM and
respondents-movants had already expired by the failure of PBM
and/or its assignee to exercise the option to renew the second 20-
year lease commencing on March 1, 1974 and also by the failure
of PBM to extend its corporate existence in accordance with law.
The motion also states that since PBM failed to remove its
improvements on the leased premises before the expiration of
the contract of lease, such improvements shall accrue to
respondents as owners of the land.
On April 22, 1982, respondent court issued an order directing the
cancellation of the inscriptions on respondents' certificates of
title. The dispositive portion of the order provides:
WHEREFORE, the Register of Deeds having
jurisdiction over the movant's land
Certificates of Title Nos. 853, 32843 and
32897 is hereby ordered, upon the payment
of the corresponding fees, to cancel therein
memoranda/inscriptions/entries Nos.
85213/T-No. 43338, 85215/T-No. 32843,
85214/T-No. 43338 and 87097/T-No.
32843.
SO ORDERED. (pp. 147-148, Rollo)
Petitioner PNB filed a motion for reconsideration of the above
order of the respondent court but the latter denied it on June 28,
1982.
On August 25, 1982, private respondents filed a motion for entry
of final judgment and issuance of a writ of execution of the order
of April 22, 1982.
On September 14, 1982, respondent court granted the aforesaid
motion for entry of final judgment and ordered the Register of
Deeds of Pasig, Rizal to cancel the entries on respondents'
certificates of title stated in the order of April 22, 1982.
Petitioner PNB filed an omnibus motion to set aside the entry of
judgment as ordered by the respondent court on the ground that
it has no prior notice or knowledge of the order of respondent
court dated June 28, 1982 which denied its motion for
reconsideration of the order of April 22, 1982 and that while there
was a certification from the Bureau of Posts that three registry
notices were sent to petitioner's counsel, there was no allegation
Page 14 of 111
or certification whatsoever that said notices were actually
received by the addressee.
On January 12, 1983, the respondent court denied the omnibus
motion.
Hence, this petition.
Petitioner alleges that respondent court acted capriciously and
arbitrarily in issuing the orders of September 14, 1982 and
January 12, 1983 which considered its previous order of April 22,
1982 as having become final on the ground that it had no notice
or knowledge that the order of June 28, 1982 denying its motion
for reconsideration was issued; that the notices of registered mail
allegedly containing the order of June 28, 1982 were not received
by petitioner's counsel of record, and that the certification of the
Bureau of Posts refers only to the fact that registry notices were
sent, and not to the fact that the notices were actually received
by the addressee.
In resolving this matter, the respondent court stated in the
questioned order of January 12, 1983 as follows:
The respondent PNB filed a motion of May
20, 1982 to set aside the Order of April 22,
1982. This was denied by the Order of June
28, 1982. Then the movants filed a motion
of August 25, 1982 for entry of judgment,
based on the postmaster's certification that
not only one but three notices of the
registered mail containing a copy of the
order of June 28, 1982 was sent to
respondent PNB's counsel at the PNB
Building at Escolta, Manila which is his
address of record in this case. Consequently
the entry of judgment Order of September
14, 1982.
xxx xxx xxx
The respondent PNB's counsel at the
hearing of said incidents on October 12,
1982 admitted that the aforesaid registered
notices could have been received by PNB's
regular Receiving Section at the PNB
Building at the Escolta but could not have
been forwarded by said Receiving Section
to said counsel's Litigation and Collection
Division, Legal Department at an upper
floor of the same building. Thus the
presumption that official duty was regularly
performed by the postmaster was not
overcome, as most recently reiterated by
the Supreme Court in Feraren vs. Santos
promulgated on April 27, 1982, 113, SCRA
707 . . . (p. 195, Rollo)
Section 8 of Rule 13 of the Rules of Court, as amended, provides
that service by registered mail is complete upon actual receipt by
the addressee; but if he fails to claim his mail from the post office
within five (5) days from the date of first notice of the postmaster,
service shall take effect at the expiration of such time. The fair
and just application of that exception depends upon the
conclusive proof that the first notice was sent by the postmaster
to the addressee. The best evidence of that fact would be the
certification from the postmaster (Barrameda v. Castillo, L-27211,
July 6, 1977, 78 SCRA 1).
In the instant case, the respondent court found that the
postmaster's certification stated that three (3) notices of the
registered mail which contained the order of June 28, 1982
denying the motion for reconsideration of the order of April 22,
1982, were sent to petitioner PNB's counsel at Escolta, Manila
which is the address stated in the record of the case. The factual
findings of the trial court bear great weight and is binding upon
this Court. Hence, as between the denial of the petitioners'
counsel that he received the notice of the registered mail and the
postmaster's certification that said notices were sent to him, the
postmaster's claim should prevail. The postmaster has the official
duty to send notices of registered mail and the presumption is
that official duty was regularly performed (Aportadera, Sr. v.
Court of Appeals, G.R. No. 41358, March 16, 1988, 158 SCRA 695).
Petitioner alleges that it is not the respondent court but the
Securities and Exchange Commission which has jurisdiction over
the private respondents' motions, which raised as issue the
corporate existence of PBM. Petitioner further submits that the
respondent court committed grave abuse of discretion in ordering
the cancellation of entries in the certificates of title of
respondents on the following grounds: 1) the motion for
cancellation would amount to a collateral attack upon the due
incorporation of PBM which cannot be done legally, 2) the
contract of lease between PBM as petitioner's assignor and
private respondents did not expire since PBM exercised its option
to renew the lease with the acquiescence of private respondents,
and 3) respondent court's ruling that ownership over the
improvements passed from PBM to private respondents upon the
expiration of lease violates the law and the contract between the
parties.
Even if We were to set aside the questioned orders directing the
entry of finality of the order cancelling entries in the titles,
petitioner's case must still fail on the merits.
Private respondent's motion with the respondent court was for
the cancellation of the entries on their titles on the ground that
the contract of lease executed between them and PBM had
expired. This action is civil in nature and is within the jurisdiction
of the respondent court. The circumstance that PBM as one of the
contracting parties is a corporation whose corporate term had
expired and which fact was made the basis for the termination of
the lease is not sufficient to confer jurisdiction on the Securities
and Exchange Commission over the case. Presidential Decree No.
902-A, as amended, enumerates the cases over which the SEC has
exclusive jurisdiction and authority to resolve. The case at bar is
not covered by the enumeration.
Anent the issue of whether the cancellation of the entries on
respondent's certificates of title is valid and proper, We find that
the respondent court did not act in excess of its jurisdiction, in
ordering the same.
The contract of lease expressly provides that the term of the lease
shall be twenty years from the execution of the contract but can
be extended for another period of twenty years at the option of
the lessee should the corporate term be extended in accordance
with law. Clearly, the option of the lessee to extend the lease for
another period of twenty years can be exercised only if the lessee
as corporation renews or extends its corporate term of existence
in accordance with the Corporation Code which is the applicable
law. Contracts are to be interpreted according to their literal
meaning and should not be interpreted beyond their obvious
intendment. Thus, in the instant case, the initial term of the
contract of lease which commenced on March 1, 1954 ended on
March 1, 1974. PBM as lessee continued to occupy the leased
premises beyond that date with the acquiescence and consent of
the respondents as lessor. Records show however, that PBM as a
corporation had a corporate life of only twenty-five (25) years
which ended an January 19, 1977. It should be noted however
that PBM allowed its corporate term to expire without complying
with the requirements provided by law for the extension of its
corporate term of existence.
Page 15 of 111
Section 11 of Corporation Code provides that a corporation shall
exist for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is
extended. Upon the expiration of the period fixed in the articles of
incorporation in the absence of compliance with the legal
requisites for the extension of the period, the corporation ceases
to exist and is dissolved ipso facto (16 Fletcher 671 cited by
Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3,
1988 Edition p. 617). When the period of corporate life expires,
the corporation ceases to be a body corporate for the purpose of
continuing the business for which it was organized. But it shall
nevertheless be continued as a body corporate for three 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 gradually to settle and close its affairs, to dispose of
and convey its property and to divide its assets (Sec. 122,
Corporation Code). There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the
dissolution of a corporation because the period of corporate
existence is provided in the articles of incorporation. When such
period expires and without any extension having been made
pursuant to law, the corporation is dissolved automatically insofar
as the continuation of its business is concerned. The quo
warranto proceeding under Rule 66 of the Rules of Court, as
amended, may be instituted by the Solicitor General only for the
involuntary dissolution of a corporation on the following grounds:
a) when the corporation has offended against a provision of an
Act for its creation or renewal; b) when it has forfeited its
privileges and franchises by non-user; c) when it has committed or
omitted an act which amounts to a surrender of its corporate
rights, privileges or franchises; d) when it has mis-used a right,
privilege or franchise conferred upon it by law, or when it has
exercised a right, privilege or franchise in contravention of law.
Hence, there is no need for the SEC to make an involuntary
dissolution of a corporation whose corporate term had ended
because its articles of incorporation had in effect expired by its
own limitation.
Considering the foregoing in relation to the contract of lease
between the parties herein, when PBM's corporate life ended on
January 19, 1977 and its 3-year period for winding up and
liquidation expired on January 19, 1980, the option of extending
the lease was likewise terminated on January 19, 1977 because
PBM failed to renew or extend its corporate life in accordance
with law. From then on, the respondents can exercise their right
to terminate the lease pursuant to the stipulations in the contract.
We now come to the question of the ownership over the
improvements constructed by PBM over the leased premises,
which improvements were mortgaged in favor of PNB, petitioner
herein.
The rights of the lessor and the lessee over the improvements
which the latter constructed on the leased premises is governed
by Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith,
useful improvements which are suitable to
the use for which the lease is intended,
without altering the form or substance of
the property leased, the lessor upon the
termination of the lease shall pay the lessee
one-half of the value of the improvements
at that time. Should the lessor refuse to
reimburse said amount, the lessee may
remove the improvements, even though
the principal thing may suffer damage
thereby. He shall not however, cause any
more impairment upon the property leased
than is necessary. . . .
The aforequoted provision gives the lessee the right to remove
the improvements if the lessor chooses not to pay one-half of the
value thereof. However, in the case at bar, the law will not apply
because the parties herein have stipulated in the contract their
own terms and conditions concerning the improvements, to wit,
that the lessee, namely PBM, bound itself to remove the
improvements before the termination of the lease. Petitioner
PNB, as assignee of PBM succeeded to the obligation of the latter
under the contract of lease. It could not possess rights more than
what PBM had as lessee under the contract. Hence, petitioner
was duty bound to remove the improvements before the
expiration of the period of lease as what we have already
discussed in the preceding paragraphs. Its failure to do so when
the lease was terminated was tantamount to a waiver of its rights
and interests over the improvements on the leased premises.
In view of the foregoing, this Court finds that respondent court
did not act with grave abuse of discretion in directing the
cancellation of entries on private respondents' certificates of title
as set forth in the questioned order.
ACCORDINGLY, the petition is DISMISSED and the assailed orders
of respondent court dated April 22, 1982, September 14, 1982
and January 12, 1983 are AFFIRMED.
SO ORDERED.
5. Majority of Stockholders of Ruby Industrial
Corporation vs. Lim, GR No. 165887, June 6, 2011 –
[Power to Increase/Decrease Capital Stock or Incur,
Create, Increase Bonded Indebtedness]
6.
VILLARAMA, JR., J.:
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 on December 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.
Page 16 of 111
 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 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 the December 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
SEC En 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
Page 17 of 111
majority of all the members of the new management committee. SEC. The
Lim, ALFC and MANCOM appealed to the CA (CA-G.R. SP Nos. Rehabilitation Plan
32404, 32469 & 32483) which by Decision[5] dated March 31, was not approved
1995 set aside the SECs approval of the Revised BENHAR/RUBY until October 28,
Plan and remanded the case to the SEC for further 1988. There was a
proceedings. The CA ruled that the revised plan circumvented its willful and blatant
earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of violation of the SEC
assignment executed by RUBYs creditors in favor of order
BENHAR. Since under the revised plan, BENHAR was to dated December 20,
receive P34.068 Million of the P60.437 Million credit facility to be 1983 on the part of
extended to RUBY, as settlement for its advance payment to petitioner Ruby
RUBYs seven (7) secured creditors, such payments made by Industrial Corp.,
BENHAR under the void Deeds of Assignment, in effect were represented by Yu
recognized as payable to BENHAR under the revised plan. The Kim Giang, by Benhar
motion for reconsideration filed by BENHAR and RUBY was International, Inc.,
likewise denied by the CA.[6] represented by Henry
Undaunted, RUBY and BENHAR filed a petition for review in this Yu and by FEBTC.
Court (G.R. Nos. 124185-87 entitled Ruby Industrial Corporation v. 2) The
Court of Appeals) alleging that the CA gravely abused its discretion magnitude and
in substituting its judgment for that of the SEC, and in allowing coverage of the
Lim, ALFC and MANCOM to file separate petitions prepared by transactions involved
lawyers representing themselves as belonging to different were such that Yu
firms. By Decision[7] dated January 20, 1998, we sustained the CAs Kim Giang and the
ruling that the Revised BENHAR/RUBY Plan contained provisions other signatories
which circumvented its final decision in CA-G.R. SP No. 18310, cannot feign
nullifying the deeds of assignment of credits and mortgages ignorance or pretend
executed by RUBYs creditors in favor of BENHAR, as well as this lack of knowledge
Courts Resolution in G.R. No. 96675, affirming the said CAs thereto in view of the
decision. We thus held: fact that they were all
Specifically, the Revised signatories to the
BENHAR/RUBY Plan considered as valid the transaction and privy
advance payments made by BENHAR in to all the negotiations
favor of some of RUBYs creditors. The leading to the
nullity of BENHARs unauthorized dealings questioned
with RUBYs creditors is settled. The deeds transactions. In
of assignment between BENHAR and RUBYs executing the Deeds
creditors had been categorically declared of Assignment, the
void by the SEC Hearing Panel in two (2) petitioners totally
orders issued on January 12, disregarded the
1989 and March 15, 1989. x x x mandate contained in
xxxx the SEC order not to
These orders were upheld by the SEC en dispose the properties
banc and the Court of Appeals. In CA-G.R. of Ruby Industrial
SP No. 18310, the Court of Appeals ruled as Corp. in any manner
follows: whatsoever pending
xxxxxxx the approval of the
xx Rehabilitation Plan
1) x x x and rendered illusory
when the Deed of the SEC efforts to
Assignment was rehabilitate the
executed on May 30, petitioner
1988 by and between corporation to the
Ruby Industrial Corp., best interests of all
Benhar International, the creditors.
Inc., and FEBTC, the 3) The
Rehabilitation Plan assignments were
proposed by made without prior
petitioner Ruby approval of the
Industrial Corp. for Management
Benhar International, Committee created
Inc. to assume all by the SEC in an
petitioners obligation Order dated August
has not been 10, 1984. Under Sec.
approved by the 6, par. d, sub. par. (2)

Page 18 of 111
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 favor of RUBY is conditioned upon the
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
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
Page 19 of 111
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, 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
Page 20 of 111
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.
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
Page 21 of 111
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. On April 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 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
Page 22 of 111
 On September 18, 2002, the SEC issued its the Management Committee is
Order[42] denying the petition for suspension of payments, as hereby DISSOLVED. It is likewise ordered to:
follows: (1) Make an inventory of the
WHEREFORE, in view of the assets, funds and
foregoing, the Commission hereby resolves properties of the
to terminate the proceedings and DENY the petitioner;
instant petition. (2) Turn-over the
Accordingly, pursuant to Sec. 5-5 aforementioned assets,
of the SECs Rules of Procedure on funds and properties to
Corporate Recovery, which provides: the proper party(ies);
Discharge (3) Render an accounting of its
of the Management management; and
Committee -- The (4) Submit its Final Report to the
Management Commission.
Committee shall be The MANCOM is ordered to
discharged and comply with the foregoing within a non-
dissolved under the extendible period of thirty (30) days from
following receipt of this Order. Relative to any
circumstances: compensation owing to the MANCOM, it is
a. Whenever left to the determination of the parties
the concerned.
Commissio No pronouncement as to costs.
n, on SO ORDERED.[43]
motion The SEC declared that since its order declaring RUBY under a state
or motu of suspension of payments was issued on December 20, 1983, the
prop[r]io, 180-day period provided in Sec. 4-9 of the Rules of Procedure on
has Corporate Recovery had long lapsed. Being a remedial rule, said
determine provision can be applied retroactively in this case. The SEC also
d that the overruled the objections raised by the minority stockholders
necessity regarding the questionable issuance of shares of stock by the
for the majority stockholders and extension of RUBYs corporate term,
Managem citing the presumption of regularity in the act of a government
ent entity which obtains upon the SECs approval of RUBYs
Committe amendment of articles of incorporation. It pointed out that Lim
e no raised the issue only in the year 2000. Moreover, the SEC found
longer that notwithstanding his allegations of fraud, Lim never proved
exists; the illegality of the additional infusion of the capitalization by
b. Upon the RUBY so as to warrant a finding that there was indeed an unlawful
appointme act.[44]
nt of a Lim, in his personal capacity and in representation of the minority
liquidator stockholders of RUBY, filed a petition for review with prayer for a
under temporary restraining order and/or writ of preliminary injunction
these before the CA (CA-G.R. SP No. 73195) assailing the SEC order
Rules; dismissing the petition and dissolving the MANCOM.
c. By agreement Ruling of the CA
of the On May 26, 2004, the CA rendered its Decision,[45] the dispositive
parties; portion of which states:
d. Upon WHEREFORE, the Questioned
terminatio Order dated 18 September 2002 issued by
n of the the Securities and Exchange Commission in
proceedin SEC Case No. 2556 entitled In the Matter of
gs. the Petition for Suspension of Payments,
Upon its Ruby Industrial Corporation, Petitioner, is
discharge and hereby SET ASIDE, and consequently:
dissolution, the (1) the infusion of additional
Management capital made by the majority stockholders
Committee shall be declared null and void and restoring the
submit its final report capital structure of Ruby to its original
and render an structure prior to the time the injunction
accounting of its was issued, that is, majority stockholders
management within 59.828% and the minority stockholders
such reasonable time 40.172% of the authorized capital stock of
as the Commission Ruby Industrial Corporation.
may allow.

Page 23 of 111
 (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
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.
Page 24 of 111
In G.R. No. 165887, petitioners Majority Stockholders and RUBY September 18, 2002 SEC Order; (2) whether the defects in the
raised the following grounds for the reversal of the assailed certification of non-forum shopping submitted by Lim warrant the
decision and the reinstatement of the SECs September 18, 2002 dismissal of his petition before the CA; (3) whether the CA was
Order: correct in reversing the SECs order dismissing the petition for
First Reason suspension of payment.
THE COURT OF APPEALS ERRED Our Ruling
AND WHEN IT DID, IT ACTED CONTRARY TO The petitions have no merit.
LAW AND PRECEDENTS WHEN IT GAVE DUE On the charge of forum shopping, we have already ruled on the
COURSE TO, AND, THEREAFTER, matter in G.R. Nos. 124185-87. Thus:
SUSTAINED, A FORMALLY AND We hold that private
SUBSTANTIALLY DEFECTIVE PETITION FOR respondents are not guilty of forum-
REVIEW. shopping. In Ramos, Sr. v. Court of Appeals,
Second Reason we ruled:
THE COURT OF APPEALS ERRED The
AND WHEN IT DID, IT ACTED IN A MANNER private respondents
AT WAR WITH ORDERLY PROCEDURE AND can be considered to
APPLICABLE JURISPRUDENCE WHEN IT have engaged in
REVERSED THE ORDER OF DISMISSAL OF forum shopping if all
THE SECURITIES AND EXCHANGE of them, acting as
COMMISSION AND SUBSTITUTED ITS one group, filed
JUDGMENT FOR THAT OF THE LATTER IN identical special civil
THE DETERMINATION OF ISSUES WELL actions in the Court
WITHIN THE EXPERTISE OF THE of Appeals and in this
COMMISSION. Court. There must be
Third Reason identity of parties or
THE COURT OF APPEALS ERRED interests
AND WHEN IT DID, IT ACTED IN GRAVE represented, rights
ABUSE OF ITS DISCRETION AND, IN FACT, IN asserted and relief
EXCESS OR LACK OF JURISDICTION -- WHEN sought in different
IT SUSTAINED COLLATERAL ATTACKS OF tribunals. In the case
FINAL ADJUDICATIONS OF THE SECURITIES at bar, two groups of
AND EXCHANGE COMMISSION.[48] private respondents
On the other hand, petitioner China Bank in G.R. No. 165929 puts appear to have acted
forth the argument that the principle of stare decisis cannot be independently of each
given effect in this case considering the prevailing factual other when they
circumstances, as to do so would result in manifest injustice. It sought relief from the
contends that the reason for the declaration of nullity of the Deed appellate court. Both
of Assignment pronounced more than a decade ago, has become groups sought relief
legally inefficacious by its obsolescence. The creditors of RUBY from the same
have the right to recover their credit. But when the CA ordered tribunal.
the nullification of China Banks Deed of Assignment in favor of It would
Greener Investment Corporation, it practically dashed its last not matter even if
hope for ever recovering its credit. there are several
China Bank is of the view that the CA overstretched the divisions in the Court
import of this Courts January 20, 1998 decision in G.R. Nos. of Appeals. The
124185-87 when the SEC was ordered to conduct further adverse party can
proceedings, as to include the unwinding of the alleged illegal always ask for the
assignment of credits. The rehabilitation of RUBY, if it still may be consolidation of the
capable of, is not made dependent on the unwinding by the SEC two cases. x x x
of the illegal assignments, as the same concerns only the issue of In the case at bar, private
who shall now become the creditors of RUBY, and does not alter respondents represent different groups
the fact that RUBY has hefty loan obligations and it has not with different interests the minority
enough cash flow to pay for the same. stockholders group, represented by private
Deploring the principal parties penchant for prolonged respondent Lim; the unsecured creditors
litigation resulting considerably in irreversible losses to RUBY, group, Allied Leasing & Finance
China Bank maintains that from the report submitted by the Corporation; and the old management
MANCOM to the SEC, it can be clearly seen that no attempt at group. Each group has distinct rights to
rehabilitation whatsoever had been pursued. Given the current protect. In line with our ruling in Ramos, the
situation, China Bank prays that the CA Decision be reversed and cases filed by private respondents should
its Deed of Assignment in favor of Greener Investment be consolidated. In fact, BENHAR and RUBY
Corporation be recognized and given full legal effect. did just that in their urgent motions filed
In fine, main issues to be resolved are: (1) whether private on December 1, 1993 and December 6,
respondents MANCOM and Lim engaged in forum shopping when 1993, respectively, they prayed for the
they filed separate petitions before the CA assailing the

Page 25 of 111
 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. 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.
Page 26 of 111
 First, the SEC did not even mention in its September December 22, 1989 Order directing them to turn over the cash,
18, 2002 Order that when this Court remanded to it the case for financial records and documents of RUBY, including certificates of
further proceedings, there remained only the Alternative Plan of title over RUBYs real properties, and render an accounting of all
RUBYs minority stockholders which had earlier been forwarded to moneys received and payments made by RUBY. On January 18,
the SEC Hearing Panel. With the CA Decision setting aside the SEC 2002, the MANCOM even filed a Motion[57] to require Yu Kim
approval of the Revised BENHAR/RUBY Plan, as affirmed by this Giang to render report/accounting of RUBY from 1983 to the
Court, it behooves on the SEC to recognize the fact that the 1st quarter of 1990, stating that despite a commitment from Mr.
Alternative Plan was endorsed by 90% of the RUBYs creditors who Giang, he has seemingly delayed his compliance, hence frustrating
had objected to the Revised BENHAR/RUBY Plan. Yet, not a single the desire of MANCOM to submit a comprehensive and complete
step was taken by the SEC to address those findings and report for the whole period of 1983 up to the present. To
conclusions made by the CA and this Court on the highly underscore the importance of making the said records available
disadvantageous and onerous provisions of the Revised for scrutiny of the SEC and MANCOM, Lim manifested before the
BENHAR/RUBY Plan. SEC that--
Moreover, the SEC failed to act on motions filed by Lim and Indeed, the majority is actually
MANCOM to implement this Courts January 20, 1998 Decision in unwilling (and not merely unable) to submit
G.R. Nos. 124185-87, by declaring all deeds of assignment with such records because these will show,
BENHAR and/or the conduits of Henry Yu of no force and legal among others:
effect, which of course necessitates the surrender by the (1) The majority to minority ratio
concerned creditors of those void deeds of assignment. Petitioner in the corporate
China Bank dismisses it as unnecessary and immaterial to the ownership is 59.828%
continued inability of RUBY to settle its long overdue :40.172%;
debts. However, the CA said that the foregoing acts should have (2) The actual amounts of the
been done by the SEC for proper documentation and orderly bank loans paid off by
settlement after proper accounting of the assignment Benhar International[,]
transactions. The appellate court then concluded that dismissal of Inc. and/or Henry Yu
the petition under Sec. 4-9 of the Rules of Procedure on would be very low;
Corporate Recovery would impair the vested rights of the (3) The illegal payment of the
minority stockholders under this Courts decision invalidating the bank loans and illegal
aforesaid deeds of assignment, thus: assignments of the
We agree with the observations mortgages to
of the petition that if the illegal assignments Benhar/Henry Yu are
not having been unwound and the contrary to the Honorable
mortgages not canceled, the majority, their Commissions Order of 20
alter ego, and/or cohorts will claim to be December 1983 for
secured creditors and freely collect extra- suspension of payments;
judicially the obligations covered by the (4) The earnings of the
illegal assignments. Ruby has very little corporation from 1983 to
money compared to the P200 Million 1989 amounted to
probable liability to the illegal assignees as millions and cannot be
unilaterally stated by Ruby without audit accounted for by the
(previously merely totaled to P34 Million in majority and the first
1998 as stated in the revised rehabilitation Mancom;
plan). Foreclosure of the mortgages by the (5) The money may have been
illegal assignees will follow; Ruby will lose spent to pay off some of
all its prime properties; there will be no the loans to the bank but
assets left for unsecured creditors; and Benhar and Henry Yu
there will be no residual P600 Million assets fraudulently claim credit
to divide.[56] therefor.[58]
Evidently, the minority stockholders and MANCOM had already It must be noted that MANCOM had rejected the two
foreseen the impossibility of implementing a viable rehabilitation rehabilitation plans proposed by BENHAR and the majority
plan if the illegal assignments made by its creditors with BENHAR stockholders. In shifting the blame to the MANCOM and minority
and the majority stockholders, and subsequently, with conduits of stockholders for the delay in the approval of a viable
RUBY or Henry Yu, are not properly unwound and those directors rehabilitation plan, the SEC apparently overlooked that from the
responsible for the void transactions not required to make a full time the SEC approved the Revised BENHAR/RUBY Plan and
accounting. Contrary to petitioner China Banks insinuation that dissolved the MANCOM, the majority stockholders has denied
the minority stockholders merely want to prolong the litigation to MANCOM access to corporate papers, documents evidencing the
the great prejudice and damage to RUBYs creditors, MANCOM amounts actually paid to creditor banks/assignors, financial
and Lim had determined and moved for SEC-supervised statements and titles over RUBYs real properties.
liquidation proceedings as the more prudent course of action for Although the SEC granted MANCOM and Lims request for a
an orderly and equitable settlement of RUBYs liabilities. hearing and direct a representative from BPI to bring all
Records likewise revealed that the SEC chose to keep silent and documents relative to the assignment of RUBYs credit, said
failed to assist the MANCOM and minority stockholders in their hearing did not materialize after the majority stockholders
efforts to demand compliance from the majority stockholders or proposed a compromise agreement with the minority
Yu Kim Giang (who headed the first MANCOM) with the stockholders. But as it turned out, this development only caused

Page 27 of 111
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
registered their objection during the said meeting by asking the
board to defer action as the SEC September 18, 1991 Order was
still on appeal with the SEC En Banc. When the SEC En
Banc denied their appeal and motion for reconsideration under
its July 30, 1993 and October 15, 1993 orders, Lim, MANCOM and
ALFC filed 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. 124185-87.
Contrary to the assertion of petitioners majority stockholders, our
decision in G.R. Nos. 124185-87 nullified the deeds of
assignment not solely on the ground of violation of the injunction
orders issued by the SEC and CA. As earlier mentioned, we
affirmed the CAs finding that the re-lending scheme under the
Revised BENHAR/RUBY Plan will not only make rehabilitation
more costly for RUBY, but also worsen its financial condition
because of the mortgage of its assets to a new creditor. To better
illumine this point, we quote from the CA decision in CA-G.R. SP
Nos. 32404, 32469 and 32483 comparing the provisions of the
rehabilitation proposals submitted by the majority stockholders
(Revised BENHAR/RUBY Plan) and the minority stockholders
(Alternative Plan):
Xxx
Prior to the September 18, 1991 Order
approving the Revised BENHAR/RUBY Plan
and dissolving the MANCOM, majority of
RUBYs creditors (90%) have already
withdrawn their support to the revised
plan and manifested that they were only
lately informed about another plan
submitted by the minority stockholders.
Hence, these creditors wrote individual
letters to the SEC Hearing Panel expressing
their agreement with and endorsement of
the Alternative Plan of the minority
stockholders. [62]
The Revised BENHAR/RUBY Plan had proposed the
calling for subscription of unissued shares through a Board
Resolution from the P11.814 million of the P23.7 million ACS in
order to allow the long overdue program of the REHAB Program.
RUBY will offer for subscription 118,140 shares of stocks at par
value of P100 each to all stockholders on record, payable within
15 days, or within a reasonable period from SEC approval of the
revised plan.[63] This was implemented by the October 2,
1991 meeting of the Board of Directors led by Yu Kim Giang. The
minority directors claimed they 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.
The SEC remained indifferent to the reliefs sought by
the minority stockholders, saying that the issue of the validity of
the additional capital infusion was belatedly raised. Even
assuming the October 2, 1991 board meeting indeed took place,
the SEC did nothing to ascertain whether indeed, as the minority
claimed: (1) the minority stockholders were not given notice as
required and reasonable time to exercise their pre-emptive rights;
and (2) the capital infusion was not for the purpose of
rehabilitation but a mere ploy to divest the minority stockholders
of their 40.172% shareholding and reduce it to a mere 25.25%.
The foregoing matters, along with the persistent
refusal of the majority stockholders, led by Yu Kim Giang, to give a
full accounting of their transactions involving RUBYs credits and
properties, were extensively argued by the minority stockholders
in their opposition to the motions to dismiss/vacate suspension
order filed by the majority stockholders and BPI, as follows:
Their receipts only show
supposed payment by the majority of a
total of P1,759,150.00 out of the correct
amount of P7,068,079.92.00 (sic) (59.828%
of P11.814 million required capital infusion
under the MRP and RRP) which should have
been the amount paid by them under the
RRP which requires full payment. Thus, they
sought to attain a 74.75% equity from a
59.828% original equity by playing more
tricks and stating that, under the general
rule, they are supposedly allowed to pay-up
only 25% of their
subscription. Unfortunately for them, in a
Page 28 of 111
rehabilitation supervised by the SEC and
with an existing Mancom, the general rule
does not apply. What is stated in the
rehabilitation plan must be strictly
followed provided the rehabilitation plan
has been finally approved.
It must be remembered that
in October 2 to 17, 1991, the amounts owed
by Ruby to the banks who illegally assigned
their 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
deprive the minority of its blocking position
and property rights since distribution after
liquidation is based on the percentage of
stockholdings. It is not only unfair,
inequitable and not meaningful it is clearly
dishonest.
xxxx
Assuming arguendo that the
Board of Directors could act independently
and this did not violate any injunction, if the
capital 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:
Page 29 of 111
 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 stockholders, members, creditors and
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 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
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.
Page 30 of 111
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 who will 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
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 the December 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.
Page 31 of 111
In the case of Union Bank of the Philippines v. Concepcion,[77] the Trial Court: Provided,
Court is presented with the issue of whether the SEC had That the Supreme
jurisdiction to proceed with insolvency proceedings after it was Court in the exercise
shown that the debtor corporation can no longer be rehabilitated. of its authority may
We held that although jurisdiction over a petition to declare a designate
corporation in a state of insolvency strictly lies with regular the Regional Trial
courts, the SEC possessed ample power under P.D. No. 902-A, as Court branches that
amended, to declare a corporation insolvent as an incident of and shall exercise
in continuation of its already acquired jurisdiction over the jurisdiction over
petition to be declared in a state of suspension of payments in the these cases. The
two instances provided in Sec. 5 (d)[78] thereof. Commission shall
Subsequently, in Consuelo Metal Corporation v. Planters retain jurisdiction
Development Bank[79] the Court was again confronted with the over pending cases
same issue. The original petition filed by the debtor corporation involving intra-
was for suspension of payment, rehabilitation and appointment of corporate disputes
a rehabilitation receiver or management committee. Finding the submitted for final
petition sufficient in form and substance, the SEC issued an order resolution which
suspending immediately all actions for claims against the should be resolved
petitioner pending before any court, tribunal or body until further within one (1) year
orders from the court. It also created a management committee from the enactment
to undertake petitioners rehabilitation. Four years later, upon the of this Code. The
management committees recommendation, the SEC issued an Commission shall
omnibus order directing the dissolution and liquidation of the retain jurisdiction
petitioner, and that the proceedings on and implementation of over pending
the order of liquidation be commenced at the Regional Trial Court suspension of
to which the case was transferred. However, the trial court payments/rehabilitat
refused to act on the motion filed by the petitioner who ion cases filed as
requested for the issuance of a TRO against the extrajudicial of 30 June 2000 until
foreclosure initiated by one of its creditors. The trial court ruled finally
that since the SEC had already terminated and decided on the disposed. (Emphasis
merits the petition for suspension of payment, the trial court no supplied)
longer had legal basis to act on petitioners motion. It likewise The SEC assumed jurisdiction
denied the motion for reconsideration stating that petition for over CMCs petition for suspension of
suspension of payment could not be converted into a petition for payment and issued a suspension order on
dissolution and liquidation because they covered different subject 2 April 1996 after it found CMCs petition to
matters and were governed by different rules. Petitioners remedy be sufficient in form and substance. While
thus was to file a new petition for dissolution and liquidation CMCs petition was still pending with the
either with the SEC or the trial court. SEC as of 30 June 2000, it was finally
When the case was elevated to the CA, the petition was dismissed disposed of on 29 November 2000 when
affirming that under Sec. 121 of the Corporation Code, the SEC the SEC issued its Omnibus Order directing
had jurisdiction to hear the petition for dissolution and the dissolution of CMC and the transfer of
liquidation. On motion for reconsideration, the CA remanded the the liquidation proceedings before the
case to the SEC for proceedings under Sec. 121 of the Corporation appropriate trial court. The SEC finally
Code. The CA denied the motion for reconsideration filed by the disposed of CMCs petition for suspension of
respondent creditor, who then filed a petition for review with this payment when it determined that CMC
Court. could no longer be successfully
We ruled that the SEC observed the correct procedure under the rehabilitated.
present law, in cases where it merely retained jurisdiction over However, the SECs jurisdiction
pending cases for suspension of payments/rehabilitation, thus: does not extend to the liquidation of a
Republic Act No. 8799 (RA 8799) corporation. While the SEC has jurisdiction
transferred to the appropriate regional trial to order the dissolution of a corporation,
courts the SECs jurisdiction defined under jurisdiction over the liquidation of the
Section 5(d) of Presidential Decree No. 902- corporation now pertains to the
A. Section 5.2 of RA 8799 provides: appropriate regional trial courts. This is the
The Commissions reason why the SEC, in its 29 November
jurisdiction over all 2000 Omnibus Order, directed that the
cases enumerated proceedings on and implementation of the
under Sec. 5 of order of liquidation be commenced at the
Presidential Decree Regional Trial Court to which this case shall
No. 902-A is hereby be transferred. This is the correct
transferred to the procedure because the liquidation of a
Courts of general corporation requires the settlement of
jurisdiction or the claims for and against the corporation,
appropriate Regional which clearly falls under the jurisdiction of

Page 32 of 111
 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 the Corporation
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.
SO ORDERED.
7. Turner v. Lorenzo Shipping Corporation, GRN. 157479,
Nov. 24, 2010 – [Power to Deny Pre-emptive Rights]
BERSAMIN, J.:
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, or P0.41/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
of P2,565,400.00 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
Page 33 of 111
 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 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
Page 34 of 111
denied the motion for reconsideration and granted the payment shall be made to any dissenting
petitioners motion for immediate execution.[10] stockholder unless the corporation has
unrestricted retained earnings in its books
Subsequently, on November 28, 2002, the RTC issued to cover such payment. Thus, the Supreme
a writ of execution.[11] Court held that:
Aggrieved, the respondent commenced a special civil action
for certiorari in the CA to challenge the two aforecited The requirement
orders of Judge Tipon, claiming that: of unrestricted retained
earnings to cover the
A. shares is based on the
JUDGE TIPON GRAVELY ABUSED HIS trust fund doctrine which
DISCRETION IN GRANTING SUMMARY means that the capital
JUDGMENT TO THE SPOUSES TURNER, stock, property and other
BECAUSE AT THE TIME THE COMPLAINT assets of a corporation are
WAS FILED, LSC HAD NO RETAINED regarded as equity in trust
EARNINGS, AND THUS WAS COMPLYING for the payment of
WITH THE LAW, AND NOT VIOLATING ANY corporate creditors. The
RIGHTS OF THE SPOUSES TURNER, WHEN IT reason is that creditors of
REFUSED TO PAY THEM THE VALUE OF a corporation are
THEIR LSC SHARES. ANY RETAINED preferred over the
EARNINGS MADE A YEAR AFTER stockholders in the
THE COMPLAINT WAS FILED ARE distribution of corporate
IRRELEVANT TO THE SPOUSES TURNERS assets. There can be no
RIGHT TO RECOVER UNDER THE distribution of assets
COMPLAINT, BECAUSE THE WELL-SETTLED among the stockholders
RULE, REPEATEDLY BROUGHT TO JUDGE without first paying
TIPONS ATTENTION, IS IF NO RIGHT EXISTED corporate creditors.
AT THE TIME (T)HE ACTION WAS Hence, any disposition of
COMMENCED THE SUIT CANNOT BE corporate funds to the
MAINTAINED, ALTHOUGH SUCH RIGHT OF prejudice of creditors is
ACTION MAY HAVE ACCRUED THEREAFTER. null and void. Creditors of
a corporation have the
right to assume that so
B. long as there are
JUDGE TIPON IGNORED CONTROLLING CASE outstanding debts and
LAW, AND THUS GRAVELY ABUSED HIS liabilities, the board of
DISCRETION, WHEN HE GRANTED AND directors will not use the
ISSUED THE QUESTIONED WRIT OF assets of the corporation
EXECUTION DIRECTING THE EXECUTION OF to purchase its own stock.
HIS PARTIAL SUMMARY JUDGMENT IN
FAVOR OF THE SPOUSES TURNER, BECAUSE In the instant case, it was
THAT JUDGMENT IS NOT A FINAL established that there were no unrestricted
JUDGMENT UNDER SECTION 1 OF RULE 39 retained earnings when the Turners filed
OF THE RULES OF COURT AND THEREFORE their Complaint. In a letter dated 20 August
CANNOT BE SUBJECT OF EXECUTION UNDER 2000, petitioner informed the Turners that
THE SUPREME COURTS CATEGORICAL payment of their shares could only be made
HOLDING IN PROVINCE OF PANGASINAN VS. if it had unrestricted earnings in its books to
COURT OF APPEALS. cover the same. Petitioner reiterated this in
a letter dated 2 January 2001 which further
Upon the respondents application, the CA issued a informed the Turners that its Financial
temporary restraining order (TRO), enjoining the petitioners, and Statement for fiscal year 1999 shows that
their agents and representatives from enforcing the writ of its retained earnings ending December 31,
execution. By then, however, the writ of execution had been 1999 was at a deficit in the amount
partially enforced. of P72,973,114.00, a matter which has not
been disputed by private
The TRO lapsed without the CA issuing a writ of respondents. Hence, in accordance with the
preliminary injunction to prevent the execution. Thereupon, the second paragraph of sec. 82, BP 68 supra,
sheriff resumed the enforcement of the writ of execution. the Turners right to payment had not yet
accrued when they filed their Complaint
The CA promulgated its assailed decision on March 4, on January 22, 2001, albeit their appraisal
2003,[12] pertinently holding: right already existed.
However, it is clear from the In Philippine American General
foregoing that the Turners appraisal right is Insurance Co. Inc. vs. Sweet Lines, Inc., the
subject to the legal condition that no Supreme Court declared that:

Page 35 of 111

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 of P11,975,490.00
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
Page 36 of 111
 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;
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.[14]
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
Page 37 of 111
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
Page 38 of 111
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 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.[30] For, 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.
Page 39 of 111
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.
SO ORDERED.
8. Edward J. Nell Co., v. Pacific Farms, Inc. , GRN L- 20850,
Nov. 29, 1965 [ Nell Doctrine]
(Topic: Merger/Consolidation)
FACTS:
On October 9, 1958, appellant secured in Civil Case No. 58579 of
the Municipal Court of Manila against Insular Farms, Inc. —
hereinafter referred to as Insular Farms a judgment for the sum of
P1,853.80 — representing the unpaid balance of the price of a
pump sold by appellant to Insular Farms — with interest on said
sum, plus P125.00 as attorney's fees and P84.00 as costs. A writ of
execution, issued after the judgment had become final, was, on
August 14, 1959, returned unsatisfied, stating that Insular Farms
had no leviable property. Soon thereafter, or on November 13,
1959, appellant filed with said court the present action against
Pacific Farms, Inc. — hereinafter referred to as appellee — for the
collection of the judgment aforementioned, upon the theory that
appellee is the alter ego of Insular Farms, which appellee has
denied. In due course, the municipal court rendered judgment
dismissing appellant's complaint.
The record shows that, on March 21, 1958, appellee purchased
1,000 shares of stock of Insular Farms for P285,126.99; that,
thereupon, appellee sold said shares of stock to certain
individuals, who forthwith reorganized said corporation; and that
the board of directors thereof, as reorganized, then caused its
assets, including its leasehold rights over a public land in Bolinao,
Pangasinan, to be sold to herein appellee for P10,000.00.
ISSUE:
Whether or not that the appellee, Pacific Farms is an alter ego of
Insular Farms?
HELD:
NO.
We agree with the Court of Appeals that these facts do not prove
that the appellee is an alter ego of Insular Farms, or is liable for its
debts. The rule is set forth in Fletcher Cyclopedia Corporations,
Vol. 15, Sec. 7122, pp. 160-161, as follows:
Generally where one corporation sells or otherwise transfers all of
its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor, except: (1) where the
purchaser expressly or impliedly agrees to assume such debts; (2)
where the transaction amounts to a consolidation or merger of
the corporations; (3) where the purchasing corporation is merely
a continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability
for such debts.
Neither is it claimed that these transactions have resulted in the
consolidation or merger of the Insular Farms and appellee herein.
On the contrary, appellant's theory to the effect that appellee is
an alter ego of the Insular Farms negates such consolidation or
merger, for a corporation cannot be its own alter ego.
9. Islamic Directorate of the Philippines v. Court of
Appeals And Iglesia Ni Cristo, G.R. No. 117897, May
14, 1997- [Power to Sell or Dispose of Corporate Assets
HERMOSISIMA, JR., J.:
The subject of this petition for review is the Decision of the
public respondent Court of Appeals,[1] dated October 28, 1994,
setting aside the portion of the Decision of the Securities and
Exchange Commission (SEC, for short) in SEC Case No. 4012 which
declared null and void the sale of two (2) parcels of land in
Quezon City covered by the Deed of Absolute Sale entered into by
and between private respondent Iglesia Ni Cristo (INC, for short)
and the Islamic Directorate of the Philippines, Inc., Carpizo Group,
(IDP, for short).
The following facts appear of record.
Petitioner IDP-Tamano Group alleges that sometime in
1971, Islamic leaders of all Muslim major tribal groups in the
Philippines headed by Dean Cesar Adib Majul organized and
incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES
(IDP), the primary purpose of which is to establish an Islamic
Center in Quezon City for the construction of a Mosque (prayer
place), Madrasah (Arabic School), and other religious
infrastructures so as to facilitate the effective practice of Islamic
faith in the area.[2]
Towards this end, that is, in the same year, the Libyan
government donated money to the IDP to purchase land at Culiat,
Tandang Sora, Quezon City, to be used as a Center for the Islamic
populace. The land, with an area of 49,652 square meters, was
covered by two titles: Transfer Certificate of Title Nos. RT-26520
(176616)[3] and RT-26521 (170567),[4] both registered in the name
of IDP.
It appears that in 1971, the Board of Trustees of the IDP
was composed of the following per Article 6 of its Articles of
Incorporation:
Senator Mamintal Tamano[5]
Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar[6]
According to the petitioner, in 1972, after the purchase of
the land by the Libyan government in the name of IDP, Martial
Law was declared by the late President Ferdinand Marcos. Most
of the members of the 1971 Board of Trustees like Senators
Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and
Congressman Al-Rashid Lucman flew to the Middle East to escape
political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group,
headed by Engineer Farouk Carpizo, and the Abbas Group, led by
Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups
Page 40 of 111
claimed to be the legitimate IDP. Significantly, on October 3, 1986,
the SEC, in a suit between these two contending groups, came out
with a Decision in SEC Case No. 2687 declaring the election of
both the Carpizo Group and the Abbas Group as IDP board
members to be null and void. The dispositive portion of the SEC
Decision reads:
WHEREFORE, judgment is hereby rendered declaring the elections
of both the petitioners[7] and respondents[8] as null and void for
being violative of the Articles of Incorporation of petitioner
corporation.With the nullification of the election of the
respondents, the approved by-laws which they certified to this
Commission as members of the Board of Trustees must necessarily
be likewise declared null and void.However, before any election of
the members of the Board of Trustees could be conducted, there
must be an approved by-laws to govern the internal government
of the association including the conduct of election. And since the
election of both petitioners and respondents have been declared
null and void, a vacuum is created as to who should adopt the by-
laws and certify its adoption. To remedy this unfortunate situation
that the association has found itself in, the members of the
petitioning corporation are hereby authorized to prepare and
adopt their by-laws for submission to the Commission. Once
approved, an election of the members of the Board of Trustees
shall immediately be called pursuant to the approved by-laws.
SO ORDERED.[9]
Neither group, however, took the necessary steps
prescribed by the SEC in its October 3, 1986 Decision, and, thus,
no valid election of the members of the Board of Trustees of IDP
was ever called. Although the Carpizo Group[10] attempted to
submit a set of by-laws, the SEC found that, aside from Engineer
Farouk Carpizo and Atty. Musib Buat, those who prepared and
adopted the by-laws were not bona fide members of the IDP, thus
rendering the adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as
new members of the Board of Trustees of IDP, the Carpizo Group
caused to be signed an alleged Board Resolution[11] of the IDP,
authorizing the sale of the subject two parcels of land to the
private respondent INC for a consideration of P22,343,400.00,
which sale was evidenced by a Deed of Absolute Sale[12]dated
April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of
Trustees headed by former Senator Mamintal Tamano, or the
Tamano Group, filed a petition before the SEC, docketed as SEC
Case No. 4012, seeking to declare null and void the Deed of
Absolute Sale signed by the Carpizo Group and the INC since the
group of Engineer Carpizo was not the legitimate Board of
Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed
of Absolute Sale executed in its favor, filed an action for Specific
Performance with Damages against the vendor, Carpizo Group,
before Branch 81 of the Regional Trial Court of Quezon City,
docketed as Civil Case No. Q-90-6937, to compel said group to
clear the property of squatters and deliver complete and full
physical possession thereof to INC. Likewise, INC filed a motion in
the same case to compel one Mrs. Leticia P. Ligon to produce and
surrender to the Register of Deeds of Quezon City the owners
duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the
aforementioned two parcels of land, so that the sale in INCs favor
may be registered and new titles issued in the name of INC. Mrs.
Ligon was alleged to be the mortgagee of the two parcels of land
executed in her favor by certain Abdulrahman R.T. Linzag and
Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo
Group.
The IDP-Tamano Group, on June 11, 1991, sought to
intervene in Civil Case No. Q-90-6937 averring, inter alia:
xxx xxx xxx
2. That the Intervenor has filed a case before the Securities and
Exchange Commission (SEC) against Mr. Farouk Carpizo, et, al.,
who, through false schemes and machinations, succeeded in
executing the Deed of Sale between the IDP and the Iglesia Ni
Kristo (plaintiff in the instant case) and which Deed of Sale is the
subject of the case at bar;
3. That the said case before the SEC is docketed as Case No.
04012, the main issue of which is whether or not the aforesaid
Deed of Sale between IDP and the Iglesia ni Kristo is null and void,
hence, Intervenors legal interest in the instant case. A copy of the
said case is hereto attached as Annex A;
4. That, furthermore, Intervenor herein is the duly constituted
body which can lawfully and legally represent the Islamic
Directorate of the Philippines;
xxx xxx xxx.[13]
Private respondent INC opposed the motion arguing, inter
alia, that the issue sought to be litigated by way of intervention is
an intra-corporate dispute which falls under the jurisdiction of the
SEC.[14]
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court
of Quezon City, denied petitioners motion to intervene on the
ground of lack of juridical personality of the IDP-Tamano Group
and that the issues being raised by way of intervention are intra-
corporate in nature, jurisdiction thereto properly pertaining to the
SEC.[15]
Apprised of the pendency of SEC Case No. 4012 involving
the controverted status of the IDP-Carpizo Group but without
waiting for the outcome of said case, Judge Reyes, on September
12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937
ordering the IDP-Carpizo Group to comply with its obligation
under the Deed of Sale of clearing the subject lots of squatters
and of delivering the actual possession thereof to INC.[16]
Thereupon, Judge Reyes in another Order, dated March 2,
1992, pertaining also to Civil Case No. Q-90-6937, treated INC as
the rightful owner of the real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or
surrender to plaintiff[17] the owners copy of RT-26521 (170567)
and RT-26520 (176616) in open court for the registration of the
Deed of Absolute Sale in the latters name and the annotation of
the mortgage executed in her favor by herein defendant Islamic
Directorate of the Philippines on the new transfer certificate of
title to be issued to plaintiff.
SO ORDERED.[18]
On April 6, 1992, the above Order was amended by Judge
Reyes directing Ligon to deliver the owners duplicate copies of
TCT Nos. RT-26521 (170567) and RT-26520 (176616) to
the Register of Deeds of Quezon City for the purposes stated in
the Order of March 2, 1992.[19]
Mortgagee Ligon went to the Court of Appeals, thru a
petition for certiorari, docketed as CA-G.R. No. SP-27973, assailing
the foregoing Orders of Judge Reyes. The appellate court
dismissed her petition on October 28, 1992.[20]
Undaunted, Ligon filed a petition for review before the
Supreme Court which was docketed as G.R. No. 107751.
In the meantime, the SEC, on July 5, 1993, finally came out
with a Decision in SEC Case No. 4012 in this wise:
1. Declaring the by-laws submitted by the respondents[21] as
unauthorized, and hence, null and void.
2. Declaring the sale of the two (2) parcels of land in Quezon City
covered by the Deed of Absolute Sale entered into by Iglesia ni
Page 41 of 111
Kristo and the Islamic Directorate of the Philippines, Inc.[22] null
and void.
3. Declaring the election of the Board of Directors[23] of the
corporation from 1986 to 1991 as null and void;
4. Declaring the acceptance of the respondents, except Farouk
Carpizo and Musnib Buat, as members of the IDP null and void.
No pronouncement as to cost.
SO ORDERED.[24]
Private respondent INC filed a Motion for Intervention,
dated September 7, 1993, in SEC Case No. 4012, but the same was
denied on account of the fact that the decision of the case had
become final and executory, no appeal having been taken
therefrom.[25]
INC elevated SEC Case No. 4012 to the public respondent
Court of Appeals by way of a special civil action for certiorari,
docketed as CA-G.R. SP No. 33295. On October 28, 1994, the
court a quo promulgated a Decision in CA-G.R. SP No. 33295
granting INCs petition. The portion of the SEC Decision in SEC Case
No. 4012 which declared the sale of the two (2) lots in question to
INC as void was ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition
for review, dated December 21, 1994, submitting that the Court
of Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity
of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches.[26]
While the above petition was pending, however, the
Supreme Court rendered judgment in G.R. No. 107751 on the
petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1,
1995, denied the Ligon petition and affirmed the October 28,
1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973
which sustained the Order of Judge Reyes compelling mortgagee
Ligon to surrender the owners duplicate copies of TCT Nos. RT-
26521 (170567) and RT-26520 (176616) to the Register of Deeds
of Quezon City so that the Deed of Absolute Sale in INCs favor
may be properly registered.
Before we rule upon the main issue posited in this petition,
we would like to point out that our disposition in G.R. No. 107751
entitled, Ligon v. Court of Appeals, promulgated on June 1, 1995,
in no wise constitutes res judicata such that the petition under
consideration would be barred if it were the case. Quite the
contrary, the requisites of res judicata do not obtain in the case at
bench.
Section 49, Rule 39 of the Revised Rules of Court lays down
the dual aspects of res judicata in actions in personam, to wit:
Effect of judgment. - The effect of a judgment or final order
rendered by a court or judge of the Philippines, having jurisdiction
to pronounce the judgment or order, may be as follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with
respect to the matter directly adjudged or as to any
other matter that could have been raised in relation
thereto, conclusive between the parties and their
successors in interest by title subsequent to the
commencement of the action or special proceeding,
litigating for the same thing and under the same
title and in the same capacity;
(c) In any other litigation between the same parties
or their successors in interest, that only is deemed
to have been adjudged in a former judgment which
appears upon its face to have been so adjudged, or
which was actually and necessarily included therein
or necessary thereto.
Section 49(b) enunciates the first concept of res
judicata known as bar by prior judgment, whereas, Section 49(c) is
referred to as conclusiveness of judgment.
There is bar by former judgment when, between the first
case where the judgment was rendered, and the second case
where such judgment is invoked, there is identity of parties,
subject matter and cause of action. When the three identities are
present, the judgment on the merits rendered in the first
constitutes an absolute bar to the subsequent action. But where
between the first case wherein judgment is rendered and the
second case wherein such judgment is invoked, there is only
identity of parties but there is no identity of cause of action, the
judgment is conclusive in the second case, only as to those
matters actually and directly controverted and determined, and
not as to matters merely involved therein. This is what is termed
conclusiveness of judgment.[27]
Neither of these concepts of res judicata find relevant
application in the case at bench. While there may be identity of
subject matter (IDP property) in both cases, there is no identity of
parties. The principal parties in G.R. No. 107751 were mortgagee
Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private
respondent. The IDP, as represented by the 1971 Board of
Trustees or the Tamano Group, was only made an ancillary party
in G.R. No. 107751 as intervenor.[28] It was never originally a
principal party thereto. It must be noted that intervention is not
an independent action, but is merely collateral, accessory, or
ancillary to the principal action. It is just an interlocutory
proceeding dependent on or subsidiary to the case between the
original parties.[29] Indeed, the IDP-Tamano Group cannot be
considered a principal party in G.R. No. 107751 for purposes of
applying the principle of res judicata since the contrary goes
against the true import of the action of intervention as a mere
subsidiary proceeding without an independent life apart from the
principal action as well as the intrinsic character of the intervenor
as a mere subordinate party in the main case whose right may be
said to be only in aid of the right of the original party.[30] It is only
in the present case, actually, where the IDP-Tamano Group
became a principal party, as petitioner, with the Iglesia Ni Cristo,
as private respondent. Clearly, there is no identity of parties in
both cases.
In this connection, although it is true that Civil Case No. Q-
90-6937, which gave rise to G.R. No. 107751, was entitled, Iglesia
Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines,
Defendant,[31] the IDP can not be considered essentially a formal
party thereto for the simple reason that it was not duly
represented by a legitimate Board of Trustees in that case. As a
necessary consequence, Civil Case No. Q-90-6937, a case for
Specific Performance with Damages, a mere action in personam,
did not become final and executory insofar as the true IDP is
concerned since petitioner corporation, for want of legitimate
representation, was effectively deprived of its day in court in said
case. Res inter alios judicatae nullum aliis praejudicium
faciunt. Matters adjudged in a cause do not prejudice those who
were not parties to it.[32] Elsewise put, no person (natural or
juridical) shall be affected by a proceeding to which he is a
stranger.[33]
Granting arguendo, that IDP may be considered a principal
party in Ligon, res judicata as a bar by former judgment will still
not set in on the ground that the cause of action in the two cases
are different. The cause of action in G.R. No. 107751 is the
surrender of the owners duplicate copy of the transfer certificates
of title to the rightful possessor thereof, whereas the cause of
action in the present case is the validity of the Carpizo Group-INC
Deed of Absolute Sale.
Page 42 of 111
 Res Judicata in the form of conclusiveness of judgment
cannot likewise apply for the reason that any mention at all
in Ligon as to the validity of the disputed Carpizo Board-INC sale
may only be deemed incidental to the resolution of the primary
issue posed in said case which is: Who between Ligon and INC has
the better right of possession over the owners duplicate copy of
the TCTs covering the IDP property? G.R. No. 107751 cannot be
considered determinative and conclusive on the matter of the
validity of the sale for this particular issue was not the principal
thrust of Ligon. To rule otherwise would be to cause grave and
irreparable injustice to IDP which never gave its consent to the
sale, thru a legitimate Board of Trustees.
In any case, while it is true that the principle of res
judicata is a fundamental component of our judicial system, it
should be disregarded if its rigid application would involve the
sacrifice of justice to technicality.[34]
The main question though in this petition is: Did the Court
of Appeals commit reversible error in setting aside that portion of
the SECs Decision in SEC Case No. 4012 which declared the sale of
two (2) parcels of land in Quezon City between the IDP-Carpizo
Group and private respondent INC null and void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to
pass upon the issue as to who among the different contending
groups is the legitimate Board of Trustees of the IDP since this is a
matter properly falling within the original and exclusive
jurisdiction of the SEC by virtue of Sections 3 and 5(c) of
Presidential Decree No. 902-A:
Section 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the
Philippines xxx xxx.
xxxxxxxxx
Section 5. In addition to the regulatory and adjudicative functions
of the Securities and Exchange Commission over corporations,
partnerships 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:
xxxxxxxxx
c) Controversies in the selection or appointment of directors,
trustees, officers, or managers of such corporations, partnerships
or associations. x x x.
If the SEC can declare who is the legitimate IDP Board, then by
parity of reasoning, it can also declare who is not the legitimate
IDP Board. This is precisely what the SEC did in SEC Case No. 4012
when it adjudged the election of the Carpizo Group to the IDP
Board of Trustees to be null and void.[35] By this ruling, the SEC in
effect made the unequivocal finding that the IDP-Carpizo Group is
a bogus Board of Trustees. Consequently, the Carpizo Group is
bereft of any authority whatsoever to bind IDP in any kind of
transaction including the sale or disposition of IDP property.
It must be noted that SEC Case No. 4012 is not the first case
wherein the SEC had the opportunity to pass upon the status of
the Carpizo Group. As far back as October 3, 1986, the SEC, in
Case No. 2687,[36] in a suit between the Carpizo Group and the
Abbas Group, already declared the election of the Carpizo Group
(as well as the Abbas Group) to the IDP Board as null and void for
being violative of the Articles of Incorporation.[37] Nothing thus
becomes more settled than that the IDP-Carpizo Group with
whom private respondent INC contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo
Board, particularly the sale of the Tandang Sora property,
allegedly in the name of the IDP, have to be struck down for
having been done without the consent of the IDP thru a legitimate
Board of Trustees. Article 1318 of the New Civil Code lays down
the essential requisites of contracts:
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid
contract. For, where even one is absent, the contract is void. As
succinctly put by Tolentino, consent is essential for the existence
of a contract, and where it is wanting, the contract is non-
existent.[38] In this case, the IDP, owner of the subject parcels of
land, never gave its consent, thru a legitimate Board of Trustees,
to the disputed Deed of Absolute Sale executed in favor of
INC. This is, therefore, a case not only of vitiated consent, but one
where consent on the part of one of the supposed contracting
parties is totally wanting. Ineluctably, the subject sale is void and
produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and
void ab initio because of the Carpizo Groups failure to comply
with Section 40 of the Corporation Code pertaining to the
disposition of all or substantially all assets of the corporation:
Sec. 40. Sale or other disposition of assets. - Subject to the
provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell,lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon terms and conditions and for
such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock; or in case of non-stock corporation, by the vote of at least
two-thirds (2/3) of the members, in a stockholders or members
meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
x x x x x x x x x.
The Tandang Sora property, it appears from the records,
constitutes the only property of the IDP. Hence, its sale to a third-
party is a sale or disposition of all the corporate property and
assets of IDP falling squarely within the contemplation of the
foregoing section. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by the vote of at least
2/3 of the bona fide members of the corporation should have
been obtained. These twin requirements were not met as the
Carpizo Group which voted to sell the Tandang Sora property was
a fake Board of Trustees, and those whose names and signatures
were affixed by the Carpizo Group together with the sham Board
Resolution authorizing the negotiation for the sale were, from all
indications, not bona fide members of the IDP as they were made
to appear to be. Apparently, there are only fifteen (15) official
Page 43 of 111
members of the petitioner corporation including the eight (8)
members of the Board of Trustees.[39]
All told, the disputed Deed of Absolute Sale executed by
the fake Carpizo Board and private respondent INC was
intrinsically void ab initio.
Private respondent INC nevertheless questions the
authority of the SEC to nullify the sale for being made outside of
its jurisdiction, the same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC
had jurisdiction to declare the subject sale null and void is
rendered moot and academic by the inherent nullity of the highly
dubious sale due to lack of consent of the IDP, owner of the
subject property. No end of substantial justice will be served if we
reverse the SECs conclusion on the matter, and remand the case
to the regular courts for further litigation over an issue which is
already determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the
motion for intervention filed by the 1971 Board of Trustees in Civil
Case No. Q-90-6937, a case for Specific Performance with
Damages between INC and the Carpizo Group on the subject Deed
of Absolute Sale. The legitimate IDP Board could have been
granted ample opportunity before the regional trial court to shed
light on the true status of the Carpizo Board and settled the
matter as to the validity of the sale then and there. But INC,
wanting to acquire the property at all costs and threatened by the
participation of the legitimate IDP Board in the civil suit, argued
for the denial of the motion averring, inter alia, that the issue
sought to be litigated by the movant is intra-corporate in nature
and outside the jurisdiction of the regional trial court.[40] As a
result, the motion for intervention was denied. When the Decision
in SEC Case No. 4012, came out nullifying the sale, INC came
forward, this time, quibbling over the issue that it is the regional
trial court, and not the SEC, which has jurisdiction to rule on the
validity of the sale. INC is here trifling with the courts. We cannot
put a premium on this clever legal maneuverings of private
respondent which, if countenanced, would result in a failure of
justice.
Furthermore, the Court observed that the INC bought the
questioned property from the Carpizo Group without even seeing
the owners duplicate copy of the titles covering the property.This
is very strange considering that the subject lot is a large piece of
real property in Quezon City worth millions, and that under the
Torrens System of Registration, the minimum requirement for one
to be a good faith buyer for value is that the vendee at least sees
the owners duplicate copy of the title and relies upon the
same.[41] The private respondent presumably knowledgeable on
the aforesaid working of the Torrens System, did not take heed of
this and nevertheless went through with the sale with undue
haste. The unexplained eagerness of INC to buy this valuable
piece of land in Quezon City without even being presented with
the owners copy of the titles casts very serious doubt on the
rightfulness of its position as vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the
public respondent Court of Appeals dated October 28, 1994 in CA-
G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and
Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is
REINSTATED. The Register of Deeds of Quezon City is hereby
ordered to cancel the registration of the Deed of Absolute Sale in
the name of respondent Iglesia Ni Cristo, if one has already been
made. If new titles have been issued in the name of Iglesia Ni
Cristo, the register of Deeds is hereby ordered to cancel the same,
and issue new ones in the name of petitioner Islamic Directorate
of the Philippines. Petitioner corporation is ordered to return to
private respondent whatever amount has been initially paid
by INC as consideration for the property with legal interest, if the
same was actually received by IDP. Otherwise, INC may run after
Engineer Farouk Carpizo and his group for the amount of money
paid.
SO ORDERED.
10. Boman Environmental Development Corporation v.
Hon. Court of Appeals, G.R. No. 77860, November
22, 1988- Power to Acquire Own Shares]
GRIÑO-AQUINO, J.:
The only issue in this case is whether or not a suit brought by a
withdrawing stockholder against the corporation to enforce
payment of the balance due on the consideration (evidenced by a
corporate promissory note) for the surrender of his shares of
stock and interests in the corporation, involves an intra-corporate
dispute. The resolution of that issue will determine whether the
Securities and Exchange Commission (SEC) or a regular court has
jurisdiction over the action.
On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to
resign as President and Member of the Board of Directors of
petitioner, Boman Environmental Development Corporation
(BEDECO), and to sell to the company all his shares, rights, and
interests therein for P 300,000 plus the transfer to him of the
company's Isuzu pick-up truck which he had been using. The
letter-offer (Exh. A-1) reads as follows:
Xxx
However, BEDECO paid only P50,000 on July 15, 1984 and another
P50,000 on August 31, 1984 and defaulted in paying the balance
of P200,000.
On April 30, 1985, Fajilan filed a complaint in the Regional Trial
Court of Makati for collection of that balance from BEDECO.
In an order dated September 9, 1985, the trial court, through
Judge Ansberto Paredes, dismissed the complaint for lack of
jurisdiction. It ruled that the controversy arose out of
intracorporate relations, hence, the Securities and Exchange
Commission has original and exclusive jurisdiction to hear and
decide it.
His motion for reconsideration of that order having been denied,
Fajilan filed a "Petition for Certiorari, and mandamus with
Preliminary Attachment" in the Intermediate Appellate Court.
In a decision dated March 2, 1987, the Court of Appeals set aside
Judge Paredes' order of dismissal and directed him to take
cognizance of the case. BEDECO's motion for reconsideration was
denied in a resolution dated March 24, 1987 of the Court of
Appeals.
In its decision, the Appellate Court characterized the case as a suit
for collection of a sum of money as Fajilan "was merely suing on
the balance of the promissory note" (p. 4, Decision; p. 196, Rollo)
which BEDECO failed and refused to pay in full. More particularly,
the Court of Appeals held:
While it is true that the circumstances
which led to the execution of the
promissory note by the Board of Directors
of respondent corporation was an intra-
corporate matter, there arose no
controversy as to the sale of petitioner's
interests and rights as well as his shares as
Member of the Board of Directors and
President of respondent corporation. The
intra-corporate matter of the resignation of
petitioner as Member of the Board of
Directors and President of respondent
Page 44 of 111
 corporation has long been settled without
issue.
The Board of Directors of respondent
corporation has likewise long settled the
sale by petitioner of all his shares, rights
and interests in favor of the corporation. No
controversy arose out of this transaction.
The jurisdiction of the Securities and
Exchange Commission therefore need not
be invoked on this matter. (p. 196, Rollo.)
The petition is impressed with merit.
Section 5(b) of P.D. No. 902-A, as amended, grants the SEC
original and exclusive jurisdiction to hear and decide cases
involving—
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; ... (Emphasis
supplied.)
This case involves an intra-corporate controversy because the
parties are a stockholder and the corporation. As correctly
observed by the trial court, the perfection of the agreement to
sell Fajilan's participation and interests in BEDECO and the
execution of the promissory note for payment of the price of the
sale did not remove the dispute from the coverage of Section 5(b)
of P.D. No. 902, as amended, for both the said agreement (Annex
C) and the promissory note (Annex D) arose from intra-corporate
relations. Indeed, all the signatories of both documents were
stockholders of the corporation at the time of signing the same. It
was an intra-corporate transaction, hence, this suit is an intra-
corporate controversy.
Fajilan's offer to resign as president and director "effective as
soon as my shares and interests thereto (sic) are sold and fully
paid" (Annex A-1, p. 239, Rollo) implied that he would remain a
stockholder until his shares and interests were fully paid for, for
one cannot be a director or president of a corporation unless he is
also a stockholder thereof. The fact that he was replaced as
president of the corporation did not necessaryily mean that he
ceased to be a stockholder considering how the corporation failed
to complete payment of the consideration for the purchase of his
shares of stock and interests in the goodwill of the business.
There has been no actual transfer of his shares to the corporation.
In the books of the corporation he is still a stockholder.
Fajilan's suit against the corporation to enforce the latter's
promissory note or compel the corporation to pay for his
shareholdings is cognizable by the SEC alone which shall
determine whether such payment will not constitute a
distribution of corporate assets to a stockholder in preference
over creditors of the corporation. The SEC has exclusive
supervision, control and regulatory jurisdiction to investigate
whether the corporation has unrestricted retained earnings to
cover the payment for the shares, and whether the purchase is for
a legitimate corporate purpose as provided in Sections 41 and 122
of the Corporation Code, which reads as follows:
SEC. 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,
Sec. 12. Corporate liquidation. ...
xxx xxx xxx
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, (77a, 89a, 16a).
These provisions of the Corporation Code should be deemed
written into the agreement between the corporation and the
stockholders even if there is no express reference to them in the
promissory note. The principle is well settled that an existing law
enters into and forms part of a valid contract without need for the
parties' expressly making reference to it (Lakas ng Manggagawang
Makabayan vs. Abiera, 36 SCRA 437).
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
..."(Steinberg vs. Velasco, 52 Phil. 953.)
WHEREFORE, the petition for certiorari is granted. The decision of
the Court of Appeals is reversed and set aside. The order of the
trial court dismissing the complaint for lack of jurisdiction is
hereby reinstated. No costs.
SO ORDERED.
11. [G.R. No. 133547. November 11, 2003]
HEIRS OF ANTONIO PAEL AND ANDREA ALCANTARA AND
CRISANTO PAEL, petitioners, vs. COURT OF APPEALS, JORGE H.
CHIN AND RENATO B. MALLARI, respondents.
[G.R. No. 133843. November 11, 2003]
MARIA DESTURA, petitioner, vs. COURT OF APPEALS, JORGE H.
CHIN AND RENATO MALLARI, respondents.
RESOLUTION
PUNO, J.:
This treats of the Report submitted to this Court by the Former
Special Fourth Division of the Court of Appeals, dated July 30,
Page 45 of 111
2003, pursuant to our Resolution, dated December 7, 2001,
directing said court to receive evidence on the conflicting claims
over the subject properties covered by TCT Nos. 52928 and 52929
between private respondents Jorge H. Chin and Renato B. Mallari,
on the one hand, and intervenor University of the Philippines (UP),
on the other.
The case at bar is another crass attempt to grab part of the
Diliman Campus of the University of the Philippines. Over and
over again, this Court has ruled that the title of UP over its
Diliman Campus is indefeasible and beyond dispute. We cannot
deviate from this ruling.
The facts reveal that on December 9, 1993, Maria Destura filed a
complaint before the Regional Trial Court of Quezon City against
her husband, Pedro Destura, together with Jorge Chin and Renato
Mallari. The complaint sought the annulment of the
memorandum of agreement (MOA) dated March 26, 1992
executed by Chin and Mallari as first parties, Pedro Destura as
second party, and Jaime Lumansag, Jr. as third party, over Lot Nos.
588-A and 588-B located in Barrio Culiat, Quezon City, covered by
TCT No. 52928 and TCT No. 52929. It alleged that Chin and Mallari
were former agents of Pedro Destura, authorized to sell Lot Nos.
588-A and 588-B, then covered by TCT No. 36048; that when
Destura came from Canada, he discovered that the title to the
land has been transferred to Chin and Mallari in whose names TCT
No. 52928 and TCT No. 52929 were registered; that Chin and
Mallari executed the MOA subject of the complaint to appease
Destura; that the MOA stated that Chin and Mallari had a buyer of
the lots and they promised to pay Destura one hundred million
pesos (P100,000,000.00) upon finality of the sale; that the sale did
not materialize and the payment of the promised amount has
become uncertain, to the prejudice of the Destura spouses. The
complaint also sought the annulment of TCT No. 52928 and TCT
No. 52929 as they were allegedly obtained through fraudulent
means. It prayed that the Register of Deeds issue a new title in the
name of the Destura spouses.[1]
The case was dismissed against Pedro Destura after he and his
wife entered into an amicable settlement.
Chin and Mallari, meanwhile, were declared in default for failure
to file their Answer.[2]
On January 24, 1995, the trial court rendered a judgment by
default. The trial court nullified the MOA in question. It ruled:
On the issue of the memorandum of agreement, it is to be noted
that under its express terms the payment of the P100,000,000.00
to Pedro Destura depended on the sale of the properties covered
by Transfer Certificates of Title Nos. 52928 and 52929 to the
alleged ready buyer of the third party, Jaime B. Lumansag, Jr.
Since no sale materialized in accordance therewith because the
buyer backed out of the transactions, the agreement lost its
efficacy. Pursuant to Art. 1181, Civil Code, upon the non-
fulfillment of the condition, the obligation of the defendants
under the memorandum of agreement did not take effect and
Destura ceased to be bound thereby.
That the fulfillment of the condition, i.e., the payment of the
P100,000,000.00 to Destura, already became uncertain and
indefinite is also established competently and conclusively. As a
consequence, the memorandum of agreement should be nullified
because it was made to depend upon a condition that was void
for being dependent upon the sole will of the debtors.[3]
The trial court likewise nullified TCT No. 52928 and TCT No. 52929.
It found:
Concerning the validity of the transfers of the certificates of title
into the names of defendants Mallari and Chin, the records
competently and credibly show that highly suspicious
circumstances attended such transfers of registered ownership
resulting in the issuance of Transfer Certificates of Title Nos.
52928 and 52929. The transfers were by virtue of two deeds of
sale covering the land described in Transfer Certificate of Title No.
36048 which appear to have been executed on the same date of
December 10, 1978. The vendors in the first deed of sale were the
spouses Luis and Leony Menor and those in the other were
Roberto Pael, Crisanto Pael, and Teofila Pael. The deeds were
supposedly notarized by a certain Catalino C. Manalaysay. Yet, as
certified to by the Chief of the Archives Division, Records
Management and Archives Office, no copy of the first deed of sale,
Exhibit U, was available at said office because the latest notarial
record on file under the name of Catalino C. Manalaysay was for
the year 1964.
Another document submitted to support the transfer of the
property to the defendants was a deed of extra-judicial
settlement of estate with waiver made and entered in among
Crisanto, Roberto, Teofila, and Cresencia, all surnamed Pael,
under date of December 27, 1965, by which the alleged heirs of
Antonio Pael and Andrea Alcantara divided and adjudicated
among themselves the property covered by Transfer Certificate of
Title No. 36048. Again the Chief of the Archives Division, Records
Management and Archives Office, certified that no copy of the
document was available at said office because the notary public
before whom the document appeared to have been
acknowledged, one Catalino E. Dumlao, had no records thereat
for the period from January, 1964 to December 18, 1967.
There was, moreover, a certification issued on September 2, 1992
by the Chief, Official Gazette Publication, National Printing Office,
attested (sic) that there were no records in said office showing
that a publication of LRC Case No. N-10792, LRC Record No. 7672,
entitled Spouses Antonio Pael and Andrea Alcantara, et al.,
Applicants, Petition of Extra-judicial Settlement had been made in
the Official Gazette. This contradicted the alleged certificate of
publication of notice of initial hearing.
The sale appears to have been made in 1978. But if that was so,
then it was fictitious, since the defendants willingly accepted
appointments as the agents of Pedro Destura with authority to
sell the property in his behalf only in 1990. Their act of accepting
the appointment was a declaration against interest, in that they
thereby admitted quite expressly the ownership of the property
on the part of the Desturas as late as 1990, in effect debunking
the alleged sale in 1978 in their favor. It is additionally relevant to
note that this fact of Desturas ownership was further confirmed
by the fact that the defendants caused the transfer of the
certificates in their names only in 1992.[4]
The trial court then ordered the Register of Deeds of Quezon City
to cancel Transfer Certificates of Title Nos. 52928 and 52929 in
the names of Jorge Chin and Renato B. Mallari and the transfer
certificates of title from which said certificates were derived until
but not including Transfer Certificate of Title No. 36048, and
Page 46 of 111
thereafter reinstate Transfer Certificate of Title No. 36048 in the
names of Spouses Antonio Pael and Andrea Alcantara and
Crisanto Pael.[5]
On February 13, 1995, Atty. Oliver Lozano, counsel for Chin and
Mallari, filed a notice of appeal.[6] The following day, the trial
court approved the notice of appeal and forwarded the records to
the Court of Appeals.[7]
A week later, Atty. Lozano filed a motion for new trial and a
supplemental motion.[8]
On August 28, 1995, the trial court denied the motion for new
trial for lack of merit. It also dismissed the appeal previously
allowed on the ground of abandonment. The trial courts decision
was thus declared final and executory.[9]
In September 1997, Chin and Mallari, assisted by new counsel,
Atty. Samuel Alentaje, filed before the Court of Appeals a Petition
for Annulment of Judgment. They claimed that the gross
negligence of their former counsel, Atty. Lozano, constituted
extrinsic fraud which prevented them from presenting their case
before the trial court. They also assailed the trial courts order
cancelling their title and upholding the title of the Paels who were
not parties to the case.[10]
On April 29, 1998, the Court of Appeals rendered a decision[11] in
favor of Chin and Mallari. It annulled the decision of the trial court
upon finding that the gross and reckless negligence of their
former counsel which caused them to be declared in default and
which later led to the dismissal of their appeal and finality of the
judgment amounted to extrinsic fraud. Further, the appellate
court reversed the order of the trial court canceling TCT No.
52928 and TCT No. 52929 and reinstating TCT No. 36048
registered in the name of the Paels. It also rejected Maria
Desturas claim over the property. It instead upheld the validity of
the sale of 70% of the property by a certain Luis and Leony Menor
and 30% thereof by the Paels to Chin and Mallari. The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the decision dated January 24,
1995 and the Order dated August 28, 1995, both issued in Civil
Case No. Q-93-18569, are hereby ANNULLED and SET ASIDE, and
accordingly judgment is issued:
a) DECLARING as valid the memorandum of agreement dated
March 26, 1992;
b) DECLARING as null and void both the cancellation of the titles,
Transfer Certificates of Title Nos. 52928 and 52929 of petitioners
Jorge H. Chin and Renato B. Mallari over the subject property and
the reinstatement of the title Transfer Certificate No. 36048, in
the names of Antonio Pael, Andrea Alcantara and Crisanto Pael;
c) DECLARING the petitioners as the true and absolute owners of
the subject property and ORDERING the Register of Deeds of
Quezon City to REINSTATE the aforementioned titles, TCT Nos.
52928 and 52929 in favor of petitioners Jorge H. Chin and Renato
B. Mallari;
xxx xxx xxx[12]
The case was elevated to this Court by the Heirs of Pael and by
Maria Destura via separate petitions for review.
The Heirs of Pael argued in G.R. No. 133547:
1. The Honorable Court of Appeals gravely misappreciated,
ignored, misapplied and/or overlooked the fact that under the
facts and circumstances of this case, the annulment of judgment
is improper as there was no extrinsic fraud or reckless and gross
negligence committed by private respondents former counsel,
Atty. Oliver Lozano, hence, the assailed decision of the appellate
court should be stricken down for being without credible basis.
2. The Honorable Court of Appeals seriously erred in not holding
that assuming arguendo that extrinsic fraud and gross and
reckless negligence were committed by Atty. Lozano, private
respondents were bound by said extrinsic fraud and gross and
reckless negligence as they themselves contributed to the
commission of such fraud and negligence of their counsel.
3. The Honorable Court of Appeals gravely erred in not holding
that the revival of the title in favor of Antonio Pael and Andrea
Alcantara and Crisanto Pael, even if they are not parties to the
case below, was a logical consequence of the default judgment.
4. The Honorable Court of Appeals gravely erred in not holding
that since the default judgment had already long become final
and executory, consequently the reinstatement of the titles of
private respondent and the declaration as null and void of the title
in the names of Antonio Pael and Andrea Alcantara and Crisanto
Pael were erroneous and improper.
5. The Honorable Court of Appeals gravely erred when in its
decision it adjudicated the case on the merits, which is
procedurally flawed.[13]
Destura raised the following errors in G.R. No. 133843:
1. The ruling of the respondent Court of Appeals that private
respondents are not bound by the negligence and incompetence
of their counsel is erroneous and contrary to law and
jurisprudence.
2. The ruling of the respondent Court of Appeals that the gross
negligence of counsel for private respondents constitutes extrinsic
fraud is likewise erroneous and contrary to law and jurisprudence.
3. Granting for the sake of argument, that there is basis to annul
the questioned decision, the action of respondent Court of
Appeals in adjudicating the merits of the case is contrary to
Section 7, Rule 47 of the Rules of Court.
4. The findings of the respondent Court of Appeals that the
interest of the private respondent in the subject property over
that of petitioner is not borne out by any evidence in the records
of the case in the trial court.[14]
On February 10, 2000, this Court rendered a Decision denying
both petitions and affirming the title of Chin and Mallari over the
property.
The Heirs of Pael and Destura filed separate motions for
reconsideration. During their pendency, the University of the
Philippines (UP) filed a motion for intervention,[15] alleging that
the properties covered by TCT Nos. 52928 and 52929 in the
Page 47 of 111
names of Chin and Mallari form part of its Diliman Campus,
registered in the name of UP under TCT No. 9462.
On December 7, 2001, this Court denied the motions for
reconsideration of Destura and the Heirs of Pael, but granted the
motion for intervention filed by UP. The Court remanded the case
to the Court of Appeals for reception of evidence on the
conflicting claims over the property in question by Chin and
Mallari as against UP.[16]
On July 30, 2003, the Former Special Fourth Division of the Court
of Appeals submitted its Report recommending that this Court
recognize the better rights of Chin and Mallari over the property
as against the claim of UP. It made the following observations:
It is the view of this court that petitioners have successfully
refuted U.P.s assertion of ownership over the subject properties,
more particularly, the two (2) parcels of land denominated as Lot
No. 588-A consisting of 518,455 square meters, and Lot 588-B,
comprising 261,022 square meters, or a total of 779,477 square
meters, or 77.9477 hectares. The preponderance of evidence
supports the claim of petitioners Chin and Mallari over the subject
properties covered by TCT Nos. 52928 and 52929, as shown by
the following:
1. The April 29, 1998 decision of this court and the February 10,
2000 decision of the Supreme Court in G.R. Nos. 133547 and
133843 which plainly and categorically stated that petitioners
Chin and Mallari are the true and absolute owners of the subject
properties.
2. The December 7, 2001 resolution of the Supreme Court itself
which remanded the instant cases to this court for reception of
evidence merely to determine the conflicting boundary claims of
the parties, petitioners and intervenor U.P.
3. The verification survey report dated January 16, 2003
submitted to the RTC, Branch 99, Quezon City, which found that
the property of Jorge Chin and Renato Mallari described on TCT
Nos. 52928 and 52929 falls inside and is entirely within the
property covered by TCT Nos. RT-107359 (192689), RT-107350
(192686), RT-58201 (192687), RT-57441 (192688) PR-32309,
registered in the name of the University of the Philippines.
4. The findings of Atty. Virgilio B. Tiongson, Assistant Regional
Executive Director for Legal Services and Public Affairs, DENR-NCR,
in his memorandum dated January 14, 2003, that since the
verification and survey report found that the properties of Chin
and Mallari, covered by TCT Nos. 52928 and 52929, fall(s) inside
the property covered by the titles of the University of the
Philippines, then there is an apparent overlapping of the titles. His
findings refuted the Tiburcio and other cases cited by U.P. which
were found to be inapplicable and irrelevant to the claim of Chin
and Mallari. Atty. Tiongson recommended that the report on the
verification/relocation survey over the properties covered by TCT
Nos. 52928 and 52929 in the names of Jorge H. Chin and Renato B.
Mallari be adopted as it appears from the record that the
properties of U.P. under TCT No. 9462 overlap the properties of
Chin and Mallari, hence, the same should be returned to Chin and
Mallari, the true and absolute owners thereof.
5. The aforementioned decision of this court dated April 29, 1998
and the decision of the Supreme Court dated February 10, 2000 in
G.R. Nos. 133547 and 133843 which categorically ruled that
petitioners Chin and Mallari are the true and absolute owners of
the subject properties and its resolution dated December 7, 2001
remanding the cases to this court for reception of evidence to
determine the conflicting boundary claims of petitioners Chin and
Mallari and intervenor U.P.
6. The findings of Geodetic Engineer Mauro Gabriel in the
narrative report dated February 20, 1995 on the verification
survey of the subject properties which he submitted to the
Regional Technical Director, DENR-NCR, who then found that the
properties of U.P. overlap the properties of the Paels identified as
Lot 588-A and Lot 588-B, Psd-1006, and recommended that said
properties be excluded from the properties claimed by U.P. under
its TCT No. 9462, thus:
xxx xxx xxx
In order to correct whatever mislead (sic) that had been (sic)
transpired by the previous preparation of the Deed of Conveyance
is to exclude properties and rights that had been long existing
before the transfer of ownership from the Commonwealth
Government of the Philippines to University of the Philippines.
That is to exclude the private property of the Paels, the survey
plan, Psd-1006 from lot 42-C, Pcs-13 (8th parcel of land) covered
by T.C.T. No. 9462 (U.P.).
In view of the foregoing, I am recommending that the long
existing private property of Antonio Pael, et al. (now Jorge H. Chin
& Renato B. Mallari) identified as lots 588-A & 588-B, Psd-1006 be
respected and that lot 42-C, Pcs-13 be amended in order to
exclude the private rights from University of the Philippines
properties, upon approval and confirmation of the proper legal
authorities concerned. (emphases supplied)[17]
The Court of Appeals further found that the certificate of title held
by Chin and Mallari originated from OCT No. 730 registered on
May 5, 1914, while that of UP originated from OCT No. 735 which
was allegedly registered on a later date, July 6, 1914. It declared:
This court, after a studied and judicious examination and
appreciation of the totality of the evidence submitted by
petitioners Chin and Mallari and intervenor U.P., finds that
petitioners TCT Nos. 52928 and 52929 originated from OCT No.
730 which was registered on May 5, 1914. On the other hand, the
court finds that intervenor U.P. has failed to sufficiently establish
that its TCT No. RT-107350 (192689) similarly originated from the
same OCT No. 730. For one, intervenor failed to submit
authenticated or certified copies of the TCT of the Commonwealth
of the Philippines which covers the parcels of land sold to U.P. and
which thereafter secured its TCT No. 9462. To note once more, in
her report to the LRA Verification Committee (Exh. 3), Atty.
Edelwina C. Pastoral lamented that because of the loss of said
documents, it is difficult to establish the link and determine the
manner of transfer of the lot in question owned by the Tuasons
from OCT No. 730 to TCT No. 2681, TCT No. 6075 & TCT No. 26550,
and to the Commonwealth of the Philippines leading to the
issuance of TCT No. 36048 in the name of the latter. Moreover,
the TCTs presented by intervenor U.P. to prove its ownership of
the lands allegedly conveyed to it by the Commonwealth of the
Philippines (marked as Exhs. 1, 2, 3, 4, 5 and 6), uniformly show
that the OCT No. 730 which, U.P. claims, was the root of said TCTs
was registered on May 3, 1914. This date appears, however, to fall
on a Sunday, which casts doubts on U.P.s claim. This court,
therefore, finds that in line with its observations on the cases
Page 48 of 111
cited by U.P., the latters TCT, which overlaps that of petitioners,
originated from another title - OCT No. 735 - which was registered
on July 6, 1914 (see Galvez vs. Tuason, supra).[18]
We rule in favor of intervenor UP.
The facts show that Chin and Mallari and the Desturas trace their
claim of ownership over the property to the Paels. The Desturas
allegedly purchased the property from the Paels through their
agent, a certain Lutgarda Marilao. Chin and Mallari claim that they
bought 70% of the property from spouses Luis and Leony Menor,
and 30% thereof directly from the Paels. The Menor spouses, in
turn, allegedly acquired the 70% also from the Paels.
The disputed property, however, is part of the UP Diliman Campus,
covered by TCT No. 9462. It was established, after the survey
conducted by the Department of Environment and Natural
Resources, National Capital Region (DENR-NCR) that the property
claimed by Chin and Mallari overlaps the property covered by UPs
title. The superiority of UPs title over that of the Paels has been
recognized by the courts in an earlier case filed by Roberto Pael,
et al. against UP.
Roberto Pael, et al., previously filed before the Court of First
Instance of Quezon City, Branch 52 a complaint against UP for
declaration of nullity and damages docketed as Civil Case No. Q-
31629. The complainants alleged that they were the heirs of
Antonio Pael and Andrea Alcantara, the registered owners of a
parcel of land consisting of Lot Nos. 588-A and 588-B of
subdivision Plan Psd-1006, located in Barrio Culiat, Quezon City
and covered by TCT No. 36048. They sought to nullify the title of
UP, TCT No. 9462, which also covered said parcel of land. After
the complainants rested their case, UP filed a demurrer to
evidence which was denied by the trial court. UP then went to the
Court of Appeals via a petition for prohibition to restrain the trial
court from proceeding with Civil Case No. Q-31619. UP contended
that the question of the validity of the certificate of title of the
land in dispute has been put to rest in three cases decided by the
Supreme Court as early as 1959. The Court of Appeals granted the
petition for prohibition and permanently enjoined the trial court
from hearing and proceeding with Civil Case No. Q-31619. It cited
the findings of this Court in prior cases that the land in question
covered by OCT No. 730 was originally owned by the Tuasons who
sold the same to UP. OCT No. 730 was cancelled and TCT No. 9462
was later issued and registered in the name of UP. It held that as
early as 1959, this Court has declared that the decree of
registration with respect to the land covered by OCT No. 730 had
become conclusive and binding against the whole world.
Upholding the validity of UPs title over the property, the Court of
Appeals ruled that Paels complaint lacked legal basis. Pael filed
before this Court a petition docketed as G.R. No. 97277 entitled
Roberto Pael, et al. vs. University of the Philippines to review the
decision of the Court of Appeals. The petition was denied by this
Court on April 15, 1991 for late filing. Entry of judgrnent was
made on August 15, 1991. The ruling in this case is final and binds
the Paels and all their successors-in-interest which include Chin
and Mallari.
Nonetheless, despite the above decision, Chin and Mallari filed
another Petition against UP for Quieting of Title before the
Regional Trial Court of Quezon City. The petition filed on February
5, 1995 alleged that Chin and Mallari were the individual owners
of Lot Nos. 588-A and 588-B located in Barrio Culiat, Quezon City
and covered by TCT No. 52928 and TCT No. 52929. They claimed
to have derived their titles from TCT No. 36048 registered under
the name of Spouses Antonio Pael and Andrea Alcantara and their
son Crisanto Pael. They alleged that based on official records and
entries in the land registration offices of the government, there
appears to be two TCT No. 36048 in existence -- one registered in
the name of the Commonwealth Government and another
registered in the name of the Paels. The Commonwealth
Governments title was later cancelled and TCT No. 9462 was
issued and registered in the name of UP. They averred that this
created a cloud on the title of the Paels from whom they derived
their titles, hence the Petition for Quieting of Title. During the
course of the proceedings, Chin and Mallari filed a Motion to
Order for Relocation and Verification Survey. They alleged that
there was a need to define in an appropriate sketch plan the
relative locations of the individual properties of the parties for the
purpose of determining whether their lots were within the
perimeter area of UPs property. The trial court granted the
motion. UP filed a petition for certiorari before the Court of
Appeals to set aside the order of the trial court granting the
motion. The appellate court dismissed the petition after finding
no grave abuse of discretion on the part of the trial court. UP filed
a petition for review before the Supreme Court docketed as G.R.
No. 127537 entitled University of the Philippines vs. Hon. Felix M.
De Guzman, etc., Jorge H. Chin and Renato B. Mallari. The petition
was denied on March 19, 1997 as it was filed late. Entry of
judgment was made on August 4, 1997. Hence, in an Order dated
August 2, 2002, the Quezon City RTC ordered the DENR-NCR to
conduct a relocation and verification survey of the properties
covered by TCT Nos. 52928 and 52929.[19] The Verification
Survey Report dated January 16, 2003 of the DENR-NCR survey
team revealed that the property of Jorge Chin and Renato Mallari
described in TCT Nos. 52928 and 52929 falls inside and is entirely
within the property covered by TCT Nos. RT-107350 (192689), RT-
107360 (192689), RT-58201 (192687) and RT 57441 (192688)
PR32309 registered in the name of the University of the
Philippines,[20] confirming its initial findings that there was an
overlapping of titles.[21]
It is judicial notice that the legitimacy of UPs title has been settled
in several other cases decided by this Court. The case of Tiburcio,
et al. vs. Peoples Homesite & Housing Corp. (PHHC), et al.[22] was
an action for reconveyance of a 430-hectare lot in Quezon City,
filed by the heirs of Eladio Tiburcio against PHHC and UP. A
portion of the disputed land was covered by TCT No. 1356
registered in the name of PHHC and another portion was covered
by TCT No. 9462 registered in the name of UP. Affirming the
validity of TCT No. 1356 and TCT No. 9462, this Court ruled:
x x x the land in question has been placed under the operation of
the Torrens system since 1914 when it has been originally
registered in the name of defendants predecessor-in-interest. It
further appears that sometime in 1955 defendant Peoples
Homesite & Housing Corporation acquired from the original
owner a parcel of land embracing practically all of plaintiffs
property for which Transfer Certificate of Title No. 1356 was
issued in its favor, while defendant University of the Philippines
likewise acquired from the same owner another portion of land
which embraces the remainder of the property for which Transfer
Certificate of Title No. 9462 was issued in its favor. It is, therefore,
clear that the land in question has been registered in the name of
defendants predecessor-in-interest since 1914 under the Torrens
system and that notwithstanding what they now claim that the
original title lacked the essential requirements prescribed by law
for their validity, they have never taken any step to nullify said
Page 49 of 111
title until 1957 when they instituted the present action. In other
words, they allowed a period of 43 years before they woke up to
invoke what they claim to be erroneous when the court decreed
in 1914 the registration of the land in the name of defendants
predecessor-in-interest. Evidently, this cannot be done for under
our law and jurisprudence, a decree of registration can only be set
aside within one year after entry on the ground of fraud provided
no innocent purchaser for value has acquired the property.[23]
Thus, this Court held that the decree of registration in the name
of the predecessor-in-interest of PHHC and UP, as well as the
titles issued pursuant thereto have become incontrovertible.
This Court again affirmed the validity and indefeasibility of UPs
title in the case of Galvez vs. Tuason,[24] where Maximo Galvez
and the heirs of Eladio Tiburcio sought the recovery of a parcel of
land in Quezon City registered under the names of Mariano
Severo, Maria Teresa Eriberta, Juan Jose, Demetrio Asuncion,
Augusto Huberto, all surnamed Tuason y de la Paz, UP, and PHHC.
This is the same land subject of the controversy in Tiburcio vs.
PHHC. This Court held in Galvez that the question of ownership of
the disputed land has been thrice settled definitely and
conclusively by the courts: first, in the proceedings for the
registration of the property in the name of the Tuasons; second,
in the application filed by Marcelino Tiburcio with the Court of
First Instance of Rizal for registration of the disputed property in
his name which was dismissed by said court; and third, in the
action for reconveyance filed by the heirs of Eladio Tiburcio
against PHHC and UP which was also dismissed by the court,
which dismissal was affirmed by this Court in Tiburcio vs. PHHC.
We held that the issue of ownership of the property was already
beyond review.
The rulings in Tiburcio vs. PHHC and Galvez vs. Tuason were
reiterated by this Court in PHHC vs. Mencias[25] and Varsity Hills
vs. Mariano.[26]
In upholding the alleged right of Chin and Mallari over the
property in dispute, the Court of Appeals relied heavily on the
Decision of this Court dated February 10, 2000 that Chin and
Mallari are its true and absolute owners. It should be emphasized,
however, that our February 10, 2000 Decision involved only the
conflicting claims of Chin and Mallari as against Maria Destura and
the Heirs of Pael. Our Decision upholding the superior rights of
Chin and Mallari over those of the petitioners was based on its
findings on the sale of the property by the Paels and a certain
Menor to Chin and Mallari. Thus, this Court held:
On the other hand, the records show that private respondents are
the owners of the subject property by virtue of the sale to them
by the Menors and the Paels as early as December 10, 1978. As
above stated, the Paels sold 70% of the total land area of the
property to the spouses Luis and Leony Menor. The Menors, in
turn, sold to private respondents the same 70%, while the
remaining 30% was sold by the surviving heirs of the Paels to
private respondents. x x x.[27]
UP was then not a party in the case and its right over the property
was not considered when this Court rendered its decision. It was
only after the petitioners filed a motion for reconsideration that
UP intervened and claimed that the property subject of this case
is within its premises and is titled to its name. Our Decision,
therefore, should not bind UP and our initial ruling as regards the
rights of the original parties to the case should not prejudice the
rights of UP. The remand of the case to the Court of Appeals was
precisely intended to determine the veracity of the allegation of
UP that the contested property is indeed within its premises. And
this fact was affirmed in the Verification Survey Report of the
DENR-NCR Survey Team which found that Lot Nos. 588-A and 588-
B overlap the property of UP. Needless to stress, Chin and Mallari
are precluded from claiming ownership of the land in dispute as
the issue of ownership by UP has long been settled in numerous
decisions by this Court, and have therefore become incontestable.
Contrary to the opinion of the Court of Appeals, the rulings of this
Court in the various cases questioning the validity of UPs title,
especially in G.R. No. 97277 entitled Roberto Pael, et al. vs.
University of the Philippines, apply to the case at bar and
constitute res judicata in the concept of conclusiveness of
judgment. There is conclusiveness of judgment when, between
the first case where the judgment was rendered and the second
case where such judgment is invoked, there is identity of parties,
not of causes of action. The judgment is conclusive in the second
case, only as to those matters actually and directly controverted
and determined, and not as to matters merely involved
therein.[28]
G.R. No. 97277 involved an action by the Paels to nullify the title
of UP over Lot Nos. 588-A and 588-B which they claim to be
likewise registered in their name. The appellate court affirmed the
validity of UPs title and held that Paels complaint lacked legal
basis. It is admitted in this case that Chin and Mallari derived their
title to Lot Nos. 588-A and 588-B from the Paels. The ruling in the
former case, therefore, insofar as the superiority of UPs title is
concerned, is conclusive in the case at bar. It has been said that
the foundation principle upon which the doctrine of res judicata
rests is that parties should not be permitted to litigate the same
issue more than once; that when a right or fact has been judicially
tried and determined by a court of competent jurisdiction, or an
opportunity for such trial has been given, the judgment of the
court, so long as it remains unreversed, should be conclusive upon
the parties and those in privity with them in law or estate.[29]
Finally, it should be emphasized that this Courts Decision in
Tiburcio, et al. vs. PHHC, as well as in the subsequent cases
upholding the validity and indefeasibility of the certificate of title
covering the UP Diliman Campus, precludes the courts from
looking anew into the validity of UPs title. Thus, the appellate
courts discourse in the case at bar as regards the origin of UPs
certificate of title, whether it came from OCT 730 or OCT 735 is
intolerable, to say the least. The rule is that material facts or
questions which were in issue in a former action and were there
admitted or judicially determined are conclusively settled by a
judgment rendered therein and that such facts or questions
become res judicata and may not again be litigated in a
subsequent action between the same parties or their privies,
regardless of the form the issue may take in the subsequent
action, whether the subsequent action involves the same or a
different form of proceedings, or whether the second action is
upon the same or a different cause of action, subject matter,
claim or demand, as the earlier action. In such cases, it is also
immaterial that the two actions are based on different grounds,
or tried on different theories, or instituted for different purposes,
and seek different reliefs. By the same token, whatever is once
irrevocably established as the controlling legal principle or
decision continues to be the law of the case between the same
parties in the same case, whether correct on general principles or
Page 50 of 111
not, so long as the facts on which such decision was predicated
continue to be the facts of the case before the court.[30]
IN VIEW OF THE FOREGOING, the Decision dated February 10,
2000 is SET ASIDE insofar as it declares private respondents Jorge
H. Chin and Renato B. Mallari as the true and absolute owners of
Lot Nos. 588-A and 588-B. The title of intervenor UP over the
disputed property is upheld. Thus, the Registry of Deeds in
Quezon City is ordered to cancel TCT Nos. 52928 and 52929 in the
names of private respondents Jorge H. Chin and Renato B. Mallari,
and Civil Case No. Q-95-22961 filed by private respondents
against intervenor UP before the Regional Trial Court of Quezon
City, Branch 99, for quieting of title is hereby dismissed.
SO ORDERED.
12. G.R. No. L-48237 June 30, 1987
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR
LEGAL AFFAIRS, THE HON. SECRETARY OF LABOR, and
MADRIGAL CENTRAL OFFICE EMPLOYEES UNION, respondents.
SARMIENTO, J.:
These are two petitions for certiorari and prohibition filed by the
petitioner, the Madrigal & Co., Inc. The facts are undisputed.
The petitioner was engaged, among several other corporate
objectives, in the management of Rizal Cement Co., Inc. 1
Admittedly, the petitioner and Rizal Cement Co., Inc. are sister
companies. 2 Both are owned by the same or practically the same
stockholders. 3 On December 28, 1973, the respondent, the
Madrigal Central Office Employees Union, sought for the renewal
of its collective bargaining agreement with the petitioner, which
was due to expire on February 28, 1974. 4 Specifically, it proposed
a wage increase of P200.00 a month, an allowance of P100.00 a
month, and other economic benefits. 5 The petitioner, however,
requested for a deferment in the negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the
petitioner reduced its capital stock from 765,000 shares to
267,366 shares. 6 This was effected through the distribution of
the marketable securities owned by the petitioner to its
stockholders in exchange for their shares in an equivalent amount
in the corporation. 7
On August 22, 1975, by yet another alleged stockholders’ action,
the petitioner reduced its authorized capitalization from 267,366
shares to 110,085 shares, again, through the same scheme. 8
After the petitioner’s failure to sit down with the respondent
union, the latter, on August 28, 1974, commenced Case No. LR-
5415 with the National Labor Relations Commission on a
complaint for unfair labor practice. 9 In due time, the petitioner
filed its position paper, 10 alleging operational losses. Pending the
resolution of Case No. LR-5415, the petitioner, in a letter dated
November 17, 1975, 11 informed the Secretary of Labor that Rizal
Cement Co., Inc., “from which it derives income” 12 “as the
General Manager or Agent” 13 had “ceased operating
temporarily.” 14 “In addition, “because of the desire of the
stockholders to phase out the operations of the Madrigal & Co.,
Inc. due to lack of business incentives and prospects, and in order
to prevent further losses,” 15 it had to reduce its capital stock on
two occasions “As the situation, therefore, now stands, the
Madrigal & Co., Inc. is without substantial income to speak of,
necessitating a reorganization, by way of retrenchment, of its
employees and operations.” 16 The petitioner then requested
that it “be allowed to effect said reorganization gradually
considering all the circumstances, by phasing out in at least three
(3) stages, or in a manner the Company deems just, equitable and
convenient to all concerned, about which your good office will be
apprised accordingly.” 17 The letter, however, was not verified
and neither was it accompanied by the proper supporting papers.
For this reason, the Department of Labor took no action on the
petitioner’s request.
On January 19, 1976, the labor arbiter rendered a decision 18
granting, among other things, a general wage increase of P200.00
a month beginning March 1, 1974 plus a monthly living allowance
of P100.00 monthly in favor of the petitioner’s employees. The
arbiter specifically found that the petitioner “had been making
substantial profits in its operation” 19 since 1972 through 1975.
The petitioner appealed.
On January 29, 1976, the petitioner applied for clearance to
terminate the services of a number of employees pursuant
supposedly to its retrenchment program. On February 3, 1976,
the petitioner applied for clearance to terminate 18 employees
more. 20 On the same date, the respondent union went to the
Regional Office (No. IV) of the Department of Labor (NLRC Case
No. R04-2-1432-76) to complain of illegal lockout against the
petitioner. 21 Acting on this complaint, the Secretary of Labor, in
a decision dated December 14, 1976, 22 found the dismissals “to
be contrary to law” 23 and ordered the petitioner to reinstate
some 40 employees, 37 of them with backwages. 24 The
petitioner then moved for reconsideration, which the Acting
Labor Secretary, Amado Inciong, denied. 25
Thereafter, the petitioner filed an appeal to the Office of the
President. The respondent, the Presidential Assistant on Legal
Affairs, affirmed with modification the Labor Department’s
decision, thus:
xxx xxx xxx
1. Eliseo Dizon, Eugenio Evangelista and Benjamin Victorio are
excluded from the order of reinstatement.
2. Rogelio Meneses and Roberto Taladro who appear to have
voluntarily retired and paid their retirement pay, their cases are
left to the judgment of the Secretary of Labor who is in a better
position to assess appellant’s allegation as to their retirement.
3. The rest are hereby reinstated with six (6) months backwages,
except Aleli Contreras, Teresita Eusebio and Norma Parlade who
are to be reinstated without backwages.
SO ORDERED. 26
xxx xxx xxx
On May 15, 1978, the petitioner came to this court. (G.R. No.
48237.)
Page 51 of 111
Meanwhile, on May 25, 1977, the National Labor Relations
Commission rendered a decision affirming the labor arbiter’s
judgment in Case No. LR-5415. 27 The petitioner appealed to the
Secretary of Labor. On June 9, 1978, the Secretary of Labor
dismissed the appeal. 28 Following these successive reversals, the
petitioner came anew to this court. (G.R. No. 49023.)
By our resolution dated October 9, 1978, we consolidated G.R. No.
48237 with G.R. No. 49023. 29 We likewise issued temporary
restraining orders. 30
In G.R. No. 48237, the petitioner argues, that.
xxx xxx xxx
I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO
VALID COMPLIANCE WITH THE CLEARANCE REQUIREMENT.
II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS NO
LOCKOUT HERE IN LEGAL CONTEMPLATION, MUCH LESS FOR
UNION-BUSTING PURPOSES.
III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING
THE REINSTATEMENT OF THE REST OF AFFECTED MEMBERS OF
RESPONDENT UNION WITH SIX (6) MONTHS BACKWAGES, EXCEPT
ALELI CONTRERAS, TERESITA EUSEBIO AND NORMA PARLADE
WHO ARE TO BE REINSTATED WITHOUT BACKWAGES.
IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO
THE JUDGMENT OF RESPONDENT SECRETARY THE CASES OF
ROGELIO MENESES AND ROBERTO TALADRO WHO HAD
VOLUNTARILY RETIRED AND PAID THEIR RETIREMENT PAY. 31
xxx xxx xxx
while in G.R. No. 49023, it submits that:
xxx xxx xxx
1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN
BANC OF THE NATIONAL LABOR RELATIONS COMMISSION
DESPITE CLEAR INDICATIONS IN THE RECORD THAT THE AWARD
WAS PREMATURE IN THE ABSENCE OF A DEADLOCK IN
NEGOTIATION AND THE FAILURE ON THE PART OF THE LABOR
ARBITER TO RESOLVE THE MAIN IF NOT ONLY ISSUE OF REFUSAL
TO BARGAIN, THEREBY DEPRIVING PETITIONER OF ITS RIGHT TO
DUE PROCESS.
2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN
NEGOTIATION, RESPONDENT MINISTER ERRED NEVERTHELESS IN
NOT FINDING THAT THE ECONOMIC BENEFITS GRANTED IN THE
FORM OF SALARY INCREASES ARE UNFAIR AND VIOLATIVE OF THE
MANDATORY GUIDELINES PRESCRIBED UNDER PRESIDENTIAL
DECREE NO. 525 AND IGNORING THE UNDISPUTED FACT THAT
PETITIONER HAD VIRTUALLY CEASED OPERATIONS AFTER HAVING
TWICE DECREASED ITS CAPITAL STOCKS AND, THEREFORE, NOT
FINANCIALLY CAPABLE TO ABSORB SUCH AWARD OF BENEFITS. 32
xxx xxx xxx
There is no merit in these two (2) petitions.
As a general rule, the findings of administrative agencies are
accorded not only respect but even finality. 33 This is especially
true with respect to the Department of Labor, which performs not
only a statutory function but carries out a Constitutional mandate
as well. 34 Our jurisdiction, as a rule, is confined to cases of grave
abuse of discretion. 35 But for certiorari to lie, there must be such
arbitrary and whimsical exercise of power, or that discretion was
exercised despotically. 36
In no way can the questioned decisions be seen as arbitrary. The
decisions themselves show why.
Anent Case No. R04-2-1432-76 (G.R. No. 48237), we are satisfied
with the correctness of the respondent Presidential Assistant for
Legal Affairs’ findings. We quote:
xxx xxx xxx
In urging reversal of the appealed decision, appellant contends
that (1) its letter dated November 17, 1975, constitute
“substantial compliance with the clearance requirement to
terminate;” and (2) individual appellees’ dismissal had no relation
to any union activities, but was the result of an honest-to-
goodness retrenchment policy occasioned by loss of income due
to cessation of operation.
We find the first contention to be without merit. Aside from the
fact that the controversial letter was unverified, with not even a
single document submitted in support thereof, the same failed to
specify the individual employees to be affected by the intended
retrenchment. Not only this, but the letter is so vague and
indefinite regarding the manner of effecting appellant’s
retrenchment plan as to provide the Secretary of (sic) a
reasonable basis on which to determine whether the request for
retrenchment was valid or otherwise, and whether the mechanics
in giving effect thereto was just or unjust to the employees
concerned. In fact, to be clearly implied from the letter is that the
implementary measures needed to give effect to the intended
retrenchment are yet to be thought of or concretized in the
indefinite future, measures about which the office of the
Secretary “will be apprised accordingly.” All these, and more, as
correctly found by the Acting Secretary, cannot but show that the
letter is insufficient in form and substance to constitute a valid
compliance with the clearance requirement. That being so, it
matters little whether or not complainant union or any of its
members failed to interpose any opposition thereto.
It cannot be over-emphasized that the purpose in requiring a prior
clearance by the Secretary of Labor, in cases of shutdown or
dismissal of employees, is to afford said official ample opportunity
to examine and determine the reasonableness of the request.
This is made imperative in order to give meaning and substance to
the constitutional mandate that the State must “afford protection
to labor,” and guarantee their “security of tenure.” Indeed, the
rules require that the application for clearance be filed ten (10)
days before the intended shutdown or dismissal, serving a copy
thereof to the employees affected in order that the latter may
register their own individual objections against the grant of the
clearance. But how could this requirement of notice to the
employees have been complied with, when, as observed by the
Acting Secretary in his modificatory decision dated June 30, 1977
“the latter of November 17, 1975 does not even state definitely
the employees involved” upon whom service could be made.
With respect to appellant’s second contention, we agree with the
Acting Secretary’s findings that individual appellee’s dismissal was
Page 52 of 111
an offshoot of the union’s demand for a renegotiation of the then
validly existing collective bargaining Agreement.
xxx xxx xxx
The pattern of appellant’s acts after the decision of the Labor
Arbiter in Case No. LR-5415 has convinced us that its sole
objective was to render moot and academic the desire of the
union to exercise its right to bargain collectively with
management, especially so when it is considered in the light of
the fact that under the said decision the demand by the union for
wage increase and allowances was granted. What renders
appellant’s motive suspect was its haste in terminating the
services of individual appellees, without waiting the outcome of
its appeal in Case No. LR-5415. The amount involved by its offer to
pay double separation could very well have been used to pay the
salaries of those employees whose services were sought to be
terminated, until the resolution of its appeal with the NLRC, since
anyway, if its planned retrenchment is found to be justifiable and
done in good faith, its only liability is to answer for the separation
pay provided by law. By and large, therefore, we agree with the
Acting Secretary that, under the circumstances obtaining in this
case, “respondent’s action [was] a systematic and deliberate
attempt to get rid of complainants because of their union
activities.
We now come to the individual cases of Aleli Contreras, Teresita
Eusebio and Norma Parlade. It is appellant’s claim that these
three (3) should not be reinstated inasmuch as they have
abandoned their work by their continued absences, and moreover
in the case of Contreras, she failed to oppose the application for
clearance filed against her on October 24, 1975. However,
appellant’s payrolls for December 16-31, 1975, January 1-15, 1976
and January 16-31, 1976, show that the three (3) were “on leave
without pay.” As correctly appreciated by the Acting Secretary,
these “payrolls prove, first, that “leave” has been granted to these
employees, and, second, that it is a practice in the company to
grant “leaves without pay” without loss of employment status, to
those who have exhausted their authorized leaves.” As regards,
Norma Parlade, the records show that she “truly incurred illness
and actually underwent surgery in Oct., 1975.” As to Aleli
Contreras, there is no showing that the Secretary of Labor or
appellant ever acted on the clearance. If we were to follow the
logic of appellant, Contreras should not have been included in the
application for clearance filed on Feb. 3, 1976. The fact that she
was included shows that up to that time, she was still considered
as a regular employee. It was for these reasons, coupled with the
length of service that these employees have rendered appellant,
that the Acting Secretary ordered their reinstatement but without
backwages. 37
xxx xxx xxx
With respect Lo Case No. LR-5415 (G.R. No. 49023), we are
likewise content with the findings of the National Labor Relations
Commission. Thus:
xxx xxx xxx
Appellant now points that the only issue certified to compulsory
arbitration is “refusal to bargain” and it is, therefore, premature
to dictate the terms of the CBA on the assumption that there was
already a deadlock in negotiation. Appellant further contends that,
assuming there was deadlock in negotiation, the economic
benefits granted are unreasonable and violative of the guideline
prescribed by P.D. 525.
On the other hand, it is the union’s stance that its economic
demands are justified by, the persistent increase in the cost of
living and the substantial earnings of the company from 1971 to
1975.
It bears to stress that although the union’s petition was
precipitated by the company’s refusal to bargain, there are glaring
circumstances pointing out that the parties also submitted
“deadlock” to arbitration. The petition itself is couched in general
terms, praying for arbitration of the union’s “dispute” with the
respondent concerning proposed changes in the collective
bargaining agreement.” It is supported with a copy of the
proposed changes which just goes to show that the union, aside
from the issue concerning respondent’s refusal to bargain, sought
determination of the merit of its proposals. On the part of the
appellant company, it pleaded financial incapacity to absorb the
proposed economic benefits during the initial stage of the
proceedings below. Even the evidence and arguments proffered
below by both parties are relevant to deadlock issue. In the face
of these factual environment, it is our view that the Labor Arbiter
below did not commit a reversible error in rendering judgment on
the proposed CBA changes. At any rate, the minimum
requirements of due process was satisfied because as heretofore
stated, the appellant was given Opportunity, and had in fact,
presented evidence and argument in avoidance of the proposed
CBA changes.
We do not also subscribe to appellant’s argument that by
reducing its capital, it is made evident that it is phasing out its
operations. On the contrary, whatever may be the reason behind
such reductions, it is indicative of an intention to keep the
company a going concern. So much so that until now almost four
(4) years later, it is still very much in existence and operational as
before.
We now come to the question concerning the equitableness of
the economic benefits granted below. It requires no evidence to
show that the employees concerned deserve some degree of
upliftment due to the unabated increase in the cost of living
especially in Metro Manila. Of course the company would like us
to believe that it is losing and is therefore not financially capable
of improving the present CBA to favor its employees. In support of
such assertion, the company points that the profits reflected in its
yearly Statement of Income and Expenses are dividends from
security holdings. We, however, reject as puerile its suggestion to
dissociate the dividends it received from security holdings on the
pretext that they belong exclusively to its stockholders. The
dividends received by the company are corporate earnings arising
from corporate investment which no doubt are attended to by the
employees involved in this proceedings. Otherwise. it would not
have been reflected as part of profits in the company’s yearly
financial statements. In determining the reasonableness of the
economic grants below, we have, therefore, scrutinized the
company’s Statement of Income and Expenses from 1972 to 1975
and after equating the welfare of the employees with the
substantial earnings of the company, we find the award to be
predicated on valid justifications.
The salary increase we herein sanction is also in keeping with the
rational that made imperative the enactment of the Termination
Pay Law since in case the respondent company really closes down,
Page 53 of 111
the employees will receive higher separation pay or retirement
benefits to tide them over while seeking another employment. 38
What clearly emerges from the recorded facts is that the
petitioner, awash with profits from its business operations but
confronted with the demand of the union for wage increases,
decided to evade its responsibility towards the employees by a
devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all
indications, just a mask for the purge of union members, who, by
then, had agitated for wage increases. In the face of the petitioner
company’s piling profits, the unionists had the right to demand for
such salary adjustments.
That the petitioner made quite handsome profits is clear from the
records. The labor arbiter stated in his decision in the collective
agreement case (Case No. LR-5415):
xxx xxx xxx
A clear scrutiny of the financial reports of the respondent [herein
petitioner] reveals that it had been making substantial profits in
the operation.
In 1972, when it still had 765,000 common shares, of which
305,000 were unissued and 459,000 outstanding capitalized at
P16,830,000.00, the respondent made a net profit of
P2,403,211.58. Its total assets were P70,821,317.81.
In 1973, based on the same capitalization, its profit increased to
P2,724,465.33. Its total assets increased to P83,240,473.73.
In 1974, although its capitalization was reduced from
P16,830,000.00 to P11,230,459.36, its profits were further
increased to P2,922,349.70. Its assets were P78,842,175.75.
The reduction in its assets by P4,398,297.98 was due to the fact
that its capital stock was reduced by the amount of P5,599,540.54.
In 1975, for the period of only six months, the respondent
reported a net profit of P547,414.72, which when added to the
surplus of P5,591.214.19, makes a total surplus of P6,138,628.91
as of June 30, 1975. 39
xxx xxx xxx
The petitioner would, however, have us believe that it in fact
sustained losses. Whatever profits it earned, so it claims were in
the nature of dividends “declared on its shareholdings in other
companies in the earning of which the employees had no
participation whatsoever.” 40 “Cash dividends,” according to it,
“are the absolute property of the stockholders and cannot be
made available for disposition if only to meet the employees’
economic demands.” 41
There is no merit in this contention. We agree with the National
Labor Relations Commission that “[t]he dividends received by the
company are corporate earnings arising from corporate
investment.” 42 Indeed, as found by the Commission, the
petitioner had entered such earnings in its financial statements as
profits, which it would not have done if they were not in fact
profits. 43
Moreover, it is incorrect to say that such profits — in the form of
dividends — are beyond the reach of the petitioner’s creditors
since the petitioner had received them as compensation for its
management services in favor of the companies it managed as a
shareholder thereof. As such shareholder, the dividends paid to it
were its own money, which may then be available for wage
increments. It is not a case of a corporation distributing dividends
in favor of its stockholders, in which case, such dividends would
be the absolute property of the stockholders and hence, out of
reach by creditors of the corporation. Here, the petitioner was
acting as stockholder itself, and in that case, the right to a share in
such dividends, by way of salary increases, may not be denied its
employees.
Accordingly, this court is convinced that the petitioner’s capital
reduction efforts were, to begin with, a subterfuge, a deception as
it were, to camouflage the fact that it had been making profits,
and consequently, to justify the mass layoff in its employee ranks,
especially of union members. They were nothing but a premature
and plain distribution of corporate assets to obviate a just sharing
to labor of the vast profits obtained by its joint efforts with capital
through the years. Surely, we can neither countenance nor
condone this. It is an unfair labor practice.
As we observed in People’s Bank and Trust Company v. People’s
Bank and Trust Co. Employees Union: 44
xxx xxx xxx
As has been held by this Court in Insular Lumber Company vs. CA,
et al., L-23875, August 29, 1969, 29 SCRA 371, retrenchment can
only be availed of if the company is losing or meeting financial
reverses in its operation, which certainly is not the case at bar.
Undisputed is the fact, that the Bank “at no time incurred losses. ”
As a matter of fact, “the net earnings of the Bank would be in the
average of P2,000,000.00 a year from 1960 to 1969 and, during
this period of nine (9) years, the Bank continuously declared
dividends to its stockholders.” Thus the mass lay-off or dismissal
of the 65 employees under the guise of retrenchment policy of
the Bank is a lame excuse and a veritable smoke-screen of its
scheme to bust the Union and thus unduly disturb the
employment tenure of the employees concerned, which act is
certainly an unfair labor practice. 45
Yet, at the same tune, the petitioner would claim that “the
phasing out of its operations which brought about the
retrenchment of the affected employees was mainly dictated be
the necessity of its stockholders in their capacity as heirs of the
late Don Vicente Madrigal to partition the estate left by him.” 46
It must be noted, however, that the labor cases were tried on the
theory of losses the petitioner was supposed to have incurred to
justify retrenchment. The petitioner cannot change its theory in
the Supreme Court. Moreover, there is nothing in the records that
will substantiate this claim. But what is more important is the fact
that it is not impossible to partition the Madrigal estate —
assuming that the estate is up for partition — without the
petitioner’s business closing shop and inevitably, without the
petitioner laying off its employees.
As regards the question whether or not the petitioner’s letter
dated November 17, 1975 47 was in substantial compliance with
legal clearance requirements, suffice it to state that apart from
the Secretary of Labor’s valid observation that the same “did not
constitute a sufficient clearance as contemplated by law, ” 48 the
Page 54 of 111
factual circumstances show that the letter in question was itself a
part of the “systematic and deliberate attempt to get rid of [the
union members] because of their union activities.” 49 Hence,
whether or not the said letter complied with the legal formalities
is beside the point since under the circumstances, retrenchment
was, in all events, unjustified. Parenthetically, the clearance
required under Presidential Decree No. 850 has been done away
with by Batas Blg. 130, approved on August 21, 1981.
During the pendency of these petitions, the petitioner submitted
manifestations to the effect that certain employees have
accepted retirement benefits pursuant to its retrenchment
scheme. 50 This is a matter of defense that should be raised
before the National Labor Relations Commission.
To do away with the protracted process of determining the
earnings acquired by the employees as a result of ad interim
employment, and to erase any doubt as to the amount of
backwages due them, this court, in line with the precedent set in
Mercury Drug Co., Inc. v. Court of Industrial Relations, 51 affirmed
in a long line of decisions that came later, 52 hereby fixes the
amount of backwages at three (3) years pay reckoned at the
increased rates decreed by the labor arbiter in Case No. LR-5415
without deduction or qualification.
WHEREFORE, the petitions are hereby DISMISSED. Subject to the
modification as to the amount of backwages hereby awarded, the
challenged decisions are AFFIRMED. The temporary restraining
orders are LIFTED. With costs against the petitioner.
This decision is IMMEDIATELY EXECUTORY.
SO ORDERED.
13. RIVIERA GOLF CLUB, INC., Petitioner, v. CCA
HOLDINGS, B.V., Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 filed by
Riviera Golf Club, Inc. (Riviera Golf) assailing the January 11, 2006
decision2 and the July 5, 2006 resolution3 of the Court of Appeals
(CA) in CA-G.R.CV No. 83824.
Background Facts
Riviera Golf, a domestic corporation, is the owner of Riviera Golf
Club (Club), a 36-hole golf course and recreational facility in Silang,
Cavite. On October 11, 1996, Riviera Golf entered into a
Management Agreement with CCA Holdings, B.V. (CCA Holdings),
a foreign corporation, for the management and operation of the
Club.
The Management Agreement was for a period of five (5) years.
Under this agreement, Riviera Golf would pay CCA Holdings a
monthly Base Management Fee of 5.5% of the Adjusted Gross
Revenue equivalent to US$16,500.00 per month, adjusted to 4.5%
per month from the opening date, plus an incentive Management
Fee of 10% of the Gross Operating Profit.
The parties also entered into a co-terminous Royalty Agreement
that would allow Riviera Golf and the Club's developer, Armed
Forces of the Philippines' Retirement and Separation Benefits
System (AFP-RSBS), to use CCA Holdings' name and facilities to
market the Club's shares. In consideration of the license to use
CCA Holdings' name, Riviera Golf and AFP-RSBS will pay CCA
Holdings a gross licensing fee of 1% on all membership fees paid
in the sale of shares, an additional gross licensing fee of 4% on all
club shares, and 7% on non-golf memberships sold.
Riviera Golf initially paid the agreed fees, but defaulted in its
payment of the licensing fees and the reimbursement claims in
September 1997. Riviera Golf likewise failed to pay the monthly
management and incentive fees in June 1999, prompting CCA
Holdings to demand the amounts due under both agreements.
On October 29, 1999, Riviera Golf sent CCA Holdings a letter
informing the latter that it was pre-terminating the Management
Agreement purportedly to alleviate the financial crisis that the
AFP-RSBS was experiencing. The Royalty Agreement was also
deemed pre-terminated.
CCA Holdings protested the termination of the agreement and
demanded that Riviera Golf settle its unpaid management and
royalty fees. Riviera Golf however refused on the ground that CCA
Holdings violated the terms of the agreement.
In April 2001, CCA Holdings filed before the Regional Trial Court
(RTC), Branch 146, Makati City, a complaint for sum of money
with damages docketed as Civil Case No. 01-611 (first complaint)
against Riviera Golf. During the pendency of the case, the parties
tried to extrajudicially settle their differences and executed a
Compromise Agreement.
On April 25, 2002, the RTC rendered a decision4 approving the
parties' Compromise Agreement. Paragraph 4 of the agreement
reads:
chanRoblesvirtualLawlibrary
4) It is understood that the execution of this compromise
agreement or the payment of the aforementioned sum of money
shall not be construed as a waiver of or with prejudice to plaintiffs
rights/cause of action, if any, arising from or relative to the pre-
termination of the parties' Management and Royalty Agreements
by the defendant subject to whatever claims and defenses may
have relative thereto; (Emphasis supplied.)
chanroblesvirtuallawlibrary
Subsequently, or on November 22, 2002, CCA Holdings again sent
a letter to Riviera Golf, this time, demanding the sum of
US$390,768.00 representing the projected net income or
expected business profits it was supposed to derive for the
unexpired two-year term of the Management Agreement. As its
demands went unheeded, CCA Holdings filed another complaint
for sum of money and damages docketed as Civil Case No. 03-399
(second complaint) before Branch 57 of the RTC of Makati City.
Noting that the first and second complaints involve the same
parties, the same subject matter, and the same causes of action,
Riviera Golf filed on August 6, 2003, a Motion to Dismiss on the
grounds of res judicata and violation of the rule against splitting of
causes of action. CCA Holdings opposed the motion contending
that there is no splitting of causes of action since the two cases
Page 55 of 111
are entirely independent of each other. CCA Holdings also
justified its belated filing of the second complaint, arguing that
the needed financial records were in Riviera Golfs possession.
The RTC Ruling
The RTC, Branch 57, Makati City granted the motion to dismiss,
holding that the first and second complaints have identical causes
of action and subject matter. Since the claims in Civil Case No. 01-
611 and Civil Case No. 03-399 arose from alleged violations of the
terms and conditions of the Management and Royalty
Agreements, the rules on res judicata and splitting of causes of
action apply.
The RTC also noted that CCA Holdings had every opportunity to
raise the issue of pre-termination when it filed Civil Case No. 01-
611. That CCA Holdings did not do so and opted instead to reserve
it for future litigation only show that it was speculating on the
results of the litigation.
The RTC likewise pointed out that the reservation clause or the
"non-waiver clause" that the parties inserted in the Compromise
Agreement was qualified by the phrase subject to whatever
claims and defenses the defendant may have relative thereto. The
RTC held that the defenses that Riviera Golf could raise are not
limited only to those relating to the legality of the pre-termination
of the agreements, but could also include all other claims and
defenses such as res judicata and splitting of a single cause of
action.
CCA Holdings appealed the dismissal of its complaint to the CA.
The CA Ruling
In its decision dated January 11, 2006, the CA set aside the order
granting the motion to dismiss, and remanded the case to the RTC
for adjudication on the merits. The CA held that res judicata and
splitting of a single cause of action were not committed based on
the following reasons:
First, there is no identity of causes of action in the two civil cases.
The test to determine the identity of causes of action is to
ascertain whether the same evidence is necessary to sustain the
two suits. In this case, the sets of evidence in the two complaints
were different.
Second, there is no splitting of a single cause of action because
Riviera Golf violated separate primary rights of CCA Holdings
under the management contract.
Third, Riviera Golf recognized CCA Holdings' right to seek damages
arising from or relative to the premature termination of the
Management Agreement. This view is evident from the literal
interpretation of Paragraph 4 (or the "non waiver clause") of the
parties' compromise agreement.
Riviera Golf moved for the reconsideration of the decision, but
the CA denied its motion in its resolution of July 5, 2006; hence,
the present recourse to us pursuant to Rule 45 of the Rules of
Court.
The Petition
Riviera Golf asks the Court to set aside the CA decision,
contending that the appellate court committed a grave error in
not holding that the filing of the second complaint amounted to
res judicata and splitting of a single cause of action. Riviera Golf
submits that based on the allegations in the two complaints, the
facts that are necessary to support the second case (Civil Case No.
03-399) would have been sufficient to authorize recovery in the
first case (Civil Case No. 01-611).
Moreover, the documentary evidence that CCA Holdings
submitted to support both complaints are also the same. Thus,
both civil cases involve not only the same facts and the same
subject matter, but also the same cause of action, i.e., breach of
the Management and Royalty Agreements.
Riviera Golf also argued that although there seems to be several
rights violated, there is only one delict or wrong committed and
consequently, only one cause of action that should have been
alleged in a single complaint. Since the alleged breach of contract
in this case was already total at the time of the filing of Civil Case
No. 01-611, the filing of the second complaint for the recovery of
damages for the pre-termination of the Management and Royalty
Agreements constitutes splitting a single cause of action that is
expressly prohibited by the Rules of Court.
Riviera Golf likewise disagrees with the CA's interpretation of the
non-waiver clause. It argues that the phrase if any and the
condition that the causes of action are subject to whatever claims
and defenses the defendant may have relative thereto in the non-
waiver clause limited its recognition of CCA Holdings' rights and
causes of action. It also maintains that the filing of the motion to
dismiss based on res judicata and splitting of causes of action
clearly falls within the non-waiver clause's limitation.
The Case for the Respondent
CCA Holdings reiterates that there was absolutely no identity of
subject matter and causes of action because the first case sought
the payment for the services it already rendered, while the
second case sought the recovery of damages representing the
projected net income that it failed to realize by reason of the
unilateral and premature termination of the Management and
Royalty Agreements. Thus, the principles of res judicata and
splitting of a single cause of action do not apply.
Even assuming that the prohibition against res judicata operates
in this case, CCA Holdings contends that Riviera Golf is already
estopped from questioning the filing of the second complaint in
view of the non-waiver clause inserted in the compromise
agreement.
The Issues
As defined by the parties, the issues before us are limited to:
1. Whether the CCA Holdings violated the prohibitions against res
judicata and splitting a single cause of action when it filed the
claim for damages for unrealized profits; and
2. Whether the CA's interpretation of paragraph 4 of the
compromise agreement is correct. If in the affirmative, whether
the parties may stipulate on an agreement violating the
prohibitions against res judicata and splitting a single cause of
action.
Page 56 of 111
Our Ruling
We find the petition meritorious.
The Second Complaint is Barred by Res Judicata
Res judicata is defined as a matter adjudged; a thing judicially
acted upon or decided; or a thing or matter settled by judgment.
Under this rule, a final judgment or decree on the merits by a
court of competent jurisdiction is conclusive as to the rights of the
parties or their privies in all later suits, and on all points and
matters determined in the former
suit.5ChanRoblesVirtualawlibrary
The concept of res judicata is embodied in Section 47(b) and (c) of
Rule 39 of the Rules of Court, which reads:
chanRoblesvirtualLawlibrary
SEC. 47. Effect of judgments or final orders. — The effect of a
judgment or final order rendered by a court of the Philippines,
having jurisdiction to pronounce the judgment or final order, may
be as follows:
(a) In case of a judgment or final order against a specific thing or
in respect to the probate of a will, or the administration of the
estate of a deceased person, or in respect to the personal,
political, or legal condition or status of a particular person or his
relationship to another, the judgment or final order is conclusive
upon the title to the thing, the will or administration, or the
condition, status or relationship of the person; however, the
probate of a will or granting of letters of administration shall only
be prima facie evidence of the death of the testator or intestate;
(b) In other cases, the judgment or final order is, with respect to
the matter directly adjudged or as to any other matter that could
have been raised in relation thereto, conclusive between the
parties and their successors in interest by title subsequent to the
commencement of the action or special proceeding, litigating for
the same thing and under the same title and in the same capacity;
and,
(c) In any other litigation between the same parties or their
successors in interest, that only is deemed to have been adjudged
in a former judgment or final order which appears upon its face to
have been so adjudged, or which was actually and necessarily
included therein or necessary thereto.
chanroblesvirtuallawlibrary
Res judicata requires the concurrence of the following requisites:
(1) the former judgment must be final; (2) it must have been
rendered by a court having jurisdiction of the subject matter and
the parties; (3) it must be a judgment on the merits; and (4) there
must be, between the first and second actions (a) identity of
parties, (b) identity of subject matter, and (c) identity of causes of
action.6ChanRoblesVirtualawlibrary
All the Elements of Res Judicata are Present
There is no dispute as to the presence of the first three elements
in the present case. The decision in Civil Case No. 01-611 is a final
judgment on the merits rendered by a court which had
jurisdiction over the subject matter and over the parties. Since a
judicial compromise operates as an adjudication on the merits, it
has the force of law and the effect of res
judicata.7ChanRoblesVirtualawlibrary
With respect to the fourth element, a careful examination of the
allegations in the two complaints shows that the cases involve the
same parties and the same subject matter. While Civil Case No.
01-611 is for the collection of unpaid management and royalty
fees, and Civil Case No. 03-399 on the other hand, is for recovery
of damages for the premature termination of the parties'
agreements, both cases were nevertheless filed on the basis of
the same Management and Royalty Agreements. Thus, we agree
that these two cases refer to the same subject matter.
The Court is also convinced that there is identity of causes of
action between the first and the second complaints.
A cause of action may give rise to several reliefs, but only one
action can be filed.8 A single cause of action or entire claim or
demand cannot be split up or divided into two or more different
actions. The rule on prohibiting the splitting of a single cause of
action is clear. Section 4, Rule 2 of the Rules of Court expressly
states:
chanRoblesvirtualLawlibrary
Section 4. Splitting a single cause of action; effect of. - If two or
more suits are instituted on the basis of the same cause of action,
the filing of one or a judgment upon the merits in any one is
available as a ground for the dismissal of the others.
chanroblesvirtuallawlibrary
In both Civil Case No. 01-611 and Civil Case No. 03-399, CCA
Holdings imputed the same wrongful act - the alleged violations of
the terms and conditions of the Management and Royalty
Agreements. In Civil Case No. 01-611, CCA Holdings' cause of
action rests on Riviera Golfs failure to pay the licensing fees,
reimbursement claims, and monthly management and incentive
fees. In Civil Case No. 03-399 on the other hand, CCA Holdings'
cause of action hinges on the damages it allegedly incurred as a
result of Riviera Golfs premature termination of the Management
and Royalty Agreements (i.e., the expected business profits it was
supposed to derive for the unexpired two-year term of the
Management Agreement). Although differing in form, these two
cases are ultimately anchored on Riviera Golfs breach of the
Management and Royalty Agreements. Thus, we conclude that
they have identical causes of action.
Same Evidence Support and Establish Both the Present and the
Former Cause of Action
It is a settled rule that the application of the doctrine of res
judicata to identical causes of action does not depend on the
similarity or differences in the forms of the two actions. A party
cannot, by varying the form of the action or by adopting a
different method of presenting his case, escape the operation of
the doctrine of res judicata.9 The test of identity of causes of
action rests on whether the same evidence would support and
establish the former and the present causes of
action.10ChanRoblesVirtualawlibrary
We held in Esperas v. The Court of Appeals11 that the ultimate
test in determining the presence of identity of cause of action is
to consider whether the same evidence would support the cause
of action in both the first and the second cases. Under the same
evidence test, when the same evidence support and establish
both the present and the former causes of action, there is likely
an identity of causes of action.12ChanRoblesVirtualawlibrary
Page 57 of 111
The pleadings and record of the present case show that there is a
glaring similarity in the documentary evidence submitted to prove
the claims under the two complaints. The pieces of evidence both
in the collection of unpaid management and royalty fees, and the
recovery of damages for the expected business profits aim at
establishing the breach of the Management and Royalty
Agreements.
Furthermore, the evidence in the first complaint will have to be
reexamined to support the cause of action in the second
complaint. We specifically note that at least four (4) documents
were presented in both actions, namely:
chanRoblesvirtualLawlibrary
(1)
the Management Agreement between Riviera Golf and CCA
Holdings;
(2)
the Royalty Agreement between Riviera Golf and CCA Holdings;
(3)
the Fees Receivable Report of CCA Holdings as of October 1999,
amounting to USD 97,122.00; and
(4)
the letter dated October 29, 1999, stating the termination of the
Management Agreement.
Based on the allegations in the two complaints, the facts that are
necessary to support the second complaint would have been
sufficient to allow CCA Holdings to recover in the first complaint.
The similarity in the pieces of evidence in these two cases
therefore strongly suggests the identity of their causes of action.
We held in this regard in Stilianopulos v. The City of
Legaspi:13cralawlawlibrary
The underlying objectives or reliefs sought in both the quieting-of-
title and the annulment-of-title cases are essentially the same
adjudication of the ownership of the disputed lot and nullification
of one of the two certificates of title. Thus, it becomes readily
apparent that the same evidence or set of facts as those
considered in the quieting-of-title case would also be used in this
Petition.
The difference in form and nature of the two actions is immaterial
and is not a reason to exempt petitioner from the effects of res
judicata. The philosophy behind this rule prohibits the parties
from litigating the same issue more than once. When a right or
fact has been judicially tried and determined by a court of
competent jurisdiction or an opportunity for such trial has been
given, the judgment of the court, as long as it remains unreversed,
should be conclusive upon the parties and those in privity with
them. Verily, there should be an end to litigation by the same
parties and their privies over a subject, once it is fully and fairly
adjudicated. (Citations omitted.)
chanroblesvirtuallawlibrary
At the Time the First Complaint was Filed
The Breach of the Agreements was Already Total
We likewise note that the non-payment of fees and the
premature termination of the contract occurred as early as 1999.
In other words, the violation of both the Management and
Royalty Agreements preceded the filing of the first complaint.
Consequently, when CCA Holdings filed its first complaint in 2001,
the breach of the agreements was already complete and total;
and the ground for the recovery of damages was available and in
existence. Thus, allowing CCA Holdings now to file two separate
and independent claims anchored on the same breach of contract
(i.e., breach of the Management and Royalty Agreements),
constitutes a blatant disregard of our prohibition against res
judicata and splitting of a single cause of action.
In contracts providing several obligations, each obligation may
give rise to a single and independent cause of action. But if
several obligations have matured, or if the entire contract is
breached at the time of the filing of the complaint, all obligations
are integrated into one cause of action. Hence, the claim arising
from such cause of action that is not included in the complaint is
barred forever. The Court's explanation in Blossom and Company,
Inc. v. Manila Gas Corporation,14 citing US jurisprudence on the
matter, is instructive, viz:
chanRoblesvirtualLawlibrary
34 Corpus Juris, p. 839, it is said:
chanRoblesvirtualLawlibrary
As a general rule[,] a contract to do several things at several times
in its nature, so as to authorize successive actions; and a judgment
recovered for a single breach of a continuing contract or covenant
is no bar to a suit for a subsequent breach thereof. But where the
covenant or contract is entire, and the breach total, there can be
only one action, and [the] plaintiff must therein recover all his
damages.
chanroblesvirtuallawlibrary
In the case of Rhoelm v. Horst, 178 U. U., 1; 44 Law. ed., 953, that
court said:
chanRoblesvirtualLawlibrary
An unqualified and positive refusal to perform a contract, though
the performance thereof is not yet due, may, if the renunciation
goes to the whole contract, be treated as a complete breach
which will entitle the injured party to bring his action at once.
chanroblesvirtuallawlibrary
In the present case, CCA Holdings' claim for the unpaid
management and royalty fees as well as the damages for its
expected business profits constituted an indivisible demand.
Verily, CCA Holdings should have included and alleged the
recovery of damages for its expected business profits as a second
cause of action in Civil Case No. 01-611. CCA Holdings cannot be
permitted to split up a single cause of action and make that single
cause of action the basis of several suits.
All told, the Court finds that the filing of the second complaint is
barred by res judicata.
The "Non-Waiver Clause" Stipulated
in the Compromise Agreement is Null and Void
CCA Holdings contends that Riviera Golf is already estopped from
questioning the filing of the second complaint because the non-
waiver clause of the Compromise Agreement recognized CCA
Holdings' prerogative to seek damages arising from the premature
termination of the Management Agreement.
We do not see any merit in this contention.
A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced.15 Like any other contract, a compromise
agreement must be consistent with the requisites and principles
of contracts. While it is true that the agreement is binding
between the parties and becomes the law between them, it is
also a rule that to be valid, a compromise agreement must not be
contrary to law, morals, good customs, and public
policy.16ChanRoblesVirtualawlibrary
Page 58 of 111
In the present case, a reading of paragraph 4 of the Compromise
Agreement shows that it allows the filing of complaints based on
the same cause of action (i.e., breach of the Management and
Royalty Agreements), to wit:
chanRoblesvirtualLawlibrary
4) It is understood that the execution of this compromise
agreement or the payment of the aforementioned sum of money
shall not be construed as a waiver of or with prejudice to plaintiffs
rights/cause of action, if any, arising from or relative to the pre-
termination of the parties' Management and Royalty Agreements
by the defendant subject to whatever claims and defenses may
have relative thereto; (Emphasis supplied.)
chanroblesvirtuallawlibrary
Since paragraph 4 allows the splitting of causes of action and res
judicata, this provision of the Compromise Agreement should be
invalidated for being repugnant to our public policy.
The well-settled rule is that the principle or rule of res judicata is
primarily one of public policy. It is based on the policy against
multiplicity of suits,17 whose primary objective is to avoid unduly
burdening the dockets of the courts.
Speaking through Justice J.B.L. Reyes, the Court in Aguila v. J.M.
Tuason & Co., Inc.18 held that:
chanRoblesvirtualLawlibrary
Public policy is firmly set against unnecessary multiplicity of suits;
the rule of res judicata, like that against splitting causes of action,
are all applications of the same policy, that matters once settled
by a Court's final judgment should not thereafter be invoked
against. Relitigation of issues already settled merely burdens the
Courts and the taxpayers, creates uneasiness and confusion, and
wastes valuable time and energy that could be devoted to
worthier cases. As the Roman maxim goes, Non bis in idem.19
(Emphasis supplied.)
Because it is contrary to our policy against multiplicity of suits, we
cannot uphold paragraph 4 of the Compromise Agreement to be
valid, for we would then render legitimate the splitting of causes
of action and negate the prohibition against res judicata. Under
Article 1409 of the Civil Code, contracts which are contrary to
public policy and those expressly prohibited or declared void by
law are considered inexistent and void from the beginning.
In sum, we declare paragraph 4 of the Compromise Agreement
null and void for being contrary to public policy.
WHEREFORE, premises considered, we GRANT the petition. The
decision dated January 11, 2006, of the Court of Appeals in CA-G.R.
CV No. 83824 is hereby REVERSED and SET ASIDE. Accordingly, the
decision dated September 29, 2004, of the Regional Trial Court,
Branch 57, Makati City, in Civil Case No. 03-399 is REINSTATED.
SO ORDERED.
14. G.R. No. 194964-65, January 11, 2016
UNIVERSITY OF MINDANAO, INC., Petitioner, v. BANGKO
SENTRAL PILIPINAS, ET AL., Respondents.
DECISION
LEONEN, J.:
Acts of an officer that arc not authorized by the board of
directors/trustees do not bind the corporation unless the
corporation ratifies the acts or holds the officer out as a person
with authority to transact on its behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals'
December 17, 2009 Decision2 and December 20, 2010
Resolution.3 The Court of Appeals reversed the Cagayan De Oro
City trial court's and the Iligan City trial court's Decisions to nullify
mortgage contracts involving University of Mindanao's
properties.4
University of Mindanao is an educational institution. For the year
1982, its Board of Trustees was chaired by Guillermo B. Torres. His
wife, Dolores P. Torres, sat as University of Mindanao's Assistant
Treasurer.5
Before 1982, Guillermo B. Torres and Dolores P. Torres
incorporated and operated two (2) thrift banks: (1) First Iligan
Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings
and Loan Association, Inc. (DSLAI). Guillermo B. Torres chaired
both thrift banks. He acted as FISLAI's President, while his wife,
Dolores P. Torres, acted as DSLAI's President and FISLAI's
Treasurer.6
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas
issued a P1.9 million standby emergency credit to FISLAI. The
release of standby emergency credit was evidenced by three (3)
promissory notes dated February 8, 1982, April 7, 1982, and May
4, 1982 in the amounts of P500,000.00, P600,000.00, and
P800,000.00, respectively. All these promissory notes were signed
by Guillermo B. Torres, and were co-signed by either his wife,
Dolores P. Torres, or FISLAI's Special Assistant to the President,
Edmundo G. Ramos, Jr.7
On May 25, 1982, University of Mindanao's Vice President for
Finance, Saturnino Petalcorin, executed a deed of real estate
mortgage over University of Mindanao's property in Cagayan de
Oro City (covered by Transfer Certificate of Title No. T-14345) in
favor of Bangko Sentral ng Pilipinas.8 "The mortgage served as
security for FISLAI's PI.9 Million loan[.]"9 It was allegedly executed
on University of Mindanao's behalf.10
As proof of his authority to execute a real estate mortgage for
University of Mindanao, Saturnino Petalcorin showed a
Secretary's Certificate signed on April 13, 1982 by University of
Mindanao's Corporate Secretary, Aurora de Leon.11 The
Secretary's Certificate stated:chanRoblesvirtualLawlibrary
That at the regular meeting' of the Board of Trustees of the
aforesaid corporation [University of Mindanao] duly convened on
March 30, 1982, at which a quorum was present, the following
resolution was unanimously adopted:chanRoblesvirtualLawlibrary
"Resolved that the University of Mindanao, Inc. be and is hereby
authorized, to mortgage real estate properties with the Central
Bank of the Philippines to serve as security for the credit facility of
First Iligan Savings and Loan Association, hereby authorizing the
President and/or Vice-president for Finance, Saturnino R.
Petalcorin of the University of Mindanao,- Inc. to sign, execute
and deliver the covering mortgage document or any other
documents which may be proper[l]y required."12
Page 59 of 111
cralawlawlibrary
The Secretary's Certificate was supported by an excerpt from the
minutes of the January 19, 1982 alleged meeting of University of
Mindanao's Board of Trustees. The excerpt was certified by
Aurora de Leon on March 13, 1982 to be a true copy of University
of Mindanao's records on file.13 The excerpt
reads:chanRoblesvirtualLawlibrary
3 - Other Matters:
(a) Cagayan de Oro and Iligan properties:
Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-
President for Finance, to represent the University of Mindanao to
transact, transfer, convey, lease, mortgage, or otherwise
hypothecate any or all of the following properties situated at
Cagayan de Oro and Iligan City and authorizing further Mr.
Petalcorin to sign any or all documents relative
thereto:chanRoblesvirtualLawlibrary
A parcel of land situated at Cagayan de Oro City, covered and
technically described in TRANSFER CERTIFICATE OF TITLE No. T-
14345 of the Registry of Deeds of Cagayan de Oro City;
A parcel of land situated at Iligan City, covered and technically
described in TRANSFER CERTIFICATE OF TITLE NO..T-15696 (a.t.) of
the Registry of Deeds of Iligan City; and
A parcel of land situated at Iligan City, covered and technically
described in TRANSFER CERTIFICATE OF TITLE NO. T-15697 (a.f.) of
the Registry of Deeds of Iligan City.14
cralawlawlibrary
The mortgage deed executed by Saturnino Petalcorin in favor of
Bangko Sentral ng Pilipinas was annotated on the certificate of
title of the Cagayan de Oro City property (Transfer Certificate of
Title No. 14345) on June 25, 1982. Aurora de Leon's'certification
was also annotated on the Cagayan de Oro City property's
certificate of title (Transfer Certificate of Title No. 14345).15
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI
an additional loan of P620,700.00. Guillermo B. Torres and
Edmundo Ramos executed a promissory note on October 21, 1982
to cover that amount.16
On November 5, 1982, Saturnino Petalcorin executed another
deed of real estate mortgage, allegedly on behalf of University of
Mindanao, over its two properties in Iligan City. This mortgage
served as additional security for FISLAI's loans. The two Iligan City
properties were covered by Transfer Certificates of Title Nos, T-
15696 and T-15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas' mortgage lien
over the Iligan City properties and Aurora de Leon's certification
were annotated on Transfer Certificates of Title Nos. T-15696 and
T-15697.18 On January 18, 1983, Bangko Sentral ng Pilipinas'
mortgage lien over the Iligan City properties was also annotated
on the tax declarations covering the Iligan City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to
DSLAI on May 27, 1983 and on August 20, 1984 in the amounts of
P1,633,900.00 and P6,489,000.00, respectively.20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the
Philippines entered into a Memorandum of Agreement intended
to rehabilitate the thrift banks, which had been suffering from
their depositors' heavy withdrawals. Among the terms of the
agreement was the merger of FISLAI and DSLAI, with DSLAI as the
surviving corporation. DSLAI later became known as Mindanao
Savings and Loan Association, Inc. (MSLAI).21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May
24, 1991.23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to
University of Mindanao, informing it that the bank would
foreclose its properties if MSLAI's total outstanding obligation of
P12,534,907.73 remained unpaid.24
In its reply to Bangko Sentral ng Pilipinas' June 18, 1999 letter,
University of Mindanao, through its Vice President for Accounting,
Gloria E. Detoya, denied that University of Mindanao's properties
were mortgaged. It also denied having received any loan proceeds
from Bangko Sentral ng Pilipinas.25cralawred
On July 16, 1999, University of Mindanao filed two Complaints for
nullification and cancellation of mortgage. One Complaint was
filed before the Regional Trial Court of Cagayan de Oro City, and
the other Complaint was filed before the Regional Trial Court of
Iligan City.26
University of Mindanao alleged in its Complaints that it did not
obtain any loan from Bangko Sentral ng Pilipinas. It also did not
receive any loan proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon's
certification was anomalous. It never authorized Saturnino
Petalcorin to execute real estate mortgage contracts involving its
properties to secure FISLAI's debts. It never ratified the execution
of the mortgage contracts. Moreover, as an educational
institution, it cannot mortgage its properties to secure another
person's debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de
Oro City rendered a Decision in favor of University of
Mindanao,29 thus:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered
in favor of plaintiff and against
defendants:chanRoblesvirtualLawlibrary
1. DECLARING the real estate mortgage Saturnino R. Petalcorin
executed in favor of BANGKO SENTRAL NG PILIPINAS involving Lot
421-A located in Cagayan de Oro City with an area of 482 square
meters covered by TCT No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan de Oro City to
cancel Entry No. 9951 and Entry No. 9952 annotated at the back
of said TCT No. T-14345, Registry of Deeds of Cagayan de Oro City;
Page 60 of 111
Prayer for attorney's fee [sic] is hereby denied there being no
proof that in demanding payment of the emergency loan,
defendant BANGKO SENTRAL NG PILIPINAS was motivated by
evident bad faith,
SO ORDERED.30 (Citation omitted)cralawlawlibrary
The Regional Trial Court of Cagayan de Oro City found that there
was no board resolution giving Saturnino Petalcorin authority to
execute mortgage contracts on behalf of University of Mindanao.
The Cagayan de Oro City trial court gave weight to Aurora de
Leon's testimony that University ofMindanao's Board of Trustees
did not issue a board resolution that would support the
Secretary's Certificate she issued. She testified that she signed the
Secretary's Certificate only upon Guillermo B. Torres' orders.31
Saturnino Petalcorin testified that he had no authority to execute
a mortgage contract on University ofMindanao's behalf. He
merely executed the contract because of Guillermo B. Torres'
request.32
Bangko Sentral ng Pilipinas' witness Daciano Pagui, Jr. also
admitted that there was no board resolution giving Saturnino
Petalcorin authority to execute mortgage contracts on behalf of
University of Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that
Saturnino Petalcorin was not authorized to execute mortgage
contracts for University of Mindanao. Hence, the mortgage of
University ofMindanao's Cagayan de Oro City property was
unenforceable. Saturnino Petalcorin's unauthorized acts should
be annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a
Decision on December 7, 2001 in favor of University of
Mindanao.35 The dispositive portion of the Decision
reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered
in favor of the plaintiff and against the defendants, as
follows:chanRoblesvirtualLawlibrary
1. Nullifying and canceling [sic] the subject Deed of Real Estate
Mortgage dated November 5, 1982 for being unenforceable or
void contract;
2. Ordering the Office of the Register of Deeds of Iligan City to
cancel the entries on TCT No. T-15696 and TCT No. T- 15697 with
respect to the aforesaid Deed of Real Estate Mortgage dated
November 5, 1982 and all other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to return
the owner's duplicate copies of TCT No. T-15696 and TCT No.
15697 to the plaintiff;
4. Nullifying the subject [foreclosure [proceedings and the
[a]uction [s]ale conducted by defendant Atty. Gerardo Paguio, Jr.
on October 8, 1999 including all the acts subsequent thereto and
ordering the Register of Deeds of Iligan City not to register any
Certificate of Sale pursuant to the said auction sale nor make any
transfer of the corresponding titles, and if already registered and
transferred, to cancel all the said entries in TCT No. T-15696 and
TCT No. T-15697 and/or cancel the corresponding new TCTs in the
name of defendant Bangko Sentral ng Pilipinas;
5. Making the Preliminary Injunction per Order of this Court dated
October 13, 2000 permanent.
No pronouncement as to costs.36 (Citation
omitted)cralawlawlibrary
The Iligan City trial court found that the Secretary's Certificate
issued by Aurora de Leon was fictitious37 and irregular for being
unnumbered.38 It also did not specify the identity, description, or
location of the mortgaged properties.39
The Iligan City trial court gave credence to Aurora de Leon's
testimony that the University of Mindanao's Board of Trustees did
not take up the documents in its meetings. Saturnino Petalcorin
corroborated her testimony.40
The Iligan City trial court ruled that the lack of a board resolution
authorizing Saturnino Petalcorin to execute documents of
mortgage on behalf of University of Mindanao made the real
estate mortgage contract unenforceable under Article 140341 of
the Civil Code.42 The mortgage contract and the subsequent acts
of foreclosure and auction sale were void because the mortgage
contract was executed without University of Mindanao' s
authority.43
The Iligan City trial court also ruled that the annotations on the
titles of University of Mindanao's properties do not operate as
notice to the University because annotations only bind third
parties and not owners.44 Further, Bangko Sentral ng Pilipinas'
right to foreclose the University of Mindanao's properties had
already prescribed.45
Bangko Sentral ng Pilipinas separately appealed the Decisions of
both the Cagayan de Oro City and the Iligan City trial courts.46
After consolidating both cases, the Court of Appeals issued a
Decision on December 17, 2009 in favor of Bangko Sentral ng
Pilipinas, thus:chanRoblesvirtualLawlibrary
FOR THE REASONS STATED, the Decision dated 23 November 2001
of the Regional Trial Court of Cagayan de Oro City, Branch 24 in
Civil Case No. 99-414 and the Decision dated 7 December 2001 of
the Regional Trial Court of Iligan City, Branch 1 in Civil Case No.
4790 are REVERSED and SET ASIDE. The Complaints in both cases
before the trial courts are DISMISSED. The Writ of Preliminary
Injunction issued by the Regional Trial Court of Iligan City, Branch
1 in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.
The Court of Appeals ruled that "[although BSP failed to prove
that the UM Board of Trustees actually passed a Board Resolution
authorizing Petalcorin to mortgage the subject real properties,"48
Aurora de Leon's Secretary's Certificate "clothed Petalcorin with
apparent and ostensible authority to execute the mortgage deed
on its behalf[.]"49 Bangko Sentral ng Pilipinas merely relied in
good faith on the Secretary's Certificate.50 University of
Mindanao is estopped from denying Saturnino Petalcorin's
authority.51
Page 61 of 111
Moreover, the Secretary's Certificate was notarized. This meant
that it enjoyed the presumption of regularity as to the truth of its
statements and authenticity of the signatures.52 Thus, "BSP
cannot be faulted for relying on the [Secretary's Certificate.]"53
The Court of Appeals also ruled that since University of
Mindanao's officers, Guillermo B. Torres and his wife, Dolores P.
Torres, signed the promissory notes, University of Mindanao was
presumed to have knowledge of the transaction.54 Knowledge of
an officer in relation to matters within the scope of his or her
authority is notice to the corporation.55
The annotations on University of Mindanao's certificates of title
also operate as constructive notice to it that its properties were
mortgaged.56 Its failure to disown the mortgages for more than a
decade was implied ratification.57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas'
action for foreclosure had not yet prescribed because the due
date extensions that Bangko Sentral ng Pilipinas granted to FISLAI
extended the due date of payment to five (5) years from February
8, 1985.58 The bank's demand letter to Dolores P. Torres on June
18, 1999 also interrupted the prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a
Motion for Reconsideration60 and Motion for Partial
Reconsideration respectively of the Court of Appeals' Decision. On
December 20, 2010, the Court of Appeals issued a Resolution,
thus:chanRoblesvirtualLawlibrary
Acting on the foregoing incidents, the Court RESOLVES
to:chanRoblesvirtualLawlibrary
GRANT the appellant's twin motions for extension of time to file
comment/opposition and NOTE the Comment . on the appellee's
Motion for Reconsideration it subsequently filed on June 23, 2010;
GRANT the appellee's three (3) motions for extension of time to
file comment/opposition and NOTE the Comment on the
appellant's Motion for Partial Reconsideration it filed on July 26,
2010;
NOTE the appellant's "Motion for Leave to File Attached Reply
Dated August 11, 2010" filed on August 13, 2010 and DENY the
attached "Reply to Comment Dated July 26, 2010";
DENY the appellee's Motion for Reconsideration as it does' not
offer any arguments sufficiently meritorious to warrant
modification or reversal of the Court's 17 December 2009
Decision. The Court finds that there is no compelling reason to
reconsider its ruling; and
GRANT the appellant's Motion for Partial Reconsideration, as the
Court finds it meritorious, considering that it ruled in its Decision
that "BSP can still foreclose on the UM's real property in Cagayan
de Oro City covered by TCT No. T- 14345." It then follows that the
injunctive writ issued by the RTC of Cagayan de Oro City, Branch
24 must be lifted. The Court's 17 December 2009 Decision is
accordingly MODIFIED and AMENDED to read as
follows:chanRoblesvirtualLawlibrary
"FOR THE REASONS STATED, the Decision dated 23 November
2001 of the Regional Trial Court of Cagayan de Oro City, Branch 24
in Civil Case No. 99-414 and the Decision dated 7 December 2001
of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No.
4790 are REVERSED and SET ASIDE. The Complaints in both cases
before the trial courts are DISMISSED. The Writs of Preliminary
Injunction issued by the Regional Trial Court of Iligan City, Branch
1 in Civil Case No. 4790 and in the Regional Trial Court of Cagayan
de Oro City, Branch 24 in Civil Case No. 99-414 are LIFTED and SET
ASIDE."
SO ORDERED.61 (Citation omitted)
cralawlawlibrary
Hence, University of Mindanao filed this Petition for Review. The
issues for resolution are:chanRoblesvirtualLawlibrary
First, whether respondent Bangko Sentral ng Pilipinas' action to
foreclose the mortgaged properties had already prescribed; and
Second, whether petitioner University of Mindanao is bound by
the real estate mortgage contracts executed by Saturnino
Petalcorin.
We grant the Petition.
I
Petitioner argues that respondent's action to foreclose its
mortgaged properties had already prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the
lapse of time.62 Its purpose is "to protect the diligent and vigilant,
not those who sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years
from the day they may be brought.64 Actions on mortgages may
be brought not upon the execution of the mortgage contract but
upon default in payment of the obligation secured by the
mortgage.65
A debtor is considered in default when he or she fails to pay the
obligation on due date and, subject to exceptions, after demands
for payment were made by the creditor. Article 1169 of the Civil
Code provides:chanRoblesvirtualLawlibrary
ART. 1169. Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:chanRoblesvirtualLawlibrary
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation
it appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.cralawlawlibrary
Page 62 of 111

Article 1193 of the Civil'Code provides that an obligation is
demandable only upon due date. It
provides:chanRoblesvirtualLawlibrary
ART. 1193. Obligations for whose fulfillment a day certain has
been fixed, shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but
terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily
come, although it may not be known when.
If the uncertainty consists in whether the day will come or not,
the obligation is conditional, and it shall be regulated by the rules
of the preceding Section.cralawlawlibrary
In other words, as a general rule, a person defaults and
prescriptive period for action runs when (1) the obligation
becomes due and demandable; and (2) demand for payment has
been made.
The prescriptive period neither runs from the date of the
execution of a contract nor does the prescriptive period
necessarily run on the date when the loan becomes due and
demandable.66 Prescriptive period runs from the date of
demand,67 subject to certain exceptions.
In other words, ten (10) .years may lapse from the date of the
execution of contract, without barring a cause of action on the
mortgage when there is a gap between the period of execution of
the contract and the due date or between the due date and the
demand date in cases when demand is necessary.68
The mortgage contracts in this case were executed by Saturnino
Petalcorin in 1982. The maturity dates of FISLAI's loans were
repeatedly extended until the loans became due and demandable
only in 1990. Respondent informed petitioner of its decision to
foreclose its properties and demanded payment in 1999.
The running of the prescriptive period of respondent's action on
the mortgages did not start when it executed the mortgage
contracts with Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from
1990 when the loan became due, if the obligation was covered by
the exceptions under Article 1169 of the Civil Code; (2) or from
1999 when respondent demanded payment, if the obligation was
not covered by the exceptions under Article 1169 of the Civil Code.
In either case, respondent's Complaint with cause of action based
on the mortgage contract was filed well within the prescriptive
period.
Given the termination of all traces of FISLAI's existence,70
demand may have been rendered unnecessary under Article
1169(3)71 of the Civil Code. Granting that this is the
case,.respondent would have had ten (10) years from due date in
1990 or until 2000 to institute an action on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of
actions may be interrupted by (1) the filing of a court action; (2) a
written extrajudicial demand; and (3) the written
acknowledgment of the debt by the debtor.
Therefore, the running of the prescriptive period was interrupted
when respondent sent its demand letter to petitioner on June 18,
1999. This eventually led to petitioner's filing of its annulment of
mortgage complaints before the Regional Trial Courts of Iligan City
and Cagayan De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent's action was
within the ten (10)-year prescriptive period. Respondent
demanded payment of the loans in 1999 and filed an action in the
same year.
II
Petitioner argues that the execution of the mortgage contract was
ultra vires. As an educational institution, it may not secure the
loans of third persons.73 Securing loans of third persons is not
among the purposes for which petitioner was established.74
Petitioner, is correct.
Corporations are artificial entities granted legal personalities upon
their creation by their incorporators in accordance with law.
Unlike natural persons, they have no inherent powers. Third
persons dealing with corporations cannot assume that
corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined
by the law and their articles of incorporation.75
A corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is
created"76 are ultra vires.
The only exception to this, rule is when acts are necessary and
incidental to carry out a corporation's purposes, and to the
exercise of powers conferred by the Corporation Code and under
a corporation's articles of incorporation.77 This exception is
specifically included in the general powers of a corporation under
Section 36 of the Corporation Code:chanRoblesvirtualLawlibrary
SEC. 36. Corporate powers and capacity.—Every corporation
incorporated under this Code has the power and
capacity:chanRoblesvirtualLawlibrary
To sue and be sued in its corporate name;
Of succession by its corporate name for the period of time stated
in the articles of incorporation and the certificate of incorporation;
To adopt and use a corporate seal;
To amend its articles of incorporation in accordance with the
provisions of this Code;
To adopt by-laws, not contrary to law, morals, or public policy,
and to amend or repeal the same in accordance with this Code;
In case of stock corporations, to issue or sell stocks to subscribers
and to sell treasury stocks in accordance with the provisions of
this Code; and to admit members to the corporation if it be a non-
stock corporation;
To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as
Page 63 of 111
the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
To enter into merger or consolidation with other corporations as
provided in this Code;
To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no corporation, domestic or
foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers and employees; and
To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in its articles of
incorporation. (Emphasis supplied)
cralawlawlibrary
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated
the test to determine if a corporate act is in accordance with its
purposes:chanRoblesvirtualLawlibrary
It is a question, therefore, in each case, of the logical relation of
the act to the corporate purpose expressed in the charter. If that
act is one which is lawful in itself, and not otherwise prohibited, is
done for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial, and not
in a remote and fanciful, sense, it may fairly be considered within
charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not.79 (Emphasis
supplied)cralawlawlibrary
As an educational institution, petitioner
serves:chanRoblesvirtualLawlibrary
To establish, conduct and operate a college or colleges, and/or
university;
To acquire properties,, real and/or personal, in connection with
the establishment and operation of such college or colleges;
To do and perform the various and sundry acts and things
permitted by the laws of the Philippines unto corporations like
classes and kinds;
To engage in agricultural, industrial, and/or commercial pursuits
in line with educational program of the corporation and to acquire
all properties, real and personal [,] necessary for the purposes[;]
To establish, operate, and/or acquire broadcasting and television
stations also in line with the educational program of the
corporation and for such other purposes as the Board of Trustees
may determine from time to time;
To undertake housing projects of faculty members and employees,
and to acquire real estates for this purpose;
To establish, conduct and operate and/or invest in educational
foundations; [As amended on December 15, 1965][;]
To establish, conduct and operate housing and dental schools,
medical facilities and other related undertakings;
To invest in other corporations. [As amended on December 9,
1998]. [Amended Articles of Incorporation of the University of
Mindanao, Inc. - the Petitioner].80
cralawlawlibrary
Petitioner does not have the power to mortgage its properties in
order to secure loans of other persons. As an educational
institution, it is limited to developing human capital thrpugh
formal instruction. It is not a corporation engaged in the business
of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment
and real estate; establishing housing facilities for personnel and
students; hiring a concessionaire; and other activities that can be
directly connected to the operations and conduct of the
education business may constitute the necessary and incidental
acts of an educational institution.
Securing FISLAI's loans by mortgaging petitioner's properties does
not appear to have even the remotest connection to the
operations of petitioner as an educational institution. Securing
loans is not an adjunct of the educational institution's conduct of
business.81 It does not appear that securing third-party loans was
necessary to maintain petitioner's business of providing
instruction to individuals.
This court upheld the validity of corporate acts when those acts
were shown to be clearly within the corporation's powers or were
connected to the corporation's purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court
declared valid the donation given to the children of a deceased
person who contributed to the growth of the corporation.83 This
court found that this donation was within the broad scope of
powers and purposes of the corporation to "aid in any other
manner any person . . . in which any interest is held by this
corporation or in the affairs or prosperity of which this
corporation has a lawful interest."84
In Twin Towers Condominium Corporation v. Court of Appeals, et
al.,85 this court declared valid a rule by Twin Towers
Condominium denying delinquent members the right to use
condominium facilities. This court ruled that the condominium's
power to promulgate rules on the use of facilities and to enforce
provisions of the Master Deed was clear in the Condominium Act,
Master Deed, and By-laws of the condominium.87 Moreover, the
promulgation of such rule was "reasonably necessary" to attain
the purposes of the condominium project.88
This court has, in effect, created a presumption that corporate
acts are valid if, on their face, the acts were within the
corporation's powers or purposes. This presumption was
explained as early as in 1915 in Coleman v. Hotel De France,89
where this court ruled that contracts entered into by corporations
in the exercise of their incidental powers are not ultra vires.90
Coleman involved a hotel's cancellation of an employment
contract it executed with a gymnast. One of the hotel's
contentions was the supposed ultra vires nature of the contract.-
It was executed outside its express and implied powers under the
articles of incorporation.91
In ruling in favor of the contract's validity, this court considered
the incidental powers of the hotel to include the execution of
employment contracts with entertainers for the purpose of
providing its guests entertainment and increasing patronage.92
Page 64 of 111
This court ruled that a contract executed by a corporation shall be
presumed valid if on its face its execution was not beyond the
powers of the corporation to do.93
Thus:chanRoblesvirtualLawlibrary
When a contract is not on its face necessarily beyond the scope of
the power of the corporation by which it was made, it will, in the
absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends
of justice or work a legal wrong.94cralawlawlibrary
However, this should not be interpreted to mean that such
presumption applies to all cases, even when the act in question is
on its face beyond the corporation's power to do or when the
evidence contradicts the presumption.
Presumptions are "inference[s] as to the existence of a fact not
actually known, arising from its usual connection with another
which is known, or a conjecture based on past experience as to
what course human affairs ordinarily take."95 Presumptions
embody values and revealed behavioral expectations under a
given set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be
overturned by evidence, however strong the evidence is.98 They
are made conclusive not because there is an established
uniformity in behavior whenever identified circumstances arise.
They are conclusive because they are declared as such under the
law or the rules. Rule 131, Section 2 of the Rules of Court
identifies two (2) conclusive
presumptions:chanRoblesvirtualLawlibrary
SEC. 2. Conclusive presumptions.— The following are instances of
conclusive presumptions:chanRoblesvirtualLawlibrary
(a) Whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in
any litigation arising out of such declaration, act or omission, be
permitted to falsify it;
(b) The tenant is not permitted to deny the title of his landlord at
the time of the commencement of the relation of landlord and
tenant between them.cralawlawlibrary
On the other hand, disputable, presumptions are presumptions
that may be overcome by contrary evidence.99 They are
disputable in recognition of the variability of human behavior.
Presumptions are not always true. They may be wrong under
certain circumstances, and courts are expected to apply them,
keeping in mind the nuances of every experience that may render
the expectations wrong.
Thus, the application of disputable presumptions on a given
circumstance must be based on the existence of certain facts on
which they are meant to operate. "[Presumptions are not
allegations, nor do they supply their absence[.]"100 Presumptions
are conclusions. They do not apply when there are no facts or
allegations to support them.
If the facts exist to set in motion the operation of a disputable
presumption, courts may accept the presumption. However,
contrary evidence may be presented to rebut the presumption.
Courts cannot disregard contrary evidence offered to rebut
disputable presumptions. Disputable presumptions apply only in
the absence of contrary evidence or explanations. This court
explained in Philippine Agila Satellite Inc. v. Usec. Trinidad-
Lichauco:101chanroblesvirtuallawlibrary
We do not doubt the existence of the presumptions of "good
faith" or "regular performance of official duty," yet these
presumptions are disputable and may be contradicted and
overcome by other evidence. Many civil actions are oriented
towards overcoming any number of these presumptions, and a
cause of action can certainly be geared towards such effect. The
very purpose of trial is to allow a party to present evidence to
overcome the disputable presumptions involved. Otherwise, if
trial is deemed irrelevant or unnecessary, owing to the perceived
indisputability of the presumptions, the judicial exercise would be
relegated to a mere ascertainment of what presumptions apply in
a given case, nothing more. Consequently, the entire Rules of
Court is rendered as excess verbiage, save perhaps for the
provisions laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a
jurisprudential rule, no public officer could ever be sued for acts
executed beyond their official functions or authority, or for
tortious conduct or behavior, since such acts would "enjoy the
presumption of good faith and in the regular performance of
official duty." Indeed, few civil actions of any nature would ever
reach the trial stage, if a case can be adjudicated by a mere
determination from the complaint or answer as to which legal
presumptions are applicable. For-example, the presumption that
a person is innocent of a wrong is a disputable presumption on
the same level as that of the regular performance of official duty.
A civil complaint for damages necessarily alleges that the
defendant committed a wrongful act or omission that would serve
as basis for the award of damages. With the rationale of the Court
of Appeals, such complaint can be dismissed upon a motion to
dismiss solely on the ground that the presumption is that a person
is innocent of a wrong.102 (Emphasis supplied, citations
omitted)cralawlawlibrary
In this case, the presumption that the execution of mortgage
contracts was within petitioner's corporate powers does not apply.
Securing third-party loans is not connected to petitioner's
purposes as an educational institution.
III
Respondent argues that petitioner's act of mortgaging its
properties to guarantee FISLAI's loans was consistent with
petitioner's business interests, since petitioner was presumably a
FISLAI shareholder whose officers and shareholders interlock with
FISLAI. Respondent points out that petitioner and its key officers
held substantial shares in MSLAI when DSLAI and FISLAI merged.
Therefore, it was safe to assume that when the mortgages were
executed in 1982, petitioner held substantial shares in FISLAI.103
Page 65 of 111

Parties dealing with corporations cannot simply assume that their
transaction is within the corporate powers. The acts of a
corporation are still limited by its powers and purposes as
provided in the law and its articles of incorporation.
Acquiring shares in another corporation is not a means to create
new powers for the acquiring corporation. Being a shareholder of
another corporation does not automatically change the nature
and purpose of a corporation's business. Appropriate
amendments must be made either to the law or the articles of
incorporation before a corporation can validly exercise powers
outside those provided in law or the articles of incorporation. In
other words, without an amendment, what is ultra vires before a
corporation acquires shares in other corporations is still ultra vires
after such acquisition.
Thus, regardless of the number of shares that petitioner had with
FISLAI, DSLAI, or MSLAI, securing loans of third persons is still
beyond petitioner's power to do. It is still inconsistent with its
purposes under the law104 and its articles of incorporation.105
In attempting to show petitioner's interest in securing FISLAI's
loans by adverting to their interlocking, directors and
shareholders, respondent disregards petitioner's separate
personality from its officers, shareholders, and other juridical
persons.
The separate personality of corporations means that they are
"vest[ed] [with] rights, powers, and attributes [of their own] as if
they were natural persons[.]"106 Their assets and liabilities are
their own and not their officers', shareholders', or another
corporation's. In the same vein, the assets and liabilities of their
officers and shareholders are not the corporations'. Obligations
incurred by corporations are not obligations of their officers and
shareholders. Obligations of officers and shareholders are not
obligations of corporations.107 In other words, corporate
interests are separate from the personal interests of the natural
persons that comprise corporations.
Corporations are given separate personalities to allow natural
persons to balance the risks of business as they accumulate
capital. They are, however, given limited competence as a means
to protect the public from fraudulent acts that may be committed
using the separate juridical personality given to corporations.
Petitioner's key officers, as shareholders of FISLAI, may have an
interest in ensuring the viability of FISLAI by obtaining a loan from
respondent and securing it by whatever means. However, having
interlocking officers and stockholders with FISLAI does not mean
that petitioner, as an educational institution, is or must
necessarily be interested in the affairs of FISLAI.
Since petitioner is an entity distinct and separate not only from its
own officers and shareholders but also from FISLAI, its interests as
an educational institution may not be consistent with FISLAI's.
Petitioner and FISLAI have different constituencies. Petitioner's
constituents comprise persons who have committed to
developing skills and acquiring knowledge in their chosen fields by
availing the formal instruction provided by petitioner. On the
other hand, FISLAI is a thrift bank, which constituencies comprise
investors.
While petitioner and FISLAI exist ultimately to benefit their
stockholders, their constituencies affect the means by which they
can maintain their existence. Their interests are congruent with
sustaining their constituents' needs because their existence
depends on that. Petitioner can exist only if it continues to
provide for the kind and quality of instruction that is needed by its
constituents. Its operations and existence are placed at risk when
resources are used on activities that are not geared toward the
attainment of its purpose. Petitioner has no business in securing
FISLAI, DSLAI, or MSLAI's loans. This activity is not compatible with
its business of providing quality instruction to its constituents.
Indeed, there are instances when we disregard the separate
corporate personalities of the corporation and its stockholders,
directors, or officers. This is called piercing of the corporate veil.
Corporate veil is pierced when the separate personality of the
corporation is being used to perpetrate fraud, illegalities, and
injustices.108 In Lanuza, Jr. v. BF
Corporation:109chanroblesvirtuallawlibrary
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate
fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate
issues." It is also warranted in alter ego cases "where a
corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation."110cralawlawlibrary
These instances have not been shown in this case. There is no
evidence pointing to the possibility that petitioner used its
separate personality to defraud third persons or commit illegal
acts. Neither is there evidence to show that petitioner was merely
a farce of a corporation. What has been shown instead was that
petitioner, too, had been victimized by fraudulent and
unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate
fraud if we accept respondent's contentions.
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to
mortgage its properties on its behalf. There was no board
resolution to that effect. Thus, the mortgages executed by
Saturnino Petalcorin were unenforceable.111
The mortgage contracts executed in favor of respondent do not
bind petitioner. They were executed without authority from
petitioner.
Petitioner must exercise its.powers and conduct its business
through its Board of Trustees. Section 23 of the Corporation Code
provides:chanRoblesvirtualLawlibrary
SEC. 23. The board of directors or trustees—Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
Page 66 of 111
board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
and until their successors are elected and
qualified.cralawlawlibrary
Being a juridical person, petitioner cannot conduct its business,
make decisions, or act in any manner without action from its
Board of Trustees. The Board of Trustees must act as a body in
order to exercise corporate powers. Individual trustees are not
clothed with corporate powers just by being a trustee. Hence, the
individual trustee cannot bind the corporation by himself or
herself.
The corporation may, however, delegate through a board
resolution its corporate powers or functions to a representative,
subject to limitations under the law and the corporation's articles
of incorporation.112
The relationship between a corporation and its representatives is
governed by the general principles of agency.113 Article 1317 of
the Civil Code provides that there must be authority from the
principal before anyone can act in his or her
name:chanRoblesvirtualLawlibrary
ART. 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right to
represent him.cralawlawlibrary
Hence, without delegation by the board of directors or trustees,
acts of a person—including those of the corporation's directors,
trustees, shareholders, or officers—executed on behalf of the
corporation are generally not binding on the corporation.114
Contracts entered into in another's name without authority or
valid legal representation are generally unenforceable. The Civil
Code provides:chanRoblesvirtualLawlibrary
ART. 1317. . . .
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they
are ratified:chanRoblesvirtualLawlibrary
(1) Those entered into in the name of another person by one who
has been given no authority or legal representation, or who has
acted beyond his powers[.]cralawlawlibrary
The unenforceable status of contracts entered into by an
unauthorized person on behalf of another is based on the basic
principle that contracts must be consented to by both parties.115
There is no contract without meeting of the minds as to the
subject matter and cause of the obligations created under the
contract.116
Consent of a person cannot be presumed from representations of
another, especially if obligations will be incurred as a result. Thus,
authority is required to make actions made on his or her behalf
binding on a person. Contracts entered into by persons without
authority from the corporation shall generally be considered ultra
vires and unenforceable117 against the corporation.
Two trial courts118 found that the Secretary's Certificate and the
board resolution were either non-existent or fictitious. The trial
courts based their findings on the testimony of the Corporate
Secretary, Aurora de Leon herself. She signed the Secretary's
Certificate and the excerpt of the minutes of the alleged board
meeting purporting to authorize Saturnino Petalcorin to mortgage
petitioner's properties. There was no board meeting to that effect.
Guillermo B. Torres ordered the issuance of the Secretary's
Certificate. Aurora de Leon's testimony was corroborated by
Saturnino Petalcorin.
Even the Court of Appeals, which reversed the trial courts'
decisions, recognized that "BSP failed to prove that the UM Board
of Trustees actually passed a Board Resolution authorizing
Petalcorin to mortgage the subject real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of
facts, is bound by the findings of fact of the trial courts and the
Court of Appeals when such findings are supported by evidence
on record.120 Hence, not having the proper board resolution to
authorize Saturnino Petalcorin to execute the mortgage contracts
for petitioner, the contracts he executed are unenforceable
against petitioner. They cannot bind petitioner.
However, personal liabilities may be incurred by directors who
assented to such unauthorized act121 and by the person who
contracted in excess of the limits of his or her authority without
the corporation's knowledge.122
V
Unauthorized acts that are merely beyond the powers of the
corporation under its articles of incorporation are not void ab
initio.
In Pirovano, et al, this court explained that corporate acts may be
ultra vires but not void.123 Corporate acts may be capable of
ratification:124chanroblesvirtuallawlibrary
[A] distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra vires.
The former contemplates the doing of an act which is contrary to
law, morals, or public order, or contravene some rules of public
policy or public duty, and are, like similar transactions between
individuals, void. They cannot serve as basis of a court action, nor
acquire validity by performance, ratification, or estoppel. Mere
ultra vires acts, on the other hand, or those which are not illegal
and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become
binding and enforceable when ratified by the
stockholders.125cralawlawlibrary
Thus, even though a person did not give another person authority
to act on his or her behalf, the action may be enforced against
him or her if it is shown that he or she ratified it or allowed the
Page 67 of 111
other person to act as if he or she had full authority to do so. The
Civil Code provides:chanRoblesvirtualLawlibrary
ART. 1910. The principal must comply with all the obligations
which the agent may have contracted within the scope of his
authority.
As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it expressly or
tacitly.
ART. 1911. Even when the agent has exceeded his authority, the
principal is solidarily liable with the agent if the former allowed
the latter to act as though he had full powers. (Emphasis
supplied)cralawlawlibrary
Ratification is a voluntary and deliberate confirmation or adoption
of a previous unauthorized act. It.converts the unauthorized act of
an agent into an act of the principal.127 It cures the lack of
consent at the time of the execution of the contract entered into
by the representative, making the contract valid and
enforceable.128 It is, in essence, consent belatedly given through
express or implied acts that are deemed a confirmation or waiver
of the right to impugn the unauthorized act.129 Ratification has
the effect of placing the principal in a position as if he or she
signed the original contract. In Board of Liquidators v. Heirs ofM.
Kalaw, et al.:130chanroblesvirtuallawlibrary
Authorities, great in number, are one in the idea that "ratification
by a corporation of an unauthorized act or contract by its officers
or others relates back to the time of the act or contract ratified,
and is equivalent to original authority;" and that "[t]he
corporation and the other party to the transaction are in precisely
the same position as if the act or contract had been authorized at
the time." The language of one case is expressive: "The adoption
or ratification of a contract by a corporation is nothing more nor
less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a corporation
to contract, and any ratification or adoption is equivalent to a
grant of prior authority."131 (Citations omitted)cralawlawlibrary
Implied ratification may take the form of silence, acquiescence,
acts consistent with approval of the act,, or acceptance or
retention of benefits.132 However, silence, acquiescence,
retention of benefits, and acts that may be interpreted as
approval of the act do not by themselves constitute implied
ratification. For an act to constitute an implied ratification, there
must be no acceptable explanation for the act-other than that
there is an intention to adopt the act as his or her own.133 "[It]
cannot be inferred from acts that a principal has a right to do
independently of the unauthorized act of the agent."134
No act by petitioner can be interpreted as anything close to
ratification. It was not shown that it issued a resolution ratifying
the execution of the mortgage contracts. It was not shown that it
received proceeds of the loans secured by the mortgage contracts.
There was also no showing that it received any consideration for
the execution of the mortgage contracts. It even appears that
petitioner was unaware of the mortgage contracts until
respondent notified it of its desire to foreclose the mortgaged
properties.
Ratification must be knowingly and voluntarily done.135
Petitioner's lack of knowledge about the mortgage executed in its
name precludes an interpretation that there was any ratification
on its part.
Respondent further argues that petitioner is presumed to have
knowledge of its transactions with respondent because its officers,
the Spouses Guillermo and Dolores Torres, participated in
obtaining the loan.136
Indeed, a corporation, being a person created by mere fiction of
law, can act only through natural persons such as its directors,
officers, agents, and representatives. Hence, the general rule is
that knowledge of an officer is considered knowledge of the
corporation.
However, even though the Spouses Guillermo and Dolores Torres
were officers of both the thrift banks and petitioner, their
knowledge of the mortgage contracts cannot be considered as
knowledge of the corporation.
The rule that knowledge of an officer is considered knowledge of
the corporation applies only when the officer is acting within the
authority given to him or her by the corporation. In Francisco v.
Government Service Insurance
System:137chanroblesvirtuallawlibrary
Knowledge of facts acquired or possessed by an officer or agent of
a corporation in the course of his employment, and in relation to
matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or
not.138cralawlawlibrary
The public should be able to rely on and be protected from the
representations of a corporate representative acting within the
scope of his or her authority. This is why an authorized officer's
knowledge is considered knowledge of corporation. However, just
as the public should be able to rely on and be protected from
corporate representations, corporations should also be able to
expect that they will not be bound by unauthorized actions made
on their account.
Thus, knowledge should be actually communicated to the
corporation through its authorized representatives. A corporation
cannot be expected to act or not act on a knowledge that had not
been communicated to it through an authorized representative.
There can be no implied ratification without actual
communication. Knowledge of the existence of contract must be
brought to the corporation's representative who has authority to
ratify it. Further, "the circumstances must be shown from which
such knowledge may be presumed."139
The Spouses Guillermo and Dolores Torres' knowledge cannot be
interpreted as knowledge of petitioner. Their knowledge was not
obtained as petitioner's representatives. It was not shown that
they were acting for and within the authority given by petitioner
when they acquired knowledge of the loan transactions and the
mortgages. The knowledge was obtained in the interest of and as
representatives of the thrift banks.
VI
Page 68 of 111
Respondent argues that Satnrnino Petalcorin was clothed with the
authority to transact on behalf of petitioner, based on the board
resolution dated March 30, 1982 and Aurora de Leon's notarized
Secretary's Certificate.140 According to respondent, petitioner is
bound by the mortgage contracts executed by Saturnino
Petalcorin.141
This court has recognized presumed or apparent authority or
capacity to bind corporate representatives in instances when the
corporation, through its silence or other acts of recognition,
allowed others to believe that persons, through their usual
exercise of corporate powers, were conferred with authority to
deal on the corporation's behalf.142
The doctrine of apparent authority does not go into the question
of the corporation's competence or power to do a particular act.
It involves the question of whether the officer has the power or is
clothed with the appearance of having the power to act for the
corporation. A finding that there is apparent authority is not the
same as a finding that the corporate act in question is within the
corporation's limited powers.
The rule on apparent authority is based on the principle of
estoppel. The Civil Code provides:chanRoblesvirtualLawlibrary
ART. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon.
....
ART, 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person is acting on
his behalf without authority.
Agency may be oral, unless the law requires a specific
form.cralawlawlibrary
A corporation is estopped by its silence and acts of recognition
because we recognize that there is information asymmetry
between third persons who have little to no information as to
what happens during corporate meetings, and the corporate
officers, directors, and representatives who are insiders to
corporate affairs.143
In People's Air car go and Warehousing Co. Inc. v. Court of
Appeals,144 this court held that the contract entered into by the
corporation's officer without a board resolution was binding upon
the corporation because it previously allowed the officer to
contract on its behalf despite the lack of board resolution.145
In Francisco, this court ruled that Francisco's proposal for
redemption of property was accepted by and binding upon the
Government Service Insurance System. This court did not
appreciate the Government Service Insurance System's defense
that since it was the Board Secretary and not the General
Manager who sent Francisco the acceptance telegram, it could
not be made binding upon the Government Service Insurance
System. It did not authorize the Board Secretary to sign for the
General Manager. This court appreciated the Government Service
Insurance System's failure to disown the telegram sent by the
Board Secretary and its silence while it accepted all payments
made by Francisco for the redemption of property.146
There can be no apparent authority and the corporation cannot
be estopped from denying the binding affect of an act when there
is no evidence pointing to similar acts and other circumstances
that can be interpreted as the corporation holding out a
representative as having authority to contract on its behalf. In
Advance Paper Corporation v. Arma Traders Corporation,147 this
court had the occasion to say:chanRoblesvirtualLawlibrary
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 agent's acts or conduct must have
produced a change of position to the third party's detriment.
(Citation omitted)cralawlawlibrary
Saturnino Petalcorin's authority to transact on behalf of petitioner
cannot be presumed based on a Secretary's Certificate and
excerpt from the minutes of the alleged board meeting that were
found to have been simulated. These documents cannot be
considered as the corporate acts that held out Saturnino
Petalcorin as petitioner's authorized representative for mortgage
transactions. They were not supported by an actual board
meeting.149
VII
Respondent argues that it may rely on the Secretary's Certificate
issued by Aurora de Leon because it was notarized.
The Secretary's Certificate was void whether or not it was
notarized.
Notarization creates a presumption of regularity and authenticity
on the document. This presumption may be rebutted by "strong,
complete and conclusive proof"150 to the contrary. While notarial
acknowledgment "attaches full faith and credit to the document
concerned[,]"151 it does not give the document its validity or
binding effect. When there is evidence showing that the
document is invalid, the presumption of regularity or authenticity
is not applicable.
In Basilio v. Court of Appeals152 this court was convinced that the
purported signatory on a deed of sale was not as represented,
despite testimony from the notary public that the signatory
appeared before him and signed the instrument.153 Apart from
finding that there was forgery,154 this court
noted:chanRoblesvirtualLawlibrary
The notary public, Atty. Ruben Silvestre, testified that he was the
one who notarized the document and that Dionisio Z. Basilio
appeared personally before him and signed the. instrument
himself. However, he admitted that he did not know Dionisio Z.
Basilio personally to ascertain if the person who signed the
document was actually Dionisio Z. Basilio himself, or another
person who stood in his place. He could not even recall whether
the document had been executed in his office or not.
Thus, considering the testimonies of various witnesses and a
comparison of the signature in question with admittedly genuine
signatures, the Court is convinced that Dionisio Z. Basilio did not
execute the questioned deed of sale. Although the questioned
Page 69 of 111
deed of sale was a public document having in its favor the
presumption of regularity, such presumption was adequately
refuted by competent witnesses showing its forgery and the
Court's own visual analysis of the document. (Emphasis supplied,
citations omitted)cralawlawlibrary
In Suntay v. Court of Appeals,156 this court held that a notarized
deed of sale was void because it was a mere sham.157 It was not
intended to have any effect between the parties.158 This court
said:chanRoblesvirtualLawlibrary
[I]t is not the intention nor the function of the notary public to
validate and make binding' an instrument never, in the first place,
intended to have any binding legal effect upon the parties
thereto.159cralawlawlibrary
Since the notarized Secretary's Certificate was found to have been
issued without a supporting board resolution, it produced no
effect. It is not binding upon petitioner. It should not have been
relied on by respondent especially given its status as a bank.
VIII
The banking institution is "impressed with public interest"160
such that the public's faith is "of paramount importance."161
Thus, banks are required to exercise the highest degree of
diligence in their transactions.162 In China Banking Corporation v.
Lagon,163 this court found that the bank was not a mortgagee in
good faith for its failure to question the due execution of a Special
Power of Attorney that was presented to it in relation to a
mortgage contract.164 This court
said:chanRoblesvirtualLawlibrary
Though petitioner is not expected to conduct an exhaustive
investigation on the history of the mortgagor's title, it cannot be
excused from the duty of exercising the due diligence required of
a banking institution. Banks are expected to exercise more care
and prudence than private individuals in their dealings, even
those that involve registered lands, for their business is affected
with public interest.165 (Citations omitted) cralawlawlibrary
For its failure to exercise the degree of diligence required of banks,
respondent cannot claim good faith in the execution of the
mortgage contracts with Saturnino Petalcorin. Respondent's
witness, Daciano Paguio, Jr., testified that there was no board
resolution authorizing Saturnino Petalcorin to act on behalf of
petitioner.166 Respondent did not inquire further as to Saturnino
Petalcorin's authority.
Banks cannot rely on assumptions. This will be contrary to the
high standard of diligence required of them.
VI
According to respondent, the annotations of respondent's
mortgage interests on the certificates of titles of petitioner's
properties operated as constructive notice to petitioner of the
existence of such interests.167 Hence, petitioners are now
estopped from claiming that they did not know about the
mortgage.
Annotations of adverse claims on certificates of title to properties
operate as constructive notice only to third parties—not to the
court or the registered owner. In Sajonas v. Court of
Appeals:168chanroblesvirtuallawlibrary
[Annotation of an adverse claim is a measure designed to protect
the interest of a person over a piece of real property where the
registration of such interest or right is not otherwise provided for
by the Land Registration Act or Act 496 (now [Presidential Decree
No.] 1529 or the Property Registration Decree), and serves a
warning to third parties dealing with said property that someone
is claiming an interest on the same or a better right than that of
the registered owner thereof.169 (Emphasis
supplied)cralawlawlibrary
Annotations are merely claims of interest or claims of the legal
nature and incidents of relationship between the person whose
name appears on the document and the person who caused the
annotation. It does not say anything about the validity of the
claim or convert a defective claim or document into a valid
one.170 These claims may be proved or disproved during trial.
Thus, annotations are not conclusive upon courts or upon owners
who may not have reason to doubt the security of their claim as
their properties' title holders.
WHEREFORE, the Petition is GRANTED. The Court of Appeals'
Decision dated December 17, 2009 is REVERSED and SET ASIDE.
The Regional Trial Courts' Decisions of November 23, 2001 and
December 7, 2001 are REINSTATED.
SO ORDERED.
15. First Leverage and Services Group, Inc. v. Solid
Builders, Inc., GRN 155680, July 2, 2012 {ultra vires]
PERALTA, J.:
Facts: A petition for review on certiorari under Rule 45 of the
Rules of Court seeking to reverse and set aside the Decision1 and
Resolution dated June 17, 2002 and October 21, 2002,
respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 47218.
The instant petition arose from a Complaint for Annulment of
Promise to Sell, Mandamus and Prohibitory Injunction filed with
the Regional Trial Court (RTC) of Manila by herein petitioner First
Leverage and Services Group, Inc. (First Leverage) against PNB
Republic Bank (PNB Republic).
In its Amended Complaint,3 wherein it impleaded herein
respondent Solid Builders, Inc. (Solid Builders) as additional
defendant, dated April 11, 1996, First Leverage alleged the
following:
A. [PNB] Republic is the owner of two (2) parcels of
land situated in Kaybagal South, Tagaytay City,
covered by Transfer Certificate of Title No. T-
4211 with an area of 1,906,710 square meters
and Transfer Certificate of Title. Both parcels of
Page 70 of 111
 land are part of the acquired assets of [PNB]
Republic.
3. Sometime in the mid-1980's, [PNB] Republic put up the
aforementioned parcels of land for sale by public bidding. Two (2)
public biddings were conducted but both were considered failed
public biddings for failure to meet certain requirements. Hence,
[PNB] Republic put up the two (2) parcels of land for negotiated
sale.
5. On June 20, 1994, the Loan Recovery and Acquired Assets
Division (LRAAD, for brevity) of [PNB] Republic received a formal
offer from Solid [Builders] for the purchase of the parcel of land
covered by TCT No. T-4050, for P12,500,000.00 with thirty percent
(30%) down payment and with the balance payable in five (5)
years at nineteen percent (19%) interest per annum.
XXX
10. The reason given by Jeremias Dimla II as regards the non-
official receipt of the letter-offer of [First Leverage] was at the
time the offer was made LRAAD had already received Solid
[Builders'] acceptance letter dated August 15, 1994, as regards
the APPROVAL by the LRAAD of Solid [Builder's] offer, contained
in its letter dated August 2, 1994, subject to certain terms and
conditions. Allegedly, the APPROVAL was communicated to Solid
by a letter dated August 12, 1994, of the LRAAD through
Jeremias Dimla II. Under this package the price for the two (2)
parcels of land was P67,000,000.00 payable as follows: 30%
downpayment payable within 90 days from receipt of approval;
the balance payable within three (3) years by monthly
amortization covered by postdated checks with interest at
prevailing non-prime rate. Accordingly, [PNB] Republic refused to
receive petitioner's letter-offer.
11. In a letter dated September 1, 1994, [First Leverage], through
Atty. Ariel F. Aguirre, reiterated [its] offer to buy the two (2)
parcels of land for P70,000,000.00 in CASH. Atty. Aguirre likewise
demanded that Solid [Builders] offer be rejected on the ground
that Solid [Builders'] offer as against that of [First Leverage] was:
first, prejudicial to [PNB] Republic; and secondly, would subject
[PNB] Republic's officers to anti-graft charges. x x x
12. In reply to Atty. Aguirre's letter, [PNB] Republic x x x replied
that [it] did not officially receive [First Leverage's] letter-offer of
August 17, 1994, since as of August 17, 1994, [PNB] Republic had
already contracted to sell the two (2) parcels of land to Solid
[Builders]. x x x
XXX
15. On September 19, 1994, [PNB] Republic, despite the better
offer of [First Leverage] and through the ultra vires acts of its
officers, executed with Solid [Builders] a Deed of Promise to Sell
covering the two (2) parcels of land. x x x
16. By reason of the threat of Atty. Aguirre of taking
administrative, criminal and/or civil action against Republic and its
officers by refusing to accept [First Leverage's] offer and
[accepting] Solid [Builder's] offer, [PNB] Republic referred Atty.
Aguirre's letter of September 14, 1994, to the Office of the
Government Corporate Counsel [OGCC] for legal opinion.
17. The OGCC rendered an opinion, x x x, dated December 7, 1994,
the thrust of which is as follows:
a) The Loans and Assets Recovery Committee, (Committee for
brevity) to which LRAAD referred Solid [Builders'] offer for
approval was not authorized to approve said offer for under
existing policies any sale or disposition of acquired assets whose
value exceeds P3,000,000.00 must be approved by [PNB]
Republic's Board of Directors.
b) One of the essential requisites of a valid contract, insofar as
[PNB] Republic and Solid [Builders are concerned], is missing,
namely consent as provided for in Art. 1318 of the Civil Code.
19. By letter dated December 13, 1994, [First Leverage]
demanded that its offer be calendared for approval by [PNB]
Republic's Board of Directors x x x. However, the Board of
Directors, without any justifiable, valid or lawful reason, refused
to approve [First Leverage's] valid, legal and subsisting offer
which, as against Solid [Builders'] offers is definitely more
advantageous to [PNB] Republic in particular and to the
Government in general.
DEFENDANT’S CONTENTION:
In its Answer to the Amended Complaint, PNB Republic denied
the material allegations in the said Amended Complaint and
contended that the Complaint states no cause of action; that the
sale of the subject properties to Solid Builders was validly
approved or thereafter ratified and confirmed by its board of
directors; that PNB Republic was justified in selling the subject
properties to Solid Builders because at that time, the latter's
offer was the highest and most advantageous; at the time that
First Leverage submitted its offer to buy the subject properties,
the offer of Solid Builders was already approved.5
RTC:
On December 23, 1996, favors the plaintiff and
against the two (2) defendants PNB Republic Bank and Solid
Builders, Inc.:
(b) Declaring null and void the alleged approval by the
Loans and Assets Recovery Board Committee (LARBC) of the
defendant Solid's verbal offer supposedly made on August 11,
1994 to buy the two (2) properties in question;
(c) Declaring null and void the Deed of Promise to Sell,
dated September 19, 1994, executed by and between the two (2)
defendants;
Solid Builders and PNB Republic filed their respective Motions for
Reconsideration, but the RTC denied them in its Order8 dated
February 10, 1997.
CA:
PNB Republic's petition for certiorari was subsequently denied
due course and dismissed by the appellate court on the ground
that the petition was resorted to as a substitute for a lost appeal.
Solid Builders, on the other hand, filed an appeal with the CA.
CA set aside RTC decision.
First Leverage filed a Motion for Reconsideration,10 but the same
was denied by the CA in its Resolution11 dated October 21, 2002.
Page 71 of 111
Hence, the instant petition for review on certiorari where First
Leverage advances the following arguments:
ISSUES:
I. THE LOWER COURT CORRECTLY RENDERED THE JUDGMENT
DATED DECEMBER 23, 1996 AS A SUMMARY JUDGMENT;
II. SINCE ONLY SOLID BUILDERS, INC. APPEALED FROM THE
JUDGMENT DATED DECEMBER 23, 1996, SAID JUDGMENT HAS
BECOME FINAL AND EXECUTORY INSOFAR AS PNB-REPUBLIC IS
CONCERNED; and
III. CONSEQUENTLY THE APPEAL OF SOLID BUILDERS HAS BECOME
MOOT AND ACADEMIC INSOFAR AS FIRST LEVERAGE AND
SERVICES GROUP, INC. IS CONCERNED.12
HELD:
The Court finds the petition of first leverage without merit.
In the present case, the Court agrees with the CA that genuine
issues exist which call for a full blown trial. The CA held as follows:
First Leverage asserted in its amended complaint that there was
no such valid perfected contract to sell. PNB Republic, however,
insisted in its answer that the LARBC, duly authorized by the
Bank's board of directors, VALIDLY APPROVED THE AWARD OF
THE PROPERTIES TO SOLID BUILDERS, AND THAT EVEN
ASSUMING THAT THE LARBC WAS NOT FULLY AUTHORIZED TO
APPROVE THE SALE, THE SAID ACTION OF LARBC WAS
SUBSEQUENTLY DULY RATIFIED AND CONFIRMED BY THE BOARD
OF DIRECTORS. Its co-defendant, Solid Builders, maintained also
in its answer that the perfection, approval and execution of the
deed of promise to sell in its favor were legal and not ultra vires.
Thus, PNB Republic's and Solid Builders' respective answers to the
complaint tendered an issue.26
Indeed, in its Amended Complaint, First Leverage contended that
[b]y [PNB] Republic's execution of a Deed of Promise to Sell with
Solid [Builders], [PNB] Republic is determined to award the sale of
the parcels of land covered by TCT No. 4050 and TCT No. 4211 to
the damage and prejudice of [First Leverage] as well as the
Government, in spite of the illegality of the approval of the offer
of Solid [Builders] by the Loans and Assets Recovery Board
Committee of [PNB] Republic. There is a compelling necessity,
therefore, for a declaration of the nullity of the approval by said
Committee of Solid [Builder's] offer to purchase the aforecited
parcels of land.27
On the other hand, in its Amended Answer, [Solid Builders]
averred that [PNB] Republic acts through duly authorized officers
and the perfection, approval and execution of the Deed of
Promise to Sell by [PNB] Republic in favor of Solid [Builders] was
in accordance with the rules and regulations of the bank pursuant
to its corporate mandate. [PNB] Republic has always maintained
that the Deed of Promise to Sell the litigated property in favor of
Solid [Builders] was legal and not ultra vires and up to this very
moment [PNB] Republic and Solid [Builders] have been faithfully
performing their respective obligations under the Deed of
Promise to Sell the litigated property.28
In the same manner, respondent, in its Pre-Trial Brief, contended
that [t]he perfected contract by and between Defendant Solid
[Builders] and PNB [Republic] was made in good faith and is not
tainted by illegality, ultra vires act, nor infirmed by and for
whatever reason, but is perfectly valid, legal and in full force and
effect.
Thus, the Court finds no cogent reason to deviate from the ruling
of the CA that genuine issues of fact were properly raised before
the RTC, particularly with regard to the validity and existence of a
perfected contract to sell, and that these issues could only be
resolved through a full-blown hearing.
Anent the second and third assignment of errors, it is true that
PNB Republic did not appeal the judgment of the RTC. This Court
has always recognized the general rule that in appellate
proceedings, the reversal of the judgment on appeal is binding
only on the parties in the appealed case and does not affect or
inure to the benefit of those who did not join or were not made
parties to the appeal.30 An exception to the rule exists, however,
where a judgment cannot be reversed as to the party appealing
without affecting the rights of his co-debtor, or where the rights
and liabilities of the parties are so interwoven and dependent on
each other as to be inseparable, in which case a reversal as to one
operates as a reversal as to all.31 This exception, which is based
on a communality of interest of said parties, is recognized in this
jurisdiction.
In the instant case, the rights and liabilities of Solid Builders and
PNB Republic are, no doubt, intertwined and inseparable. The
enforcement of the rights of Solid Builders under the contract it
entered into with PNB Republic is completely dependent upon the
latter's performance of its obligations thereunder. Assuming that
Solid Builders' offer to purchase the disputed properties is
subsequently proven to be superior to that of First Leverage, PNB
Republic shall be required to proceed with its contract to sell the
subject properties to Solid Builders. Thus, to allow the execution
of the RTC judgment, by requiring PNB Republic to sell the
questioned lots to First Leverage, without first determining with
finality whether the latter's offer to buy the disputed properties is
indeed superior to Solid Builders' offer would not only result in
the deprivation of Solid Builders' right to due process but, more
importantly, an unwarranted defeat or forfeiture of its
substantive rights.
WHEREFORE, the instant petition is DENIED. The Decision of the
Court of Appeals, dated June 17, 2002, as well as its Resolution of
October 21, 2002 in CA-G.R. SP No. 47218, are AFFIRMED.
SO ORDERED.
16. MAGALLANES WATERCRAFT ASSOCIATION v.
MARGARITO C. AUGUIS & DIOSCORO C. BASNIG
MENDOZA, J.:
FACTS: This petition for review on certiorari.
Petitioner Magallanes Watercraft Association, Inc. (MWAI) is a
local association of motorized banca owners and operators
ferrying cargoes and passengers from Magallanes, Agusan del
Norte, to Butuan City and back.
Page 72 of 111
Respondents Margarito C. Auguis (Auguis) and Dioscoro C. Basnig
(Basnig) were members and officers of MWAI - vice-president
and secretary, respectively.[3]
On December 5, 2003, the Board of Trustees (Board) of MWAI
passed Resolution and thereafter issued Memorandum
suspending the rights and privileges of Auguis and Basnig as
members of the association for thirty (30) days for their refusal
to pay their membership dues and berthing fees because of their
pending oral complaint and demand for financial audit of the
association funds. Auguis had an accumulated unpaid obligation
of P4,059.00 while Basnig had P7,552.00.[4]
In spite of the suspension of their privileges as members, Auguis
and Basnig still failed to settle their obligations with MWAI. For
said reason, the latter issued Memorandum No. 002, Series of
2004, dated January 8, 2004, suspending their rights and
privileges for another thirty (30) days.[5]
On February 6, 2004y respondents filed an action for damages
and attorney's fees with a prayer for the issuance of a writ of
preliminary injunction before the RTC.
RTC: In its January 11, 2007 decision, the trial court ordered
Auguis and Basnig to pay their unpaid accounts. It, nonetheless,
required MWAI to pay them actual damages and attorney's fees.
The CA Ruling (as appealed by MWAI):
In its March 14, 2013 decision, the CA affirmed with
modification the RTC decision.
According to the appellate court, the RTC correctly
held that MWAI was guilty of an ultra vires act.
//The CA noted that neither MWAI's Articles of
Incorporation nor its By-Laws[7] contained any provision that
expressly and/or impliedly vested power or authority upon its
Board to recommend the imposition of disciplinary sanctions on
its delinquent officers and/or members.//
It further noted that MWAI lacked the authority to
suspend the right of the respondents to operate their bancas,
which was granted through a Certificate of Public Convenience.
The appellate court pointed out that the Maritime Industry
Authority (MARINA) expressly reminded MWAI that it was the
sole government agency which had the authority to suspend,
cancel and'or revoke the franchise of the two. The CA explained
that the suspension of their berthing privileges resulted in the
failure of the latter to operate their bancas—contrary to the
express reminder of the MARINA. Hence, the CA concluded that
MWAI acted beyond the scope of its powers when it suspended
the rights of Auguis and Basnig as members of MWAI to berth on
the seaport of Magallanes and operate their bancas.
It also ruled that MWAI was bound to indemnify respondents
because they suffered financial losses as a result of the illegal
suspension of their berthing privileges and their right to operate
their bancas. The appellate court agreed with the RTC that MWAI
was liable for damages in favor of the respondents. The CA,
however, deleted the award of actual damages for their failure to
adduce evidence to prove the claimed loss of actual income. It,
nonetheless, awarded them temperate damages in recognition of
the pecuniary loss they suffered.
Moreover, the CA saw it fit to grant a reduced amount
of attorney's fees because Auguis and Basnig were compelled to
litigate or incur expenses to protect their interests.
Undaunted, it filed this present petition with the sole
ASSIGNMENT OF ERROR
ISSUE:
WON MWAI is guilty of ultra vires acts.
HELD:
No. The petition of MWAI is meritorious.
Corporate powers include implied and incidental powers
Central to the resolution of the propriety of the award of
temperate damages and attorney's fees is the contested authority
of MWAI to suspend rights and privileges of its members for the
latter's failure to pay their obligations. If the suspension of rights
and privileges of members is not among the corporate powers
granted to MWAI, then the same is an ultra vires act which
exposes MWAI to possible liability.
“Section 45 of the Corporation Code provides for the powers
possessed by a corporation, to wit:
Sec. 45. Ultra vires acts of corporations. - No corporation under
this Code shall possess or exercise any corporate powers except
those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the
powers so conferred.
From a reading of the said provision, it is clear that a
corporation has: (1) express powers, which are bestowed upon
by law or its articles of incorporation; and (2) necessary or
incidental powers to the exercise of those expressly conferred.
An act which cannot fall under a corporation's express
or necessary or incidental powers is an ultra vires act.
Corporations are artificial entities granted legal personalities upon
their creation by their incorporators in accordance with law.
Unlike natural persons, they have no inherent powers. Third
persons dealing with corporations cannot assume that
corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined
by the law and their articles of incorporation.
A corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is created"
are ultra vires.
MWAI faults the CA in finding that it was guilty of an ultra vires
act when it suspended respondents' berthing rights because its
by-laws obliged Auguis and Basnig as members to: (1) obey and
comply with the by-laws, rules and regulations that may be
promulgated by the association from time to time; and (2) to pay
its membership dues and other assessments.
Thus, MWAI argues that respondents cannot claim either actual
or temperate damages because the suspension of their rights and
privileges was anchored on its by-laws.
Petitioner also contends that respondents are not entitled to
attorney's fees either because the award of attorney's fees is the
Page 73 of 111
exception rather than the rule. It points out that it was through
respondents' own fault that their rights were suspended. Hence,
they cannot be considered as having been compelled to litigate.
The Court's Ruling
The petition is meritorious.
xxxx
Under Section 3(a) and Section 3(c) Article V of MWAI's By-Laws,
its members are bound "[t]o obey and comply with the by-laws,
rules and regulations that may be promulgated by the
association from time to time" and "[t]o pay membership dues
and other assessments of the association."[13] Thus, the
respondents were obligated to pay the membership dues of
which they were delinquent. MWAI could not be faulted in
suspending the rights and privileges of its delinquent members.
The fact alone that neither the articles of incorporation nor the
by-laws of MWAI granted its Board the authority to discipline
members does not make the suspension of the rights and
privileges of the respondents ultra vires.
In National Power Corporation v. Vera,[14] the Court stressed
that an act might be considered within corporate powers, even if
it was not among the express powers, if the same served the
corporate ends, to wit:
For if that act is one which is lawful in itself and not otherwise
prohibited, and is done for the purpose of serving corporate ends,
and reasonably contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense, it may be fairly
considered within the corporation's charter powers.
NOTE: A corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is
created" are ultra vires.
The only exception to this rule is when acts are necessary and
incidental to carry out a corporation's purposes, and to the
exercise of powers conferred by the Corporation Code and under
a corporation's articles of incorporation. xxx
x x x x Considering that the suspension of Auguis and Basnig was
in the lawful exercise of MWAFs rights and powers as a
corporation, no remedy for any consequent damage, which they
could have suffered, is available. They shall bear the losses they
may have suffered as a consequence of their lawful suspension.
Further, the Court notes that in suspending the rights and
privileges of the said respondents, MWAI merely denied them
access from its berthing facilities and in no way suspended or
revoked their certificates of public convenience.
WHEREFORE, the petition is GRANTED. The March 14, 2013
Decision and the January 17, 2014 Resolution of the Court of
Appeals in CA-G.R. CV No. 01170-MIN are REVERSED and SET
ASIDE. The complaint for damages against petitioner Magallanes
Watercraft Association, Inc. is DISMISSED for lack of merit.
SO ORDERED.
17. Cebu Mactan Members Center, Inc. v. Masahiro
Tsukahara, G.R. No. 159624 (2009)
CARPIO, J.:
FACTS: This is a petition for review of the Court of Appeals
Decision dated 29 July 2003 in CA-G.R. CV No. 68321. The Court of
Appeals affirmed the Decision[3] dated 24 September 1999 of the
Regional Trial Court of Cebu City, Branch 58 (RTC).
In February 1994, petitioner Cebu Mactan Members Center, Inc.
(CMMCI), through Mitsumasa Sugimoto (Sugimoto), the President
and Chairman of the Board of Directors of CMMCI, obtained a
loan amounting to P6,500,000 from respondent Masahiro
Tsukahara. As payment for the loan, CMMCI issued seven
postdated checks of CMMCI payable to Tsukahara, with details as
follows:
xxx
xxx
Upon maturity, the seven checks were presented for payment by
Tsukahara, but the same were dishonored by PNB, the drawee
bank. After several failed attempts to collect the loan amount
totaling P16,500,000, Tsukahara filed the instant case for
collection of sum of money against CMMCI and Sugimoto.
Tsukahara alleged that the amount of P16,500,000 was used by
CMMCI for the improvement of its beach resort, which included
the construction of a wave fence, the purchase of airconditioners
and curtains, and the provision of salaries of resort employees. He
also asserted that Sugimoto, as the President of CMMCI, has the
power to borrow money for said corporation by any legal means
whatsoever and to sign, endorse and deliver all checks and
promissory notes on behalf of the corporation.
CMMCI, on the other hand, denied borrowing the amount from
Tsukahara, and claimed that both loans were personal loans of
Sugimoto. The company also contended that if the loans were
those of CMMCI, the same should have been supported by
resolutions issued by CMMCIs Board of Directors.
RTC: On 24 September 1999, the RTC rendered a Decision, the
dispositive portion of which reads:
Judgment is hereby rendered in favor of the plaintiff and against
the defendants by ordering the defendants to pay jointly and
severally to the plaintiff.
ISSUE: Whether the Court of Appeals erred in holding that CMMCI
is liable for the loan contracted by its President without a
resolution issued by the CMMCI Board of Directors.
HELD: NO. The CA is correct in holding in favor of plaintiff.
“A corporation, being a juridical entity, may act through its board
of directors, which exercises almost all corporate powers, lays
down all corporate business policies and is responsible for the
efficiency of management.
THE GENERAL RULE is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly
bind a corporation.
Section 23 of the Corporation Code of the Philippines
provides:
Page 74 of 111

SEC. 23. The Board of Directors or Trustees. Unless
otherwise provided in this Code, the corporate powers
of all corporations formed under this Code shall be
exercised, all business conducted and all property of
such corporations controlled and held by the board of
directors or trustees x x x.
HOWEVER, just as a natural person 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 by-laws
or authorization from the board, either expressly or impliedly by
habit, custom or acquiescence in the general course of business.
This Court has held, thus:
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 which have been intentionally conferred, and
also such 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 persons dealing
with the officer or agent to believe that it has conferred.[14]
In this case, the corporate by-laws of CMMCI provide:
ARTICLE III
2. President.
xxx
c. Borrow money for the company by any legal means whatsoever,
including the arrangement of letters of credit and overdrafts with
any and all banking institutions;
d. Execute on behalf of the company all contracts and agreements
which the said company may enter into;
e. Sign, indorse, and deliver all checks, drafts, bill of exchange,
promissory notes and orders of payment of sum of money in the
name and on behalf of the corporation;[15]
It is clear from the foregoing that the president of CMMCI is given
the power to borrow money, execute contracts, and sign and
indorse checks and promissory notes, in the name and on behalf
of CMMCI. With such powers expressly conferred under the
corporate by-laws, the CMMCI president, in exercising such
powers, need not secure a resolution from the companys board of
directors. We quote with approval the ruling of the appellate
court, viz:
x x x The court a quo correctly ruled that a board resolution in this
case is a superfluity given the express provision of the corporate
by-laws.
By-laws of a corporation should be construed and given effect
according to the general rules governing the construction of
contracts.
They, as the self-imposed private laws of a corporation, have,
when valid, substantially the same force and effect as laws of the
corporation, as have the provisions of its charter insofar as the
corporation and the persons within it are concerned. They are in
effect written into the charter and in this sense, they become part
of the fundamental law of the corporation. And the corporation
and its directors (or trustees) and officers are bound by and must
comply with them.
The corporation is now estopped from denying the authority of
its president to bind the former into contractual relations. x x
WHEREFORE, we DENY the petition. We AFFIRM the Court of
Appeals Decision .
18. [G.R. No. 117188. August 7, 1997]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
INC., petitioner, vs. HON. COURT OF APPEALS,
ROMERO, J.:
FACTS: May the failure of a corporation to file its by-laws within
one month from the date of its incorporation, as mandated by
Section 46 of the Corporation Code, result in its automatic
dissolution?
This is the issue raised in this petition for review
on certiorari of the Decision of the Court of Appeals affirming the
decision of the Home Insurance and Guaranty Corporation
(HIGC).
This quasi-judicial body recognized Loyola Grand Villas
Homeowners Association (LGVHA) as the sole homeowners
association in Loyola Grand Villas, a duly registered subdivision in
Quezon City and Marikina City that was owned and developed by
Solid Homes, Inc. It revoked the certificates of registration issued
to Loyola Grand Villas Homeowners (North) Association
Incorporated (the North Association for brevity) and Loyola Grand
Villas Homeowners (South) Association Incorporated (the South
Association).
LGVHAI was organized on February 8, 1983 as the
association of homeowners and residents of the Loyola Grand
Villas. It was registered with the Home Financing Corporation, the
predecessor of herein respondent HIGC, as the sole homeowners
organization in the said subdivision under Certificate of
Registration No. 04-197. It was organized by the developer of the
subdivision and its first president was Victorio V. Soliven, himself
the owner of the developer. For unknown reasons, however,
LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to
register its by-laws. They failed to do so.[2] To the officers
consternation, they discovered that there were two other
organizations within the subdivision the North Association and
the South Association. According to private respondents, a non-
resident and Soliven himself, respectively headed these
associations. They also discovered that these associations had five
(5) registered homeowners each who were also the incorporators,
directors and officers thereof. None of the members of the
LGVHAI was listed as member of the North Association while
three (3) members of LGVHAI were listed as members of the
South Association.[3] The North Association was registered with
the HIGC on February 13, 1989 under Certificate of Registration
No. 04-1160 covering Phases West II, East III, West III and East
IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of
LGVHAI, Atty. Joaquin A. Bautista, the head of the legal
department of the HIGC, informed him that LGVHAI had been
automatically dissolved for two reasons. First, it did not submit its
Page 75 of 111
by-laws within the period required by the Corporation Code and,
second, there was non-user of corporate charter because HIGC
had not received any report on the associations
activities. Apparently, this information resulted in the registration
of the South Association with the HIGC on July 27, 1989 covering
Phases West I, East I and East 11. It filed its by-laws on July 26,
1989.
These developments prompted the officers of the LGVHAI
to lodge a complaint with the HIGC. They questioned the
revocation of LGVHAIs certificate of registration without due
notice and hearing and concomitantly prayed for the cancellation
of the certificates of registration of the North and South
Associations by reason of the earlier issuance of a certificate of
registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private
respondents obtained a favorable ruling from HIGC Hearing
Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89
as follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola
Grand Villas Homeowners Association, Inc., under Certificate of
Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners,
and declaring the Certificates of Registration of Loyola Grand
Villas Homeowners (North) Association, Inc. and Loyola Grand
Villas Homeowners (South) Association, Inc. as hereby revoked or
cancelled; that the receivership be terminated and the Receiver is
hereby ordered to render an accounting and turn-over to Loyola
Grand Villas Homeowners Association, Inc., all assets and records
of the Association now under his custody and possession.
The South Association appealed to the Appeals Board of
the HIGC. In its Resolution of September 8, 1993, the
Board[4] dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the
Court of Appeals, raising two issues. First, whether or not LGVHAIs
failure to file its by-laws within the period prescribed by Section
46 of the Corporation Code resulted in the automatic dissolution
of LGVHAI. Second, whether or not two homeowners associations
may be authorized by the HIGC in one sprawling subdivision.
However, in the Decision of August 23, 1994 being assailed here,
the Court of Appeals affirmed the Resolution of the HIGC Appeals
Board.
In resolving the first issue, the Court of Appeals held that
under the Corporation Code, a private corporation commences to
have corporate existence and juridical personality from the date
the Securities and Exchange Commission (SEC) issues a certificate
of incorporation under its official seal. The requirement for the
filing of by-laws under Section 46 of the Corporation Code within
one month from official notice of the issuance of the certificate of
incorporation presupposes that it is already incorporated,
although it may file its by-laws with its articles of
incorporation. Elucidating on the effect of a delayed filing of by-
laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e.,
Sections 46 and 22, Corporation Code, or in any other provision of
the Code and other laws which provide or at least imply that
failure to file the by-laws results in an automatic dissolution of the
corporation. While Section 46, in prescribing that by-laws must be
adopted within the period prescribed therein, may be interpreted
as a mandatory provision, particularly because of the use of the
word must, its meaning cannot be stretched to support the
argument that automatic dissolution results from non-
compliance.
We realize that Section 46 or other provisions of the Corporation
Code are silent on the result of the failure to adopt and file the
by-laws within the required period. Thus, Section 46 and other
related provisions of the Corporation Code are to be construed
with Section 6 (1) of P.D. 902-A. This section empowers the SEC to
suspend or revoke certificates of registration on the grounds
listed therein. Among the grounds stated is the failure to file by-
laws (see also II Campos: The Corporation Code, 1990 ed., pp.
124-125). Such suspension or revocation, the same section
provides, should be made upon proper notice and
hearing. Although P.D. 902-A refers to the SEC, the same
principles and procedures apply to the public respondent HIGC as
it exercises its power to revoke or suspend the certificates of
registration or homeowners associations. (Section 2 [a], E.O. 535,
series 1979, transferred the powers and authorities of the SEC
over homeowners associations to the HIGC.)
We also do not agree with the petitioners interpretation that
Section 46, Corporation Code prevails over Section 6, P.D. 902-A
and that the latter is invalid because it contravenes the
former. There is no basis for such interpretation considering that
these two provisions are not inconsistent with each other. They
are, in fact, complementary to each other so that one cannot be
considered as invalidating the other.
The Court of Appeals added that, as there was no showing
that the registration of LGVHAI had been validly revoked, it
continued to be the duly registered homeowners association in
the Loyola Grand Villas. More importantly, the South Association
did not dispute the fact that LGVHAI had been organized and that,
thereafter, it transacted business within the period prescribed by
law.
On the second issue, the Court of Appeals reiterated its
previous ruling[5] that the HIGC has the authority to order the
holding of a referendum to determine which of two contending
associations should represent the entire community, village or
subdivision.
Undaunted, the South Association filed the instant petition
for review on certiorari. It elevates as sole issue for resolution the
first issue it had raised before the Court of Appeals, i.e., whether
or not the LGVHAIs failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code had the effect
of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word
must with respect to the filing of by-laws, noncompliance
therewith would result in self-extinction either due to non-
occurrence of a suspensive condition or the occurrence of a
resolutory condition under the hypothesis that (by) the issuance
of the certificate of registration alone the corporate personality is
deemed already formed. It asserts that the Corporation Code
provides for a gradation of violations of requirements. Hence,
Section 22 mandates that the corporation must be formally
organized and should commence transactions within two years
from date of incorporation. Otherwise, the corporation would be
deemed dissolved. On the other hand, if the corporation
commences operations but becomes continuously inoperative for
five years, then it may be suspended or its corporate franchise
revoked.
Petitioner concedes that Section 46 and the other
provisions of the Corporation Code do not provide for sanctions
for non-filing of the by-laws. However, it insists that no sanction
need be provided because the mandatory nature of the provision
is so clear that there can be no doubt about its being an essential
attribute of corporate birth. To petitioner, its submission is
buttressed by the facts that the period for compliance is spelled
out distinctly; that the certification of the SEC/HIGC must show
that the by-laws are not inconsistent with the Code, and that a
copy of the by-laws has to be attached to the articles of
Page 76 of 111
incorporation. Moreover, no sanction is provided for because in
the first place, no corporate identity has been completed.
Petitioner asserts that non-provision for remedy or sanction is
itself the tacit proclamation that non-compliance is fatal and no
corporate existence had yet evolved, and therefore, there was no
need to proclaim its demise.[6] In a bid to convince the Court of its
arguments, petitioner stresses that:
x x x the word MUST is used in Sec. 46 in its universal literal
meaning and corollary human implication its compulsion is
integrated in its very essence MUST is always enforceable by the
inevitable consequence that is, OR ELSE. The use of the
word MUST in Sec. 46 is no exception it means file the by-laws
within one month after notice of issuance of certificate of
registration OR ELSE. The OR ELSE, though not specified, is
inextricably a part of MUST. Do this or if you do not you are
Kaput. The importance of the by-laws to corporate existence
compels such meaning for as decreed the by-laws is `the
government of the corporation. Indeed, how can the corporation
do any lawful act as such without by-laws. Surely, no law is
intended to create chaos.[7]
Petitioner asserts that P.D. No. 902-A cannot exceed the
scope and power of the Corporation Code which itself does
not provide sanctions for non-filing of by-laws. For the
petitioner, it is not proper to assess the true meaning of Sec. 46 x
x x on an unauthorized provision on such matter contained in the
said decree.
In their comment on the petition, private respondents
counter that the requirement of adoption of by-laws is not
mandatory. They point to P.D. No. 902-A as having resolved the
issue of whether said requirement is mandatory or merely
directory. Citing Chung Ka Bio v. Intermediate Appellate
Court,[8] private respondents contend that Section 6(I) of that
decree provides that non-filing of by-laws is only a ground for
suspension or revocation of the certificate of registration of
corporations and, therefore, it may not result in automatic
dissolution of the corporation.Moreover, the adoption and filing
of by-laws is a condition subsequent which does not affect the
corporate personality of a corporation like the LGVHAI. This is so
because Section 9 of the Corporation Code provides that the
corporate existence and juridical personality of a corporation
begins from the date the SEC issues a certificate of incorporation
under its official seal. Consequently, even if the by-laws have not
yet been filed, a corporation may be considered a de
facto corporation. To emphasize the fact the LGVHAI was
registered as the sole homeowners association in the Loyola
Grand Villas, private respondents point out that membership in
the LGVHAI was an unconditional restriction in the deeds of sale
signed by lot buyers.
In its reply to private respondents comment on the
petition, petitioner reiterates its argument that the word must in
Section 46 of the Corporation Code is mandatory. It adds that,
before the ruling in Chung Ka Bio v. Intermediate
Appellate Court could be applied to this case, this Court must first
resolve the issue of whether or not the provisions of P.D. No. 902-
A prescribing the rules and regulations to implement the
Corporation Code can rise above and change the substantive
provisions of the Code.
The pertinent provision of the Corporation Code that is the
focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under
this Code, must within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For the adoption
of by-laws by the corporation, the affirmative vote of the
stockholders representing at least a majority of the outstanding
capital stock, or of at least a majority of the members, in the case
of non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall
be kept in the principal office of the corporation, subject to the
stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to inspection of the
stockholders or members during office hours; and a copy thereof,
shall be filed with the Securities and Exchange Commission which
shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
the Securities and Exchange Commission of a certification that the
by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company,
insurance company, public utility, educational institution or other
special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in
accordance with law.
As correctly postulated by the petitioner, interpretation of
this provision of law begins with the determination of the
meaning and import of the word must in this section. Ordinarily,
the word must connotes an imperative act or operates to impose
a duty which may be enforced.[9] It is synonymous with ought
which connotes compulsion or mandatoriness.[10] However, the
word must in a statute, like shall, is not always imperative. It may
be consistent with an exercise of discretion. In this jurisdiction,
the tendency has been to interpret shall as the context or a
reasonable construction of the statute in which it is used
demands or requires.[11] This is equally true as regards the word
must. Thus, if the language of a statute considered as a whole and
with due regard to its nature and object reveals that the
legislature intended to use the words shall and must to be
directory, they should be given that meaning.[12]
In this respect, the following portions of the deliberations
of the Batasang Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr.
Speaker.
On page 34, referring to the adoption of
by-laws, are we made to understand here, Mr.
Speaker, that by-laws must immediately be
filed within one month after the issuance? In
other words, would this be mandatory or
directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory,
Mr. Speaker, what would be the effect of the
failure of the corporation to file these by-laws
within one month?
MR. MENDOZA. There is a provision in
the latter part of the Code which identifies
and describes the consequences of violations
of any provision of this Code. One such
consequence is the dissolution of the
corporation for its inability, or perhaps,
incurring certain penalties.
Page 77 of 111
 MR. FUENTEBELLA. But it will not
automatically amount to a dissolution of the
corporation by merely failing to file the by-
laws within one month. Supposing the
corporation was late, say, five days, what
would be the mandatory penalty?
MR. MENDOZA. I do not think it will
necessarily result in the automatic or ipso
facto dissolution of the corporation. Perhaps,
as in the case, as you suggested, in the case of
El Hogar Filipino where a quo warranto action
is brought, one takes into account the gravity
of the violation committed. If the by-laws
were late the filing of the by-laws were late
by, perhaps, a day or two, I would suppose
that might be a tolerable delay, but if they are
delayed over a period of months as is
happening now because of the absence of a
clear requirement that by-laws must be
completed within a specified period of time,
the corporation must suffer certain
consequences.[13]
This exchange of views demonstrates clearly that
automatic corporate dissolution for failure to file the by-laws on
time was never the intention of the legislature. Moreover, even
without resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the best
interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum),[14] Section 46 aforequoted
reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word must in the first sentence
thereof. Note should be taken of the second paragraph of the law
which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the Code rules
out mandatory compliance with the requirement of filing the by-
laws within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission. It necessarily follows that failure to file the
by-laws within that period does not imply the demise of the
corporation. By-laws may be necessary for the government of the
corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related
statutes.[15] There are in fact cases where by-laws are unnecessary
to corporate existence or to the valid exercise of corporate
powers, thus:
In the absence of charter or statutory provisions to the contrary,
by-laws are not necessary either to the existence of a corporation
or to the valid exercise of the powers conferred upon it, certainly
in all cases where the charter sufficiently provides for the
government of the body; and even where the governing statute in
express terms confers upon the corporation the power to adopt
by-laws, the failure to exercise the power will be ascribed to
mere nonaction which will not render void any acts of the
corporation which would otherwise be valid.[16] (Italics supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of
its life, and that until by-laws have been adopted the corporation
may not be able to act for the purposes of its creation, and that
the first and most important duty of the members is to adopt
them. This would seem to follow as a matter of principle from the
office and functions of by-laws. Viewed in this light, the adoption
of by-laws is a matter of practical, if not one of legal, necessity.
Moreover, the peculiar circumstances attending the formation of
a corporation may impose the obligation to adopt certain by-laws,
as in the case of a close corporation organized for specific
purposes. And the statute or general laws from which the
corporation derives its corporate existence may expressly require
it to make and adopt by-laws and specify to some extent what
they shall contain and the manner of their adoption. The mere
fact, however, of the existence of power in the corporation to
adopt by-laws does not ordinarily and of necessity make the
exercise of such power essential to its corporate life, or to the
validity of any of its acts.[17]
Although the Corporation Code requires the filing of by-
laws, it does not expressly provide for the consequences of the
non-filing of the same within the period provided for in Section
46. However, such omission has been rectified by Presidential
Decree No. 902-A, the pertinent provisions on the jurisdiction of
the SEC of which state:
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx xxx
(l) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporations, partnerships or associations, upon any of the
grounds provided by law, including the following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the
Commissions or by a Commissioner or by such other bodies,
boards, committees and/or any officer as may be created or
designated by the Commission for the purpose. The decision,
ruling or order of any such Commissioner, bodies, boards,
committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the
appellant of notice of such decision, ruling or order. The
Commission shall promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling within its
jurisdiction.
The aggrieved party may appeal the order, decision or ruling of
the Commission sitting en banc to the Supreme Court by petition
for review in accordance with the pertinent provisions of the
Rules of Court.
Even under the foregoing express grant of power and
authority, there can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required filing of
by-laws embodied in Section 46 of the Corporation Code. There is
no outright demise of corporate existence. Proper notice and
hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the
incorporators must be given the chance to explain their neglect or
omission and remedy the same.
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on
March 11, 1976, is very much apposite to the Code. Accordingly,
the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code
and P.D. No. 902-A are statutes in pari materia. Interpretare et
concordare legibus est optimus interpretandi. Every statute must
be so construed and harmonized with other statutes as to form a
uniform system of jurisprudence.[18]
As the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and
Page 78 of 111
directors and officers with relation thereto and among themselves
in their relation to it,[19] by-laws are indispensable to corporations
in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance
and management of corporations. Nonetheless, failure to file
them within the period required by law by no means tolls the
automatic dissolution of a corporation.
In this regard, private respondents are correct in relying on
the pronouncements of this Court in Chung Ka Bio v.
Intermediate Appellate Court,[20] as follows:
x x x. Moreover, failure to file the by-laws does not automatically
operate to dissolve a corporation but is now considered only a
ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section
22 of the Corporation Code, provided that the powers of the
corporation would cease if it did not formally organize and
commence the transaction of its business or the continuation of
its works within two years from date of its incorporation. Section
20, which has been reproduced with some modifications in
Section 46 of the Corporation Code, expressly declared that every
corporation formed under this Act, must within one month after
the filing of the articles of incorporation with the Securities and
Exchange Commission, adopt a code of by-laws. Whether this
provision should be given mandatory or only directory effect
remained a controversial question until it became academic with
the adoption of PD 902-A. Under this decree, it is now clear that
the failure to file by-laws within the required period is only a
ground for suspension or revocation of the certificate of
registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of
the corporation. Under Section 6(I) of PD 902-A, the SEC is
empowered to suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration of a
corporation on the ground inter alia of failure to file by-laws
within the required period. It is clear from this provision that
there must first of all be a hearing to determine the existence of
the ground, and secondly, assuming such finding, the penalty is
not necessarily revocation but may be only suspension of the
charter. In fact, under the rules and regulations of the SEC, failure
to file the by-laws on time may be penalized merely with the
imposition of an administrative fine without affecting the
corporate existence of the erring firm.
It should be stressed in this connection that substantial
compliance with conditions subsequent will suffice to perfect
corporate personality. Organization and commencement of
transaction of corporate business are but conditions subsequent
and not prerequisites for acquisition of corporate personality. The
adoption and filing of by-laws is also a condition subsequent.
Under Section 19 of the Corporation Code, a corporation
commences its corporate existence and juridical personality and is
deemed incorporated from the date the Securities and Exchange
Commission issues certificate of incorporation under its official
seal. This may be done even before the filing of the by-laws,
which under Section 46 of the Corporation Code, must be
adopted within one month after receipt of official notice of the
issuance of its certificate of incorporation.[21]
That the corporation involved herein is under the
supervision of the HIGC does not alter the result of this case. The
HIGC has taken over the specialized functions of the former Home
Financing Corporation by virtue of Executive Order No. 90 dated
December 17, 1986.[22] With respect to homeowners associations,
the HIGC shall exercise all the powers, authorities and
responsibilities that are vested on the Securities and Exchange
Commission x x x, the provision of Act 1459, as amended by P.D.
902-A, to the contrary notwithstanding.[23]
WHEREFORE, the instant petition for review on certiorari is
hereby DENIED and the questioned Decision of the Court of
Appeals AFFIRMED. This Decision is immediately executory.Costs
against petitioner.
SO ORDERED.
19. [G.R. No. 117604. March 26, 1997]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF
APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC.,
respondents.
DECISION
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of
the Revised Rules of Court, petitioner China Banking Corporation
seeks the reversal of the decision of the Court of Appeals dated 15
August 1994 nullifying the Securities and Exchange Commission's
order and resolution dated 4 June 1993 and 7 December 1993,
respectively, for lack of jurisdiction. Similarly impugned is the
Court of Appeals' resolution dated 4 September 1994 which
denied petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for
brevity) a stockholder of private respondent Valley Golf & Country
Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No.
1219 to petitioner China Banking Corporation (CBC, for brevity).[1]
On 16 September 1974, petitioner wrote VGCCI requesting
that the aforementioned pledge agreement be recorded in its
books.[2]
In a letter dated 27 September 1974, VGCCI replied that
the deed of pledge executed by Calapatia in petitioner's favor was
duly noted in its corporate books.[3]
On 3 August 1983, Calapatia obtained a loan of P20,000.00
from petitioner, payment of which was secured by the
aforestated pledge agreement still existing between Calapatia and
petitioner.[4]
Due to Calapatia's failure to pay his obligation, petitioner,
on 12 April 1985, filed a petition for extrajudicial foreclosure
before Notary Public Antonio T. de Vera of Manila, requesting the
latter to conduct a public auction sale of the pledged stock.[5]
On 14 May 1985, petitioner informed VGCCI of the above-
mentioned foreclosure proceedings and requested that the
pledged stock be transferred to its (petitioner's) name and the
same be recorded in the corporate books. However, on 15 July
1985, VGCCI wrote petitioner expressing its inability to accede to
petitioner's request in view of Calapatia's unsettled accounts with
the club.[6]
Despite the foregoing, Notary Public de Vera held a public
auction on 17 September 1985 and petitioner emerged as the
highest bidder at P20,000.00 for the pledged stock. Consequently,
petitioner was issued the corresponding certificate of sale.[7]
On 21 November 1985, VGCCI sent Calapatia a notice
demanding full payment of his overdue account in the amount of
P18,783.24.[8] Said notice was followed by a demand letter dated
12 December 1985 for the same amount[9] and another notice
dated 22 November 1986 for P23,483.24.[10]
On 4 December 1986, VGCCI caused to be published in the
newspaper Daily Express a notice of auction sale of a number of
its stock certificates, to be held on 10 December 1986 at 10:00
a.m. Included therein was Calapatia's own share of stock (Stock
Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed
Calapatia of the termination of his membership due to the sale of
his share of stock in the 10 December 1986 auction.[11]
Page 79 of 111
 On 5 May 1989, petitioner advised VGCCI that it is the new
owner of Calapatia's Stock Certificate No. 1219 by virtue of being
the highest bidder in the 17 September 1985 auction and
requested that a new certificate of stock be issued in its name.[12]
On 2 March 1990, VGCCI replied that "for reason of
delinquency" Calapatia's stock was sold at the public auction held
on 10 December 1986 for P25,000.00.[13]
On 9 March 1990, petitioner protested the sale by VGCCI of
the subject share of stock and thereafter filed a case with the
Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock
certificate in its name.[14]
On 18 June 1990, the Regional Trial Court of Makati
dismissed the complaint for lack of jurisdiction over the subject
matter on the theory that it involves an intra-corporate dispute
and on 27 August 1990 denied petitioner's motion for
reconsideration.
On 20 September 1990, petitioner filed a complaint with
the Securities and Exchange Commission (SEC) for the nullification
of the sale of Calapatia's stock by VGCCI; the cancellation of any
new stock certificate issued pursuant thereto; for the issuance of
a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea
rendered a decision in favor of VGCCI, stating in the main that
"(c)onsidering that the said share is delinquent, (VGCCI) had valid
reason not to transfer the share in the name of the petitioner in
the books of (VGCCI) until liquidation of
delinquency."[15] Consequently, the case was dismissed.[16]
On 14 April 1992, Hearing Officer Perea denied petitioner's
motion for reconsideration.[17]
Petitioner appealed to the SEC en banc and on 4 June 1993,
the Commission issued an order reversing the decision of its
hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a
prior right over the pledged share and because of pledgor's failure
to pay the principal debt upon maturity, appellant-petitioner can
proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992
and April 14, 1992 are hereby SET ASIDE. The auction sale
conducted by appellee-respondent Club on December 10, 1986 is
declared NULL and VOID. Finally, appellee-respondent Club is
ordered to issue another membership certificate in the name of
appellant-petitioner bank.
SO ORDERED.[18]
VGCCI sought reconsideration of the abovecited order.
However, the SEC denied the same in its resolution dated 7
December 1993.[19]
The sudden turn of events sent VGCCI to seek redress from
the Court of Appeals. On 15 August 1994, the Court of Appeals
rendered its decision nullifying and setting aside the orders of the
SEC and its hearing officer on ground of lack of jurisdiction over
the subject matter and, consequently, dismissed petitioner's
original complaint. The Court of Appeals declared that the
controversy between CBC and VGCCI is not intra-corporate. It
ruled as follows:
In order that the respondent Commission can take cognizance of a
case, the controversy must pertain to any of the following
relationships: (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 in so far as its franchise, permit or
license to operate is concerned, and (d) among the stockholders,
partners or associates themselves (Union Glass and Container
Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The
establishment of any of the relationship mentioned will not
necessarily always confer jurisdiction over the dispute on the
Securities and Exchange Commission to the exclusion of the
regular courts. The statement made in Philex Mining Corp. vs.
Reyes, 118 SCRA 602, that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in determining
which body has jurisdiction over a case would be to consider not
only the status or relationship of the parties but also the nature of
the question that is the subject of their controversy (Viray vs.
Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank
which involves ownership of the stock that used to belong to
Calapatia, Jr. is not within the competence of respondent
Commission to decide. It is not any of those mentioned in the
aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated
December 7, 1993 of respondent Securities and Exchange
Commission (Annexes Y and BB, petition) and of its hearing officer
dated January 3, 1992 and April 14, 1992 (Annexes S and W,
petition) are all nullified and set aside for lack of jurisdiction over
the subject matter of the case. Accordingly, the complaint of
respondent China Banking Corporation (Annex Q, petition)
is DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED.[20]
Petitioner moved for reconsideration but the same was
denied by the Court of Appeals in its resolution dated 5 October
1994.[21]
Hence, this petition wherein the following issues were
raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former
Eighth Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED
JUNE 04, 1993 AND ORDER DATED DECEMBER
07, 1993 OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC, AND WHEN IT
DISMISSED THE COMPLAINT OF PETITIONER
AGAINST RESPONDENT VALLEY GOLF ALL FOR
LACK OF JURISDICTION OVER THE SUBJECT
MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE
SECURITIES AND EXCHANGE COMMISSION EN
BANC DATED JUNE 04, 1993 DESPITE
PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF
MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE
SHARE OF RESPONDENT VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has
jurisdiction over the controversy, the regular courts or the SEC.
P.D. No. 902-A conferred upon the SEC the following
pertinent powers:
SECTION 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the
Philippines, and in the exercise of its authority, it shall have the
power to enlist the aid and support of and to deputize any and all
enforcement agencies of the government, civil or military as well
as any private institution, corporation, firm, association or person.
xxx
Page 80 of 111
SECTION 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships 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;
c) Controversies in the election or appointment of directors,
trustees, officers, or managers of such corporations, partnerships
or associations.
d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where
the corporation, partnership or association possesses property to
cover all of its debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the Management Committee
created pursuant to this Decree.
The aforecited law was expounded upon in Viray v.
CA[22] and in the recent cases of Mainland Construction Co., Inc. v.
Movilla[23] and Bernardo v. CA,[24] thus:
. . . The better policy in determining which body has jurisdiction
over a case would be to consider not only the status or
relationship of the parties but also the nature of the question that
is the subject of their controversy.
Applying the foregoing principles in the case at bar, to
ascertain which tribunal has jurisdiction we have to determine
therefore whether or not petitioner is a stockholder of VGCCI and
whether or not the nature of the controversy between petitioner
and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase
of the subject share or membership certificate at public auction
by petitioner (and the issuance to it of the corresponding
Certificate of Sale) transferred ownership of the same to the latter
and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did
not assail the transfer directly and has in fact, in its letter of 27
September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner
and has even noted said agreement in its corporate books.[25] In
addition, Calapatia, the original owner of the subject share, has
not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became
a bona fide stockholder of VGCCI and, therefore, the conflict that
arose between petitioner and VGCCI aptly exemplies an intra-
corporate controversy between a corporation and its stockholder
under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the
controversy between petitioner and private respondent
corporation. VGCCI claims a prior right over the subject share
anchored mainly on Sec. 3, Art VIII of its by-laws which provides
that "after a member shall have been posted as delinquent, the
Board may order his/her/its share sold to satisfy the claims of the
Club . . ."[26] It is pursuant to this provision that VGCCI also sold the
subject share at public auction, of which it was the highest bidder.
VGCCI caps its argument by asserting that its corporate by-laws
should prevail. The bone of contention, thus, is the proper
interpretation and application of VGCCI's aforequoted by-laws, a
subject which irrefutably calls for the special competence of the
SEC.
We reiterate herein the sound policy enunciated by the Court in
Abejo v. De la Cruz:[27]
6. In the fifties, the Court taking cognizance of the move to vest
jurisdiction in administrative commissions and boards the power
to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that
Congress in requiring the Industrial Court's intervention in the
resolution of labor-management controversies likely to cause
strikes or lockouts meant such jurisdiction to be exclusive,
although it did not so expressly state in the law. The Court held
that under the "sense-making and expeditious doctrine of primary
jurisdiction . . . the courts cannot or will not determine a
controversy involving a question which is within the jurisdiction of
an administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the special
knowledge, experience, and services of the administrative tribunal
to determine technical and intricate matters of fact, and a
uniformity of ruling is essential to comply with the purposes of the
regulatory statute administered."
In this era of clogged court dockets, the need for specialized
administrative boards or commissions with the special knowledge,
experience and capability to hear and determine promptly
disputes on technical matters or essentially factual matters,
subject to judicial review in case of grave abuse of discretion, has
become well nigh indispensable. Thus, in 1984, the Court noted
that "between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the former.
'Increasingly, this Court has been committed to the view that
unless the law speaks clearly and unequivocably, the choice
should fall on [an administrative agency.]'" The Court in the earlier
case of Ebon v. De Guzman, noted that the lawmaking authority,
in restoring to the labor arbiters and the NLRC their jurisdiction to
award all kinds of damages in labor cases, as against the previous
P.D. amendment splitting their jurisdiction with the regular
courts, "evidently,. . . had second thoughts about depriving the
Labor Arbiters and the NLRC of the jurisdiction to award damages
in labor cases because that setup would mean duplicity of suits,
splitting the cause of action and possible conflicting findings and
conclusions by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be
over-emphasized involving as it does the meticulous analysis and
correct interpretation of a corporation's by-laws as well as the
applicable provisions of the Corporation Code in order to
determine the validity of VGCCI's claims. The SEC, therefore, took
proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from
denying its earlier position, in the first complaint it filed with the
RTC of Makati (Civil Case No. 90-1112) that there is no intra-
corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,[28] this Court, through Mr.
Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court
which has no jurisdiction over it does not prevent the plaintiff
from filing the same complaint later with the competent court.
Page 81 of 111
The plaintiff is not estopped from doing so simply because it
made a mistake before in the choice of the proper forum . . .
We remind VGCCI that in the same proceedings before the
RTC of Makati, it categorically stated (in its motion to dismiss) that
the case between itself and petitioner is intra-corporate and
insisted that it is the SEC and not the regular courts which has
jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse
to the SEC.
Having resolved the issue on jurisdiction, instead of
remanding the whole case to the Court of Appeals, this Court
likewise deems it procedurally sound to proceed and rule on its
merits in the same proceedings.
It must be underscored that petitioner did not confine the
instant petition for review on certiorari on the issue of
jurisdiction. In its assignment of errors, petitioner specifically
raised questions on the merits of the case. In turn, in its
responsive pleadings, private respondent duly answered and
countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated
in the case of Heirs of Crisanta Gabriel-Almoradie v. Court of
Appeals,[29] citing Escudero v. Dulay[30] and The Roman Catholic
Archbishop of Manila v. Court of Appeals:[31]
In the interest of the public and for the expeditious administration
of justice the issue on infringement shall be resolved by the court
considering that this case has dragged on for years and has gone
from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle
the entire controversy in a single proceeding leaving no root or
branch to bear the seeds of future litigation. No useful purpose
will be served if a case or the determination of an issue in a case is
remanded to the trial court only to have its decision raised again
to the Court of Appeals and from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an
issue to the lower court for further reception of evidence is not
necessary where the Court is in position to resolve the dispute
based on the records before it and particularly where the ends of
justice would not be subserved by the remand thereof. Moreover,
the Supreme Court is clothed with ample authority to review
matters, even those not raised on appeal if it finds that their
consideration is necessary in arriving at a just disposition of the
case.
In the recent case of China Banking Corp., et al. v. Court of
Appeals, et al.,[32] this Court, through Mr. Justice Ricardo J.
Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that that
since the filing of this suit before the trial court, none of the
substantial issues have been resolved. To avoid and gloss over the
issues raised by the parties, as what the trial court and
respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of
mortgage. Undoubtedly, this will run counter to the avowed
purpose of the rules, i.e., to assist the parties in obtaining just,
speedy and inexpensive determination of every action or
proceeding. The Court, therefore, feels that the central issues of
the case, albeit unresolved by the courts below, should now be
settled specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file have
amply ventilated their various positions and arguments on the
matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the
case (from the proceedings before the SEC) sufficient to enable us
to render a sound judgment and since only questions of law were
raised (the proper jurisdiction for Supreme Court review), we can,
therefore, unerringly take cognizance of and rule on the merits of
the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement
executed by Calapatia in petitioner's favor. It contends that the
same was null and void for lack of consideration because the
pledge agreement was entered into on 21 August 1974[33] but the
loan or promissory note which it secured was obtained by
Calapatia much later or only on 3 August 1983.[34]
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily
reveal that the contracting parties explicitly stipulated therein
that the said pledge will also stand as security for any future
advancements (or renewals thereof) that Calapatia (the pledgor)
may procure from petitioner:
xxx
This pledge is given as security for the prompt payment when due
of all loans, overdrafts, promissory notes, drafts, bills or exchange,
discounts, and all other obligations of every kind which have
heretofore been contracted, or which may hereafter be
contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one of
them, in favor of the PLEDGEE, including discounts of Chinese
drafts, bills of exchange, promissory notes, etc., without any
further endorsement by the PLEDGOR(S) and/or Debtor(s) up to
the sum of TWENTY THOUSAND (P20,000.00) PESOS, together
with the accrued interest thereon, as hereinafter provided, plus
the costs, losses, damages and expenses (including attorney's
fees) which PLEDGEE may incur in connection with the collection
thereof.[35] (Emphasis ours.)
The validity of the pledge agreement between petitioner
and Calapatia cannot thus be held suspect by VGCCI. As candidly
explained by petitioner, the promissory note of 3 August 1983 in
the amount of P20,000.00 was but a renewal of the first
promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to
settle his delinquent accounts, it had the right to sell the share in
question in accordance with the express provision found in its by-
laws.
Private respondent's insistence comes to naught. It is
significant to note that VGCCI began sending notices of
delinquency to Calapatia after it was informed by petitioner
(through its letter dated 14 May 1985) of the foreclosure
proceedings initiated against Calapatia's pledged share, although
Calapatia has been delinquent in paying his monthly dues to the
club since 1975. Stranger still, petitioner, whom VGCCI had
officially recognized as the pledgee of Calapatia's share, was
neither informed nor furnished copies of these letters of overdue
accounts until VGCCI itself sold the pledged share at another
public auction. By doing so, VGCCI completely disregarded
petitioner's rights as pledgee. It even failed to give petitioner
notice of said auction sale. Such actuations of VGCCI thus belie its
claim of good faith.
In defending its actions, VGCCI likewise maintains that
petitioner is bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the
by-laws of a corporation since they are not privy thereto
(Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is
when third persons have actual or constructive knowledge of the
same. In the case at bar, petitioner had actual knowledge of the
by-laws of private respondent when petitioner foreclosed the
pledge made by Calapatia and when petitioner purchased the
share foreclosed on September 17, 1985. This is proven by the
fact that prior thereto, i.e., on May 14, 1985 petitioner even
quoted a portion of private respondent's by-laws which is
Page 82 of 111
material to the issue herein in a letter it wrote to private
respondent. Because of this actual knowledge of such by-laws
then the same bound the petitioner as of the time when
petitioner purchased the share. Since the by-laws was already
binding upon petitioner when the latter purchased the share of
Calapatia on September 17, 1985 then the petitioner purchased
the said share subject to the right of the private respondent to sell
the said share for reasons of delinquency and the right of private
respondent to have a first lien on said shares as these rights are
provided for in the by-laws very very clearly.[36]
VGCCI misunderstood the import of our ruling in
Fleischer v. Botica Nolasco Co.:[37]
And moreover, the by-law now in question cannot have any effect
on the appellee. He had no knowledge of such by-law when the
shares were assigned to him. He obtained them in good faith and
for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzales
and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his rights as a purchaser.
"An unauthorized by-law forbidding a shareholder to sell his
shares without first offering them to the corporation for a period
of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and
took part in its adoption." (10 Cyc., 579; Ireland vs. Globe Milling
Co., 21 R.I., 9.)
"When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any contractual
restriction of which he had no notice." (Brinkerhoff-Farris Trust &
Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
"The assignment of shares of stock in a corporation by one who
has assented to an unauthorized by-law has only the effect of a
contract by, and enforceable against, the assignor; the assignee is
not bound by such by-law by virtue of the assignment alone."
(Ireland vs. Globe Milling Co., 21 R.I., 9.)
"A by-law of a corporation which provides that transfers of stock
shall not be valid unless approved by the board of directors, while
it may be enforced as a reasonable regulation for the protection
of the corporation against worthless stockholders, cannot be
made available to defeat the rights of third persons." (Farmers'
and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
(Underscoring ours.)
In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time the transaction or
agreement between said third party and the shareholder was
entered into, in this case, at the time the pledge agreement was
executed. VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing petitioner as
pledgee of one of its shares registered in Calapatia's name.
Petitioner's belated notice of said by-laws at the time of
foreclosure will not suffice. The ruling of the SEC en banc is
particularly instructive:
By-laws signifies the rules and regulations or private laws enacted
by the corporation to regulate, govern and control its own
actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves
in their relation to it. In other words, by-laws are the relatively
permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals
composing it and having the direction, management and control
of its affairs, in whole or in part, in the management and control
of its affairs and activities. (9 Fletcher 4166. 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among
themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law.
(Ibid.)
Therefore, it is the generally accepted rule that third persons are
not bound by by-laws, except when they have knowledge of the
provisions either actually or constructively. In the case of Fleisher
v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the
by-law restricting the transfer of shares cannot have any effect on
the the transferee of the shares in question as he "had no
knowledge of such by-law when the shares were assigned to him.
He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by the
by-law between the shareholder x x x and the Botica Nolasco,
Inc. Said by-law cannot operate to defeat his right as a purchaser."
(Underscoring supplied.)
By analogy of the above-cited case, the Commission en banc is of
the opinion that said case is applicable to the present controversy.
Appellant-petitioner bank as a third party can not be bound by
appellee-respondent's by-laws. It must be recalled that when
appellee-respondent communicated to appellant-petitioner bank
that the pledge agreement was duly noted in the club's books
there was no mention of the shareholder-pledgor's unpaid
accounts. The transcript of stenographic notes of the June 25,
1991 Hearing reveals that the pledgor became delinquent only in
1975. Thus, appellant-petitioner was in good faith when the
pledge agreement was contracted.
The Commission en banc also believes that for the exception to
the general accepted rule that third persons are not bound by by-
laws to be applicable and binding upon the pledgee, knowledge of
the provisions of the VGCCI By-laws must be acquired at the time
the pledge agreement was contracted. Knowledge of said
provisions, either actual or constructive, at the time of foreclosure
will not affect pledgee's right over the pledged share. Art. 2087 of
the Civil Code provides that it is also of the essence of these
contracts that when the principal obligation becomes due, the
things in which the pledge or mortgage consists maybe alienated
for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club,
Inc., the Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the certificate,
their cancellation, and the issuance to him of new ones, and when
done, the pledgee will be fully protected against a subsequent
purchaser who would be charged with constructive notice that
the certificate is covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock until the
pledgor pays or tenders to him the amount due on the debt
secured. In other words, the pledgee has the right to resort to its
collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new
certificate to a third person who purchased the same certificate
covered by the pledge, will certainly defeat the right of the
pledgee to resort to its collateral for the payment of the debt. The
pledgor or his representative or registered stockholders has no
right to require a return of the pledged stock until the debt for
which it was given as security is paid and satisfied, regardless of
the length of time which have elapsed since debt was created.
(12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities
or liens in favor either of the corporation or of third persons, if he
has no notice thereof, but not otherwise. He also takes it free of
liens or claims that may subsequently arise in favor of the
corporation if it has notice of the pledge, although no demand for
a transfer of the stock to the pledgee on the corporate books has
Page 83 of 111
been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle
Fruit Co., 75 F2d739)[38]
Similarly, VGCCI's contention that petitioner is duty-bound
to know its by-laws because of Art. 2099 of the Civil Code which
stipulates that the creditor must take care of the thing pledged
with the diligence of a good father of a family, fails to convince.
The case of Cruz & Serrano v. Chua A. H . Lee,[39] is clearly not
applicable:
In applying this provision to the situation before us it must be
borne in mind that the ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes from
hand to hand by mere delivery of the ticket; and the contract of
the pledge is, therefore, absolvable to bearer. It results that one
who takes a pawn ticket in pledge acquires domination over the
pledge; and it is the holder who must renew the pledge, if it is to
be kept alive.
It is quite obvious from the aforequoted case that a
membership share is quite different in character from a pawn
ticket and to reiterate, petitioner was never informed of
Calapatia' s unpaid accounts and the restrictive provisions in
VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides
that "no shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation"
cannot be utilized by VGCCI. The term "unpaid claim" refers to
"any unpaid claim arising from unpaid subscription, and not to
any indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transaction."[40] In the case at
bar, the subscription for the share in question has been fully paid
as evidenced by the issuance of Membership Certificate No.
1219.[41] What Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of
the Court of Appeals is REVERSED and the order of the SEC en
banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.
20. G.R. Nos. 163356-57 July 10, 2015
JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B.
MARAMARA, JOSE T. FRONDOSO, IGNACIO T. MACROHON, JR.,
AND PAULINO T. LIM, ACTING IN THEIR CAP A CITY AS
INDIVIDUAL DIRECTORS OF MAKATI SPORTS CLUB, INC., AND ON
BEHALF OF THE BOARD OF DIRECTORS OF MAKATI SPORTS
CLUB, Petitioners,
vs.
JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G. LIBREA,
SAMUEL L. ESGUERRA, ROLANDO P. DELA CUESTA, RUBEN L.
TORRES, ALEX Y. PARDO, MA. CRISTINA SIM, ROGER T.
AGUILING, JOSE B. QUIMSON, CELESTINO L. ANG, ELISEO V.
VILLAMOR, FELIPE L. GOZON, CLAUDIO B. ALTURA, ROGELIO G.
VILLAROSA, MANUEL R. SANTIAGO, BENJAMIN A. CARANDANG,
REGINA DE LEON-HERLIHY, CARLOS Y. RAMOS, JR., ALEJANDRO
Z. BARIN, EFRENILO M. CAYANGA AND JOHN
DOES, Respondents.
x-----------------------x
G.R. Nos. 163368-69
JOVENCIO F. CINCO, RICARDO G. LIBREA AND ALEX Y.
PARDO, Petitioners,
vs.
JOSE A BERNAS, CECILE H. CHENG AND IGNACIO A.
MACROHON, Respondents.
DECISION
PEREZ, J.:
Before us are two consolidated Petitions for Review on
Certiorari1 assailing the 28 April 2003 Decision and the 27 April
2004 Resolution of the Court of Appeals in CA-G.R. SP No.
62683,2 which declared the 17 December 1997 Special
Stockholders' Meeting of the Makati Sports Club invalid for having
been improperly called but affirmed the actions taken during the
Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999
and 17 April 2000. The dispositive portion of the assailed decision
reads:
WHEREFORE, foregoing considered, the instant petition for review
is hereby GRANTED. The appealed Decision dated December 12,
2000 of the SEC en bane is SET ASIDE and the Decision dated April
20, 1998 of the Hearing Officer is REINSTATED and AMENDED as
follows:
1. The supposed Special Stockholders' Meeting of
December 17, 1997 was prematurely or invalidly called
by the [Cinco Group]. It therefore failed to produce any
legal effects and did not effectively remove [the Bernas
Group] as directors of the Makati Sports Club, Inc.;
2. The expulsion of petitioner Jose A. Bernas as well as
the public auction of his share[s] is hereby declared
void and without legal effect;
3. The ratification of the removal of [the Bernas Group]
as directors, the expulsion of petitioner Bernas and the
sale of his share by the defendants and by the
stockholders held in their Regular Stockholders'
Meeting held in April of 1998, 1999 and 2000, is void
and produces no effects as they were not the proper
party to cause the ratification;
4. All other actions of the [Cinco Group] and
stockholders taken during the Regular Stockholders'
Meetings held in April 1998, 1999 and 2000, including
the election of the [Cinco Group] as directors after the
expiration of the term of office of petitioners as
directors, are hereby declared valid;
5. No awards for damages and attorney's fees.3
The Facts
Makati Sports Club (MSC) is a domestic corporation duly
organized and existing under Philippine laws for the primary
purpose of establishing, maintaining, and providing social,
cultural, recreational and athletic . activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile
H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio
T. Macrohon and Paulino T. Lim (Bernas Group) were among the
Members of the Board of Directors and Officers of the
corporation whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea ·
and Alex Y. Pardo (Cinco Group) are the members and
stockholders of the corporation who were elected Members of
the Board of Directors and Officers of the club during the 17
December 1997 Special Stockholders Meeting.
The antecedent events of the meeting and its results, follow:
Alarmed with the rumored anomalies in handling the corporate
funds, the MSC Oversight Committee (MSCOC), composed of the
past presidents of the club, demanded from the Bernas Group,
who were then incumbent officers of the corporation, to resign
from their respective positions to pave the way for the election of
new set of officers.4Resonating this clamor were the stockholders
of the corporation representing at least 100 shares who sought
the assistance of the MSCOC to call for a special stockholders
meeting for the purpose of removing the sitting officers and
electing new ones.5 Pursuant to such request, the MSCOC called a
Special Stockholders' Meeting and sent out notices6 to all
stockholders and members stating therein the time, place and
Page 84 of 111
purpose of the meeting. For failure of the Bernas Group to secure
an injunction before the Securities Commission (SEC), the meeting
proceeded wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa,
Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr. and
Paulino T. Lim were removed from office and, in their place and
stead, Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T.
Aguiling, Rogelio G. · Villarosa, Armando David, Norberto
Maronilla, Regina de Leon-Herlihy and Claudio B. Altura, were
elected.7
Aggrieved by the turn of events, the Bernas Group initiated an
action before the Securities Investigation and Clearing
Department (SICD) of the SEC docketed as SEC Case No. 5840
seeking for the nullification of the 17 December 1997 Special
Stockholders Meeting on the ground that it was improperly called.
Citing Section 28 of the Corporation Code, the Bernas Group
argued that the authority to call a meeting lies with the Corporate
. Secretary and not with the MSCOC which functions merely as an
oversight body and is not vested with the power to call corporate
meetings. For being called by the persons not authorized to do so,
the Bernas Group urged the SEC. to declare the 17 December
1997 Special Stockholders' Meeting, including the removal of the
sitting officers and the election of new ones, be nullified.
For their part, the Cinco Group insisted that the 17 December
1997 Special Stockholders' Meeting is sanctioned by the
Corporation Code and the MSC by-laws. In justifying the call
effected by the MSCOC, they reasoned that Section 258 of the
MSC by-laws merely authorized the Corporate Secretary to issue
notices of meetings and nowhere does it state that such authority
solely belongs to him. It was further asseverated by the Cinco
Group that it would be useless to course the request to call a
meeting thru the Corporate Secretary because he repeatedly
refused to call a special stockholders' meeting despite demands
and even "filed a suit to restrain the holding of a special meeting.9
Meanwhile, the newly elected directors initiated an investigation
on the alleged anomalies in administering the corporate affairs
and after finding Bernas guilty of irregularities,10 the Board
resolved to expel him from the club by selling his shares at public
auction.11 After the notice12 requirement was complied with,
Bernas' shares was accordingly sold for ₱902,000.00 to the
highest bidder:
Prior to the resolution of SEC Case No. 5840, an Annual
Stockholders' Meeting was held on 20 April 1998 pursuant to
Section 8 of the MSC bylaws.13 During the said meeting, which
was attended by 1,017 stockholders representing 2/3 of the
outstanding shares, the majority resolved to approve, confirm and
ratify, among others, the calling and · holding of 17 December
1997 Special Stockholders' Meeting, the acts and resolutions
adopted therein including the removal of Bernas Group from the
Board and the election of their replacements.14
Due to the filing of several petitions for and against the removal
of the Bernas Group from the Board pending before the SEC
resulting in the piling up of legal controversies involving MSC, the
SEC En Banc, in its Decision15 dated 30 March 1999, resolved to
supervise the holding of the 1999 Annual Stockholders' Meeting.
During the said meeting, the stockholders once again approved,
ratified and confirmed the holding of the 17 December 1997
Special Stockholders' Meeting.
The conduct of the 17 December 1997 Special Stockholders'
Meeting was likewise ratified by the stockholders during the 2000
Annual Stockholders' Meeting which was held on 17 April 2000.16
On 9 May 2000, the SICD rendered a Decision17 in SEC Case No.
12-. 97-5840 finding, among others, that the 17 December 1997
Special Stockholders' Meeting and the Annual Stockholders'
Meeting conducted on 20 April 1998 and 19 April 1999 are invalid.
The SICD likewise nullified the expulsion of Bernas from the
corporation and the sale of his share at the public auction. The
dispositive portion of the said decision reads:
WHEREFORE, in view of the foregoing considerations this Office,
through the undersigned Hearing Officer, hereby declares as
follows:
(1) The supposed Special Stockholders' Meeting of
December 17, 1997 was prematurely or invalidly called
by the [the Cinco Group]. It therefore failed to produce
any legal effects and did not effectively remove [the
Bernas Group] as directors of the Makati Sports Club,
Inc.
(2) The April 20, 1998 meeting was not attended by a
sufficient number of valid proxies. No quorum could
have been present at the said meeting. No corporate
business could have been validly completed and/or
transacted during the said meeting. Further, it was not
called by the validly elected Corporate Secretary Victor
Africa nor presided over by the validly elected
president Jose A. Bernas. Even if the April 20, 1998
meeting was valid, it could not ratify the December 17,
1997 meeting because being a void meeting, the
December 1 7, 1997 meeting may not be ratified.
(3) The April 1998 meeting was null and void and
therefore produced no legal effect.
(4) The April 1999 meeting has not been raised as a
defense in the Answer nor assailed in a supplemental
complaint. However, it has been raised by [the Cinco
Group] in a manifestation dated April 21, 1999 and in
their position paper dated April 8, 2000. Its legal
effects must be the subject of this Decision in order to
put an end to the controversy at hand. In the first
place, by [the Cinco Group's] own admission, the
alleged attendance at the April 1999 meeting
amounted to less than 2/3 of the stockholders entitled
to vote, the minimum number required to effect a
removal. No removal or ratification of a removal may
be effected by less than 2/3 vote of the stockholders.
Further, it cannot ratify the December 1997 meeting
for failure to adhere to the requirement of the By-laws
on notice as explained in paragraph (2) above, even if
it was accompanied by valid proxies, which it was not.
(5) The [the Cinco Group], their agents, representatives
and all persons acting for and conspiring on their
behalf, are hereby permanently enjoined from carrying
into effect the resolutions and actions adopted during
the 17 December 1997 and April 20, 1998 meetings
and of the Board of Directors and/or other
stockholders' meetings resulting therefrom, and from
performing acts of control and management of the
club.
(6) The expulsion of complainant Jose A. Bernas as well
as the public auction of his share is hereby declared
void and without legal effect, as prayed for. While it is
true that [the Cinco Group] were no.t restrained from
acting as directors during the pendency of this case,
their tenure as directors prior to this Decision is in the
nature of de facto directors of a de facto Board. Only
the ordinary acts of administration which [the Cinco
Group] carried out de facto in good faith are valid.
Other acts, such as political acts and the expulsion or
other disciplinary acts imposed on the [the Bernas
Group] may not be appropriately taken by de facto
officers because the legality of their tenure as directors
Page 85 of 111
 is not complete and subject to the outcome of this
case. (7) No awards for damages and attorney's fees.18
On appeal, the SEC En Banc, in its 12 December 2000
Decision19 reversed the findings of the SICD and validated the
holding of the 17 December 1997 Special Stockholders' Meeting
as well as the Annual Stockholders' Meeting held on 20 April 1998
and 19 April 1999.
On 28 April 2003, the Court of Appeals rendered a
Decision20 declaring the 17 December 1997 Special Stockholders'
Meeting invalid for being improperly called but affirmed the
actions taken during the Annual Stockholders' Meeting held on 20
April 1998, 19 April 1999 and 17 April 2000.
In a Resolution21 dated 27 April 2004, the appellate court refused
to reconsider its earlier decision.
Aggrieved by the disquisition of the Court of Appeals, both parties
elevated the case before this Court by filing their respective
Petitions for Review on Certiorari. While the Bernas Group agrees
with the disquisition of the appellate court that the Special
Stockholders' Meeting is invalid for being called by the persons
not authorized to do so, they urge the Court to likewise invalidate
the holding of the subsequent Annual Stockholders' Meetings
invoking the application of the holdover principle. The Cinco
Group, for its part, insists that the holding. of 17 December 1997
Special Stockholders' Meeting is valid and binding underscoring
the overwhelming ratification made by the stockholders during
the subsequent annual stockholders' meetings and the previous
refusal of the Corporate Secretary to call a special stockholders'
meeting despite demand. For the resolution of the Court are the
following issues:
The Issues
I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN RULING THAT THE 17 DECEMBER 1997 SPECIAL
STOCKHOLDERS' MEETING IS INVALID; AND
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN FAILING TO NULLIFY THE HOLDING OF THE ANNUAL
STOCKHOLDERS' MEETING ON 20 APRIL 1998, 19 APRIL 1999 AND
17 APRIL 2000.
The Court's Ruling
The Corporation Code laid down the rules on the removal of the
Directors of the corporation by providing, inter alia, the persons
authorized to call the meeting and the number of votes required
for the purpose of removal, thus:
Sec. 28. Removal of directors or trustees. -Any director or trustee
of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of
the outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the members
entitled to vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting. A special
meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on the
written demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or, if it be a non-
stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to
call the special meeting upon such demand or fail or refuse to give
the notice, or if there is no secretary, the call for the meeting may
be addressed directly to the stockholders or members by any
stockholder or member of the corporation signing the demand.
Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication
or by written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may not
be used to deprive minority stockholders or members of the right
of representation to which they may be entitled under Section 24
of this Code. (Emphasis supplied)
Corollarily, the pertinent provisions of MSC by-laws which govern
the manner of calling and sending of notices of the annual
stockholders' meeting and the special stockholders' meeting
provide:
SEC. 8. Annual Meetings. The annual meeting of stockholders shall
be held at the Clubhouse on the third Monday of April of every
year unless such day be a holiday in which case the annual
meeting shall be held on the next succeeding business day. At
such meeting, the President shall render a report to the
stockholders of the clubs.
xxxx
SEC. 10. Special Meetings. Special meetings of stockholders shall
be held at the Clubhouse when called by the President or by the
Board of Directors or upon written request of the stockholders
representing not less than one hundred (100) shares. Only
matters specified in the notice and call will be taken up at special
meetings.
xxxx
SEC. 25. Secretary. The Secretary shall keep the stock and transfer
book and the corporate seal, which he shall stamp on all
documents requiring such seal, fill and sign together with the
President, all the certificates of stocks issued, give or caused to be
given all notices required by law of these By-laws as well as
notices of all meeting of the Board and of the stockholders; shall
certify as to quorum at meetings; shall approve and sign all
correspondence pertaining to the Office of the Secretary; shall
keep the minutes of all meetings of the stockholders, the Board of
Directors and of all committees in a book or books kept for that
purpose; and shall be acting President in the absence of the
President and Vice-:President. The Secretary must be a citizen and
a resident of the Philippines. The Secretary shall keep a record of
all the addresses and telephone numbers of all stockholders.22
Textually, only the President and the Board of Directors are
authorized by the by-laws to call a special meeting. In cases where
the person authorized to call a meeting refuses, fails or neglects
to call a meeting, then the stockholders representing at least 100
shares, upon written request, may file a petition to call a special
stockholder's meeting.
In the instant case, there is no dispute that the 17 December 1997
Special Stockholders' Meeting was called neither by the President
nor by the Board of Directors but by the MSCOC. While the
MSCOC, as its name suggests, is created for the purpose of
overseeing the affairs of the corporation, nowhere in the by-laws
does it state that it is authorized to exercise corporate powers,
such as the power to call a special meeting, solely vested by law
and the MSC by-laws on the President or the Board of Directors.
The board of directors is the directing and controlling body of the
corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from
them. The board of directors, in drawing to itself the power of the
corporation, occupies a position of trusteeship in relation to the
stockholders, in the sense that the board should exercise not only
care and diligence, but utmost good faith in the management of
the corporate affairs.23
The underlying policy of the Corporation Code is that the business
and affairs of a corporation must be governed by a board of
Page 86 of 111
directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis.
Only in that way can the continued accountability to shareholders,
and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the
theory that legitimizes the exercise of power by the directors or
officers over the properties that they do not own.24
Even the Corporation Code is categorical in stating that a
corporation exercises its powers through its board of directors
and/or its duly authorized officers and agents, except in instances
where the Corporation Code requires stockholders' approval for
certain specific acts:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise
provided in this Code, the corporate powers of all the
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors and trustees x x x.
A corporation's board of directors is understood to be that body
which (1) exercises all powers provided for under the Corporation
Code; (2) conducts all business of the corporation; and (3)
controls and holds all the property of the corporation. Its
members have been characterized as trustees or directors clothed
with fiduciary character.25
It is ineluctably clear that the fiduciary relation is between the
stockholders and the board of directors and who are vested with
the power to manage the affairs of the corporation. The ordinary
trust relationship of · directors of a corporation and stockholders
is not a matter of statutory or technical law.26 It springs from the
fact that directors have the control and guidance of corporate
affairs and property and hence of the property interests of the
stockholders.27 Equity recognizes that stockholders are the
proprietors of the corporate interests and are ultimately the only
beneficiaries thereof.28 Should the board fail to perform its
fiduciary duty to safeguard the interest of the stockholders or
commit acts prejudicial to their interest, the law and the by-laws
provide mechanisms to remove and replace the erring director.29
Relative to the powers of the Board of Directors, nowhere in the
Corporation Code or in the MSC by-laws can it be gathered that
the Oversight Committee is authorized to step in wherever there
is breach of fiduciary duty and call a special meeting for the
purpose of removing the existing officers and electing their
replacements even if such call was made upon the request of
shareholders. Needless to say, the MSCOC is neither · empowered
by law nor the MSC by-laws to call a meeting and the subsequent
ratification made by the stockholders did not cure the substantive
infirmity, the defect having set in at the time the void act was
done. The defect goes into the very authority of the persons who
made the call for the meeting. It is apt to recall that illegal acts of
a corporation which contemplate the doing of an act which is
contrary to law, morals or public order, or contravenes some rules
of public policy or public duty, are, like similar transactions
between individuals, void.30 They cannot serve as basis for a court
action, nor acquire validity by performance, ratification or
estoppel.31 The same principle can apply in the present case. The
void election of 17 December 1997 cannot be ratified by the
subsequent Annual Stockholders' Meeting.
A distinction should be made between corporate acts or contracts
which are illegal and those which are merely ultra vires. The
former contemplates the doing of an act which are contrary to
law, morals or public policy or public duty, and are, like similar
transactions between individuals, void: They cannot serve as basis
of a court action nor acquire validity by performance, ratification
or estoppel. Mere ultra vires acts, on the other hand, or those
which are not illegal or void ab initio, but are not merely within
the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the
stockholders.32 The 1 7 December 1997 Meeting belongs to the
category of the latter, that is, it is void ab initio and cannot be
validated.
Consequently, such Special Stockholders' Meeting called by the
Oversight Committee cannot have any legal effect. The removal of
the Bernas Group, as well as the election of the Cinco Group,
effected by the assembly in that improperly called meeting is
void, and since the Cinco Group has no legal right to sit in the
board, their subsequent acts of expelling Bernas from the club
and the selling of his shares. at the public auction, are likewise
invalid.
The Cinco Group cannot invoke the application of de facto
officership doctrine to justify the actions taken after the invalid
election since the operation of the principle is limited to third
persons who were originally not part of the corporation but
became such by reason of voting of government-sequestered
shares.33 In Cojuangco v. Roxas,34 the Court deemed the directors
who were elected through the voting of government of
sequestered shares who assumed office in good faith as de facto
officers, viz:
In the light of the foregoing discussion, the Court finds and so
holds that the PCGG has no right to vote the sequestered shares
of petitioners including the sequestered corporate shares. Only
their owners, duly authorized representatives or proxies may vote
the said shares. Consequently, the election of private respondents
Adolfo Azcuna, Edison Coseteng and Patricio Pineda as members
of the board of directors of SMC for 1990-1991 should be set
aside. However, petitioners cannot be declared as duly elected
members of the board of directors thereby. An election for the
purpose should be held where the questioned shares may be
voted by their owners and/or their proxies. Such election may be
held at the next shareholders' meeting in April 1991 or at such
date as may be set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de
facto officers who in good faith assumed their duties and
responsibilities as duly elected members of the board of directors
of the SMC. They are thereby legally entitled to emoluments of
the office including salary, fees and other compensation attached
to the office until they vacate the same. (Emphasis supplied)
Apparently, the assumption of office of the Cinco Group did not
bear parallelism with the factual milieu in Cojuangco and as such
they cannot be considered as de facto officers and thus, they are
without colorable authority to authorize the removal of Bernas
and the sale of his shares at the public auction. They cannot bind
the corporation to third persons who acquired the shares of
Bernas and such third persons cannot be deemed as buyer in
good faith.35
The case would have been different if the petitioning stockholders
went directly to the SEC and sought its assistance to call a special
stockholders' meeting citing the previous refusal of the Corporate
Secretary to call a meeting. Where there is an officer authorized
to call a meeting and that officer refuses, fails, or neglects to call a
meeting, the SEC can assume jurisdiction and issue an order to
the petitioning stockholder to call a meeting pursuant to its
regulatory and administrative powers to implement the
Corporation Code.36 This is clearly provided for by Section 50 of
the Corporation Code which we quote:
Sec. 50. Regular and special meetings of stockholders or
members. - x x x
xxxx
Whenever, for any cause, there is no person authorized to call a
meeting, the Securities and Exchange Commission, upon petition
Page 87 of 111
of a stockholder or member, and on a showing of good cause
therefore, may issue an order to the petitioning stockholder or
member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at
least majority of the stockholders or members present have
chosen one of their member[s] as presiding officer.
As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of
First Instance (now the SEC)38 is empowered to call a meeting
upon petition of the stockholder or member and upon showing of
good cause, thus:
On the showing of good cause therefore, the court may authorize
a stockholder to call a meeting and to preside thereat until the
majority stockholders representing a majority of the stock present
and permitted to be voted shall have chosen one among them to
preside it. And this showing of good cause therefor exists when
the court is apprised of the fact that the by-laws of the
corporation require the calling of a general meeting of the
stockholders to elect the board of directors but the call for such
meeting has not been done.39
The same jurisprudential rule resonates in Philippine National
Construction Corporation v. Pabion,40 where the Court validated
the order of the SEC to compel the corporation to conduct a
stockholders' meeting in the exercise of its regulatory and
administrative powers to implement the Corporation Code:
SEC's assumption of jurisdiction over this case is proper, as the
controversy involves the election of PNCC's directors. Petitioner
does not really contradict the nature of the question presented
and agrees that there is an intra-corporate question involved.
xxxx
Prescinding from the above premises, it necessarily follows that
SEC can compel PNCC to hold a stockholders' meeting for the
purpose of electing members of the latter's board of directors.
xxxx
As respondents point out, the SEC's action is also justified by its
regulatory and administrative powers to implement the
Corporation Code, specifically to compel the PNCC to hold a
stockholders' meeting for election purposes.41
Given the broad administrative and regulatory powers of the SEC
outlined under Section 50 of the Corporation Code and Section 6
of Presidential Decree (PD) No. 902-A, the Cinco Group cannot
claim that if was left without recourse after the Corporate
Secretary previously refused to heed its demand to call a special
stockholders' meeting. If it be true that the Corporate Secretary
refused to call a meeting despite fervent demand from the
MSCOC, the remedy of the stockholders would have been to file a
petition to the SEC to direct him to call a meeting by giving proper
notice required under the Code. To rule otherwise would open
the floodgates to abuse where any stockholder, who consider
himself aggrieved by certain corporate actions, could call a special
stockholders' meeting for the purpose of removing the sitting
officers in direct violation of the rules pertaining to the call of
meeting laid down in the by-laws.
Every corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.42 The
by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation.
They are in effect written into the charter. In this sense they
become part of the fundamental law of the corporation with
which the corporation and its directors and officers must
comply.43 The general rule is that a corporation, through its board
of directors, should act in the manner and within the formalities,
if any, prescribed in its charter or by the general law. Thus,
directors must act as a body in a meeting called pursuant to the
law or the corporation's by-laws, otherwise, any action taken
therein may be questioned by the objecting director or
shareholder.44
Certainly, the rules set in the by-laws are mandatory for every
member of the corporation to respect.1âwphi1 They are the
fundamental law of the corporation with which the corporation
and its officers and members must comply. It is on this score that
we cannot upon the other hand sustain the Bernas Group's stance
that the subsequent annual stockholders' meetings were invalid.
First, the 20 April 1998 Annual Stockholders Meeting was valid
because it was sanctioned by Section 845 of the MSC bylaws.
Unlike in Special Stockholders Meeting46 wherein the bylaws
mandated that such meeting shall be called by specific persons
only, no such specific requirement can be obtained under Section
8.
Second, the 19 April 1999 Annual Stockholders Meeting is likewise
valid because in addition to the fact that it was conducted in
accordance to Section 8 of the MSC bylaws, such meeting was
supervised by the SEC in the exercise of its regulatory and
administrative powers to implement the Corporation Code.47
Needless to say, the conduct of SEC supervised Annual
Stockholders Meeting gave rise to the presumption that the
corporate officers who won the election were duly elected to
their positions and therefore can be rightfully considered as de
jure officers. As de jure officials, they can lawfully exercise
functions and legally perform such acts that are within the scope
of the business of the corporation except ratification of actions
that are deemed void from the beginning.
Considering that a new set of officers were already duly elected in
1998 and 1999 Annual Stockholders Meetings, the Bernas Group
cannot be permitted to use the holdover principle as a shield to
perpetuate in office. Members of the group had no right to
continue as directors of the corporation unless reelected by the
stockholders in a meeting called for that purpose every
year.48 They had no right to hold-over brought about by the
failure to perform the duty incumbent upon them.49 If they were
sure to be reelected, why did they fail, neglect, or refuse to call
the meeting to elect the members of the board?50
Moreover, it is fundamental rule that factual findings of quasi-
judicial agencies like the SEC, if supported by substantial evidence,
are generally accorded not only great respect but even finality,
and are binding upon this Court unless it was shown that the
quasi-judicial agencies had arbitrarily disregarded evidence before
it had misapprehended evidence to such an extent as to compel a
contrary conclusion if such evidence had been properly
appreciated.51 It is not the function of this Court to analyze or
weigh all over again the evidence and credibility of witnesses
presented before the lower court, tribunal, or office, as we are
not trier of facts.52 Our jurisdiction is limited to reviewing and
revising errors of law imputed to the lower court, the latter's
finding of facts being conclusive and not reviewable by this
Court.53 However, when it can be shown that administrative
bodies grossly misappreciated evidence of such nature as to
compel a contrary conclusion, the Court will not hesitate to
reverse its factual findings.54 In the case at bar, the incongruent
findings of the SEC on the one hand, and the Court of Appeals on
the other, constrained the Court to review the records to
ascertain which body correctly appreciated the facts vis-a-vis the
standing statutory and jurisprudential principles.
After finding that the ruling of the appellate court was in
accordance with the existing laws and jurisprudence as
exhaustively discussed above, we hereby quote with approval its
Page 88 of 111
disquisition: (1) The supposed Special Stockholders' Meeting of 1
7 December 1997 was prematurely or invalidly called by the
[Cinco Group]. It therefore failed to produce any legal effects and
did not effectively remove [the Bernas Group] as directors of the
Makati Sports Club, Inc.;
(2) The expulsion of [Bernas] as well as the public
auction of his shares is hereby declared void and
without legal effect;
(3) The ratification of the removal of [the Bernas
Group] as directors, the expulsion of Bernas and the
sale of his share by the [Cinco Group] and by the
stockholders held in their Regular Stockholders'
Meeting held in April of 1998, 1999 and 2000, is void
and produces no effects as they were not the proper
party to cause the ratification;
(4) All other actions of the [Cinco Group] and
stockholders taken during the Regular Stockholders'
Meetings held in April 1998, 1999 and 2000, including
the election of the [Cinco Group] as directors after the
expiration of the term of office of [Bernas Group] as
directors, are hereby declared valid.55
In fine, we hold that 17 December 1997 Special Stockholders'
Meeting is null and void and produces no effect; the resolution
expelling the Bernas Group from the corporation and authorizing
the sale of Bernas' shares at the public auction is likewise null and
void. The subsequent Annual Stockholders' Meeting held on 20
April 1998, 19 April 1999 and 17 April 2000 are valid and binding
except the ratification of the removal of the Bernas Group and the
sale of Bernas' shares at the public auction effected by the body
during the said meetings. The expulsion of the Bernas Group and
the subsequent auction of Bernas' shares are void from the very
beginning and therefore the ratifications effected during the
subsequent meetings cannot be sustained. A void act cannot be
the subject of ratification.56
WHEREFORE, premises considered, the petitions of Jose A.
Bernas, Cecile. H. Cheng, Victor Africa, Jesus B. Maramara, Jose T.
Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos.
163356-57 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo
in G.R. Nos. 163368-69 are hereby DEN~ED. The assailed Decision
dated 28 April 2003 and Resolution dated 27 April 2004 of the
Court of Appeals are hereby AFFIRMED.
SO ORDERED.
21. NAUTICA CANNING G.R. No. 164588
CORPORATION, FIRST
DOMINION PRIME HOLDINGS,
INC. and FERNANDO R.
ARGUELLES, JR.,
YNARES-SANTIAGO, J.:
Petitioners assail the September 26, 2001 Decision[1] of the Court
of Appeals in CA-G.R. SP No. 61919, affirming in toto the Decision
of the Securities and Exchange Commission (SEC) En Banc in SEC
Case No. 10-96-5455, as well as the July 16, 2004
Resolution[2] denying the motion for reconsideration.
The facts of the case show that Nautica Canning Corporation
(Nautica) was organized and incorporated on May 11, 1994 with
an authorized capital stock of P40,000,000 divided into 400,000
shares with a par value of P100.00 per share. It had a subscribed
capital stock of P10,000,000 with paid-in subscriptions from its
incorporators as follows:[3]
Name No. of Shares Amount Subscribed Amount Paid
ALVIN Y. DEE 89,991 P8,999,100 P4,499,100
JONATHAN Y. DEE 2 200 200
JOANNA D. LAUREL 2 200 200
DARLENE EDSA MARIE
GONZALES 2 200 200
JENNIFER Y. DEE 2 200 200
ROBERTO C. YUMUL 1 100 100
JERRY ANGPING 10,000 1,000,000 500,000
-------------- -------------------- -------------------
100,000 P10,000,000 P5,000,000
On December 19, 1994, respondent Roberto C. Yumul
was appointed Chief Operating Officer/General Manager of
Nautica with a monthly compensation of P85,000 and an
additional compensation equal to 5% of the companys operating
profit for the calendar year.[4] On the same date, First Dominion
Prime Holdings, Inc., Nauticas parent company, through its
Chairman Alvin Y. Dee, granted Yumul an Option to Purchase[5] up
to 15% of the total stocks it subscribed from Nautica.
On June 22, 1995, a Deed of Trust and
Assignment[6] was executed between First Dominion Prime
Holdings, Inc. and Yumul whereby the former assigned 14,999 of
its subscribed shares in Nautica to the latter. The deed stated that
the 14,999 shares were acquired and paid for in the name of the
ASSIGNOR only for convenience, but actually executed in behalf of
and in trust for the ASSIGNEE.
In March 1996, Nautica declared a P35,000,000 cash
dividend, P8,250,000 of which was paid to Yumul representing his
15% share.
After Yumuls resignation from Nautica on August 5,
1996, he wrote a letter[7] to Dee requesting the latter to formalize
his offer to buy Yumuls 15% share in Nautica on or before August
20, 1996; and demanding the issuance of the corresponding
certificate of shares in his name should Dee refuse to buy the
same. Dee, through Atty. Fernando R. Arguelles, Jr., Nauticas
corporate secretary, denied the request claiming that Yumul was
not a stockholder of Nautica.
On September 6, 1996[8] and September 9,
1996,[9] Yumul requested that the Deed of Trust and
Assignment be recorded in the Stock and Transfer Book of Nautica,
and that he, as a stockholder, be allowed to inspect its books and
records.
Yumuls requests were denied allegedly because he
neither exercised the option to purchase the shares nor paid for
the acquisition price of the 14,999 shares. Atty. Arguelles
maintained that the cash dividend received by Yumul is held by
him only in trust for First Dominion Prime Holdings, Inc.
Thus, Yumul filed on October 3, 1996, before the SEC a
petition for mandamus with damages, with prayer that the Deed
of Trust and Assignment be recorded in the Stock and Transfer
Book of Nautica and that the certificate of stocks corresponding
thereto be issued in his name.[10]
On October 12, 2000, the SEC En Banc rendered the
Decision,[11] the dispositive portion of which reads:
Page 89 of 111

WHEREFORE, judgment is hereby
rendered in favor of the petitioner and
against the respondents, as follows:
1. Declaring petitioner
as a stockholder of
respondent Nautica;
2. Declaring petitioner
as beneficial owner of
14,999 shares of
Nautica under the
Deed of Trust and
Assignment dated
June 22, 1995
3. Declaring petitioner
to be entitled to the
right of inspection of
the books of the
corporation pursuant
to the pertinent
provisions of the
Corporation Code;
and
4. Directing the
Corporate Secretary
of Nautica to
recognize and
register the Deed of
Trust and Assignment
dated June 22, 1995.
SO ORDERED.[12]
On appeal, the Court of Appeals affirmed the decision of the
SEC En Banc. Petitioners motion for reconsideration was denied in
a Resolution dated July 16, 2004.
Hence, this petition.
At the outset, we note that petitioners recourse to this
Court via a combined petition under Rule 65 and an appeal under
Rule 45 of the Rules of Court is irregular. A petition for review
under Rule 45 is the proper remedy of a party aggrieved by a
decision of the Court of Appeals, which is not identical to a
petition for certiorari under Rule 65. Under Rule 45, decisions,
final orders or resolutions of the Court of Appeals is appealed by
filing a petition for review, which is a continuation of the
appellate process over the original case.[13] On the other hand, the
writ of certiorari under Rule 65 is filed when petitioner has no
plain, speedy and adequate remedy in the ordinary course of law
against its perceived grievance. A remedy is considered plain,
speedy and adequate if it will promptly relieve the petitioner from
the injurious effects of the judgment and the acts of the lower
court or agency.
In this case, petitioners speedy, available and adequate
remedy is appeal via Rule 45, and not certiorari under Rule 65.
Notwithstanding petitioners procedural lapse, we shall treat the
petition as one filed under Rule 45.
The petition is partly meritorious.
Petitioners contend that Yumul was not a stockholder of Nautica;
that he was just a nominal owner of one share as the beneficial
ownership belonged to Dee who paid for said share when Nautica
was incorporated. They presented China Banking Corporation
Check No. A2620636 and Citibank Check No. B82642 as proof of
payment by Dee; a letter by Dee dated July 15, 1994 requesting
the corporate secretary of Nautica to issue a certificate of stock in
Yumuls name but in trust for Dee; and Stock Certificate No. 6 with
annotation ITF Alvin Y. Dee which means that respondent held
said stock In Trust For Alvin Y. Dee.
We are not persuaded.
Indeed, it is possible for a business to be wholly owned
by one individual. The validity of its incorporation is not affected
when such individual gives nominal ownership of only one share
of stock to each of the other four incorporators. This is not
necessarily illegal.[14] But, this is valid only between or among the
incorporators privy to the agreement. It does bind the corporation
which, at the time the agreement is made, was non-existent.
Thus, incorporators continue to be stockholders of a corporation
unless, subsequent to the incorporation, they have validly
transferred their subscriptions to the real parties in interest. As
between the corporation on the one hand, and its shareholders
and third persons on the other, the corporation looks only to its
books for the purpose of determining who its shareholders are.[15]
In the case at bar, the SEC and the Court of Appeals correctly
found Yumul to be a stockholder of Nautica, of one share of stock
recorded in Yumuls name, although allegedly held in trust for Dee.
Nauticas Articles of Incorporation and By-laws, as well as the
General Information Sheet filed with the SEC indicated that Yumul
was an incorporator and subscriber of one share.[16] Even granting
that there was an agreement between Yumul and Dee whereby
the former is holding the share in trust for Dee, the same is
binding only as between them. From the corporations vantage
point, Yumul is its stockholder with one share, considering that
there is no showing that Yumul transferred his subscription to
Dee, the alleged real owner of the share, after Nauticas
incorporation.
We held in Ponce v. Alsons Cement Corp.[17] that:
... [A] transfer of shares of stock not
recorded in the stock and transfer book of
the corporation is non-existent as far as the
corporation is concerned. As between the
corporation on one hand, and its
shareholders and third persons on the
other, the corporation looks only to its
books for the purpose of determining who
its shareholders are. It is only when the
transfer has been recorded in the stock and
transfer book that a corporation may
rightfully regard the transferee as one of its
stockholders. From this time, the
consequent obligation on the part of the
corporation to recognize such rights as it is
mandated by law to recognize arises.
Hence, without such recording,
the transferee may not be regarded by the
Page 90 of 111
 corporation as one among its stockholders
and the corporation may legally refuse the
issuance of stock certificates[.]
Moreover, the contents of the articles of incorporation
bind the corporation and its stockholders. Its contents cannot be
disregarded considering that it was the basic document which
legally triggered the creation of the corporation.[18]
The Court of Appeals, in affirming the factual findings of SEC, held
that:
The evidence submitted by petitioners to
establish trust is palpably incompetent,
consisting mainly of the self-serving
allegations by the petitioners and the China
Banking Corporation checks issued as
payment for the shares of stock of Nautica.
Dee did not testify on the supposed trust
relationship between him and Yumul. While
Atty. Arguelles testified, his testimony is
barren of probative value since he had no
first-hand knowledge of the relationship in
question. The isolated fact that Dee might
have paid for the share in the name of
Yumul did not by itself make the latter a
man of straw. Such act of payment is so
nebulous and equivocal that it can not yield
the meaning which the petitioners would
want to squeeze from it without the
clarificatory testimony of Dee.[19]
We see no cogent reason to set aside the factual
findings of the SEC, as upheld by the Court of Appeals. Findings of
fact of quasi-judicial agencies, like the SEC, are generally accorded
respect and even finality by the Supreme Court, if supported by
substantial evidence, in recognition of their expertise on the
specific matters under their consideration,[20] moreso if the same
has been upheld by the appellate court, as in this case.
Besides, other than petitioners self-serving assertion
that the beneficial ownership belongs to Dee, they failed to show
that the subscription was transferred to Dee after Nauticas
incorporation. The conduct of the parties also constitute sufficient
proof of Yumuls status as a stockholder. On April 4, 1995, Yumul
was elected during the regular annual stockholders meeting as a
Director of Nauticas Board of Directors.[21] Thereafter, he was
elected as president of Nautica.[22] Thus, Nautica and its
stockholders knowingly held respondent out to the public as an
officer and a stockholder of the corporation.
Section 23 of Batas Pambansa (BP) Blg. 68 or The
Corporation Code of the Philippines requires that every director
must own at least one share of the capital stock of the
corporation of which he is a director. Before one may be elected
president of the corporation, he must be a director.[23] Since
Yumul was elected as Nauticas Director and as President thereof,
it follows that he must have owned at least one share of the
corporations capital stock.
Thus, from the point of view of the corporation, Yumul
was the owner of one share of stock. As such, the SEC correctly
ruled that he has the right to inspect the books and records of
Nautica,[24] pursuant to Section 74 of BP Blg. 68 which states that
the records of all business transactions of the corporation and the
minutes of any meetings shall be open to inspection by any
director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in
writing, for a copy of excerpts from said records or minutes, at his
expense.
As to whether or not Yumul is the beneficial owner of the 14,999
shares of stocks of Nautica, petitioners allege that Yumul was
given the option to purchase shares of stocks in Nautica under
the Option to Purchase dated December 19, 1994. However, he
failed to exercise the option, thus there was no cause or
consideration for the Deed of Trust and Assignment, which makes
it void for being simulated or fictitious.[25]
Anent this issue, the SEC did not make a categorical
finding on whether Yumul exercised his option and also on the
validity of the Deed of Trust and Assignment. Instead, it held that:
... Although unsubstantiated, the apparent
objective of the respondents allegation was
to refute petitioners claim over the shares
covered by the Deed of Trust and
Assignment. This must therefore be
deemed as nothing but a ploy to deprive
petitioner of his right over the shares in
question, which to us should not be
countenanced.[26]
Neither did the Court of Appeals rule on the issue as it
only held that:
Petitioners also contend that the
Deed is a simulated contract.
Simulation is the declaration of a
fictitious will, deliberately made by
agreement of the parties, in order to
produce, for the purposes of deception, the
appearances of a judicial act which does not
exist or is different with that which was
really executed. The characteristic of
simulation is that the apparent contract is
not really desired or intended to produce
legal effect or in any way alter the juridical
situation of the parties.
The requisites for simulation are:
(a) an outward declaration of will different
from the will of the parties; (b) the false
appearance must have been intended by
mutual agreement; and (c) the purpose is to
deceive third persons. These requisites have
not been proven in this case.[27]
Thus, other than defining and enumerating the
requisites of a simulated contract or deed, the Court of Appeals
did not make a determination whether the SEC has the
jurisdiction to resolve the issue and whether the questioned deed
was fictitious or simulated.
In Intestate Estate of Alexander T. Ty v. Court of
Appeals,[28] we held that:
The question raised in the complaints is
whether or not there was indeed a sale in
the absence of cause or consideration. The
Page 91 of 111
 proper forum for such a dispute is a regular
trial court. The Court agrees with the ruling
of the Court of Appeals that no special
corporate skill is necessary in resolving the
issue of the validity of the transfer of shares
from one stockholder to another of the
same corporation. Both actions, although
involving different property, sought to
declare the nullity of the transfers of said
property to the decedent on the ground
that they were not supported by any cause
or consideration, and thus, are considered
void ab initio for being absolutely simulated
or fictitious. The determination whether a
contract is simulated or not is an issue that
could be resolved by applying pertinent
provisions of the Civil Code, particularly
those relative to obligations and contracts.
Disputes concerning the application of the
Civil Code are properly cognizable by
courts of general jurisdiction. No special
skill is necessary that would require the
technical expertise of the SEC. (Emphasis
supplied)
Thus, when the controversy involves matters purely
civil in character, it is beyond the ambit of the limited jurisdiction
of the SEC. As held in Viray v. Court of Appeals,[29]the better policy
in determining which body has jurisdiction over a case would be
to consider not only the status or relationship of the parties, but
also the nature of the question that is the subject of their
controversy. This, however, is now moot and academic due to the
passage of Republic Act No. 8799 or The Securities Regulation
Code which took effect on August 8, 2000. The Act transferred
from the SEC to the regional trial court jurisdiction over cases
involving intra-corporate disputes. Thus, whether or not the issue
is intra-corporate, it is now the regional trial court and no longer
the SEC that takes cognizance of the controversy.
Considering that the issue of the validity of the Deed of Trust and
Assignment is civil in nature, thus, under the competence of the
regular courts, and the failure of the SEC and the Court of Appeals
to make a determinative finding as to its validity, we are
constrained to refrain from ruling on whether or not Yumul can
compel the corporate secretary to register said deed. It is only
after an appropriate case is filed and decision rendered thereon
by the proper forum can the issue be resolved.
WHEREFORE, the petition is PARTIALLY GRANTED. The
September 26, 2001 Decision of the Court of Appeals in CA-G.R.
SP No. 61919, is AFFIRMED insofar as it declares respondent
Roberto C. Yumul as a subscriber and stockholder of one share of
stock of Nautica Canning Corporation. The Decision is REVERSED
and SET ASIDE insofar as it affirms the validity of the Deed of Trust
and Assignment and orders its registration in the Stock and
Transfer Book of Nautica Canning Corporation.
SO ORDERED.
15. G.R. No. 154069, June 06, 2016
INTERPORT RESOURCES CORPORATION, Petitioner, v. SECURITIES
SPECIALIST, INC., AND R.C. LEE SECURITIES INC., Respondents.
DECISION
BERSAMIN, J.:
This appeal assails the decision promulgated on February 11,
2002,1 whereby the Court of Appeals (CA), in C.A.-G.R. SP No.
66600, affirmed the decision the Securities and Exchange
Commission (SEC) rendered in SEC AC No. 501-5022 ordering
Interport Resources Corporation (Interport) to deliver 25% of the
shares of stocks under Subscription Agreements Nos. 1805 and
1808-1811, or the value thereof, and to pay to respondent
Securities Specialist, Inc. (SSI), jointly and severally with R.C. Lee
Securities, Inc. (R.C. Lee), exemplary damages and litigation
expenses.
Antecedents
In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic)
entered into a subscription agreement with R.C. Lee, a domestic
corporation engaged in the trading of stocks and other securities,
covering 5,000,000 of its shares with par value of P0.01 per share,
for a total of P50,000.00. Thereupon, R.C. Lee paid 25% of the
subscription, leaving 75% unpaid. Consequently, Oceanic issued
Subscription Agreements Nos. 1805, 1808, 1809, 1810, and 1811
to R.C. Lee.3chanrobleslaw
On July 28, 1978, Oceanic merged with Interport, with the latter
as the surviving corporation. Interport was a publicly-listed
domestic corporation whose shares of stocks were traded in the
stock exchange. Under the terms of the merger, each share of
Oceanic was exchanged for a share of Interport.4chanrobleslaw
On April 16, 1979 and April 18, 1979, SSI, a domestic corporation
registered as a dealer in securities, received in the ordinary course
of business Oceanic Subscription Agreements Nos. 1805, 1808 to
1811, all outstanding in the name of R.C. Lee, and Oceanic official
receipts showing that 25% of the subscriptions had been
paid.5 The Oceanic subscription agreements were duly delivered
to SSI through stock assignments indorsed in blank by R.C.
Lee.6chanrobleslaw
Later on, R.C. Lee requested Interport for a list of subscription
agreements and stock certificates issued in the name of R.C. Lee
and other individuals named in the request. In response, Atty.
Rhodora B. Morales, Interport1 s Corporate Secretary, provided
the requested list of all subscription agreements of Interport and
Oceanic, as well as the requested stock certificates of
Interport.7 Upon finding no record showing any transfer or
assignment of the Oceanic subscription agreements and stock
certificates of Interport as contained in the list, R.C. Lee paid its
unpaid subscriptions and was accordingly issued stock certificates
corresponding thereto.8chanrobleslaw
On February 8, 1989, Interport issued a call for the full payment of
subscription receivables, setting March 15, 1989 as the deadline.
SSI tendered payment prior to the deadline through two
stockbrokers of the Manila Stock Exchange. However, the
stockbrokers reported to SSI that Interport refused to honor the
Oceanic subscriptions.9chanrobleslaw
Still on the date of the deadline, SSI directly tendered payment to
Interport for the balance of the 5,000,000 shares covered by the
Oceanic subscription agreements, some of which were in the
name of R.C. Lee and indorsed in blank. Interport originally
rejected the tender of payment for all unpaid subscriptions on the
ground that the Oceanic subscription agreements should have
been previously converted to shares in Interport.10chanrobleslaw
SSI then required Interport to furnish it with a copy of any notice
Page 92 of 111
requiring the conversion of Oceanic shares to Interport shares.
However, Interport failed to show any proof of the notice. Thus,
through a letter dated March 30, 1989, SSI asked the SEC for a
copy of Interport's board resolution requiring said conversion. The
SEC, through Atty. Fe Eloisa C. Gloria, Director of Brokers and
Exchange Department, informed SSI that the SEC had no record of
any such resolution.11chanrobleslaw
Having confirmed the non-existence of the resolution, Francisco
Villaroman, President of SSI, met with Pablo Roman, President
and Chairman of the Board of Interport, and Atty. Pineda,
Interport's Corporate Secretary, at which meeting Villaroman
formally requested a copy of the resolution. However, Interport
did not produce a copy of the resolution.12chanrobleslaw
Despite that meeting, Interport still rejected SSI's tender of
payment for the 5,000,000 shares covered by the Oceanic
Subscription Agreements Nos. 1805, and 1808 to
1811.13chanrobleslaw
On March 31, 1989, or 16 days after its tender of payment, SSI
learned that Interport had issued the 5,000,000 shares to R.C. Lee,
relying on the latter's registration as the owner of the subscription
agreements in the books of the former, and on the affidavit
executed by the President of R.C. Lee stating that no transfers or
encumbrances of the shares had ever been made.14chanrobleslaw
Thus, on April 27, 1989, SSI wrote R.C. Lee demanding the delivery
of the 5,000,000 Interport shares on the basis of a purported
assignment of the subscription agreements covering the shares
made in 1979. R.C. Lee failed to return the subject shares
inasmuch as it had already sold the same to other parties. SSI thus
demanded that R.C. Lee pay not only the equivalent of the 25% it
had paid on the subscription but the whole 5,000,000 shares at
current market value.15chanrobleslaw
SSI also made demands upon Interport and R.C. Lee for the
cancellation of the shares issued to R.C. Lee and for the delivery of
the shares to SSI.16chanrobleslaw
On October 6, 1989, after its demands were not met, SSI
commenced this case in the SEC to compel the respondents to
deliver the 5,000,000 shares and to pay damages.17 It alleged
fraud and collusion between Interport and R.C. Lee in rejecting
the tendered payment and the transfer of the shares covered by
the subscription agreements.
On October 25, 1994, after due hearing, the Hearing Officer of the
SEC's Securities Investigation and Clearing Department (SICD)
rendered a decision,18 disposing
thusly:ChanRoblesVirtualawlibrary
WHEREFORE, judgment is hereby rendered ordering respondent
Interport to deliver the five (5) million shares covered by Oceanic
Oil and Mineral Resources, Inc. subscription agreement TNos.
1805, 1808-1811 to petitioner SSI; and if the same not be possible
to deliver the value thereof, at the market price as of the date of
this judgment; and ordering both respondents, jointly and
severally, to indemnify the complainant in the sum of FIVE
HUNDRED THOUSAND PESOS (P500,000.00) by way of temperate
or moderate damages, to indemnify complainant in the sum of
FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of
exemplary damages; to pay for complainant's litigation expenses,
including attorney's fees, reasonably in the sum of THREE
HUNDRED THOUSAND pesos (P300,000.00) and to pay the costs
of suit.19chanroblesvirtuallawlibrary
Both Interport and R.C. Lee appealed to the SEC En Banc, which
ultimately ruled as follows:ChanRoblesVirtualawlibrary
After a careful review of the records of this case, we find basis in
partially reversing the decision dated October 25, 1994.
It is undisputed from the facts presented and evidence adduced
that the subject matter of this case pertains to the subscription
agreements for which complainant paid only twenty five percent
and the remaining balance of seventy five percent paid for by
respondent RCL. Accordingly, to order the return of the five
million shares or the payment of the entire value thereof to the
complainant, without requiring the latter to pay the balance of
seventy five percent will be inequitable. Accordingly, the
pertinent portion of the decision is hereby revised to reflect this.
As regards the portion awarding temperate damages, the same
may not be awarded. All evidence presented by Securities
Specialist, Inc. pertaining to its "lost opportunity" seeking for
damages for its supposed failure to sell Interport's shares, when
the market was allegedly good, is merely speculative. Moreover,
even if the alleged pecuniary loss of SSI would be considered, the
same is again purely speculative and deserves scant consideration
by the Commission. Hence, temperate damages may not be justly
awarded along with the other damages prayed for.
WHEREFORE, premises considered, judgment is hereby rendered,
ordering respondent Interport to deliver the corresponding shares
previously covered by Oceanic Oil Mineral Resources Inc.
subscription agreements Nos. 1805-1811 to petitioner SSI, to the
extent only of 25% thereof, as duly paid by petitioner SSI; and if
the same will not be possible, to deliver the value thereof at the
market price as of the date of this judgment and ordering both
respondents jointly and severally, to indemnify the complainant in
the sum of five hundred thousand pesos (P500,000.00) by way of
exemplary damages, to pay for complainant's litigation expenses,
including attorney's fees, reasonably in the sum of three hundred
thousand pesos (P300,000.00) and to pay the costs of the
suit.20chanroblesvirtuallawlibrary
Interport appealed to the CA,21 which on February 11, 2002
affirmed the SEC's decision,22viz.:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered the Petition is hereby DENIED
DUE COURSE and ordered DISMISSED and the challenged decision
of the Securities and Exchange Commission AFFIRMED, with costs
to Petitioner.
SO ORDERED.
On June 25, 2002, the CA denied Interport's motion for
reconsideration.23chanrobleslaw
Issues
Interport assigns the following errors to the CA,
namely:ChanRoblesVirtualawlibrary
I
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE
OF DISCRETION IN THE APPRECIATION OF THE FACTS IN HOLDING
PETITIONER LIABLE TO DELIVER THE 25% OF THE SUBJECT 5
MILLION SHARES OR IF THE SAME NOT BE POSSIBLE TO DELIVER
THE VALUE THEREOF DESPITE THE EVIDENCE TO THE CONTRARY.
II
THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS
Page 93 of 111
LIABLE FOR EXEMPLARY DAMAGES IN THE AMOUNT OF P500
000.00 WITHOUT LEGAL BASIS, WHICH IS NOT IN ACCORD WITH
LAW AND APPLICABLE DECISIONS OF THE SUPREME COURT.
III
THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS
LIABLE FOR ATTORNEY'S FEES IN THE AMOUNT OF P300.000.00
AND COSTS THERE BEING NO FACTUAL AND LEGAL BASIS, WHICH
IS NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF
THE SUPREME COURT.24chanroblesvirtuallawlibrary
The issues are: (a) whether or not Interport was liable to deliver
to SSI the Oceanic shares of stock, or the value thereof, under
Subscriptions Agreement No. 1805, and Nos. 1808 to 1811 to SSI;
and (b) whether or not SSI was entitled to exemplary damages
and attorney's fees.
Ruling
The appeal is partly meritorious.
1.
Interport was liable to deliver the Oceanic shares of stock, or the
value thereof, under Subscription Agreements Nos. 1805, and
1808 to 1811 to SSI
Interport argues that R.C. Lee should be held liable for the
delivery of 25% of the shares under the subject subscription
agreements inasmuch as R.C. Lee had already received all the
5,000,000 shares upon its payment of the 75% balance on the
subscription price to Interport; that it was only proper for R.C. Lee
to deliver 25% of the shares under the Oceanic subscription
agreements because it had already received the corresponding
payment therefor from SSI for the assignment of the shares; that
R.C. Lee would be unjustly enriched if it retained the 5,000,000
shares and the 25% payment of the subscription price made by SSI
in favor of R.C. Lee as a result of the assignment; and that it
merely relied on its records, in accordance with Section 74 of
the Corporation Code, when it issued the stock certificates to R.C.
Lee upon its full payment of the subscription price.
Interport's arguments must fail.
In holding Interport liable for the delivery of the Oceanic shares,
the SEC explained:ChanRoblesVirtualawlibrary
x x x [T]he Oceanic subscriptions agreements were duly delivered
to the Complainant SSI supported by stock assignments of
respondent R.C. Lee (Exhibits "B" to "B-4" of the petitioner) and
by official receipts of Oceanic showing that twenty five percent of
the subscription had been paid (Exhibits "C" to "C-4"). To this
date, respondent R.C. Lee does not deny having subscribed and
delivered such stock assignments to the Oceanic subscription
agreements. Therefore, having negotiated them by allowing to
be in street certificates, respondent R.C. Lee, as a broker, cannot
now legally and morally claim any further interests over such
subscriptions or the shares of stock they represent.
x x x x
Both respondents seek to be absolved of liability for their
machinations by invoking both the rule on novation of the debtor
without the creditor's consent; as well as the Corporation Code
rule of nonregistration of transfers in the corporation's stock and
transfer book. Neither will avail in the case at bar. Art. 1293 of the
New Civil Code states:
chanRoblesvirtualLawlibrary"Art. 1293. Novation which consists in
substituting a new debtor in the place of the original one may be
made even without the knowledge or against the will of the latter
but not without the consent of the creditor" x x x.
More importantly, the allusion by the respondents likening the
subscription contracts to the situation of debtor-creditor finds no
basis in law. Indeed, as held by the Supreme Court, shareholders
are not creditors of the corporation with respect to the
shareholdings (Garcia vs. Lim Chu Sing, 59 Phil. 562).
The Memorandum of R.C. Lee, likewise cites the Opinion of the
SEC dated November 12, 1976, which states "that since an
assignment will involve a substitution of debtor or novation of
contract, as such the consent of the creditor must be obtained"
has the same effect. The opinion, however, merely restated the
general rule already embodied in the Codal provision quoted
above; it does not preclude previously authorized transfers.
According to Tolentino -
"When the original contract authorizes the debtor to transfer his
obligations to a third person, the novation by substitution of
debtor is effected when the creditor is notified that such transfer
has been made" (IV Tolentino 392, 1991 ed, Emphasis supplied)
But even following the argument of the respondents, when
complainant SSI tendered the balance of the unpaid subscription
on the subject five (5) million shares on the basis of the existing
subscription agreements covering the same, respondents
Interport was bound to accept payment even as the same were
being tendered in the name of the registered subscriber,
respondent R.C. Lee and once the payment is fully accepted in
the name of respondent R.C. Lee, respondent Interport was then
bound to recognize the stock assignment also tendered duly
executed by respondent R.C. Lee in favor of complainant
SSI.25cralawred(bold Emphasis supplied.)
The SEC correctly categorized the assignment of the subscription
agreements as a form of novation by substitution of a new debtor
and which required the consent of or notice to the creditor. We
agree. Under the Civil Code, obligations may be modified by: (1)
changing their object or principal conditions; or (2) substituting
the person of the debtor; or (3) subrogating a third person in the
rights of the creditor.26Novation, which consists in substituting a
new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not
without the consent of the creditor.27 In this case, the change of
debtor took place when R.C. Lee assigned the Oceanic shares
under Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI
so that the latter became obliged to settle the 75% unpaid
balance on the subscription.
The SEC likewise did not err in appreciating the fact that Interport
was duly notified of the assignment when SSI tendered its
payment for the 75% unpaid balance, and that it could not
anymore refuse to recognize the transfer of the subscription that
SSI sufficiently established by documentary evidence.
Yet, Interport claims that SSI waived its rights over the 5,000,000
shares due to its failure to register the assignment in the books of
Interport; and that SSI was estopped from claiming the assigned
shares, inasmuch as the assignor, R.C. Lee, had already
transferred the same to third parties.
Interport's claim cannot be upheld. It should be stressed that
novation extinguished an obligation between two parties.28 We
have stated in that respect that:ChanRoblesVirtualawlibrary
Page 94 of 111
x x x Novation may:
chanRoblesvirtualLawlibrary[E]ither be extinctive or modificatory,
much being dependent on the nature of the change and the
intention of the parties. Extinctive novation is never presumed;
there must be an express intention to novate; in cases where it is
implied, the acts of the parties must clearly demonstrate their
intent to dissolve the old obligation as the moving consideration
for the emergence of the new one. Implied novation necessitates
that the incompatibility between the old and new obligation be
total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is whether
they can stand together, each one having an independent
existence; if they cannot and are irreconcilable, the subsequent
obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new
one in its stead. This kind of novation presupposes a confluence of
four essential requisites: (1) a previous valid obligation, (2) an
agreement of all parties concerned to a new contract, (3) the
extinguishment of the old obligation, and (4) the birth of a valid
new obligation. Novation is merely modificatory where the
change brought about by any subsequent agreement is merely
incidental to the main obligation (e.g., a change in interest rates
or an extension of time to pay; in this instance, the new
agreement will not have the effect of extinguishing the first but
would merely supplement it or supplant some but not all of its
provisions.29chanroblesvirtuallawlibrary
Clearly, the effect of the assignment of the subscription
agreements to SSI was to extinguish the obligation of R.C. Lee to
Oceanic, now Interport, to settle the unpaid balance on the
subscription. As a result of the assignment, Interport was no
longer obliged to accept any payment from R.C. Lee because the
latter had ceased to be privy to Subscription Agreements Nos.
1805, and 1808 to 1811 for having been extinguished insofar as it
was concerned. On the other hand, Interport was legally bound to
accept SSI's tender of payment for the 75% balance on the
subscription price because SSI had become the new debtor under
Subscription Agreements Nos. 1805, and 1808 to 1811. As such,
the issuance of the stock certificates in the name of R.C. Lee had
no legal basis in the absence of a contractual agreement between
R.C. Lee and Interport.
Under Section 63 of the Corporation Code, no transfer of shares of
stock 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. Hence:ChanRoblesVirtualawlibrary
[A] transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as the
corporation is concerned. As between the corporation on the one
hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining
who its shareholders are. It is only when the transfer has been
recorded in the stock and transfer book that a corporation may
rightfully regard the transferee as one of its stockholders. From
this time, the consequent obligation on the part of the
corporation to recognize such rights as it is mandated by law to
recognize arises.30chanroblesvirtuallawlibrary
This statutory rule cannot be strictly applied herein, however,
because Interport had unduly refused to recognize the
assignment of the shares between R.C. Lee and SSI. Accordingly,
we adopt with approval the SEC's following conclusion that -
x x x To say that the ten years since the assignment had been
made are a sufficient lapse of time in order for respondent SSI to
be considered to have abandoned its rights under the subscription
agreements, is to ignore the rule -
"The right to have the transfer registered exists from the time of
the transfers and it is to the transferee's benefit that the right be
exercised early. However, since the law does not prescribed (sic)
any period within which the registration should be effected the
action to be enforced the right does not accrue until here has
been a demand and a refusal to record the transfer." (11 Campus
310, 1990 ed., citing Won v. Wack Wack Golf, 104 Phil.
466, Emphasis supplied).
Petitioner SSI was denied recognition of its subscription
agreement on March 15, 1989; the complaint against the
respondents was filed before the SEC on October 6 of that same
year. This is the period of time that is to be taken into account,
not the period between 1979 and 1989. The Commission thus
finds that petitioner acted with sufficient dispatch in seeking to
enforce its rights under the subscription agreements, and sought
the intervention of this Commission within a reasonable period.
In the affidavit of respondent R.C. Lee's president, Ramon C. Lee,
dated February 22, 1989, there are several averments that need
to be examined, in the light of respondent R.C. Lee's claim of
having acted in good faith.
The first is the statement made in paragraph 3
thereof:ChanRoblesVirtualawlibrary
"That R.C. Lee Securities, Inc. has delivered to Interport its
subscription Agreements for Twenty Five Million (25,000,000)
shares of Oceanic for conversion into Interport shares however, as
of date, only twenty million (20,000,000) shares have been duly
covered by Interport Subscription Agreements and the Five
million (5,000,000) shares still remains without Subscription
Agreements".
No explanation is given for the failure of respondent Interport to
convert the five (5) million shares. As can be seen from the letter
of Interport to counsel of R.C. Lee, dated January 27, 1989,
already mentioned above, these five (5) million shares
purportedly belonging to respondent R.C. Lee do not seem to be
covered by any properly identified subscription agreements. Yet
respondent Interport issued the shares without respondent R.C.
Lee having anything to show for the same. On the other hand,
respondent Interport refused to recognize complainant SSI's claim
to five (5) millions (sic) shares inspite of the fact that its claim was
fully supported by duly issued subscription agreements, stock
assignment and receipts of payment of the initial subscription. x x
x31chanrobleslaw
Subscription Agreements Nos. 1805, and 1808 to 1811 were now
binding between Interport and SSI only, and only such parties
were expected to comply with the terms thereof. Hence, the CA
did not err in relying on the findings of the SEC, which was in a
better position to pass judgment on whether or not Interport was
liable to deliver to SSI the Oceanic shares under Subscription
Agreements Nos. 1805, and 1808 to 1811.
2.
Interport and R.C. Lee were not liable to pay exemplary damages
and attorney's fees
Article 2229 of the Civil Code provides that exemplary damages
Page 95 of 111
may be imposed by way of example or correction for the public
good. While exemplary damages cannot be recovered as a matter
of right, they need not be proved, although the plaintiff must
show that he is entitled to moral, temperate, or compensatory
damages before the court may consider the question of whether
or not exemplary damages should be awarded. Exemplary
damages are imposed not to enrich one party or impoverish
another, but to serve as a deterrent against or as a negative
incentive to curb socially deleterious actions.32chanrobleslaw
SSI was not able to show that it was entitled to moral, temperate,
or compensatory damages. In fact, the SEC pointed out that the
award of temperate damages was not proper because SSI's
alleged pecuniary loss was merely speculative in nature. Neither
could SSI recover exemplary damages considering that there was
no award of moral damages. Indeed, exemplary damages are to
be allowed only in addition to moral damages, and should not be
awarded unless the claimant first establishes a clear right to moral
damages.33chanrobleslaw
Nonetheless, the Court observes that exemplary damages were
awarded in the past despite the award of moral damages being
deleted because the defendant party to a contract acted in a
wanton, fraudulent, oppressive or malevolent
manner.34chanrobleslaw
In this case, the Court finds that Interport's act of refusing to
accept SSI's tender of payment for the 75% balance of the
subscription price was not performed in a wanton, fraudulent,
oppressive or malevolent manner. In doing so, Interport merely
relied on its records which did not show that an assignment of the
shares had already been made between R.C. Lee and SSI as early
as 1979. R.C. Lee, on the other hand, persisted in paying the 75%
balance on the subscription price simply on the basis of
Interport's representation that no transfer has yet been made in
connection with Subscription Agreement Nos. 1805, and 1808 to
1811. Although Interport and R.C. Lee might have acted in bad
faith35 in refusing to recognize the assignment of the subscription
agreements in favor of SSI, their acts certainly did not fall within
the ambit of being performed in a wanton, fraudulent, oppressive
or malevolent manner as to entitle SSI to an award for exemplary
damages.
We delete the attorney's fees for lack of legal
basis.36chanrobleslaw
WHEREFORE, the Court PARTIALLY GRANTS the petition for
review on certiorari; and AFFIRMS the decision promulgated on
February 11, 2002 subject to the following MODIFICATIONS,
namely:
chanRoblesvirtualLawlibrary1. ORDERING Interport Resources
Corporation: (a) To accept the tender of payment of Securities
Specialist, Inc. corresponding to the 75% unpaid balance of the
total subscription price under Subscription Agreements Nos. 1805,
1808, 1809, 1810 and 1811; (b) To deliver 5,000,000 shares of
stock and to issue the corresponding stock certificates to
Securities Specialist, Inc. upon receipt of the payment of the latter
under Item No. (a); (c) To cancel the stock certificates issued to
R.C. Lee Securities, Inc. corresponding to the 5,000,000 shares of
stock covered by Subscription Agreements Nos. 1805, 1808, 1809,
1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the
amounts it paid representing the 75% unpaid balance of the total
subscription price of Subscription Agreements Nos. 1805, 1808,
1809, 1810 and 1811; and (e) In the alternative, if the foregoing is
no longer possible, Interport Resources Corporation shall pay
Securities Specialist, Inc. the market value of the 5,000,000 shares
of stock covered by Subscription Agreements Nos. 1805, 1808,
1809, 1810 and 1811 at the time of the promulgation of this
decision; and cralawlawlibrary
2. DELETING the award for exemplary damages and attorney's
fees for lack of merit.
No pronouncement on costs of suit.
SO ORDERED.chanRoblesvirtualLawl
22. 15. FERRO CHEMICALS, INC., Petitioner, v. ANTONIO
M. GARCIA, ROLANDO NAVARRO, JAIME Y.
GONZALES AND CHEMICAL INDUSTRIES OF THE
PHILIPPINES, INC., Respondents
svirtuallawlibrary
The Facts
Ferro Chemicals Incorporated (Ferro Chemicals), is a domestic
corporation duly authorized by existing law to engage in business
in the Philippines. It is represented in this action by its President,
Ramon M. Garcia.
Chemical Industries of the Philippines Inc. (Chemical Industries),
on the other hand, is also a domestic corporation duly organized
and existing by virtue of Philippine laws. Antonio Garcia, one of
the parties in the instant case, is the Chairman of the Board of
Directors (BOD) of Chemical Industries and a brother of Ferro
Chemical's President, Ramon Garcia. Rolando Navarro is the
Corporate Secretary of Chemical Industries while Jaime Gonzales
is a close financial advisor of Antonio Garcia.
The Deed of Absolute Sale and Purchase of Shares of Stock
On 15 July 1988, Antonio Garcia and Ferro Chemicals entered into
a Deed of Absolute Sale and Purchase of Shares of Stock5 over
1,717,678 shares of capital stock of Chemical Industries registered
under the name of Antonio Garcia for a consideration of P-
79,207,331.28 (subject shares). Included as subjects of the sale
were Antonio Garcia's 371,697 shares of stocks in Vision
Insurance Consultants, Inc., (VIC) and his proprietary membership
in Alabang Country Club and Manila Polo Club. Under the sale
agreement, Antonio Garcia warranted the following:
chanRoblesvirtualLawlibrary
(1) That the subject shares are free from the liens and
encumbrances except the ones under the Security Bank and Trust
Company (Security Bank) and the Insular Bank of Asia and
America (Insular Bank);
(2) That the seller undertakes to defend the sale contract and
defray the litigation cost should its validity be assailed, and, to
reimburse Ferro Chemicals the amount of the purchase price
(3) That in the event that the sale is invalidated, the seller will
reimburse the buyer the amount of the purchase price.
The parties also stipulated in the agreement that Ferro Chemicals
will deliver a part of the purchase price to Security Bank in
satisfaction of Antonio Garcia's obligation as judgment obligor
with Security Bank.
Page 96 of 111
Pursuant to the sale contract, Ferro Chemicals remitted the
amount of P-35,462,869.92 to Security Bank and Trust Co. (SBTC)
in the form of a check drawn against its account with Bank of
America. On the ground that the amount tendered was
insufficient to satisfy Antonio Garcia's obligation, the payment
was not accepted by Security Bank, leaving the obligor with no
recourse but to consign the check to the court which adjudicated
his liability. (Security Bank Case) On 19 June 1990, the CA
approved the consignation effected by Antonio Garcia and held
that the amount tendered is sufficient to discharge his liability. In
a Resolution dated 21 November 1990 the Court affirmed the
final settlement of Antonio Garcia's liability with the bank. This
settled the Security Bank Case with finality.
The Compromise Agreement
On 17 January 1989, Antonio Garcia entered into a Compromise
Agreement6 with Philippine Investments System Organization
(PISO), Bank of the Philippine Islands (BPI), Philippine Commercial
International Bank (PCIB), Rizal Commercial Banking Corporation
(RCBC) and Land Bank of the Philippines (LBP) (collectively known
as Consortium Banks). The settlement was entered in connection
with the Surety Agreements previously contracted by Antonio
Garcia and Dynetics Corporation with the onsortium Banks.
The First Consortium Case
The 17 January 1989 Compromise Agreement sprang from Civil
Case No. 8527, filed by Antonio Garcia and Dynetics,. Inc. before
the RTC of Makati City, seeking to enjoin the Consortium Banks
from collecting the amount of P117,800,000.00, excluding
interests, penalties and attorney's fees, purportedly representing
their liability under surety contracts.
The RTC, upon application therefor by the Consortium Banks,
issued a Notice of Garnishment7 dated 19 July 1985 over the
1,717,678 shares of stocks of Antonio Garcia in Chemical
Industries to secure any contingent claims that may be awarded in
favor of the banks. On the ground that only absolute transfers of
shares are required to be on the corporation's stock and transfer
books, the Corporate Secretary did not annotate the banks' claims
on Chemical Industries' books.
Subsequently, the RTC issued Orders dated 25 March 1988 and 20
May 1988 dismissing Civil Case No. 8527. In effect, the causes of
action of the plaintiffs and the counterclaims of the defendants
were all denied. Insisting on their right to enforce the surety
contracts, the Consortium Banks assailed the dismissal of Civil
Case No. 8527 before the appellate court. During the pendency of
the appeal docketed as CA-G.R. No. 20467, the parties agreed to
amicably settle the case, and thus, the creditors accepted the
offer of the debtors to immediately pay the obligation in
exchange for the waiver of interests, penalties and attorney's
fees. The compromise agreement, which required Antonio Garcia
and Dynetics to pay the Consortium Banks the amount of
P145,000,000.00, was consequently approved by the CA in a
Judgment dated 22 May 1989.
The Deed of Right to Repurchase
After the parties in the First Consortium Case forged a
Compromise Agreement, Antonio Garcia and Ferro Chemicals
entered into a Deed of Right to Repurchase8 dated 3 March 1989.
Under the repurchase contract, Ferro Chemicals stipulated to sell
back the subject shares to Antonio Garcia within 180 days from its
execution or until 30 August 1989 subject to the foregoing terms:
chanRoblesvirtualLawlibrary
(1) That the consideration for the repurchase shall either be
equivalent to the amount actually paid by the buyer for the sale
or the sum of P79,207,331.28, whichever is lesser, plus interest
charges, bank charges, broker's commission, transfer taxes and
documentary stamp tax;
(2) Should the tender of the repurchase price be effected 90 days
after 3 March 1989, the seller, shall, in addition to the payment of
the above stated amount, shall pay a surcharge equivalent to 5%
over and above the actual cost of the buyer in holding the shares.
Desirous to reacquire the ownership of the subject shares,
Antonio Garcia, on 12 July 1989, notified Ferro Chemicals of his
intention to exercise his right, under the repurchase deed. On 31
July 1989, Antonio Garcia reiterated his intent to reacquire the
subject shares by sending another notice to Ferro Chemicals and
tendering the amount of the agreed repurchase price. On the
ground that the taxes and the interests due were not included in
the consideration for repurchase price tendered by Antonio
Garcia, Ferro Chemicals refused to sell back the shares to him.
Instead, Ferro Chemicals opted to cede its rights over the subject
shares to Chemphil Export and Import Corporation (Chemphil
Export) by virtue of an Agreement9 dated 26 June 1989.
First and Second Repurchase Cases
The assignment. effected by Ferro Chemicals to a third party did
not deter Antonio Garcia's efforts to recover the subject shares.
On 21 August 1989, he initiated an action for Specific
Performance before the RTC of Makati City. The case, which was
raffled to Branch 145 and docketed as Civil Case No. 89-4837,
sought for the enforcement of the seller's right under the
repurchase agreement and prayed that the buyer be ordered to
reconvey the subject shares to him. Finding that the issues raised
involved an intra-corporate dispute cognizable by the Securities
and Exchange Commission (SEC), the RTC dismissed Civil Case No.
89-4837.
Undeterred, Antonio Garcia filed a Second Repurchase
Case before the SEC which was docketed as SEC Case No. 04303.
In his Complaint, the seller cited the unjustified refusal of the
buyer to comply with the terms of the agreement and reiterated
his prayer in the First Repurchase Case that the buyer be enjoined
to observe its obligation under the repurchase agreement.
Enforcement o[the First Consortium Case
With Antonio Garcia and Dynetics' failure to comply with the
compromise agreement, the Consortium Banks, on 18 July 1989,
filed a Motion for Execution.10 Thus, the RTC, issued a Writ of
Execution11 on 11 August 1989, to enforce the court-approved
compromise against Antonio Garcia and Dynetics.
Pursuant to the writ of execution, the sheriff levied the 1,717,678
shares of capital stocks in Chemical Industries that were
previously attached on the strength of the 19 July 1985 RTC
Order12 in the First Consortium Case. After the notice and the
publication requirements were complied with, a public auction
was conducted whereby the Consortium Banks were declared as
the highest bidders as shown in the Certificate of
Sale.13chanrobleslaw
The RTC, upon application of the Consortium Banks, issued an
Order14 dated 4 September 1989, directing the Corporate
Page 97 of 111
Secretary of Chemical Industries to enter the sheriffs certificate of
sale in the company's stock and transfer books. In effect, the
corporate secretary was enjoined to cancel the certificates of
shares of stocks under the name of Antonio Garcia and all those
claiming rights under him and issue new ones in favor of the
Consortium Banks.
The Second Consortium Case
Before the corporate secretary could carry out the foregoing
directive, Chemphil Export filed an Urgent Motion15 opposing the
4 September 1989 RTC Order. Tracing back its ownership to Ferro
Chemicals, which in tum, came into ownership of the disputed
shares as early as 15 July 1988, the intervenor propounded that it
has superior right as against the Consortium Banks.
On 27 September 1989, the RTC issued an Order,16 allowing the
intervention. On the belief that there is a necessity of resolving
first the question of which between Chemphil Export on the one
hand, and the Consortium Banks on the other, is rightfully entitled
to the ownership of the disputed shares, the RTC recalled its 4
September 1989 Order. For Chemphil Export, the garnishment
effected by the Sheriff on 19 July 1985 is not binding on third
persons because it was not recorded on the stock and transfer
book of the corporation.
The Second Consortium Case was litigated all the way up to this
Court in G.R. Nos. 112438-39 and 113394. In a Decision dated 12
December 1995, the Court ruled in favor of the Consortium Banks
and declared that the attachment lien they previously acquired is
valid and effective even though it was not annotated in the
corporation's stock and transfer books. The chief purpose of the
remedy of attachment is to secure a contingent lien on the
defendant's property until plaintiff can, by appropriate
proceedings, obtain a judgment and have such property applied
to its satisfaction.17 For this reason, the Court adjudged the
Consortium Banks as the rightful owners of the disputed shares.
This decision settled with finality the Second Consortium
Case.18chanrobleslaw
The Ferro Chemicals Case
After losing the disputed shares to the Consortium Banks,
Chemphil Export proceeded to demand from Ferro Chemicals the
value of the lost shares in the amount of P100,000,000.00. In
payment thereof, Ferro Chemicals ceded its fights over its chrome
plant in Misamis Oriental m favor of the former.19chanrobleslaw
In the interregnum, Consortium Banks also assigned their rights
over the disputed shares to Jaime Gonzales by executing a Deed
of Assignment of Credit Without Recourse20 on 7 July 1993.
On the belief that it is aggrieved by the tum of events, Ferro
Chemicals initiated several civil and criminal cases against
Chemical Industries, Antonio Garcia, Rolando Navarro, Jaime
Gonzales and a certain Atty. Virgilio Gesmundo before different
courts and judicial bodies.
On 3 December 1996, Ferro Chemicals filed an action for damages
before the RTC of Makati, seeking for the recovery of the amount
of the shares that was lost by Chemphil Export to the Consortium
Banks in the Second Consortium Case.
In its Complaint21 docketed as Civil Case No. 96-1964, Ferro
Chemicals claimed that defendants conspired and abetted to
fraudulently induce the buyer to purchase Antonio Garcia's shares
by falsely warranting that these shares are free from liens and
encumbrances. These representations were made despite their
knowledge that the subject shares were previously garnished by
Consortium Banks. Relying on defendants' warranty, Ferro
Chemicals parted with the amount of P35,462,868.69 as payment
for those shares only to lose the said shares to prior lienholders
after a protracted legal battle which reached all the way up to this
Court. It was alleged that the fraudulent scheme was perpetuated
by Antonio Garcia, together with his co-defendants, Jaime
Gonzales and Rolando Navarro, who conspired with him in
enticing Ferro Chemicals to purchase the subject shares.
In refuting liability, defendants Chemical Industries and Antonio
Garcia averred that there is no truth to the claim of Ferro
Chemicals that it was not made aware of the prior attachment of
the Consortium Banks. They insisted that, all the outstanding
claims against the subject shares, were fully disclosed to Ferro
Chemicals' President, Ramon Garcia, during the negotiation of the
sale which took almost a year before the parties finally decided to
sign the transfer deed. While the subject lien was not mentioned
in the purchase agreement, Ramon Garcia, however, was wholly
apprised of the status of the encumbrance who went to the
extent of inserting the "reimbursement clause" and "the
obligation to defend the sale clause" in the agreement in order to
protect Ferro Chemicals' rights in the event that prior lienholders
will exercise their right over the subject properties. The reason
why the said lien was not expressly stated, defendants argued,
was because at the time the contract was perfected, the First
Consortium Case was ordered dismissed by the
RTC.22chanrobleslaw
To expose the frailty of the case, defendants Chemical Industries
and Antonio Garcia punctuated Ferro Chemical's unjustified
refusal to sell back the shares to Antonio Garcia and the latter's
unrelenting efforts to reacquire the shares at the price stipulated
in the Deed of Right to Repurchase. It was postulated that had it
been the intention of the defendants to deprive plaintiff of the
subject shares, an offer to repurchase made in good faith, coupled
with the tender of the agreed consideration, would not have been
made.23chanrobleslaw
By its obstinate refusal to divest its ownership over the shares, it
was argued that plaintiff obviously chose to profit from the shares
even at the risk of losing it to third person·s. After it was finally
divested of its right to receive dividends, defendants pointed out,
Ferro Chemicals turned to Antonio Garcia for the value of the lost
shares trumpeting all sorts of specious claims against him and
other defendants.24chanrobleslaw
For his part, defendant Jaime Gonzales claimed that he is not a
party to the agreement which was merely between the brothers
Ramon Garcia and Antonio Garcia and their respective
corporations, Ferro Chemicals and Chemical
Industries.25cralawred Contrary to the claim of Ferro Chemicals,
Jaime Gonzales maintained that Ramon Garcia was well aware of
the levy of Consortium Banks against the shares of Antonio Garcia
as this issue was fully discussed to him in the presence of Jaime
Gonzales during the negotiation of the agreement. He invited the
attention of the trial court to the peculiar provisions in the
transfer deed which stipulates "the seller undertook to defend the
validity of the sale and defray the cost of litigation and reimburse
the buyer of the payments made should the sale be invalidated'
that were inserted for the precise reason that the parties wanted
to protect the interest of Ferro Chemicals from the claims of the
Page 98 of 111
Consortium Banks. In any case, Jaime Gonzales claimed that there
is no proof that he conspired with his co-defendants to carry out
the sinister design alleged by the plaintiff.26chanrobleslaw
Defendant Rolando Navarro also denied liability by pointing out
that he was neither a party nor a privy to the contract in question
and his participation in the transaction was limited to his signing
of the deed as an instrumental witness thereof. It was Atty.
Virgilio Gesmundo who was consulted by Antonio Garcia during
the negotiation of the agreement and was the one who also
prepared the draft of the contract in accordance with the terms
agreed upon by parties. Not being a party nor a privy, Rolando
Navarro posited that he was not in a position to make any
representation or warranty with respect to the subject shares.
After the Pre-Trial Conference, trial on the merits ensued. During
the trial, parties adduced their respective testimonial and
documentary evidence to support their case.
The RTC Decision
On 4 September 2000, the RTC rendered a Decision27 in favor of
Ferro Chemicals and found Chemical Industries, Antonio Garcia,
Jaime Gonzales and Rolando Navarro solidarily liable for the total
amount of P269,355,537.41, representing the value ofthe lost
shares, costs of litigation, attorney's fees and exemplary damages.
In finding Antonio Garcia liable, the RTC harbored the belief that
no reasonable businessman would assume the risk of buying the
shares for P-79,207,331.28 and then end up answering liabilities
to its prior lienholders in the amount of P145,000,000.00. To find
flawed Antonio Garcia's defense, the court a quo went on to
declare that it would be an unwise business decision for Ferro
Chemicals to purchase shares of stocks that were already
attached to answer for contingent claims, viz:
chanRoblesvirtualLawlibrary
"Verily, Antonio Garcia has more reason not to disclose the
lien/claim of the consortium since the consummation of the sale
is more to his benefit. Ramon Garcia's testimony that Antonio
Garcia's [Chemical Industries] shares which have been garnished
by [Security Bank] have been the subject of attempts by the latter
to ell the same at public auction which will result in its disposal at
much lower price as is always the case in such sales, and
acquisition thereof by the bank itself, an adverse party is
undisputed. xxx.
xxxx
In fine, Antonio Garcia entered into an agreement with [Ferro
Chemicals] for the sale and purchase of his [Chemical Industries]
shares, among others, covered by Deed of Absolute Sale and
Purchase of Shares of Stock. He falsely represented and
warranted that the same is free from all liens and encumbrances
except that of [Security Bank] and [Insular Bank], despite his
knowledge of the lien of the consortium. He, therefore, concealed
[the] said lien from [Ferro Chemicals]. The [Chemical Industries]
shares were subsequently lost when said shares were executed
and sold at public auction to satisfy Antonio Garcia's liability with
the consortium, the ownership of the latter having been declared
by the Supreme Court."28
After having found that Antonio Garcia violated the terms of the
purchase agreement by falsely representing to Ferro Chemicals
that the subject shares were free from liens and encumbrances
other than the ones mentioned in the agreement, the trial court
found him liable under Article 1170 of the New Civil Code which
states that "those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages."
With respect to acts imputed against Jaime Gonzales and Rolando
Navarro, the RTC found that their conduct prior to, during and
subsequent to the execution of the contract reflected a common
design to aide Antonio Garcia to evade his contractual obligations
with Ferro Chemicals. In effect, the lower court found Jaime
Gonzales and Rolando Navarro liable for tortious interference for
having perpetrated acts which are akin to the scenario wherein
third persons induce a party to renege on or violate his
undertaking under the contract warranting relief therefrom. The
RTC decreed that these acts of Jaime Gonzales and Rolando
Navarro are indicative of their scheme to aide Antonio Garcia
unjustly deprive Ferro Chemicals of its purchased shares, to wit:
chanRoblesvirtualLawlibrary
"Defendant Navarro is now estopped from disclaiming his active
participation in the transaction involving the sale of Antonio
Garcia's shares to [Ferro Chemicals]. The Court believes that he
showed the stock and transfer book of [Chemical Industries] to
Ramon Garcia confident that the garnishment of the corporation
will not be revealed because as corporate secretary who had the
duty to annotate the garnishment he did not respond to the call
obviously because he was protecting the interest of Antonio
Garcia whom he had been assisting regarding the former's shares
and/or disposition thereof. Worse, defendant Navarro even
cancelled the certificate of shares in the name of Antonio Garcia
and issued new ones to [Ferro Chemicals]. This was followed by
the issuance of new certificates of shares to [Chemphil Export].
What cannot be explained is the fact that he continuously did not
record the consortium's garnishment despite being aware that
the interests of Antonio Garcia over his [Chemical Industries]
shares was already being transferred to third parties, whose
interests are definitely affected.
Likewise, defendant Gonzales is also estopped from denying his
participation in the transaction involving the sale of Antonio
Garcia's [Chemical Industries] shares to [Ferro Chemicals] after
previously admitting unconditionally his participation in his
Affidavit of 30 May 1990. His subsequent qualification of such
participation is unavailing. In fact, defendant Gonzales' interest
being intertwined with that of Antonio Garcia personally, in
business and in matters regarding the subject [Chemical
Industries] shares of the latter is an understatement- he is a
financial officer and [a] business associate of Antonio Garcia; he
was also [an] attorney-in-fact of Antonio Garcia in negotiating and
entering into a compromise agreement with the consortium; and
the subject [Chemical Industries] shares of Antonio Garcia were
ultimately assigned [']to his name['] by the said consortium."29
As to defendant Chemical Industries, the RTC made the
corporation accountable for the acts of its Corporate Secretary,
Rolando Navarro, which were carried out to the damage and
prejudice of Ferro Chemicals.
Having laid the individual participation of each defendant to
defraud the plaintiff, the RTC then found them jointly and
severally liable for the purchase price of the subject shares, cost
of litigation, attorney's fees and exemplary damages, viz:
Page 99 of 111

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"WHEREFORE, premises above considered, and [Ferro Chemicals]
having duly established its claim, judgement is hereby rendered in
favor of [Ferro Chemicals] and as against [Chemical Industries,
Antonio Garcia, Jaime Gonzales and Rolando Navarro], who are
hereby ordered to pay [Ferro Chemicals], jointly and severally, as
follows:
chanRoblesvirtualLawlibrary
(1) P256,255,537.41, which is the value of the lost shares minus
the balance of the purchase price;
(2) P12,000,000.00, which is the cost of suit and expenses of
litigation in the case against the consortium and the instant case;
(3) P100,000.000 as exemplary damages[;]
(4) P1,000,000.00 plus additional 10% of the value of the shares as
attorney's fees.
SO ORDERED."30chanroblesvirtuallawlibrary
The Court of Appeals Decision
On 3 March 2004, the CA rendered a Decision affirming with
modification the RTC Decision. Finding no sufficient evidence on
record that Rolando Navarro actively participated in the fraud
perpetrated by Antonio Garcia against Ferro Chemicals, the CA
discharged him from liability. Underlying the ruling was the
finding that Rolando Navarro's participation was limited to his
failure to disclose the existence of lien in favor of Consortium
Banks without any showing that he subsequently "abetted,
actively participated or connived" with Antonio Garcia in
breaching the latter's obligation under the agreement. Being a
corporation with a personality separate and distinct from its
officers and members, the CA held that Chemical Industries could
not be held liable for the acts of the latter. Finally, the CA struck
down the grant of "attorney's fees in the sum of P1,000,000.00
plus 10% of the value of the shares" for being reasonable and
excessive and deleted the grant for reimbursement of litigation
expenses for lack of proof.
In a Resolution dated 17 May 2005, the CA denied the Motions for
Partial Reconsideration separately filed by Ferro Chemicals,
Antonio Garcia and Jaime Gonzales for lack of merit.
The Petitions Before This Court
From the foregoing CA Decision and Resolution arose three
separate Petitions for Review n Certiorari: (1) G.R. No. 168134.
Ferro Chemicals, Inc., v. Antonio M. Garcia, Rolando P. Navarro,
Jaime Y. Gonzales and Chemical Industries of the Philippines, Inc.;
(2) G.R. No. 168183, Jaime Y. Gonzales v. Hon. Court of Appeals
and Ferro Chemicals, Inc.; and (3) G.R. No. 168196, Antonio M.
Garcia v. Ferro Chemicals, Inc. For identity of the parties and
similarity of the issues involved, the Court directed the
consolidation of G.R. Nos. 168196, 168134 and 168183.
G.R. No. 168134
This is a petition filed by Ferro Chemicals assailing the CA ruling
which discharged Rolando Navarro and Chemical Industries from
liability. Ferro Chemicals likewise questioned in this petition the
deletion of the reimbursement for the. litigation costs expended
by Chemphil Export in the Second Consortium Case in the amount
of P12,000,000.00, and, the attorney's fees in the sum of
P1,000,000.00 with the additional 10% of the value of the shares
which were previously awarded by the RTC.
G.R. No. 168183
In G.R. No. 168183, Jaime Gonzales controverts the CA's finding
which adjudged him liable for tortious interference under Article
1314 of the New Civil Code on account of participation in the
negotiation of sale of the shares and his eventual acquisition of
the same shares from the Consortium Banks.
G.R. No. 168196
For his part, Antonio Garcia initiated G.R. No. 168196 seeking the
nullity of the CA Decision and Resolution finding him guilty of
fraud in the performance of his obligations and in failing to
comply with his obligation to defend the sale. He questions the
failure of the CA to deduct the dividends earned by the subject
shares in its computation of the value of the shares lost including
the value of Alabang Country Club, Inc. and Manila Polo Club, Inc.
shares which were both transferred by Antonio Garcia to Ferro
Chemicals thereby allowing Ferro Chemicals to unjustly enrich
itself at his expense.
The Issues
I.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN EXONERATING RESPONDENT ROLANDO NAVARRO
FROM LIABILITY DESPITE HIS PARtiCIPATION IN THE SINISTER
PLAN TO DECEIVE [FERRO CHEMICALS]. HIS FAILURE TO COMPLY
WITH HIS DUTIES AS CORPORATE SECRETARY AND INTERFERING
AND OBSTRUCTING THE FAITHFUL FULFILLMENT OF [ANTONIO
GARCIA'S] OBLIGATION UNDER THE CONTRACT BETWEEN [FERRO
CHEMICALS] AND [ANTONIO GARCIA];
II.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN EXONERATING [CHEMICAL INDUSTRIES] FROM LIABILITY
DESPITE THE TORTIOUS ACTS OF ITS RESPONSIBLE OFFICERS;
III.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN RULING THAT THERE IS NO EVIDENCE THAT [FERRO
CHEMICALS] ASSUMED THE EXPENSES OF LITIGATION IN A CASE
AGAINST THE CONSORTIUM BANKS IN THE AMOUNT OF
P12,000,000.00;
IV.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN DISREGARDING THE UNCONTROVERTED EVIDENCE AND
LEGAL JUSTIFICATION FOR THE AWARD OF P1,000,000.00 PLUS
THE ADDITIONAL 10% OF THE VALUE OF THE SHARES AS
ATTORNEY'S FEES IN FAVOR OF THE PETITIONERS.
V.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN FINDING JAIME GONZALES LIABLE FOR TORTIOUS
INTERFERENCE FOR HIS PARTICIPATION IN THE NEGOTIATION OF
THE PURCHASE AGREEMENT AND IN EVENTUALLY ACQUIRING
THE SUBJECT SHARES FROM THE CONSORTIUM BANKS;
VI.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN FINDING ANTONIO GARCIA GUILTY OF FRAUD IN THE
PERFORMANCE OF HIS OBLIGATION UNDER THE PURCHASE
Page 100 of 111
AGREEMENT IN FAILING TO COMPLY WITH HIS OBLIGATION TO
DEFEND THE SALE UNDER THE SAID CONTRACT;
VII.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY
ERRED IN FAILING TO DEDUCT THE DIVIDENDS EARNED BY THE
SUBJECT SHARES INCLUDING THE VALUE OF THE ALABANG GOLF
CLUB AND MANILA POLO CLUB SHARES IN ITS COMPUTATION OF
THE VALUE OF FERRO CHEMICAL'S LOSS.
The Court's Ruling
On the liability of
Antonio Garcia for fraud and
breach of obligation
Resonating the RTC, the CA arrived at the conclusion that Antonio
Garcia is guilty of fraud in the performance of his obligation, but
the CA made its independent judgment pinning Antonio Garcia on
the basis of the following assumptions:
chanRoblesvirtualLawlibrary
1. That Ferro Chemicals would not have
entered into the sale had it known that the
subject shares were subject of the
Consortium Banks' lien as to do so would be
tantamount to "committing financial
suicide;"
2. That if it were true that Ferro Chemicals
was apprised of the pendency of the claims
in question, that fact would have been
embodied in the provisions of the contract.
Under the Best Evidence Rule, defendants
cannot be permitted to present
evidence aliunde;
3. That defendants cannot impute negligence
to Ramon Garcia for failing to uncover the
subject attachment prior to the execution
of the sale as it is the obligation of Antonio
Garcia to fully disclose in good faith all
existing claims against the disputed shares.
The CA endeavored to tie all the loose ends by declaring that
Antonio Garcia's liability was hinged primarily not on his
misrepresentations with respect to the sale contract, but on
alleged fraudulent acts he perpetrated in connection with
the First Consortium Case. For the CA, his acts subsequent to the
consummation of the sale were not at arm's length and
jeopardized the position of Ferro Chemicals in relation to
Chemical Industries' shares. All these circumstances, taken
together, led the CA to its conclusion that Antonio Garcia
breached his obligation under the circumstances, to wit:
chanRoblesvirtualLawlibrary
1. By recognizing his liability with the banks in
the Compromise Agreement, Antonio Garcia
placed the subject shares within the reach
of his obligors knowing that these shares
were previously attached to answer his
obligation with them;
2. By failing to move for the lifting of the
attachment effected by the Consortium
Banks over the subject shares and to offer
his other properties as substitutes after he
sold these shares to Ferro Chemicals;
3. By allowing the execution on sale to
proceed without opposition on his part and
by refusing to reimburse Ferro Chemicals of
the amount of litigation expenses it
incurred in its effort to defend its
ownership of the subject shares;
The appellate court, in other words, saw that Antonio Garcia, all
throughout the First Consortium Case, maintained a lackadaisical
stance which paved the way for the Consortium Banks'
enforcement of garnishment and the consequent sale of the
attached shares at the public auction to the damage and prejudice
of Ferro Chemicals.
We are not convinced.
TheCA's lament, in every tum, that Antonio Garcia was guilty of
bad faith from the inception of the sale contract until his
compromise with the Consortium Banks is inexorably rebuked by
the following chronology of factual incidents that governs the
relationship of Antonio Garcia and Ferro Chemicals:
chanRoblesvirtualLawlibrary
(1) On 15 July 1988, Antonio Garcia and Ferro Chemicals entered
into a Deed of Absolute Sale and Purchase of Shares of
Stock;31chanrobleslaw
(2) On 17 January 1989, Antonio Garcia and Consortium Banks
entered into a Compromise Agreement32 with respect to the First
Consortium Case;
(3) On 3 March 1989, Antonio Garcia and Ferro Chemicals
entered into a Deed of Right to Repurchase;33chanrobleslaw
(4) On 12 July 1989, Antonio Garcia notified Ferro Chemicals of
his intention to exercise his right to buy back the sold shares
under the repurchase deed;
(5) On 31 July 1989, Antonio Garcia reiterated his intent to
reacquire the subject shares by sending another notice to Ferro
Chemicals coupled with the tender of the amount of the agreed
repurchase price;
(6) On 11 August 1989, the RTC of Makati, Branch 145, issued
a Writ of Execution34 to enforce the Judgment by Compromise in
the First Consortium Case;
(7) On 22 August 1989, the Consortium Banks were declared as
the highest bidders of the levied shares at the public
auction;35chanrobleslaw
(8) On 26 September 1989, Ferro Chemicals (thru Chemphil
Export) successor-in-interest, opposed the consolidation of
ownership of the subject shares in the names of the Consortium
Banks;36chanrobleslaw
(9) From 26 September 1989 up to 12 December 1995, the Second
Consortium Case was under litigation;
(10) On 1 April 1996, Ferro Chemicals lost the Second Consortium
Case with finality;37chanrobleslaw
Page 101 of 111
(11) On 3 December 1996, Ferro Chemicals initiated the Ferro
Chemicals Case for the payment of damages based on
fraud.38 (Emphasis supplied)
While the factual milieu of this case is seemingly mazy because of
the number of cases and legal issues that stemmed from a simple
transfer of shares contract, there are two clearly crucial
evidentiary matters that were without warrant overlooked by the
lower tribunals: (I) the execution by Ferro Chemicals and Antonio
Garcia of the Deed of Right to Repurchase on 3 March 1989; and
(2) that on two separate occasions, Antonio Garcia conveyed in
writing his intent to buy back the shares in accordance with the
terms of the repurchase deed. These pieces of evidence, if
appreciated in light of the allegation of fraud, would overthrow
the very foundation upon which the Ferro Chemicals rested its
case.
Notably, Antonio Garcia's right to repurchase the subject shares,
his attempts to exercise that right and Ferro Chemicals' refusal to
honor it, as well as the legal actions taken by Antonio Garcia
against Ferro Chemicals, were duly pleaded as affirmative
allegations in Antonio Garcia's Answer,39 in Civil Case No. 96-
1964 to wit:
chanRoblesvirtualLawlibrary
"3.7 On 3 March 1989, [Antonio Garcia] and [Ferro Chemicals]
entered into a Deed of Right to Repurchase (the "Repurchase
Deed", hereafter) covering the shares subject matter of the Deed
of Sale, including the CIP Shares, confirming earlier verbal
agreement between the brothers, Ramon M. Garcia and [Antonio
Garcia], that the latter could repurchase the said shares from
[Ferro Chemicals]. Under the Repurchase Deed, defendant Garcia
had until 30 August 1989 to exercise his right to repurchase the
shares.
3.7.1 On July 1989, or long before the expiration of his right to
repurchase the shares, Antonio Garcia informed [Ferro Chemicals]
that it was going to exercise said right. This notice was reiterated
on 31 July 1989 with a tender of the repurchase price as
stipulated in the Repurchase Deed;
3.7.2 [Ferro Chemicals] refused to honor [Antonio Garcia's] right
under the Repurchase Deed alleging that the amount tendered
was insufficient in that interest for one day and the broker's
commission were not included in said amount. [Antonio Garcia]
offered to pay the interest for one day but refused to pay the
broker's commission because the sale of the shares was not
coursed through the stock exchange. [Ferro Chemicals] still
refused to honor [Antonio Garcia's] right under the Repurchase
Agreement. Worse, [Ferro Chemicals] assigned its rights over the
[Chemical Industries] Shares to [Chemphil Export] supposedly on
26 June 1989;
3.7.3 Accordingly, on 21 August 1989; Antonio Garcia filed a
complaint for specific performance and annulment of transfer of
shares against [Ferro Chemicals] and [Chemphil Export] entitled
[']Antonio M. Garcia v. Ferro Chemicals,,Inc., et al.,['] docketed as
Civil Case No. 89-4837, with the Regional Trial Court of Makati,
which was raffled to Branch 145 (the "First Repurchase Case",
hereafter). [Antonio Garcia] sought, among other reliefs, the
reconveyance of the shares, including the [Chemical Industries]
Shares from [Ferro Chemicals] and [Chemphil Export]. This case
was, however, ordered dismissed by the Court of Appeals based
on its finding that the Repurchase Case involved an intra-
corporate dispute over which the Securities and Exchange
Commission ("SEC") has exclusive jurisdiction;
3.7.4 Pursuant to the Court of Appeals decision, [Antonio Garcia],
on 26 August 1992, filed with the SEC a complaint for specific
performance and/or rescission, with damages against Ramon M.
Garcia, [Chemphil Export] and [Ferro Chemicals]', docketed as SEC
Case No. 04303 (the "Second Repurchase Case", hereafter). In the
Second Repurchase Case, [Antonio Garcia] again sought, among
other relief, the reconveyance of the [Chemical Industries] shares.
As in the First Reconveyance Case, Ramon M. Garcia, [Chemphil
Export] and [Ferro Chemicals] again vigorously opposed [Antonio
Garcia's] action to recover the shares subject matter of the Deed
of Sale, including the [Chemical Industries] Shares. The Second
Repurchase Case is still pending with the SEC."40
Antonio Garcia attached a copy of the Deed of Right to
Repurchase as Annex 1 of his Answer and argued, as one of his
affirmative defenses, that Ferro Chemicals does not have a cause
of action against him because:
chanRoblesvirtualLawlibrary
"4.1.3 Despite its full knowledge of the Bank Consortium's claim
on the [Chemical Industries] shares, Ferro Chemicals refused and
opposed all offers and efforts of Antonio Garcia to repurchase the
[Chemical Industries] shares."41
Harping on the infallibility of the lower tribunals' factual findings,
Ferro Chemicals impresses upon this Court that Antonio Garcia,
driven by the desire to profit from the disposal of his shares and
to satisfy his obligations with his creditors at the same time,
employed deceptive schemes to lure Ramon Garcia to purchase
the subject shares by concealing the lien of the Consortium Banks.
The non-disclosure of the subject lien, Ferro Chemicals claimed
and the RTC and CA believed, is constitutive of an actionable fraud
warranting the award of damages. In no uncertain terms both
tribunals pronounced that the non-mention of the lien in the
transfer contract was intentionally and deceptively done by
Antonio Garcia in bad faith and with intent to defraud. For the
lower courts, the testimonial evidence sought to be introduced by
Antonio Garcia, which modifies the express terms of the purchase
agreement to suggest that the subject lien was purportedly
contemplated by the parties in the contract, is not permissible
under the Parole Evidence Rule.
We do not agree.
Fraud, in its general sense, is deemed to comprise anything
calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or
by which an undue and unconscionable advantage is taken of
another. It is a question of fact and the circumstances constituting
it must be alleged and proved in the court below.42chanrobleslaw
In the case of Tankeh v. DBP, et al.,43 this Court reviewed the
doctrines of fraud in relation to contractual relations and the
quantum of proof necessary to prove fraud and establish liability
therefor:
chanRoblesvirtualLawlibrary
"Fraud is defined in Article 1338 of the Civil Code
as:ChanRoblesVirtualawlibrary
Page 102 of 111
x x x fraud when, through insidious words or machinations of one
of the contracting parties, the other is induced to enter into
contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
Art. 1339. Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential relations,
constitutes fraud. (n)
Art. 1340. The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves
fraudulent. (n)
Art. 1341. . A mere expression of an opm10n does not signify
fraud, unless made by an expert and the other party has relied on
the former's special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created substantial
mistake and the same is mutual. '(n)
Art. 1343. Misrepresentation made in good faith 1s not fraudulent
but may constitute error. (n)
"The distinction between fraud as a ground for rendering a
contract voidable or as basis for an award of damages is provided
in Article 1344:
chanRoblesvirtualLawlibrary
In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting
parties.
Incidental fraud only obliges the person employing it to pay
damages. (1270)
"There are two types of fraud contemplated in the performance
of contracts: dolo incidenteor incidental fraud and dolo
causante or fraud serious enough to render a contract voidable.
In Geraldez v. Court of Appeals, this Court held
that:ChanRoblesVirtualawlibrary
This fraud or dolo which is present or employed at the time of
birth or perfection of a contract may either be dolo
causante or dolo incidente. The first, or causal fraud referred to in
Article 1338, are those deceptions or misrepresentations of a
serious character employed by one party and without which the
other party would not have entered into the contract. Dolo
incidente, or incidental fraud which is referred to in Article 1344,
are those which are not serious in character and without which
the other party would still have entered into the contract. Dolo
causante determines or is the essential cause of the consent,
while dolo incidente refers only to some particular or accident of
the obligation. The effects of dolo causante are the nullity of the
contract and the indemnification of damages, and dolo
incidente also obliges the person employing it to pay damages..
"In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et
al., this Court elaborated on the distinction between dolo
causante and dolo incidente:
chanRoblesvirtualLawlibrary
Fraud refers to all kinds of deception -- whether through insidious
machination, manipulation, concealment or misrepresentation --
that would lead an ordinarily prudent person into error after
taking the circumstances into account. In contracts, a fraud
known as dolo causante or causal fraud is basically a deception
used by one party prior to or simultaneous with the contract, in
order to secure the consent of the other. Needless to say, the
deceit employed must be serious. In contradistinction, only some
particular or accident of the obligation is referred to by incidental
fraud or dolo incidente, or that which is not serious in character
and without which the other party would have entered into the
contract anyway.
"Under Article 1344, the fraud must be serious to annul or avoid a
contract and render it voidable. This fraud or deception must be
so material that had it not been present, the defrauded party
would not have entered into the contract. In the recent case
of Spouses Carmen S. Tongson and Jose C. Tongson, et al., v.
Emergency Pawnshop Bula, Inc., this Court provided some
examples of what constituted dolo causante or causal fraud:
chanRoblesvirtualLawlibrary
Some of the instances where this Court found the existence of
causal fraud include: (1) when the seller, who had no intention to
part with her property, was "tricked into believing" that what she
signed were papers pertinent to her application for the
reconstitution of her burned certificate of title, not a deed of sale;
(2) when the signature of the authorized corporate officer was
forged; or (3) when the seller was seriously ill, and died a week
after signing the deed of sale raising doubts on whether the seller
could have read, or fully understood, the contents of the
documents he signed or of the consequences of his act. (Citations
omitted)
"However, Article 1344 also provides that if fraud is incidental, it
follows that this type of fraud is not serious enough so as to
render the original contract voidable.
"A classic example of dolo incidente is Woodhouse v. Halili. In this
case, the plaintiff Charles Woodhouse entered into a written
agreement with the defendant Fortunato Halili to organize a
partnership for the bottling and distribution of soft drinks.
However, the partnership did not come into fruition, and the
plaintiff filed a Complaint in order to execute the partnership. The
defendant filed a Counterclaim, alleging that the plaintiff had
defrauded him because the latter was not actually the owner of
the franchise of a soft drink bottling operation. Thus, defendant
sought the nullification of the contract to enter into the
partnership. This Court concluded that:
chanRoblesvirtualLawlibrary
x x x from all the foregoing x x x plaintiff did actually represent to
defendant that he was the holder of the exclusive franchise. The
defendant was made to believe, and he actually believed, that
plaintiff had the exclusive franchise. x x x The record abounds with
circumstances indicative that the fact that the principal
consideration, the main cause that induced defendant to enter
into the partnership. agreement with plaintiff, was the ability of
plaintiff to get the exclusive franchise to bottle and distribute for
the defendant or for the partnership. x x x The defendant was,
therefore, led to the belief that plaintiff had the exclusive
franchise, but that the same was to be secured for or transferred
to the partnership. The plaintiff no longer had the exclusive
franchise, or the option thereto, at the time the contract was
perfected. But while he had already lost his option thereto (when
the contract was entered into), the principal obligation that he
Page 103 of 111
assumed or undertook was to secure said franchise for the
partnership, as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the
principal inducement, that led plaintiff to enter into the
partnership agreement.
But, on the other hand, this supposed ownership of an exclusive
franchise was actually the consideration or price plaintiff gave in
exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give
plaintiff 30 per cent share in the net profits because he was
transferring his exclusive franchise to the partnership. x x x.
Plaintiff had never been a bottler or a chemist; he never had
experience in the production or distribution of beverages. As a
matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.
We conclude from the above that while the representation that
plaintiff had the exclusive franchise' did not vitiate defendant's
consent to the contract, it was used by plaintiff to get from
defendant a share of 30 per cent of the net profits; in other
words, by pretending that he had the exclusive franchise and
promising to transfer it to defendant, he obtained the consent of
the latter to give him (plaintiff) a big slice in the net profits. This is
the dolo incidente defined in article 1270 of the Spanish Civil
Code, because it was used to get the other party's consent to a
big share in the profits, an incidental matter in the agreement.
"Thus, this Court held that the original agreement may not be
declared null and void. This Court also said that the plaintiff had
been entitled to damages because of the refusal of the defendant
to enter into the partnership. However, the plaintiff was also held
liable for damages to the defendant for the misrepresentation
that the former had the exclusive franchise to soft drink bottling
operations.
To summarize, if there is fraud in the performance of the contract,
then this fraud will give rise to damages. If the fraud did not
compel the imputing party to give his or her consent, it may not
serve as the basis to annul the contract; which exhibits dolo
causante. However, the party alleging the existence of fraud may
prove the existence of dolo incidente. This may make the party
against whom fraud is alleged liable for damages."44
Applying the foregoing precepts in this case, we find it hard to
believe that Antonio Garcia, in view of his impassioned efforts to
buy back the disputed shares way before the Second Consortium
Case commenced and even after the shares were assigned already
to Chemphil Export, could be motivated by his fraudulent desire
to extract money and then ease out Ferro Chemicals from its
ownership of the subject shares. The flagrancy of the Deed of the
Right to Repurchase ought to have caused the lower courts to
delve into the repurchase issue since this could have very well
dispelled the fraud alleged to have attended the acts of Antonio
Garcia. By disregarding the repurchase contract and Antonio
Garcia's intent in good faith to buy back the shares, the lower
tribunals fell prey into the skewed representations of Ferro
Chemicals of the factual incidents of this case. Indeed, both the
contractual agreement on Antonio Garcia's right to repurchase
and Antonio Garcia's actual earnest attempts at repurchase were
central to the cause of Antonio Garcia in the proceedings below.
Though it fashioned itself as the vulnerable party, who was lured
into buying shares of stocks that later turned out to be
overburdened by liens, the fact is that Ramon· Garcia is the
President of Ferro Chemicals and the brother of Antonio Garcia of
Chemical Industries which, like Ferro Chemicals, is into initiated
business ventures. The transactions that Ramon and Antonio
Garcia had with each other were between brothers about their
businesses. Ramon Garcia, both in buying the subject shares from
Antonio Garcia, and later on, in refusing to sell back the shares to
Antonio Garcia did so in furtherance of his interests. It would be
rash judgment to say it was not so and hold that business dealings
in multimillions were done without conducting due diligence on
the subject of the contract.
Indeed, the allegation that Antonio Garcia employed fraudulent
machinations to hide the subject lien to facilitate the disposal of
his shares and to lure Ferro Chemicals to part with its money is
diametrically opposed to Antonio Garcia's subsequent offers to
repurchase the shares and tender of the repurchase price. On the
other hand, Ferro Chemicals' explanation that the reason why it
did not agree to the reacquisition was because the repurchase
price tendered did not include the amount of taxes and interest
due,45 is flimsy and unacceptable under the circumstances. It must
be pointed out that no negotiation in good faith between. the
parties as to the correct amount of taxes and interests should be
paid took place since Ferro Chemicals at the outset flatly refused
the offer to buy. As a matter of fact, Antonio Garcia was
constrained to initiate two repurchase cases in his effort to
reacquire the property.
The succession of events shows that Ferro Chemical's refusal to
sell back the shares to Antonio Garcia was a calculated move by
Ramon Garcia who measured the risk of losing the subject shares
to the Consortium Banks against the visible returns on the shares
during the pendency of the Consortium Bank Case. Between the
time of the initial offer of Antonio Garcia to buy back the shares
on 31 July 1989' up to the finality of the Court's decision in
the Second Consortium Case on 12 December 1995, Ferro
Chemicals thru Chemphil Export, profited from the Chemical
Industries' shares. It was only after it had lost the shares to the
Consortium Banks by the decision of the Court that Ferro
Chemicals went back to Antonio Garcia and his co-defendants for
the enforcement of the sale contract asking for the
reimbursement of the amount of the shares that was lost. The
buying and selling of stocks and the subsequent agreement on
reversed activities were in the exercise of business judgment.
Fraud has been defined to include an inducement through
insidious machination. Insidious machination refers to a deceitful
scheme or plot with an evil or devious purpose. Deceit exists
where the party, with intent to deceive, conceals or omits to state
material facts and, by reason of such omission or concealment,
the other party was induced to give consent that would not
otherwise have been given. These are allegations of fact that
demand clear and convincing proof. They are serious accusations
that can be so conveniently and casually invoked, and that is why
they are never presumed.46 Applying the doctrines to the case at
bar, a judgment on fraud requires allegation and proof of facts
and circumstances by which undue and unconscionable
advantage is taken by Antonio Garcia. Ramon Garcia failed in this
regard. In contrast, the succession of transaction between
Antonio and Ramon Garcia indicated that Ramon Garcia wanted
to have a way out of his failed business decision of holding on to
his shares instead of selling it back to Antonio Garcia when he had
Page 104 of 111
the opportunity to do so. He saw that it was better to hold on to
the shares he bought from Antonio Garcia. The Court cannot save
him from the fall that came from his own choice.
On the liability of Rolando Navarro
and Jaime Gonzales for tortious
interference
In imputing liability to Rolando Navarro, Ferro Chemicals harps on
the following acts found by the trial court to be demonstrative of
his malicious intention to interfere with the contract between
Antonio Garcia and Ferro Chemicals:
chanRoblesvirtualLawlibrary
(1) He facilitated in the execution of the Deed by showing the
Stock and Transfer Book of [Chemical Industries] to [Ferro
Chemicals] thru [Ramon Garcia] to assure the latter that the
disputed shares had no lien other than those in the Stock and
Transfer Book and in order to conceal the [Consortium Bank's]
lien;
(2) He, together with Atty. Virgilio Gesmundo, also drafted in the
boardroom of the [Chemical Industries] the Deed which embodied
the basic terms and conditions of the sale as agreed upon by the
parties;
(3) He also signed as instrumental witness in the Deed;
(4) Upon examination of the Deed and despite knowledge of the
irregularity of the sale, he, acting as corporate secretary of
[Chemical Industries], transferred the disputed shares in the name
of [Ferro Chemicals] and issued the corresponding certificates of
stock;
(5) He drafted the Deed of Right to Repurchase under which
[Antonio Garcia] was given the right to redeem the shares sold to
[Ferro Chemicals] within 180 days from signing of the said deed
and subject to other conditions stated therein;
(6) He, as the corporate secretary of [Chemical Industries], again
made the transfer of the said shares in the Stock and Transfer
Book of [Chemical Industries] this time with respect to the
4,119,614 shares (which included the disputed shares) assigned
by [Ferro Chemicals] to [Chemphil Export].
In essence, Ferro Chemicals contends that while Rolando Navaro
is not privy to the contract, his individual acts form part of the
bigger scheme to defraud the corporation.
In his Comment,47 Rolando Navarro denies liability by arguing that
not being a party to the contract, he cannot be held liable for
breach thereof under Article 1311 of the New Civil Code. He
underscores that Ferro Chemical's complaint was for ·breach of
contract, i.e. for failure to deliver the clean title of the subject
shares, which obligation befalls on the buyer alone. As an
instrumental witness to the deed, it is absurd to hold him liable
for failure of the buyer to make good his warranty under the
agreement. Invoking that only absolute transfers of shares of
stocks are required to be recorded in the corporation's stock and
transfer book, Rolando Navarro insists that he cannot be held
liable for failing to record the claim of the Consortium Banks since
it is merely an attachment. Finally, he asserts that none of the
conduct imputed against him constitute tortious interference
under Article 1314 of the New Civil Code because these acts, i.e.,
transfer the certificate of title of the said shares and preparing a
draft of contracts, were mainly part of his primary duty as the
Corporate Secretary of the Chemical Industries.
We affirm the ruling of the Court of Appeals in favor of Rolando
Navarro.
The basic principle of relativity of contracts is that contracts can
only bind the parties who entered into it, and cannot favor or
prejudice a third person, even if he is aware of such contract and
has acted with knowledge thereof.48 Where there is no privity of
contract, there is likewise no obligation or liability to speak
about.49 Article 1311 of the New Civil Code provides:
chanRoblesvirtualLawlibrary
Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond
the value of the property he received from the decedent.
The obligation of contracts is limited to the parties making them
and, ordinarily, only those who are parties to contracts are liable
for their breach. Parties to a contract cannot thereby impose any
liability on one who, under its terms, is a stranger to the contract,
and, in any event, in order to bind a third person contractually, an
expression of assent by such person is necessary.50chanrobleslaw
Under Article 1314 of the New Civil Code, however, any third
person who induces another to violate .his contract shall be liable
for damages to the other contracting party. The tort recognized in
that provision is known as interference with contractual relations.
The interference is penalized because it violates the property right
of a party in a contract to reap the benefits that should result
therefrom.51chanrobleslaw
The Court, in the case of So Ping Bun v. Court of Appeals, et
al.,52 laid down the elements of tortious interference with
contractual relations: (1) existence of a valid contract; (2)
knowledge on the part of the third person of the existence of the
contract and (3) interference on the part of the third person
without legal justification or excuse.53chanrobleslaw
A duty which the law of torts is concerned with is respect for
property of others, and cause of action ex delicto may be
predicated by an unlawful interference by any person of the
enjoyment of the other of his private property. This may pertain
to a situation where a third person induces a person to renege on
or violate his undertaking under a contract.54chanrobleslaw
A perusal of the. allegations proffered against Rolando Navarro
would show that none of his conduct prior or even subsequent to
the execution of the subject deed, which was primarily done in
furtherance of his duties as corporate secretary, constitutes
tortious interference. To imply that by preparing a draft of a
contract, signing as instrumental witness of the deed and
recording of transfer of shares on the corporate books, Rolando
Navarro can now be held liable for tortious interference, is
incredulous. Nothing from his acts as found by the trial court,
which were clearly carried out within the bounds of his office
devoid of malice and bad faith, would suggest involvement in the
sinister design to deprive Ferro Chemicals of its property right
over the disputed shares. As the Corporate Secretary of Chemical
Industries, Rolando Navarro is under obligation to record in the
Page 105 of 111
stock and transfer book any and all alienation involving the shares
of stocks of the corporation as mandated by Section 74 of the
Corporation Code which states:
chanRoblesvirtualLawlibrary
Sec. 74. Books to he kept; stock transfer agent. x x x
xxxx
Stock corporations must also keep a book to be known as the
"stock and transfer book," in which must be kept a record of all
stocks in the names of the stockholders alphabetically arranged;
the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of
stock made the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe. The stock and
transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.
Clearly, the transfer of the certificates of stocks covering the
subject shares in favor of Ferro Chemicals effected on the
strength of a valid deed of sale cannot be taken as an actionable
tortious conduct, whether such action is viewed in isolation or in
connection with conduct of his co-defendants. The Court, in So
Ping Bun v. Court of Appeals, et al.,55 defined what constitutes an
unlawful interference with contract:
chanRoblesvirtualLawlibrary
"The foregoing issues involve, essentially, the correct
interpretation of the applicable law on tortuous conduct,
particularly unlawful interference with contract. We have to
begin, obviously, with certain fundamental principles on torts and
damages.
Damage is the loss, hurt, or harm which results from injury, and
damages are the recompense or compensation awarded for the
damage suffered. One becomes liable in an action for damages for
a nontrespassory invasion of another's interest in the private use
and enjoyment of asset if (a) the other has property rights and
privileges with respect to the use or enjoyment interfered with,
(b) the invasion is substantial, (c) the defendant's conduct is a
legal cause of the invasion, and (d) the invasion is either
intentional and unreasonable or unintentional and actionable
under general negligence rules."
For sure, Rolando Navarro has transgressed no right of Ferro
Chemicals while performing his obligation as an officer of
Chemical Industries. There is absolutely no proof other than the
weak indicia which, the plaintiff contends, show the existence
thereof.. Even if we lend credence to the graver allegation that
Rolando Navarro showed the stock and transfer books of the
corporation to Ramon Garcia which bore no record of the
Consortium Banks' lien, still he could not be faulted in the
absence of showing that he acted in bad faith with the intention
to lure the buyer to believe that the subject shares were lien-free.
As the Corporate Secretary of Chemical Industries, he is under no
obligation to record the attachment of the Consortium Banks, not
being a transfer of ownership but merely a burden on the title of
the owner. Only absolute transfers of shares of stock are
required to be recorded in the corporation's stock and transfer
book in order to have "force and effect as a ainst third
persons."56 In Chemphil Export and Import Corporation v. Court of
Appeals, et al.,57 the Court enunciated the rule that attachments
of shares are not considered "transfer" and need not be recorded
in the corporations' stock and transfer book, viz:
chanRoblesvirtualLawlibrary
"'Are attachments of shares of stock included in the term
"transfer" as provided in Sec. 63 of the Corporation Code? We
rule in the negative. As succinctly declared in the case
of Monserrat v. Ceron, chattel mortgage over shares of stock need
not be registered in the corporation's stock and transfer book
inasmuch as chattel mortgage over shares of stock does not
involve a "transfer of shares," and that only absolute transfers of
shares of stock are required to be recorded in the corporation's
stock and transfer book in order to have "force and effect as
against third persons."
xxxx
"A 'transfer' is the act by which the owner of a thing delivers it to
another with the intent of passing the rights which he has in it to
the latter, and a chattel mortgage is not within the meaning of
such term.
xxxx
Although the Monserrat case refers to a chattel mortgage over
shares of stock, the same may be applied to the attachment of
the disputed shares of stock in the present controversy since an
attachment does not constitute an absolute conveyance of
property but is primarily used as a means "to seize the debtor's
property in order to secure the debt or claim of the creditor in
the event that a judgment is rendered."
Known commentators on the Corporation Code expound, thus:
chanRoblesvirtualLawlibraryxxxx
Shares of stock being personal property, may be the subject
matter of pledge and chattel mortgage. Such collateral transfers
are however not covered by the registration requirement of
Section 63, since our Supreme Court has held that such provision
applies only to absolute transfers thus, the registration in the
corporate books of pledges and chattel mortgages of share
cannot have any legal effect.
xxxx
The requirement that the transfer shall be recorded in the books
of the corporation to be valid as against third persons has
reference only to absolute transfers or absolute conveyance of
the ownership or title to a share."58[Emphasis supplied]
Veritably, the facts, statutes and jurisprudence do not support
Ferro Chemical's imputation of fraud to Rolando Navarro. The
accusations of fraud directed to him upon which Ferro Chemicals
rests its case are unsubstantiated, no direct evidence of it exists; it
was clutching at straws pointing out to a remote participation of
the defendant who carried out the imputed acts within the
bounds of his office. Fraud cannot be presumed but must be
proved by clear and convincing evidence.59 Whoever alleges fraud
affecting a transaction must substantiate his allegation, because a
person is always presumed to take ordinary care of his concerns,
and private transactions are similarly presumed to have been fair
Page 106 of 111
and regular.60 To be remembered is that mere allegation is
definitely not evidence; hence, it must be proved by sufficient
evidence.61chanrobleslaw
Be that as it may, undisputed is the fact that Rolando Navarro
derived no financial gains from the breach of Antonio Garcias
obligation to Ferro Chemicals watering down the allusion that his
acts were impelled by economic motive.
Even if Jaime ,Gonzales, on other hand, eventually became the
assignee of the subject shares, he cannot, for that reason alone,
be held liable for tortious interference as the elements of this act
are clearly wanting in this case. Jaime Gonzales did nothing more
than act as instrumental witness of the deed of sale and give
Antonio Garcia financial advice on the matter. None of these acts
is actionable tort.
In any case, the allegations against Rolando Navarro and Jaime
Gonzales have no more leg to stand on as we have ruled that
fraud never attended the transaction and that Ferro Chen1icals
entered the contract subject of this case with the full knowledge
and discretion of the existence of any and all liens.
On the liability of Chemical Industries
for the acts of its responsible officers
On the premise that Chemical Industries afforded plenary powers
to its officers to make certain representations to third persons,
Ferro Chemicals faults the ruling of the appellate court absolving
Chemical Industries from liability by arguing that the corporation
is liable for the tortious and wrongful acts of its corporate officers,
Antonio Garcia and Rolando Navarro, under the principle of
agency.
Chemical Industries, however, argues otherwise. It submits that
Ferro Chemical's reliance on the doctrine of apparent authority is
misplaced. Citing the findings of the appellate court, it posits that
the sale of Antonio Garcia's shares was a purely personal
transaction between him and Ferro Chemicals which requires no
"express direction or authority" from Chemical Industries.
Having settled that Rolando Navarro committed no tortious acts
generative of liability, we now limit our discussion on whether
Chemical Industries can be held liable supposedly for the fraud
and breach of contract perpetrated by Antonio Garcia.
We rule in the negative.
A corporation, upon coming to existence, is invested by law with a
personality separate and distinct from those of the persons
composing it. Ownership by a single or a small group of
stockholders of nearly all of the capital stock of the corporation is
not, without more, sufficient to disregard the fiction of separate
corporate personality. Thus, obligations incurred by corporate
officers, acting as corporate agents, are not theirs, but direct
accountabilities of the corporation they represent. Solidary
liability on the part of corporate officers may at times attach, but
only under exceptional circumstances, such as when they act with
malice or in bad faith. Also, in appropriate cases, the veil of
corporate fiction shall be disregarded when the separate juridical
personality of a corporation is abused or used to commit fraud
and perpetrate a social injustice, or used as a vehicle to evade
obligations.62chanrobleslaw
It must be stressed at the onset that the sale contract was
entered by Antonio Garcia in his personal capacity and not as the
President of Chemical Industries. As aptly found by the CA:
chanRoblesvirtualLawlibrary
"xxx. As can be gleaned from the Deed of Sale, [Antonio Garcia]
sold the disputed shares in his private capacity as owner thereof
and not as responsible officer or representative of [Chemical
Industries]. Moreover, the disputed shares constitute merely 20%
of [Chemical Industries'] outstanding capital stocks. As such, the
corporation's consent in the disposition is not required. Neither
does its conveyance require any action on the part of the
corporation, except the ministerial duty of recording the same in
its stock and transfer book.
Considering the nature of the transaction involved, whatever
obligation [Antonio Garcia] incurred, it was incurred in his
personal capacity. xxx"63
Even if Antonio Garcia was selling his shares of stocks in the
Chemical Industries, the corporation was neither made a party to
the contract nor did the sale redound to its benefit. As a matter of
fact, the subject of the purchase agreement was not limited to
Antonio Garcia's shares in Chemical Industries, but likewise
included his shares in Vision Insurance Consultants, Inc., Alabang
Country Club, Inc. and Manila Polo Club, Inc.64 His shares of capital
stocks with Chemical Industries became the subject of
controversy because of the allegation that he intentionally
withheld the information from Ferro Chemicals that these shares
were subject of the Consortium Banks' claim. Notably, the
purported misrepresentation was: not alleged to have been
authorized or abetted by the corporation. It was a purely personal
act of the seller desirous to dispose conveniently his shares in the
corporation. It bears underscoring that a corporation has a
personality separate and distinct from that of each stockholder. It
has the right ,of continuity or perpetual succession,65 that is, its
existence is not extinguished by the transfer of ownership of its
shares of capital stock from one shareholder to another.
Needless to say, the imputation of liability Chemical Industries for
the acts of its corporate officer and the consequent shedding of
corporate shroud cannot rest on flimsy grounds. The application
of the doctrine of piercing the veil of corporate fiction is frowned
upon.66 It can only be done if it has been clearly established that
the separate and distinct personality of the corporation is used to
justify a wrong, protect fraud, or perpetrate a deception.67 As
explained by the Court in Philippine National Bank v. Andrada
Electric & Engineering Company:68chanrobleslaw
"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. Otherwise, an injustice that
was never unintended may result from an erroneous application."
In the case at bar, Ferro Chemicals failed to adduce satisfactory
evidence to prove that Chemical Industries' separate corporate
personality was being used by Antonio Garcia to protect fraud or
perpetrate deception warranting the shedding of its veil and the
consequent imposition of solidary liability upon it.
On Ferro Chemical's claim for
Page 107 of 111
reimbursement of litigation expenses
in the amount of P12,000,000.00, as
payment of attorney's fees
The award of litigation expenses in the amount of P12,000,000.00
is not proper because Ferro Chemicals failed to justify
satisfactorily its claim, and the trial court failed to state explicitly
in its decision the rationale for the award. Likewise, We agree
with the CA's finding that the award of attorney's fees in the sum
of P1,000,000.00 plus additional 10% ofthe value of the shares is
unreasonable and excessive. Article 2208 of the New Civil Code
enumerates the instances where such may be awarded and, in
any event, it must be reasonable, just and equitable.69 Attorney's
fees as part of damages are not meant to enrich the winning party
at the expense of the losing litigant.70 They are not awarded every
time a party prevails in a suit because of the policy that no
premium should be placed on the right to litigate. The award of
attorney's fees is the exception rather than the
rule.71chanrobleslaw
As such, it is necessary for the court to make findings of fact and
law that would bring the -case within the exception and justifY the
grant of such award.72chanrobleslaw
For lack of factual basis, we cannot likewise lend credence to
Antonio Garcia's claim that the dividends earned from Alabang
Country Club, Inc. and Manila Polo Club, Inc. shares should be
deducted from the cost of the lost shares.
WHEREFORE, premises considered, the petition of Ferro
Chemicals, Inc. in G.R. No. 168134 is hereby DENIED while the
petitions of Jaime Y. Gonzales in G.R. No. 168183 and Antonio M.
Garcia in G.R. No. 168196 are hereby GRANTED. Consequently,
the Decision of the Court of Appeals is modified to read:
chanRoblesvirtualLawlibrary1) Chemical Industries of the
Philippines, Inc. and Rolando Navarro are hereby exonerated from
liabilities;
2) Antonio M. Garcia and Jaime Y. Gonzales are likewise
discharged from liabilities;
3) The award of P12,000,000.00, representing the cost of the suit
and expenses of litigation in the Consortium Case is deleted.
SO ORDERED.chanRoblesvirtualLawlibrary
[G.R. No. 124535. September 28, 2001]
23. THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS
AND DIRECTORS, BERNARDO BAUTISTA, JAIME
CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO
CUSTODIO, and JUANITA BAUTISTA OF THE RURAL
BANK OF LIPA CITY, INC., petitioners, vs. HONORABLE
COURT OF APPEALS, HONORABLE COMMISSION EN
BANC, SECURITIES AND EXCHANGE COMMISSION,
HONORABLE ENRIQUE L. FLORES, JR., in his capacity
as Hearing Officer, REYNALDO VILLANUEVA, SR.,
AVELINA M. VILLANUEVA, CATALINO VILLANUEVA,
ANDRES GONZALES, AURORA LACERNA, CELSO
LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari assailing the
Decision of the Court of Appeals dated February 27, 1996, as well
as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861.
The instant controversy arose from a dispute between the
Rural Bank of Lipa City, Incorporated (hereinafter referred to as
the Bank), represented by its officers and members of its Board of
Directors, and certain stockholders of the said bank. The records
reveal the following antecedent facts:
Private respondent Reynaldo Villanueva, Sr., a stockholder
of the Rural Bank of Lipa City, executed a Deed of
Assignment,[1] wherein he assigned his shares, as well as those of
eight (8) other shareholders under his control with a total of
10,467 shares, in favor of the stockholders of the Bank
represented by its directors Bernardo Bautista, Jaime Custodio
and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva,
Sr. and his wife, Avelina, executed an Agreement[2] wherein they
acknowledged their indebtedness to the Bank in the amount of
Four Million Pesos (P4,000,000.00), and stipulated that said debt
will be paid out of the proceeds of the sale of their real property
described in the Agreement.
At a meeting of the Board of Directors of the Bank on
November 15, 1993, the Villanueva spouses assured the Board
that their debt would be paid on or before December 31 of that
same year; otherwise, the Bank would be entitled to liquidate
their shareholdings, including those under their control. In such
an event, should the proceeds of the sale of said shares fail to
satisfy in full the obligation, the unpaid balance shall be secured
by other collateral sufficient therefor.
When the Villanueva spouses failed to settle their
obligation to the Bank on the due date, the Board sent them a
letter[3] demanding: (1) the surrender of all the stock certificates
issued to them; and (2) the delivery of sufficient collateral to
secure the balance of their debt amounting to P3,346,898.54. The
Villanuevas ignored the banks demands, whereupon their shares
of stock were converted into Treasury Stocks. Later, the
Villanuevas, through their counsel, questioned the legality of the
conversion of their shares.[4]
On January 15, 1994, the stockholders of the Bank met to
elect the new directors and set of officers for the year 1994. The
Villanuevas were not notified of said meeting. In a letter dated
January 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva
spouses, questioned the legality of the said stockholders meeting
and the validity of all the proceedings therein. In reply, the new
set of officers of the Bank informed Atty. Ignacio that the
Villanuevas were no longer entitled to notice of the said meeting
since they had relinquished their rights as stockholders in favor of
the Bank.
Consequently, the Villanueva spouses filed with the
Securities and Exchange Commission (SEC), a petition for
annulment of the stockholders meeting and election of directors
and officers on January 15, 1994, with damages and prayer for
preliminary injunction[5], docketed as SEC Case No. 02-94-
4683. Joining them as co-petitioners were Catalino Villanueva,
Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo Reyes,
Alejandro Tonogan, and Elena Usi. Named respondents were the
newly-elected officers and directors of the Rural Bank, namely:
Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco
Custodio and Juanita Bautista.
The Villanuevas main contention was that the stockholders
meeting and election of officers and directors held on January 15,
1994 were invalid because: (1) they were conducted in violation
of the by-laws of the Rural Bank; (2) they were not given due
notice of said meeting and election notwithstanding the fact that
they had not waived their right to notice; (3) they were deprived
of their right to vote despite their being holders of common stock
with corresponding voting rights; (4) their names were irregularly
excluded from the list of stockholders; and (5) the candidacy of
Page 108 of 111
petitioner Avelina Villanueva for directorship was arbitrarily
disregarded by respondent Bernardo Bautista and company
during the said meeting.
On February 16, 1994, the SEC issued a temporary
restraining order enjoining the respondents, petitioners herein,
from acting as directors and officers of the Bank, and from
performing their duties and functions as such.[6]
In their joint Answer,[7] the respondents therein raised the
following defenses:
1) The petitioners have no legal capacity to sue;
2) The petition states no cause of action;
3) The complaint is insufficient;
4) The petitioners claims had already been paid,
waived, abandoned, or otherwise extinguished;
5) The petitioners are estopped from challenging the
conversion of their shares.
Petitioners, respondents therein, thus moved for the lifting
of the temporary restraining order and the dismissal of the
petition for lack of merit, and for the upholding of the validity of
the stockholders meeting and election of directors and officers
held on January 15, 1994. By way of counterclaim, petitioners
prayed for actual, moral and exemplary damages.
On April 6, 1994, the Villanuevas application for the
issuance of a writ of preliminary injunction was denied by the SEC
Hearing Officer on the ground of lack of sufficient basis for the
issuance thereof.However, a motion for reconsideration[8] was
granted on December 16, 1994, upon finding that since the
Villanuevas have not disposed of their shares, whether voluntarily
or involuntarily, they were still stockholders entitled to notice of
the annual stockholders meeting was sustained by the
SEC. Accordingly, a writ of preliminary injunction was issued
enjoining the petitioners from acting as directors and officers of
the bank.[9]
Thereafter, petitioners filed an urgent motion to quash the
writ of preliminary injunction,[10] challenging the propriety of the
said writ considering that they had not yet received a copy of the
order granting the application for the writ of preliminary
injunction.
With the impending 1995 annual stockholders meeting
only nine (9) days away, the Villanuevas filed an Omnibus
Motion[11] praying that the said meeting and election of officers
scheduled on January 14, 1995 be suspended or held in abeyance,
and that the 1993 Board of Directors be allowed, in the
meantime, to act as such. One (1) day before the scheduled
stockholders meeting, the SEC Hearing Officer granted the
Omnibus Motion by issuing a temporary restraining order
preventing petitioners from holding the stockholders meeting and
electing the board of directors and officers of the Bank.[12]
A petition for Certiorari and Annulment with Damages was
filed by the Rural Bank, its directors and officers before the SEC en
banc,[13] naming as respondents therein SEC Hearing Officer
Enrique L. Flores, Jr., and the Villanuevas, erstwhile petitioners in
SEC Case No. 02-94-4683. The said petition alleged that the orders
dated December 16, 1994 and January 13, 1995, which allowed
the issuance of the writ of preliminary injunction and prevented
the bank from holding its 1995 annual stockholders meeting,
respectively, were issued by the SEC Hearing Officer with grave
abuse of discretion amounting to lack or excess of
jurisdiction. Corollarily, the Bank, its directors and its officers
questioned the SEC Hearing Officers right to restrain the
stockholders meeting and election of officers and directors
considering that the Villanueva spouses and the other petitioners
in SEC Case No. 02-94-4683 were no longer stockholders with
voting rights, having already assigned all their shares to the Bank.
In their Comment/Opposition, the Villanuevas and other
private respondents argued that the filing of the petition for
certiorari was premature and there was no grave abuse of
discretion on the part of the SEC Hearing Officer, nor did he act
without or in excess of his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition
for certiorari in an Order,[14] which stated:
In the case now before us, petitioners could not show any proof
of despotic or arbitrary exercise of discretion committed by the
hearing officer in issuing the assailed orders save and except the
allegation that the private respondents have already transferred
their stockholdings in favor of the stockholders of the Bank. This,
however, is the very issue of the controversy in the case a quo
and which, to our mind, should rightfully be litigated and proven
before the hearing officer. This is so because of the undisputed
fact the (sic) private respondents are still in possession of the
stock certificates evidencing their stockholdings and as held by
the Supreme Court in Embassy Farms, Inc. v. Court of Appeals, et
al., 188 SCRA 492, citing Nava v. Peers Marketing Corp., the non-
delivery of the stock certificate does not make the transfer of the
shares of stock effective. For an effective transfer of stock, the
mode of transfer as prescribed by law must be followed.
We likewise find that the provision of the Corporation Code cited
by the herein petitioner, particularly Section 83 thereof, to
support the claim that the private respondents are no longer
stockholders of the Bank is misplaced. The said law applies to
acquisition of shares of stock by the corporation in the exercise of
a stockholders right of appraisal or when the said stockholder
opts to dissent on a specific corporate act in those instances
provided by law and demands the payment of the fair value of his
shares. It does not contemplate a transfer whereby the
stockholder, in the exercise of his right to dispose of his shares
(jus disponendi) sells or assigns his stockholdings in favor of
another person where the provisions of Section 63 of the same
Code should be complied with.
The hearing officer, therefore, had a basis in issuing the
questioned orders since the private respondents rights as
stockholders may be prejudiced should the writ of injunction not
be issued. The private respondents are presumably stockholders
of the Bank in view of the fact that they have in their possession
the stock certificates evidencing their stockholdings. Until proven
otherwise, they remain to be such and the hearing officer, being
the one directly confronted with the facts and pieces of evidence
in the case, may issue such orders and resolutions which may be
necessary or reasonable relative thereto to protect their rights
and interest in the meantime that the said case is still pending
trial on the merits.
A subsequent motion for reconsideration[15] was likewise
denied by the SEC en banc in a Resolution[16] dated September 29,
1995.
A petition for review was thus filed before the Court of
Appeals, which was docketed as CA-G.R. SP No. 38861, assailing
the Order dated June 7, 1995 and the Resolution dated
September 29, 1995 of the SEC en banc in SEC EB No. 440. The
ultimate issue raised before the Court of Appeals was whether or
not the SEC en banc erred in finding:
1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did
not commit any grave abuse of discretion that would warrant the
filing of a petition for certiorari;
2. That the private respondents are still stockholders of the
subject bank and further stated that it does not contemplate a
transfer whereby the stockholders, in the exercise of his right to
dispose of his shares (Jus Disponendi) sells or assigns his
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stockholdings in favor of another person where the provisions of
Sec. 63 of the same Code should be complied with; and
3. That the private respondents are presumably stockholders of
the bank in view of the fact that they have in their possession the
stock certificates evidencing their stockholdings.
On February 27, 1996, the Court of Appeals rendered the
assailed Decision[17] dismissing the petition for review for lack of
merit. The appellate court found that:
The public respondent is correct in holding that the Hearing
Officer did not commit grave abuse of discretion. The officer, in
exercising his judicial functions, did not exercise his judgment in a
capricious, whimsical, arbitrary or despotic manner. The
questioned Orders issued by the Hearing Officer were based on
pertinent law and the facts of the case.
Section 63 of the Corporation Code states: x x x Shares of stock so
issued are personal property and may be transferred by delivery
of the certificate or certificates indorsed by the owner x x x. 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.
In the case at bench, when private respondents executed a deed
of assignment of their shares of stocks in favor of the
Stockholders of the Rural Bank of Lipa City, represented by
Bernardo Bautista, Jaime Custodio and Octavio Katigbak, title to
such shares will not be effective unless the duly indorsed
certificate of stock is delivered to them. For an effective transfer
of shares of stock, the mode and manner of transfer as prescribed
by law should be followed. Private respondents are still presumed
to be the owners of the shares and to be stockholders of the Rural
Bank.
We find no reversible error in the questioned orders.
Petitioners motion for reconsideration was likewise denied
by the Court of Appeals in an Order[18] dated March 29, 1996.
Hence, the instant petition for review seeking to annul the
Court of Appeals decision dated February 27, 1996 and the
resolution dated March 29, 1996. In particular, the decision is
challenged for its ruling that notwithstanding the execution of the
deed of assignment in favor of the petitioners, transfer of title to
such shares is ineffective until and unless the duly indorsed
certificate of stock is delivered to them. Moreover, petitioners
faulted the Court of Appeals for not taking into consideration the
acts of disloyalty committed by the Villanueva spouses against the
Bank.
We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in
affirming the order of the SEC en banc, which in turn upheld the
order of the SEC Hearing Officer, for the said rulings were in
accordance with law and jurisprudence.
The Corporation Code specifically 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 stocks 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.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
(Underscoring ours)
Petitioners argue that by virtue of the Deed of
Assignment,[19] private respondents had relinquished to them any
and all rights they may have had as stockholders of the
Bank. While it may be true that there was an assignment of
private respondents shares to the petitioners, said assignment
was not sufficient to effect the transfer of shares since there was
no endorsement of the certificates of stock by the owners, their
attorneys-in-fact or any other person legally authorized to make
the transfer. Moreover, petitioners admit that the assignment of
shares was not coupled with delivery, the absence of which is a
fatal defect. The rule is that the delivery of the stock certificate
duly endorsed by the owner is the operative act of transfer of
shares from the lawful owner to the transferee.[20] Thus, title may
be vested in the transferee only by delivery of the duly indorsed
certificate of stock.[21]
We have uniformly held that for a valid transfer of stocks,
there must be strict compliance with the mode of transfer
prescribed by law.[22] The requirements are: (a) There must be
delivery of the stock certificate; (b) The certificate must be
endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (c) To be valid against
third parties, the transfer must be recorded in the books of the
corporation. As it is, compliance with any of these requisites has
not been clearly and sufficiently shown.
It may be argued that despite non-compliance with the
requisite endorsement and delivery, the assignment was valid
between the parties, meaning the private respondents as
assignors and the petitioners as assignees. While the assignment
may be valid and binding on the petitioners and private
respondents, it does not necessarily make the transfer
effective. Consequently, the petitioners, as mere assignees,
cannot enjoy the status of a stockholder, cannot vote nor be
voted for, and will not be entitled to dividends, insofar as the
assigned shares are concerned. Parenthetically, the private
respondents cannot, as yet, be deprived of their rights as
stockholders, until and unless the issue of ownership and transfer
of the shares in question is resolved with finality.
There being no showing that any of the requisites
mandated by law[23] was complied with, the SEC Hearing Officer
did not abuse his discretion in granting the issuance of the
preliminary injunction prayed for by petitioners in SEC Case No.
02-94-4683 (herein private respondents). Accordingly, the order
of the SEC en banc affirming the ruling of the SEC Hearing Officer,
and the Court of Appeals decision upholding the SEC en
banc order, are valid and in accordance with law and
jurisprudence, thus warranting the denial of the instant petition
for review.
To enable the shareholders of the Rural Bank of Lipa City,
Inc. to meet and elect their directors, the temporary restraining
order issued by the SEC Hearing Officer on January 13, 1995 must
be lifted.However, private respondents shall be notified of the
meeting and be allowed to exercise their rights as stockholders
thereat.
While this case was pending, Republic Act No. 8799[24] was
enacted, transferring to the courts of general jurisdiction or the
appropriate Regional Trial Court the SECs jurisdiction over all
cases enumerated under Section 5 of Presidential Decree No. 902-
A.[25] One of those cases enumerated is any controversy arising
out of intra-corporate or partnership relations, between and
Page 110 of 111
among stockholders, members, or associates, between any
and/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. The instant controversy
clearly falls under this category of cases which are now cognizable
by the Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court
designated specific branches of the Regional Trial Courts to try
and decide cases formerly cognizable by the SEC. For the Fourth
Judicial Region, specifically in the Province of Batangas, the RTC of
Batangas City, Branch 32 is the designated court.[26]
WHEREFORE, in view of all the foregoing, the instant
petition for review on certiorari is DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are
hereby AFFIRMED. The case is ordered REMANDED to the
Regional Trial Court of Batangas City, Branch 32, for proper
disposition. The temporary restraining order issued by the SEC
Hearing Officer dated January 13, 1995 is ordered LIFTED.
SO ORDERED.

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