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G.R. No.

141735 June 8, 2005 On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee
to look into the CAMEC transaction, which had cost the bank Six Million Pesos
SAPPARI K. SAWADJAAN, petitioner, (P6,000,000.00) in losses.9 The subsequent events, as found and decided upon by the
vs. Court of Appeals,10 are as follows:
THE HONORABLE COURT OF APPEALS, THE CIVIL SERVICE COMMISSION and AL-
AMANAH INVESTMENT BANK OF THE PHILIPPINES, respondents. On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP]
Chairman Roberto F. De Ocampo charging him with Dishonesty in the Performance of
DECISION Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and
preventively suspending him.
CHICO-NAZARIO, J.:
In his memorandum dated 8 September 1993, petitioner informed the Investigating
Committee that he could not submit himself to the jurisdiction of the Committee because
This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision1 of the of its alleged partiality. For his failure to appear before the hearing set on 17 September
Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 1993, after the hearing of 13 September 1993 was postponed due to the Manifestation of
of the Civil Service Commission (CSC) dated 11 August 1994 and 11 April 1995, even date filed by petitioner, the Investigating Committee declared petitioner in default
respectively, which in turn affirmed Resolution No. 2309 of the Board of Directors of the and the prosecution was allowed to present its evidence ex parte.
Al-Amanah Islamic Investment Bank of the Philippines (AIIBP) dated 13 December 1993,
finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or
Conduct Prejudicial to the Best Interest of the Service and dismissing him from the On 08 December 1993, the Investigating Committee rendered a decision, the pertinent
service, and its Resolution2 of 15 December 1999 dismissing petitioner’s Motion for portions of which reads as follows:
Reconsideration.
In view of respondent SAWADJAAN’S abject failure to perform his duties and assigned
The records show that petitioner Sappari K. Sawadjaan was among the first employees of tasks as appraiser/inspector, which resulted to the prejudice and substantial damage to
the Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree the Bank, respondent should be held liable therefore. At this juncture, however, the
No. 264 on 02 August 1973. He rose through the ranks, working his way up from his Investigating Committee is of the considered opinion that he could not be held liable for
initial designation as security guard, to settling clerk, bookkeeper, credit investigator, the administrative offense of dishonesty considering the fact that no evidence was
project analyst, appraiser/ inspector, and eventually, loans analyst.3 adduced to show that he profited or benefited from being remiss in the performance of
his duties. The record is bereft of any evidence which would show that he received any
amount in consideration for his non-performance of his official duties.
In February 1988, while still designated as appraiser/investigator, Sawadjaan was
assigned to inspect the properties offered as collaterals by Compressed Air Machineries
and Equipment Corporation (CAMEC) for a credit line of Five Million Pesos This notwithstanding, respondent cannot escape liability. As adverted to earlier, his
(P5,000,000.00). The properties consisted of two parcels of land covered by Transfer failure to perform his official duties resulted to the prejudice and substantial damage to
Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of his Inspection the Islamic Bank for which he should be held liable for the administrative offense of
and Appraisal Report,4 the PAB granted the loan application. When the loan matured on CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.
17 May 1989, CAMEC requested an extension of 180 days, but was granted only 120 days
to repay the loan.5 Premises considered, the Investigating Committee recommends that respondent
SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.6 SUSPENSION from office in accordance with the Civil Service Commission’s
Memorandum Circular No. 30, Series of 1989.
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing
P.D. No. 264 (which created the PAB). All assets, liabilities and capital accounts of the On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted
PAB were transferred to the AIIBP,7 and the existing personnel of the PAB were to Resolution No. 2309 finding petitioner guilty of Dishonesty in the Performance of Official
continue to discharge their functions unless discharged.8 In the ensuing reorganization, Duties and/or Conduct Prejudicial to the Best Interest of the Service and imposing the
Sawadjaan was among the personnel retained by the AIIBP. penalty of Dismissal from the Service.

When CAMEC failed to pay despite the given extension, the bank, now referred to as the On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the
AIIBP, discovered that TCT No. N-130671 was spurious, the property described therein Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner
non-existent, and that the property covered by TCT No. C-52576 had a prior existing from dismissal to suspension for a period of six (6) months and one (1) day.
mortgage in favor of one Divina Pablico.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection out effectively the provisions of this Charter as well as internal rules and
Board (MSPB). regulations necessary for the conduct of its Islamic banking business and all matters
related to personnel organization, office functions and salary administration. (Italics ours)
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for
lack of merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled "Prescribing
Directors of Islamic Bank. Procedure and Sanctions to Ensure Speedy Disposition of Administrative Cases" directs,
"all administrative agencies" to "adopt and include in their respective Rules of
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioner’s Motion Procedure" provisions designed to abbreviate administrative proceedings.
for Reconsideration.
The above two (2) provisions relied upon by petitioner does not require the Islamic Bank
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the [AIIBP] to promulgate rules of procedure before administrative discipline may be
following assignment of errors: imposed upon its employees. The internal rules of procedures ordained to be adopted by
the Board refers to that necessary for the conduct of its Islamic banking business and all
matters related to "personnel organization, office functions and salary administration."
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has On the contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic Bank
committed a grave abuse of discretion amounting to excess or lack of the "broadest powers to manage the Islamic Bank." This grant of broad powers would be
jurisdiction when it initiated and conducted administrative investigation an idle ceremony if it would be powerless to discipline its employees.
without a validly promulgated rules of procedure in the adjudication of
administrative cases at the Islamic Bank.
The second assignment of error must likewise fail. The issue is raised for the first
time via this petition for certiorari.Petitioner submitted himself to the jurisdiction of the
II. Public respondent Civil Service Commission has committed a grave abuse of CSC. Although he could have raised the alleged lack of jurisdiction in his Motion for
discretion amounting to lack of jurisdiction when it prematurely and falsely Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By filing the
assumed jurisdiction of the case not appealed to it, but to the Merit System Motion for Reconsideration, he is estopped from denying the CSC’s jurisdiction over him,
Protection Board. as it is settled rule that a party who asks for an affirmative relief cannot later on impugn
the action of the tribunal as without jurisdiction after an adverse result was meted to
III. Both the Islamic Bank and the Civil Service Commission erred in finding him. Although jurisdiction over the subject matter of a case may be objected to at any
petitioner Sawadjaan of having deliberately reporting false information and stage of the proceedings even on appeal, this particular rule, however, means that
therefore guilty of Dishonesty and Conduct Prejudicial to the Best Interest of jurisdictional issues in a case can be raised only during the proceedings in said case and
the Service and penalized with dismissal from the service. during the appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The case at bar
is a petition [for] certiorari and not an appeal.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this
Honorable Court pursuant to Revised Administrative Circular No. 1-95, which took effect But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-
on 01 June 1995. 2387 dated 29 June 1993, provides:

We do not find merit [in] the petition. Decisions in administrative cases involving officials and employees of the civil service
appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e.,
Anent the first assignment of error, a reading of the records would reveal that petitioner Administrative Code of 1987) including personnel actions such as contested
raises for the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules appointments shall now be appealed directly to the Commission and not to the MSPB.
of procedure governing the adjudication and disposition of administrative cases
involving its personnel. It is a rule that issues not properly brought and ventilated below In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:
may not be raised for the first time on appeal, save in exceptional circumstances
(Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of which, however, obtain in this . . . The functions of the MSPB relating to the determination of administrative disciplinary
case. Granting arguendo that the issue is of such exceptional character that the Court may cases were, in other words, re-allocated to the Commission itself.
take cognizance of the same, still, it must fail. Section 26 of Republic Act No. 6848 (1990)
provides:
Be that as it may, "(i)t is hornbook doctrine that in order `(t)o ascertain whether a court
(in this case, administrative agency) has jurisdiction or not, the provisions of the law
Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to should be inquired into.’ Furthermore, `the jurisdiction of the court must appear clearly
manage the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry from the statute law or it will not be held to exist.’"(Azarcon v. Sandiganbayan, 268 SCRA
747, 757) From the provision of law abovecited, the Civil Service Commission clearly has ignoring the facts and evidences that the alleged Islamic Bank and its alleged Board of
jurisdiction over the Administrative Case against petitioner. Directors have no jurisdiction to act in the manner they did in the absence of a valid by-
laws; iv) in not correcting the acts of the Civil Service Commission who erroneously
Anent the third assignment of error, we likewise do not find merit in petitioner’s rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of fraud,
proposition that he should not be liable, as in the first place, he was not qualified to falsification and/or misrepresentations committed by Farouk A. Carpizo and his group,
perform the functions of appraiser/investigator because he lacked the necessary training including Roberto F. de Ocampo; v) in affirming an unconscionably harsh and/or
and expertise, and therefore, should not have been found dishonest by the Board of excessive penalty; and vi) in failing to consider newly discovered evidence and reverse
Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that the position its decision accordingly.
of appraiser/inspector is "one of the most serious [and] sensitive job in the banking
operations." He should have been aware that accepting such a designation, he is obliged Subsequently, petitioner Sawadjaan filed an "Ex-parte Urgent Motion for Additional
to perform the task at hand by the exercise of more than ordinary prudence. As Extension of Time to File a Reply (to the Comments of Respondent Al-Amanah
appraiser/investigator, he is expected, among others, to check the authenticity of the Investment Bank of the Philippines),17 Reply (to Respondent’s Consolidated
documents presented by the borrower by comparing them with the originals on file with Comment,)18 and Reply (to the Alleged Comments of Respondent Al-Amanah Islamic
the proper government office. He should have made it sure that the technical Bank of the Philippines)."19 On 13 October 2000, he informed this Court that he had
descriptions in the location plan on file with the Bureau of Lands of Marikina, jibe with terminated his lawyer’s services, and, by himself, prepared and filed the following: 1)
that indicated in the TCT of the collateral offered by CAMEC, and that the mortgage in Motion for New Trial;20 2) Motion to Declare Respondents in Default and/or Having
favor of the Islamic Bank was duly annotated at the back of the copy of the TCT kept by Waived their Rights to Interpose Objection to Petitioner’s Motion for New Trial;21 3) Ex-
the Register of Deeds of Marikina. This, petitioner failed to do, for which he must be held Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G.
liable. That he did not profit from his false report is of no moment. Neither the fact that it Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to
was not deliberate or willful, detracts from the nature of the act as dishonest. What is Inhibit them from Appearing in this Case Until they Can Present Valid Evidence of Legal
apparent is he stated something to be a fact, when he really was not sure that it was so. Authority;22 4) Opposition/Reply (to Respondent AIIBP’s Alleged Comment); 23 5) Ex-
Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the
Wherefore, above premises considered, the instant Petition is DISMISSED, and the Issuance of a Commitment Order/Warrant for His Arrest;24 6) Reply/Opposition (To the
assailed Resolutions of the Civil Service Commission are hereby AFFIRMED. Formal Notice of Withdrawal of Undersigned Counsel as Legal Counsel for the
Respondent Islamic Bank with Opposition to Petitioner’s Motion to Punish Undersigned
Counsel for Contempt of Court for the Issuance of a Warrant of Arrest);25 7)
On 24 March 1999, Sawadjaan’s counsel notified the court a quo of his change of Memorandum for Petitioner;26 8) Opposition to SolGen’s Motion for Clarification with
address,11 but apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Motion for Default and/or Waiver of Respondents to File their Memorandum;27 9)
Sawadjaan, by himself, filed a Motion for New Trial12 in the Court of Appeals based on the Motion for Contempt of Court and Inhibition/Disqualification with Opposition to OGCC’s
following grounds: fraud, accident, mistake or excusable negligence and newly Motion for Extension of Time to File Memorandum;28 10) Motion for Enforcement (In
discovered evidence. He claimed that he had recently discovered that at the time his Defense of the Rule of Law);29 11) Motion and Opposition (Motion to Punish OGCC’s
employment was terminated, the AIIBP had not yet adopted its corporate by-laws. He Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
attached a Certification13 by the Securities and Exchange Commission (SEC) that it was Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their
only on 27 May 1992 that the AIIBP submitted its draft by-laws to the SEC, and that its Arrest; and Opposition to their Alleged "Manifestation and Motion" Dated February 5,
registration was being held in abeyance pending certain corrections being made thereon. 2002);30 12) Motion for Reconsideration of Item (a) of Resolution dated 5 February 2002
Sawadjaan argued that since the AIIBP failed to file its by-laws within 60 days from the with Supplemental Motion for Contempt of Court;3113) Motion for Reconsideration of
passage of Rep. Act No. 6848, as required by Sec. 51 of the said law, the bank and its Portion of Resolution Dated 12 March 2002;32 14) Ex-Parte Urgent Motion for Extension
stockholders had "already forfeited its franchise or charter, including its license to exist of Time to File Reply Memorandum (To: CSC and AIIBP’s Memorandum);33 15) Reply
and operate as a corporation,"14 and thus no longer have "the legal standing and Memorandum (To: CSC’s Memorandum) With Ex-Parte Urgent Motion for Additional
personality to initiate an administrative case." Extension of time to File Reply Memorandum (To: AIIBP’s Memorandum);34 and 16)
Reply Memorandum (To: OGCC’s Memorandum for Respondent AIIBP).35
Sawadjaan’s counsel subsequently adopted his motion, but requested that it be treated
as a motion for reconsideration.15 This motion was denied by the court a quo in its Petitioner’s efforts are unavailing, and we deny his petition for its procedural and
Resolution of 15 December 1999.16 substantive flaws.

Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the The general rule is that the remedy to obtain reversal or modification of the judgment on
Rules of Court challenging the above Decision and Resolution of the Court of Appeals on the merits is appeal. This is true even if the error, or one of the errors, ascribed to the
the ground that the court a quo erred: i) in ignoring the facts and evidences that the court rendering the judgment is its lack of jurisdiction over the subject matter, or the
alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts and evidences that the exercise of power in excess thereof, or grave abuse of discretion in the findings of fact or
Islamic Bank lost its juridical personality as a corporation on 16 April 1990; iii) in of law set out in the decision.36
The records show that petitioner’s counsel received the Resolution of the Court of powers may not be inquired into collaterally in any private suit to which such
Appeals denying his motion for reconsideration on 27 December 1999. The fifteen day corporations may be a party.44
reglamentary period to appeal under Rule 45 of the Rules of Court therefore lapsed on
11 January 2000. On 23 February 2000, over a month after receipt of the resolution Moreover, a corporation which has failed to file its by-laws within the prescribed period
denying his motion for reconsideration, the petitioner filed his petition does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of
for certiorari under Rule 65. the Certificate of Registration of Corporations,45details the procedures and remedies that
may be availed of before an order of revocation can be issued. There is no showing that
It is settled that a special civil action for certiorari will not lie as a substitute for the lost such a procedure has been initiated in this case.
remedy of appeal,37 and though there are instances38 where the extraordinary remedy
of certiorari may be resorted to despite the availability of an appeal,39 we find no special In any case, petitioner’s argument is irrelevant because this case is not a corporate
reasons for making out an exception in this case. controversy, but a labor dispute; and it is an employer’s basic right to freely select or
discharge its employees, if only as a measure of self-protection against acts inimical to its
Even if we were to overlook this fact in the broader interests of justice and treat this as a interest.46 Regardless of whether AIIBP is a corporation, a partnership, a sole
special civil action for certiorari under Rule 65,40 the petition would nevertheless be proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the petitioner’s
dismissed for failure of the petitioner to show grave abuse of discretion. Petitioner’s employer. AIIBP chose to retain his services during its reorganization, controlled the
recurrent argument, tenuous at its very best, is premised on the fact that since means and methods by which his work was to be performed, paid his wages, and,
respondent AIIBP failed to file its by-laws within the designated 60 days from the eventually, terminated his services.47
effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP and all actions
resulting therefrom are a patent nullity. Or, in his words, the AIIBP and its officers and And though he has had ample opportunity to do so, the petitioner has not alleged that he
Board of Directors, is anything other than an employee of AIIBP. He has neither claimed, nor shown, that he
is a stockholder or an officer of the corporation. Having accepted employment from
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic AIIBP, and rendered his services to the said bank, received his salary, and accepted the
Bank, file administrative charges and investigate petitioner in the manner they did and promotion given him, it is now too late in the day for petitioner to question its existence
allegedly passed Board Resolution No. 2309 on December 13, 1993 which is null and and its power to terminate his services. One who assumes an obligation to an ostensible
void for lack of an (sic) authorized and valid by-laws. The CIVIL SERVICE COMMISSION corporation as such, cannot resist performance thereof on the ground that there was in
was therefore affirming, erroneously, a null and void "Resolution No. 2309 dated fact no corporation.481avvphi1
December 13, 1993 of the Board of Directors of Al-Amanah Islamic Investment Bank of
the Philippines" in CSC Resolution No. 94-4483 dated August 11, 1994. A motion for Even if we were to consider the facts behind petitioner Sawadjaan’s dismissal from
reconsideration thereof was denied by the CSC in its Resolution No. 95-2754 dated April service, we would be hard pressed to find error in the decision of the AIIBP.
11, 1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud,
falsifications and misrepresentations of the alleged Chairman and CEO Roberto F. de
Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged Islamic As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of
Bank.41 the properties offered by CAMEC as collaterals and check the copies of the certificates of
title against those on file with the Registry of Deeds. Not only did he fail to conduct these
routine checks, but he also deliberately misrepresented in his appraisal report that after
Nowhere in petitioner’s voluminous pleadings is there a showing that the court a reviewing the documents and conducting a site inspection, he found the CAMEC loan
quo committed grave abuse of discretion amounting to lack or excess of jurisdiction application to be in order. Despite the number of pleadings he has filed, he has failed to
reversible by a petition for certiorari. Petitioner already raised the question of AIIBP’s offer an alternative explanation for his actions.
corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for
Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite the
volume of pleadings he has submitted thus far, he has added nothing substantial to his When he was informed of the charges against him and directed to appear and present his
arguments. side on the matter, the petitioner sent instead a memorandum questioning the fairness
and impartiality of the members of the investigating committee and refusing to recognize
their jurisdiction over him. Nevertheless, the investigating committee rescheduled the
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts hearing to give the petitioner another chance, but he still refused to appear before it.
business, has shareholders, corporate officers, a board of directors, assets, and
personnel. It is, in fact, here represented by the Office of the Government Corporate
Counsel, "the principal law office of government-owned corporations, one of which is Thereafter, witnesses were presented, and a decision was rendered finding him guilty of
respondent bank."42 At the very least, by its failure to submit its by-laws on time, the dishonesty and dismissing him from service. He sought a reconsideration of this decision
AIIBP may be considered a de facto corporation43 whose right to exercise corporate and the same committee whose impartiality he questioned reduced their recommended
penalty to suspension for six months and one day. The board of directors, however,
opted to dismiss him from service.

On appeal to the CSC, the Commission found that Sawadjaan’s failure to perform his
official duties greatly prejudiced the AIIBP, for which he should be held accountable. It
held that:

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the
performance of his duties as appraiser/inspector. Had respondent performed his duties
as appraiser/inspector, he could have easily noticed that the property located at
Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the
properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had
respondent reflected such fact in his appraisal/inspection report on said property the
ISLAMIC BANK would not have approved CAMEC’s loan of P500,000.00 in 1987 and
CAMEC’s P5 Million loan in 1988, respondent knowing fully well the Bank’s policy of not
accepting encumbered properties as collateral.

Respondent SAWADJAAN’s reprehensible act is further aggravated when he failed to


check and verify from the Registry of Deeds of Marikina the authenticity of the property
located at Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and which is one of
the properties offered as collateral by CAMEC for its P5 Million loan in 1988. If he only
visited and verified with the Register of Deeds of Marikina the authenticity of TCT No. N-
130671 he could have easily discovered that TCT No. N-130671 is fake and the property
described therein non-existent.

...

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his


failure to perform his official duties resulted to the prejudice and substantial damage to
the ISLAMIC BANK for which he should be held liable for the administrative offense of
CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.49

From the foregoing, we find that the CSC and the court a quo committed no grave abuse
of discretion when they sustained Sawadjaan’s dismissal from service. Grave abuse of
discretion implies such capricious and whimsical exercise of judgment as equivalent to
lack of jurisdiction, or, in other words, where the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility, and it must be so patent and
gross as to amount to an evasion of positive duty or to a virtual refusal to perform the
duty enjoined or to act at all in contemplation of law.50 The records show that the
respondents did none of these; they acted in accordance with the law.

WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30


March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service
Commission, and its Resolution of 15 December 1999 are hereby affirmed. Costs against
the petitioner.

SO ORDERED.
G.R. No. 117604 March 26, 1997 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
CHINA BANKING CORPORATION, petitioner, letter dated 12 December 1985 for the same amount9 and another notice dated 22
vs. November 1986 for P23,483.24. 10
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.
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).
KAPUNAN, J.:
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, of his membership due to the sale of his share of stock in the 10 December 1986
petitioner China Banking Corporation seeks the reversal of the decision of the Court of auction. 11
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 On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock
1994 which denied petitioner's motion for reconsideration. 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
The case unfolds thus:
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 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 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 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books.2
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
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by dispute and on 27 August 1990 denied petitioner's motion for reconsideration.
Calapatia in petitioner's favor was duly noted in its corporate books.3
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the
which was secured by the aforestated pledge agreement still existing between Calapatia cancellation of any new stock certificate issued pursuant thereto; for the issuance of a
and petitioner.4 new certificate in petitioner's name; and for damages, attorney's fees and costs of
litigation.
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, On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of
requesting the latter to conduct a public auction sale of the pledged stock.5 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
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure (VGCCI) until liquidation of
proceedings and requested that the pledged stock be transferred to its (petitioner's) delinquency." 15 Consequently, the case was dismissed. 16
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 On 14 April 1992, Hearing Officer Perea denied petitioner's motion for
Calapatia's unsettled accounts with the club.6 reconsideration. 17

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an
and petitioner emerged as the highest bidder at P20,000.00 for the pledged stock. order reversing the decision of its hearing officer. It declared thus:
Consequently, petitioner was issued the corresponding certificate of sale.7
The Commission en banc believes that appellant-petitioner has a prior WHEREFORE, the decision dated June 4, 1993, and order dated
right over the pledged share and because of pledgor's failure to pay December 7, 1993 of respondent Securities and Exchange Commission
the principal debt upon maturity, appellant-petitioner can proceed (Annexes Y and BB, petition) and of its hearing officer dated January
with the foreclosure of the pledged share. 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
WHEREFORE, premises considered, the Orders of January 3, 1992 and of the case. Accordingly, the complaint of respondent China Banking
April 14, 1992 are hereby SET ASIDE. The auction sale conducted by Corporation (Annex Q, petition) is DISMISSED. No pronouncement as
appellee-respondent Club on December 10, 1986 is declared NULL to costs in this instance.
and VOID. Finally, appellee-respondent Club is ordered to issue
another membership certificate in the name of appellant-petitioner SO ORDERED. 20
bank.
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in
SO ORDERED. 18 its resolution dated 5 October 1994. 21

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the Hence, this petition wherein the following issues were raised:
same in its resolution dated 7 December 1993. 19
II
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 ISSUES
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 WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former
ruled as follows: Eighth Division) GRAVELY ERRED WHEN:

In order that the respondent Commission can take cognizance of a 1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04,
case, the controversy must pertain to any of the following 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES
relationships: (a) between the corporation, partnership or association AND EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED
and the public; (b) between the corporation, partnership or THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY
association and its stockholders, partners, members, or officers; (c) GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER
between the corporation, partnership or association and the state in OF THE CASE;
so far as its franchise, permit or license to operate is concerned, and
(d) among the stockholders, partners or associates themselves (Union 2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND
Glass and Container Corporation vs. SEC, November 28, 1983, 126 EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE
SCRA 31). The establishment of any of the relationship mentioned will PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE
not necessarily always confer jurisdiction over the dispute on the LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE
Securities and Exchange Commission to the exclusion of the regular SHARE OF RESPONDENT VALLEY GOLF.
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 The petition is granted.
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 The basic issue we must first hurdle is which body has jurisdiction over the controversy,
their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 the regular courts or the SEC.
SCRA 308, 322-323).
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Indeed, the controversy between petitioner and respondent bank
which involves ownership of the stock that used to belong to Sec. 3. The Commission shall have absolute jurisdiction, supervision
Calapatia, Jr. is not within the competence of respondent Commission and control over all corporations, partnerships or associations, who
to decide. It is not any of those mentioned in the aforecited case. 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 The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases
support of and to deputize any and all enforcement agencies of the of Mainland Construction Co., Inc. v. Movilla 23 and Bernardo v. CA, 24 thus:
government, civil or military as well as any private institution,
corporation, firm, association or person. . . . .The better policy in determining which body has jurisdiction over
a case would be to consider not only the status or relationship of the
xxx xxx xxx parties but also the nature of the question that is the subject of their
controversy.
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships Applying the foregoing principles in the case at bar, to ascertain which tribunal has
and other forms of associations registered with it as expressly granted jurisdiction we have to determine therefore whether or not petitioner is a stockholder of
under existing laws and decrees, it shall have original and exclusive VGCCI and whether or not the nature of the controversy between petitioner and private
jurisdiction to hear and decide cases involving: respondent corporation is intra-corporate.

a) Devices or schemes employed by or any acts of As to the first query, there is no question that the purchase of the subject share or
the board of directors, business associates, its membership certificate at public auction by petitioner (and the issuance to it of the
officers or partners, amounting to fraud and corresponding Certificate of Sale) transferred ownership of the same to the latter and
misrepresentation which may be detrimental to the thus entitled petitioner to have the said share registered in its name as a member of
interest of the public and/or of the stockholders, VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has in
partners, members of associations or organizations fact, in its letter of 27 September 1974, expressly recognized the pledge agreement
registered with the Commission. 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
b) Controversies arising out of intra-corporate or subject share, has not contested the said transfer.
partnership relations, between and among
stockholders, members, or associates; between any By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of
or all of them and the corporation, partnership or VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly
association of which they are stockholders, exemplies an intra-corporate controversy between a corporation and its stockholder
members or associates, respectively; and between under Sec. 5(b) of P.D. 902-A.
such corporation, partnership or association and
the State insofar as it concerns their individual An important consideration, moreover, is the nature of the controversy between
franchise or right to exist as such entity; 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
c) Controversies in the election or appointment of a member shall have been posted as delinquent, the Board may order his/her/its share
directors, trustees, officers, or managers of such sold to satisfy the claims of the Club. . ." 26 It is pursuant to this provision that VGCCI also
corporations, partnerships or associations. 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,
d) Petitions of corporations, partnerships or thus, is the proper interpretation and application of VGCCI's aforequoted by-laws, a
associations to be declared in the state of subject which irrefutably calls for the special competence of the SEC.
suspension of payments in cases where the
corporation, partnership or association possesses We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:
property to cover all of its debts but foresees the
impossibility of meeting them when they 6. In the fifties, the Court taking cognizance of the move to vest
respectively fall due or in cases where the jurisdiction in administrative commissions and boards the power to
corporation, partnership or association has no resolve specialized disputes in the field of labor (as in corporations,
sufficient assets to cover its liabilities, but is under public transportation and public utilities) ruled that Congress in
the Management Committee created pursuant to requiring the Industrial Court's intervention in the resolution of
this Decree. 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 We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically
cannot or will not determine a controversy involving a question which stated (in its motion to dismiss) that the case between itself and petitioner is intra-
is within the jurisdiction of an administrative tribunal, where the corporate and insisted that it is the SEC and not the regular courts which has jurisdiction.
question demands the exercise of sound administrative discretion This is precisely the reason why the said court dismissed petitioner's complaint and led
requiring the special knowledge, experience, and services of the to petitioner's recourse to the SEC.
administrative tribunal to determine technical and intricate matters of
fact, and a uniformity of ruling is essential to comply with the purposes Having resolved the issue on jurisdiction, instead of remanding the whole case to the
of the regulatory statute administered. Court of Appeals, this Court likewise deems it procedurally sound to proceed and rule on
its merits in the same proceedings.
In this era of clogged court dockets, the need for specialized
administrative boards or commissions with the special knowledge, It must be underscored that petitioner did not confine the instant petition for review
experience and capability to hear and determine promptly disputes on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner
on technical matters or essentially factual matters, subject to judicial specifically raised questions on the merits of the case. In turn, in its responsive pleadings,
review in case of grave abuse of discretion, has become well nigh private respondent duly answered and countered all the issues raised by petitioner.
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 Applicable to this case is the principle succinctly enunciated in the case of Heirs of
been committed to the view that unless the law speaks clearly and Crisanta Y. Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The
unequivocably, the choice should fall on [an administrative agency.]'" Roman Catholic Archbishop of Manila v. Court of Appeals. 31
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 In the interest of the public and for the expeditious administration of
their jurisdiction to award all kinds of damages in labor cases, as justice the issue on infringement shall be resolved by the court
against the previous P.D. amendment splitting their jurisdiction with considering that this case has dragged on for years and has gone from
the regular courts, "evidently, . . . had second thoughts about depriving one forum to another.
the Labor Arbiters and the NLRC of the jurisdiction to award damages
in labor cases because that setup would mean duplicity of suits, It is a rule of procedure for the Supreme Court to strive to settle the
splitting the cause of action and possible conflicting findings and entire controversy in a single proceeding leaving no root or branch to
conclusions by two tribunals on one and the same claim." 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
In this case, the need for the SEC's technical expertise cannot be over-emphasized trial court only to have its decision raised again to the Court of
involving as it does the meticulous analysis and correct interpretation of a corporation's Appeals and from there to the Supreme Court.
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 We have laid down the rule that the remand of the case or of an issue
the instant case. 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
VGCCI further contends that petitioner is estopped from denying its earlier position, in records before it and particularly where the ends of justice would not
the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is be subserved by the remand thereof. Moreover, the Supreme Court is
no intra-corporate relations between itself and VGCCI. clothed with ample authority to review matters, even those not raised
on appeal if it finds that their consideration is necessary in arriving at
VGCCI's contention lacks merit. a just disposition of the case.

In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court,
that: through Mr. Justice Ricardo J. Francisco, ruled in this wise:

It follows that as a rule the filing of a complaint with one court which At the outset, the Court's attention is drawn to the fact that since the
has no jurisdiction over it does not prevent the plaintiff from filing the filing of this suit before the trial court, none of the substantial issues
same complaint later with the competent court. The plaintiff is not have been resolved. To avoid and gloss over the issues raised by the
estopped from doing so simply because it made a mistake before in parties, as what the trial court and respondent Court of Appeals did,
the choice of the proper forum. . . . would unduly prolong this litigation involving a rather simple case of
foreclosure of mortgage. Undoubtedly, this will run counter to the August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note
avowed purpose of the rules, i.e., to assist the parties in obtaining just, covered by the same pledge agreement.
speedy and inexpensive determination of every action or proceeding.
The Court, therefore, feels that the central issues of the case, albeit VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it
unresolved by the courts below, should now be settled specially as had the right to sell the share in question in accordance with the express provision found
they involved pure questions of law. Furthermore, the pleadings of the in its by-laws.
respective parties on file have amply ventilated their various
positions and arguments on the matter necessitating prompt
adjudication. 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
In the case at bar, since we already have the records of the case (from the proceedings Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly
before the SEC) sufficient to enable us to render a sound judgment and since only dues to the club since 1975. Stranger still, petitioner, whom VGCCI had officially
questions of law were raised (the proper jurisdiction for Supreme Court review), we can, recognized as the pledgee of Calapatia's share, was neither informed nor furnished
therefore, unerringly take cognizance of and rule on the merits of the case. 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
The procedural niceties settled, we proceed to the merits. pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of
VGCCI thus belie its claim of good faith.
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 In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws.
pledge agreement was entered into on 21 August It argues in this wise:
1974 33 but the loan or promissory note which it secured was obtained by Calapatia
much later or only on 3 August 1983. 34 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.
VGCCI's contention is unmeritorious. Botica Nolasco, 47 Phil. 584). The exception to this is when third
persons have actual or constructive knowledge of the same. In the
A careful perusal of the pledge agreement will readily reveal that the contracting parties case at bar, petitioner had actual knowledge of the by-laws of private
explicitly stipulated therein that the said pledge will also stand as security for any future respondent when petitioner foreclosed the pledge made by Calapatia
advancements (or renewals thereof) that Calapatia (the pledgor) may procure from and when petitioner purchased the share foreclosed on September 17,
petitioner: 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 material to the issue herein in a letter it wrote to private
xxx xxx xxx respondent. Because of this actual knowledge of such by-laws then the
same bound the petitioner as of the time when petitioner purchased
This pledge is given as security for the prompt payment when due of the share. Since the by-laws was already binding upon petitioner
all loans, overdrafts, promissory notes, drafts, bills or exchange, when the latter purchased the share of Calapatia on September 17,
discounts, and all other obligations of every kind which have 1985 then the petitioner purchased the said share subject to the right
heretofore been contracted, or which may hereafter be contracted, by of the private respondent to sell the said share for reasons of
the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of delinquency and the right of private respondent to have a first lien on
the PLEDGEE, including discounts of Chinese drafts, bills of exchange, said shares as these rights are provided for in the by-laws very very
promissory notes, etc., without any further endorsement by the clearly. 36
PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND
(P20,000.00) PESOS, together with the accrued interest thereon, as VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
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.) 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
The validity of the pledge agreement between petitioner and Calapatia cannot thus be consideration. He was not a privy to the contract created by said by-
held suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 law between the shareholder Manuel Gonzales and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a themselves. They are self-imposed and, although adopted pursuant to
purchaser. statutory authority, have no status as public law. (Ibid.)

An unauthorized by-law forbidding a shareholder to sell his shares Therefore, it is the generally accepted rule that third persons are not
without first offering them to the corporation for a period of thirty bound by by-laws, except when they have knowledge of the
days is not binding upon an assignee of the stock as a personal provisions either actually or constructively. In the case of Fleisher
contract, although his assignor knew of the by-law and took part in its v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law
adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.) restricting the transfer of shares cannot have any effect on the
transferee of the shares in question as he "had no knowledge of such
When no restriction is placed by public law on the transfer of by-law when the shares were assigned to him. He obtained them in
corporate stock, a purchaser is not affected by any contractual good faith and for a valuable consideration. He was not a privy to the
restriction of which he had no notice. (Brinkerhoff-Farris Trust & contract created by the by-law between the shareholder . . .and the
Savings Co. vs. Home Lumber Co., 118 Mo., 447.) Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a
purchaser. (Emphasis supplied.)
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 analogy of the above-cited case, the Commission en banc is of the
by, and enforceable against, the assignor; the assignee is not bound by opinion that said case is applicable to the present controversy.
such by-law by virtue of the assignment alone. (Ireland vs. Globe Appellant-petitioner bank as a third party can not be bound by
Milling Co., 21 R.I., 9.) 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
A by-law of a corporation which provides that transfers of stock shall mention of the shareholder-pledgor's unpaid accounts. The transcript
not be valid unless approved by the board of directors, while it may be of stenographic notes of the June 25, 1991 Hearing reveals that the
enforced as a reasonable regulation for the protection of the pledgor became delinquent only in 1975. Thus, appellant-petitioner
corporation against worthless stockholders, cannot be made available was in good faith when the pledge agreement was contracted.
to defeat the rights of third persons. (Farmers' and Merchants' Bank
of Lineville vs. Wasson, 48 Iowa, 336.) (Emphasis ours.)
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
In order to be bound, the third party must have acquired knowledge of the pertinent by- be applicable and binding upon the pledgee, knowledge of the
laws at the time the transaction or agreement between said third party and the provisions of the VGCI By-laws must be acquired at the time the
shareholder was entered into, in this case, at the time the pledge agreement was pledge agreement was contracted. Knowledge of said provisions,
executed. VGCCI could have easily informed petitioner of its by-laws when it sent notice either actual or constructive, at the time of foreclosure will not affect
formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's pledgee's right over the pledged share. Art. 2087 of the Civil Code
name. Petitioner's belated notice of said by-laws at the time of foreclosure will not provides that it is also of the essence of these contracts that when the
suffice. The ruling of the SEC en banc is particularly instructive: principal obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the creditor.
By-laws signifies the rules and regulations or private laws enacted by
the corporation to regulate, govern and control its own actions, affairs In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc.,
and concerns and its stockholders or members and directors and the Commission issued an opinion to the effect that:
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 According to the weight of authority, the pledgee's
government and that of the individuals composing it and having the right is entitled to full protection without
direction, management and control of its affairs, in whole or in part, in surrender of the certificate, their cancellation, and
the management and control of its affairs and activities. (9 Fletcher the issuance to him of new ones, and when done,
4166, 1982 Ed.) the pledgee will be fully protected against a
subsequent purchaser who would be charged with
constructive notice that the certificate is covered
The purpose of a by-law is to regulate the conduct and define the by the pledge. (12-A Fletcher 502)
duties of the members towards the corporation and among
The pledgee is entitled to retain possession of the case at bar, the subscription for the share in question has been fully paid as evidenced by
stock until the pledgor pays or tenders to him the the issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation
amount due on the debt secured. In other words, were merely the monthly dues. Hence, the aforequoted provision does not apply.
the pledgee has the right to resort to its collateral
for the payment of the debts. (Ibid, 502) 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.
To cancel the pledged certificate outright and the
issuance of new certificate to a third person who SO ORDERED.
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 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
G.R. No. 152392 May 26, 2005 averred that in that same teleconference, the board of directors approved a resolution
authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file
EXPERTRAVEL & TOURS, INC., petitioner, the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written
vs. copy of the aforesaid resolution.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
On April 12, 2000, the trial court issued an Order4 denying the motion to dismiss, giving
DECISION credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of
Directors indeed conducted a teleconference on June 25, 1999, during which it approved
a resolution as quoted in the submitted affidavit.
CALLEJO, SR., J.:
ETI filed a motion for the reconsideration of the Order, contending that it was
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals inappropriate for the court to take judicial notice of the said teleconference without any
(CA) in CA-G.R. SP No. 61000 dismissing the petition for certiorari and mandamus filed prior hearing. The trial court denied the motion in its Order5dated August 8, 2000.
by Expertravel and Tours, Inc. (ETI).
ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC. In
The Antecedents its comment on the petition, KAL appended a certificate signed by Atty. Aguinaldo dated
January 10, 2000, worded as follows:
Korean Airlines (KAL) is a corporation established and registered in the Republic of
South Korea and licensed to do business in the Philippines. Its general manager in the SECRETARY’S/RESIDENT AGENT’S CERTIFICATE
Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and
his law firm.
KNOW ALL MEN BY THESE PRESENTS:
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint2 against ETI with
the Regional Trial Court (RTC) of Manila, for the collection of the principal amount I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and appointed
of P260,150.00, plus attorney’s fees and exemplary damages. The verification and Corporate Secretary and Resident Agent of KOREAN AIRLINES, a foreign
certification against forum shopping was signed by Atty. Aguinaldo, who indicated corporation duly organized and existing under and by virtue of the laws of the
therein that he was the resident agent and legal counsel of KAL and had caused the Republic of Korea and also duly registered and authorized to do business in the
preparation of the complaint. Philippines, with office address at Ground Floor, LPL Plaza Building, 124 Alfaro
St., Salcedo Village, Makati City, HEREBY CERTIFY that during a special meeting
of the Board of Directors of the Corporation held on June 25, 1999 at which a
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not quorum was present, the said Board unanimously passed, voted upon and
authorized to execute the verification and certificate of non-forum shopping as required approved the following resolution which is now in full force and effect, to wit:
by Section 5, Rule 7 of the Rules of Court. KAL opposed the motion, contending that Atty.
Aguinaldo was its resident agent and was registered as such with the Securities and
Exchange Commission (SEC) as required by the Corporation Code of the Philippines. It RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo &
was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL. Associates or any of its lawyers are hereby appointed and authorized
Appended to the said opposition was the identification card of Atty. Aguinaldo, showing to take with whatever legal action necessary to effect the collection of
that he was the lawyer of KAL. the unpaid account of Expert Travel & Tours. They are hereby
specifically authorized to prosecute, litigate, defend, sign and execute
any document or paper necessary to the filing and prosecution of said
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been claim in Court, attend the Pre-Trial Proceedings and enter into a
authorized to file the complaint through a resolution of the KAL Board of Directors compromise agreement relative to the above-mentioned claim.
approved during a special meeting held on June 25, 1999. Upon his motion, KAL was
given a period of 10 days within which to submit a copy of the said resolution. The trial
court granted the motion. Atty. Aguinaldo subsequently filed other similar motions, IN WITNESS WHEREOF, I have hereunto affixed my signature this 10th day of
which the trial court granted. January, 1999, in the City of Manila, Philippines.

Finally, KAL submitted on March 6, 2000 an Affidavit3 of even date, executed by its (Sgd.)
general manager Suk Kyoo Kim, alleging that the board of directors conducted a special
teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also
MARIO A. AGUINALDO Long Distance Telephone Company, Inc. had provided a record of corporate conferences
Resident Agent and meetings through FiberNet using fiber-optic transmission technology, and that such
technology facilitates voice and image transmission with ease; this makes constant
communication between a foreign-based office and its Philippine-based branches faster
SUBSCRIBED AND SWORN to before me this 10th day of January, 1999, Atty. and easier, allowing for cost-cutting in terms of travel concerns. It points out that even
Mario A. Aguinaldo exhibiting to me his Community Tax Certificate No. the E-Commerce Law has recognized this modern technology. The respondent posits that
14914545, issued on January 7, 2000 at Manila, Philippines. the courts are aware of this development in technology; hence, may take judicial notice
thereof without need of hearings. Even if such hearing is required, the requirement is
Doc. No. 119; (Sgd.) nevertheless satisfied if a party is allowed to file pleadings by way of comment or
Page No. 25; ATTY. HENRY D. ADASA opposition thereto.
Book No. XXIV Notary Public
Series of 2000. Until December 31, 2000 In its reply, the petitioner pointed out that there are no rulings on the matter of
PTR #889583/MLA 1/3/20006 teleconferencing as a means of conducting meetings of board of directors for purposes of
passing a resolution; until and after teleconferencing is recognized as a legitimate means
of gathering a quorum of board of directors, such cannot be taken judicial notice of by
On December 18, 2001, the CA rendered judgment dismissing the petition, ruling that the
the court. It asserts that safeguards must first be set up to prevent any mischief on the
verification and certificate of non-forum shopping executed by Atty. Aguinaldo was
public or to protect the general public from any possible fraud. It further proposes
sufficient compliance with the Rules of Court. According to the appellate court, Atty.
possible amendments to the Corporation Code to give recognition to such manner of
Aguinaldo had been duly authorized by the board resolution approved on June 25, 1999,
board meetings to transact business for the corporation, or other related corporate
and was the resident agent of KAL. As such, the RTC could not be faulted for taking
matters; until then, the petitioner asserts, teleconferencing cannot be the subject of
judicial notice of the said teleconference of the KAL Board of Directors.
judicial notice.

ETI filed a motion for reconsideration of the said decision, which the CA denied. Thus,
The petitioner further avers that the supposed holding of a special meeting on June 25,
ETI, now the petitioner, comes to the Court by way of petition for review
1999 through teleconferencing where Atty. Aguinaldo was supposedly given such an
on certiorari and raises the following issue:
authority is a farce, considering that there was no mention of where it was held, whether
in this country or elsewhere. It insists that the Corporation Code requires board
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE resolutions of corporations to be submitted to the SEC. Even assuming that there was
ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT such a teleconference, it would be against the provisions of the Corporation Code not to
RENDERED ITS QUESTIONED DECISION AND WHEN IT ISSUED ITS have any record thereof.
QUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANT PETITION?7
The petitioner insists that the teleconference and resolution adverted to by the
The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of Court can be respondent in its pleadings were mere fabrications foisted by the respondent and its
determined only from the contents of the complaint and not by documents or pleadings counsel on the RTC, the CA and this Court.
outside thereof. Hence, the trial court committed grave abuse of discretion amounting to
excess of jurisdiction, and the CA erred in considering the affidavit of the respondent’s
The petition is meritorious.
general manager, as well as the Secretary’s/Resident Agent’s Certification and the
resolution of the board of directors contained therein, as proof of compliance with the
requirements of Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that Section 5, Rule 7 of the Rules of Court provides:
the RTC cannot take judicial notice of the said teleconference without prior hearing, nor
any motion therefor. The petitioner reiterates its submission that the teleconference and SEC. 5. Certification against forum shopping.— The plaintiff or principal party
the resolution adverted to by the respondent was a mere fabrication. shall certify under oath in the complaint or other initiatory pleading asserting a
claim for relief, or in a sworn certification annexed thereto and simultaneously
The respondent, for its part, avers that the issue of whether modern technology is used filed therewith: (a) that he has not theretofore commenced any action or filed
in the field of business is a factual issue; hence, cannot be raised in a petition for review any claim involving the same issues in any court, tribunal or quasi-judicial
on certiorari under Rule 45 of the Rules of Court. On the merits of the petition, it insists agency and, to the best of his knowledge, no such other action or claim is
that Atty. Aguinaldo, as the resident agent and corporate secretary, is authorized to sign pending therein; (b) if there is such other pending action or claim, a complete
and execute the certificate of non-forum shopping required by Section 5, Rule 7 of the statement of the present status thereof; and (c) if he should thereafter learn
Rules of Court, on top of the board resolution approved during the teleconference of June that the same or similar action or claim has been filed or is pending, he shall
25, 1999. The respondent insists that "technological advances in this time and age are as report that fact within five (5) days therefrom to the court wherein his
commonplace as daybreak." Hence, the courts may take judicial notice that the Philippine aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere … For who else knows of the circumstances required in the Certificate but its
amendment of the complaint or other initiatory pleading but shall be cause for own retained counsel. Its regular officers, like its board chairman and
the dismissal of the case without prejudice, unless otherwise provided, upon president, may not even know the details required therein.
motion and after hearing. The submission of a false certification or non-
compliance with any of the undertakings therein shall constitute indirect Indeed, the certificate of non-forum shopping may be incorporated in the complaint or
contempt of court, without prejudice to the corresponding administrative and appended thereto as an integral part of the complaint. The rule is that compliance with
criminal actions. If the acts of the party or his counsel clearly constitute willful the rule after the filing of the complaint, or the dismissal of a complaint based on its non-
and deliberate forum shopping, the same shall be ground for summary compliance with the rule, is impermissible. However, in exceptional circumstances, the
dismissal with prejudice and shall constitute direct contempt, as well as a cause court may allow subsequent compliance with the rule.12 If the authority of a party’s
for administrative sanctions. counsel to execute a certificate of non-forum shopping is disputed by the adverse party,
the former is required to show proof of such authority or representation.
It is settled that the requirement to file a certificate of non-forum shopping is
mandatory8 and that the failure to comply with this requirement cannot be excused. The In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty.
certification is a peculiar and personal responsibility of the party, an assurance given to Aguinaldo to execute the requisite verification and certificate of non-forum shopping as
the court or other tribunal that there are no other pending cases involving basically the the resident agent and counsel of the respondent. It was, thus, incumbent upon the
same parties, issues and causes of action. Hence, the certification must be accomplished respondent, as the plaintiff, to allege and establish that Atty. Aguinaldo had such
by the party himself because he has actual knowledge of whether or not he has initiated authority to execute the requisite verification and certification for and in its behalf. The
similar actions or proceedings in different courts or tribunals. Even his counsel may be respondent, however, failed to do so.
unaware of such facts.9 Hence, the requisite certification executed by the plaintiff’s
counsel will not suffice.10
The verification and certificate of non-forum shopping which was incorporated in the
complaint and signed by Atty. Aguinaldo reads:
In a case where the plaintiff is a private corporation, the certification may be signed, for
and on behalf of the said corporation, by a specifically authorized person, including its
retained counsel, who has personal knowledge of the facts required to be established by I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210
the documents. The reason was explained by the Court in National Steel Corporation v. Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, after having
Court of Appeals,11 as follows: sworn to in accordance with law hereby deposes and say: THAT -

Unlike natural persons, corporations may perform physical actions only 1. I am the Resident Agent and Legal Counsel of the plaintiff in the above
through properly delegated individuals; namely, its officers and/or agents. entitled case and have caused the preparation of the above complaint;

… 2. I have read the complaint and that all the allegations contained therein are
true and correct based on the records on files;
The corporation, such as the petitioner, has no powers except those expressly
conferred on it by the Corporation Code and those that are implied by or are 3. I hereby further certify that I have not commenced any other action or
incidental to its existence. In turn, a corporation exercises said powers through proceeding involving the same issues in the Supreme Court, the Court of
its board of directors and/or its duly-authorized officers and agents. Physical Appeals, or different divisions thereof, or any other tribunal or agency. If I
acts, like the signing of documents, can be performed only by natural persons subsequently learned that a similar action or proceeding has been filed or is
duly-authorized for the purpose by corporate by-laws or by specific act of the pending before the Supreme Court, the Court of Appeals, or different divisions
board of directors. "All acts within the powers of a corporation may be thereof, or any tribunal or agency, I will notify the court, tribunal or agency
performed by agents of its selection; and except so far as limitations or within five (5) days from such notice/knowledge.
restrictions which may be imposed by special charter, by-law, or statutory
provisions, the same general principles of law which govern the relation of (Sgd.)
agency for a natural person govern the officer or agent of a corporation, of
whatever status or rank, in respect to his power to act for the corporation; and
MARIO A. AGUINALDO
agents once appointed, or members acting in their stead, are subject to the
Affiant
same rules, liabilities and incapacities as are agents of individuals and private
CITY OF MANILA
persons."


SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999, affiant The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not
exhibiting to me his Community Tax Certificate No. 00671047 issued on specifically authorized to execute the said certification. It attempted to show its
January 7, 1999 at Manila, Philippines. compliance with the rule subsequent to the filing of its complaint by submitting, on
March 6, 2000, a resolution purporting to have been approved by its Board of Directors
during a teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo and Suk
Doc. No. 1005; (Sgd.) Kyoo Kim in attendance. However, such attempt of the respondent casts veritable doubt
Page No. 198; not only on its claim that such a teleconference was held, but also on the approval by the
Book No. XXI ATTY. HENRY D. ADASA Board of Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate
Series of 1999. Notary Public of non-forum shopping.
Until December 31, 2000
PTR No. 320501 Mla. 1/4/9913 In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of
modern technology, persons in one location may confer with other persons in other
places, and, based on the said premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo
As gleaned from the aforequoted certification, there was no allegation that Atty. had a teleconference with the respondent’s Board of Directors in South Korea on June 25,
Aguinaldo had been authorized to execute the certificate of non-forum shopping by the 1999. The CA, likewise, gave credence to the respondent’s claim that such a
respondent’s Board of Directors; moreover, no such board resolution was appended teleconference took place, as contained in the affidavit of Suk Kyoo Kim, as well as Atty.
thereto or incorporated therein. Aguinaldo’s certification.

While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this does Generally speaking, matters of judicial notice have three material requisites: (1) the
not mean that he is authorized to execute the requisite certification against forum matter must be one of common and general knowledge; (2) it must be well and
shopping. Under Section 127, in relation to Section 128 of the Corporation Code, the authoritatively settled and not doubtful or uncertain; and (3) it must be known to be
authority of the resident agent of a foreign corporation with license to do business in the within the limits of the jurisdiction of the court. The principal guide in determining what
Philippines is to receive, for and in behalf of the foreign corporation, services and other facts may be assumed to be judicially known is that of notoriety. Hence, it can be said
legal processes in all actions and other legal proceedings against such corporation, thus: that judicial notice is limited to facts evidenced by public records and facts of general
notoriety.[15] Moreover, a judicially noticed fact must be one not subject to a reasonable
SEC. 127. Who may be a resident agent. – A resident agent may either be an dispute in that it is either: (1) generally known within the territorial jurisdiction of the
individual residing in the Philippines or a domestic corporation lawfully trial court; or (2) capable of accurate and ready determination by resorting to sources
transacting business in the Philippines: Provided, That in the case of an whose accuracy cannot reasonably be questionable.16
individual, he must be of good moral character and of sound financial standing.
Things of "common knowledge," of which courts take judicial matters coming to the
SEC. 128. Resident agent; service of process. – The Securities and Exchange knowledge of men generally in the course of the ordinary experiences of life, or they may
Commission shall require as a condition precedent to the issuance of the license be matters which are generally accepted by mankind as true and are capable of ready
to transact business in the Philippines by any foreign corporation that such and unquestioned demonstration. Thus, facts which are universally known, and which
corporation file with the Securities and Exchange Commission a written power may be found in encyclopedias, dictionaries or other publications, are judicially noticed,
of attorney designating some persons who must be a resident of the provided, they are of such universal notoriety and so generally understood that they may
Philippines, on whom any summons and other legal processes may be served in be regarded as forming part of the common knowledge of every person. As the common
all actions or other legal proceedings against such corporation, and consenting knowledge of man ranges far and wide, a wide variety of particular facts have been
that service upon such resident agent shall be admitted and held as valid as if judicially noticed as being matters of common knowledge. But a court cannot take
served upon the duly-authorized officers of the foreign corporation as its home judicial notice of any fact which, in part, is dependent on the existence or non-existence of a
office.14 fact of which the court has no constructive knowledge.17

Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of In this age of modern technology, the courts may take judicial notice that business
non-forum shopping as required by Section 5, Rule 7 of the Rules of Court. This is transactions may be made by individuals through teleconferencing. Teleconferencing is
because while a resident agent may be aware of actions filed against his principal (a interactive group communication (three or more people in two or more locations)
foreign corporation doing business in the Philippines), such resident may not be aware through an electronic medium. In general terms, teleconferencing can bring people
of actions initiated by its principal, whether in the Philippines against a domestic together under one roof even though they are separated by hundreds of miles. 18 This
corporation or private individual, or in the country where such corporation was type of group communication may be used in a number of ways, and have three basic
organized and registered, against a Philippine registered corporation or a Filipino types: (1) video conferencing - television-like communication augmented with sound; (2)
citizen. computer conferencing - printed communication through keyboard terminals, and (3)
audio-conferencing-verbal communication via the telephone with optional capacity for 4. Lack of participant familiarity with the equipment, the medium itself, and
telewriting or telecopying.19 meeting skills.

A teleconference represents a unique alternative to face-to-face (FTF) meetings. It was 5. Acoustical problems within the teleconferencing rooms.
first introduced in the 1960’s with American Telephone and Telegraph’s Picturephone.
At that time, however, no demand existed for the new technology. Travel costs were 6. Difficulty in determining participant speaking order; frequently one person
reasonable and consumers were unwilling to pay the monthly service charge for using monopolizes the meeting.
the picturephone, which was regarded as more of a novelty than as an actual means for
everyday communication.20In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because of the 7. Greater participant preparation time needed.
money saved, among other advantages include:
8. Informal, one-to-one, social interaction not possible.22
1. People (including outside guest speakers) who wouldn’t normally attend a
distant FTF meeting can participate. Indeed, teleconferencing can only facilitate the linking of people; it does not alter the
complexity of group communication. Although it may be easier to
2. Follow-up to earlier meetings can be done with relative ease and little communicate via teleconferencing, it may also be easier to miscommunicate.
expense. Teleconferencing cannot satisfy the individual needs of every type of meeting.23

3. Socializing is minimal compared to an FTF meeting; therefore, meetings are In the Philippines, teleconferencing and videoconferencing of members of board of
shorter and more oriented to the primary purpose of the meeting. directors of private corporations is a reality, in light of Republic Act No. 8792. The
Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on
November 30, 2001, providing the guidelines to be complied with related to such
4. Some routine meetings are more effective since one can audio-conference conferences.24Thus, the Court agrees with the RTC that persons in the Philippines may
from any location equipped with a telephone. have a teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.
5. Communication between the home office and field staffs is maximized.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a
6. Severe climate and/or unreliable transportation may necessitate teleconference along with the respondent’s Board of Directors, the Court is not
teleconferencing. convinced that one was conducted; even if there had been one, the Court is not inclined
to believe that a board resolution was duly passed specifically authorizing Atty.
7. Participants are generally better prepared than for FTF meetings. Aguinaldo to file the complaint and execute the required certification against forum
shopping.
8. It is particularly satisfactory for simple problem-solving, information
exchange, and procedural tasks. The records show that the petitioner filed a motion to dismiss the complaint on the
ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of Court.
The respondent opposed the motion on December 1, 1999, on its contention that Atty.
9. Group members participate more equally in well-moderated teleconferences Aguinaldo, its resident agent, was duly authorized to sue in its behalf. The respondent,
than an FTF meeting.21 however, failed to establish its claim that Atty. Aguinaldo was its resident agent in the
Philippines. Even the identification card25 of Atty. Aguinaldo which the respondent
On the other hand, other private corporations opt not to hold teleconferences because of appended to its pleading merely showed that he is the company lawyer of the
the following disadvantages: respondent’s Manila Regional Office.

1. Technical failures with equipment, including connections that aren’t made. The respondent, through Atty. Aguinaldo, announced the holding of the teleconference
only during the hearing of January 28, 2000; Atty. Aguinaldo then prayed for ten days, or
2. Unsatisfactory for complex interpersonal communication, such as until February 8, 2000, within which to submit the board resolution purportedly
negotiation or bargaining. authorizing him to file the complaint and execute the required certification against forum
shopping. The court granted the motion.26 The respondent, however, failed to comply,
and instead prayed for 15 more days to submit the said resolution, contending that it
3. Impersonal, less easy to create an atmosphere of group rapport. was with its main office in Korea. The court granted the motion per its Order27 dated
February 11, 2000. The respondent again prayed for an extension within which to The Court is, thus, more inclined to believe that the alleged teleconference on June 25,
submit the said resolution, until March 6, 2000.28 It was on the said date that the 1999 never took place, and that the resolution allegedly approved by the respondent’s
respondent submitted an affidavit of its general manager Suk Kyoo Kim, stating, inter Board of Directors during the said teleconference was a mere concoction purposefully
alia, that he and Atty. Aguinaldo attended the said teleconference on June 25, 1999, foisted on the RTC, the CA and this Court, to avert the dismissal of its complaint against
where the Board of Directors supposedly approved the following resolution: the petitioner.

RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court
Associates or any of its lawyers are hereby appointed and authorized to take of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The Regional Trial
with whatever legal action necessary to effect the collection of the unpaid Court of Manila is hereby ORDERED to dismiss, without prejudice, the complaint of the
account of Expert Travel & Tours. They are hereby specifically authorized to respondent.
prosecute, litigate, defend, sign and execute any document or paper necessary
to the filing and prosecution of said claim in Court, attend the Pre-trial SO ORDERED.
Proceedings and enter into a compromise agreement relative to the above-
mentioned claim.29

But then, in the same affidavit, Suk Kyoo Kim declared that the respondent "do[es] not
keep a written copy of the aforesaid Resolution" because no records of board resolutions
approved during teleconferences were kept. This belied the respondent’s earlier
allegation in its February 10, 2000 motion for extension of time to submit the questioned
resolution that it was in the custody of its main office in Korea. The respondent gave the
trial court the impression that it needed time to secure a copy of the resolution kept in
Korea, only to allege later (via the affidavit of Suk Kyoo Kim) that it had no such written
copy. Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was embodied in
the Secretary’s/Resident Agent’s Certificate signed by Atty. Aguinaldo. However, no such
resolution was appended to the said certificate.

The respondent’s allegation that its board of directors conducted a teleconference on


June 25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is
incredible, given the additional fact that no such allegation was made in the complaint. If
the resolution had indeed been approved on June 25, 1999, long before the complaint
was filed, the respondent should have incorporated it in its complaint, or at least
appended a copy thereof. The respondent failed to do so. It was only on January 28, 2000
that the respondent claimed, for the first time, that there was such a meeting of the
Board of Directors held on June 25, 1999; it even represented to the Court that a copy of
its resolution was with its main office in Korea, only to allege later that no written copy
existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that
the meeting of the Board of Directors where the resolution was approved was
held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a
Secretary’s/Resident Agent’s Certificate alleging that the board of directors held a
teleconference on June 25, 1999. No such certificate was appended to the complaint,
which was filed on September 6, 1999. More importantly, the respondent did not explain
why the said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and
yet was notarized one year later (on January 10, 2000); it also did not explain its failure
to append the said certificate to the complaint, as well as to its Compliance dated March
6, 2000. It was only on January 26, 2001 when the respondent filed its comment in the
CA that it submitted the Secretary’s/Resident Agent’s Certificate30 dated January 10,
2000.
G.R. No. 184068, April 19, 2016 (Sgd)
GILBERT G. GUY Executive
SIMNY G. GUY, AS MINORITY STOCKHOLDER AND FOR AND IN BEHALF OF Vice-President
GOODLAND COMPANY, INC., Petitioner, v. GILBERT G. GUY, ALVIN AGUSTIN T.
IGNACIO AND JOHN AND/OR JANE DOES, Respondents. On 22 September 2004, or fifteen (15) days after the stockholders' meeting, petitioner
received the aforementioned notice.8
DECISION
On 30 September 2004, petitioner, for himself and on behalf of GCI and Grace Guy Cheu
(Cheu), filed a Complaint against respondents before the RTC of Manila 9 for the
SERENO, C.J.:
"Nullification of Stockholders' Meeting and Election of Directors, Nullification of Acts and
Resolutions, Injunction and Damages with Prayer for Temporary Restraining Order
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of and/or Writ of Preliminary Injunction."10
Court, assailing the Decision1 and Resolution2 of the Court of Appeals (CA) in CA-G.R. SP
No. 99749. The CA affirmed in totothe Decision3 issued by the Regional Trial Court (RTC) Petitoner assailed the election held on 7 September 2004 on the following grounds: (1)
of Manila, Branch 24. The challenged rulings upheld the validity of a special stockholders' there was no previous notice to petitioner and Cheu; (2) the meeting was not called by
meeting, the election of directors and officers of Goodland Company, Inc. (GCI), and any the proper person; and (3) the notices were not issued by the person who had the legal
further proceedings, acts or resolutions resulting therefrom. authority to do so.11

FACTUAL ANTECEDENTS In his Answer, respondent Gilbert G. Guy (Gilbert) argued that the stockholders' meeting
on 7 September 2004 was legally called and held; that the notice of meeting was signed
GCI is a family-owned corporation of the Guy family duly organized and existing under by the authorized officer of GCI and sent in accordance with the by-laws of the
Philippine laws.4Petitioner Simny G. Guy (Simny) is a stockholder of record and member corporation; and that Cheu was not a stockholder of record of the corporation, a status
of the board of directors of the corporation. Respondents are also GCI stockholders of that would have entitled her to receive a notice of the meeting.12
record who were allegedly elected as new directors by virtue of the assailed
stockholders' meeting held on 7 September 2004.5 On 18 October 2004, the RTC issued a Temporary Restraining Order (TRO) enjoining
respondents and their officers, agents, assigns, and all other persons deriving authority
On 10 September 2004, Paulino Delfin Pe and Benjamin Lim (stockholders of record of from them from acting or holding themselves out as new directors/officers of the
GCI) informed petitioner that they had received a notice dated 31 August 2004 calling for corporation.13
the holding of a special stockholders' meeting on 7 September 2004 at the Manila
Diamond Hotel.6 The notice7 reads: In a Manifestation dated 10 August 2005, respondents disclosed that an annual
stockholders' meeting of GCI for the year 2005 had been held. They prayed for the
NOTICE OF MEETING dismissal of the Complaint, claiming that the issues raised therein had already become
moot and academic by virtue of the 2005 annual stockholders' meeting.14 The pertinent
Please take notice that the Special Stockholders' meeting of Goodland Company, Inc. shall portions of the Manifestation read:
be held on 7 September 2004 at 10:00 a.m. at the Manila Diamond Hotel located at Roxas
Boulevard corner Dr. J. Quintos Street, Ermita, Manila, for the purposes, among others, of 4. On March 30, 2005, defendant Gilbert G. Guy [herein respondent], in his capacity as
the election of the Board of Directors for the year 2004-2005, and consideration of such Acting President, Vice-President, Director and majority stockholder of GOODLAND, sent
other matters as may arise during the meeting. a "Notice of 2005 Annual Meeting of Stockholders" to all stockholders of record of
GOODLAND notifying all stockholders that "pursuant to Art. II, Sec. 1 of the By-Laws of
If you are unable to be present at the stockholders' meeting, please nominate and GOODLAND COMPANY, INC., the annual meeting of the stockholders of the Corporation
authorize your proxy representative by executing, signing and delivering to the shall be held on the SECOND MONDAY OF APRIL, " or on APRIL 11, 2005, at 2:00 o'clock in
undersigned the proxy for the meeting of the stockholders. the afternoon, at Taal Conference Room, Upper Lobby, Century Park Sheraton Hotel, P.
Ocampo, Sr., St. Manila" xxx.
The newly elected Board of Directors may meet thereafter for the purposes, among
others, of election and appointment of officers, and consideration of such other matters 5. The said Notice complies with the provisions of Art. II, Sections] 2 and 3 of the By-
as may arise during the meeting. Laws of GOODLAND, which provide that:

Quezon City, 31 August 2004. "Sec. 2. Special meeting of the stockholders may be called at the principal office of the
company at any time by resolution of the Board of Directors or by order of the President
and must be called upon the written request of stockholders registered as the owners of
one-third (1/3) of the total outstanding stock. " as in fact, the evidence she presented during trial are the valid, existing, and uncancelled
Goodland Stock Certificate Nos. 49 and 58 in the name of one Paulino Delfin Pe for a total
"Section 3. Notice of meeting written or printed for every regular or special meeting of the of 8 shares xxx, and Goodland Stock Certificate Nos. 50 and 59 in the name of one
stockholders shall be prepared and mailed to the Registered post office address of each Benjamin Lim for a total of 7 shares x x x.22
stockholder not less than five (5) days prior to the date set for such meeting, and if for a
special meeting, such notice shall state the object or objects of the same. No failure or On the other hand, respondent Gilbert Guy was shown to own 63,996 shares or around
irregularity of notice of any meeting shall invalidate such meeting at which all the 79.99% of the total subscribed shares of Goodland x x x.23
stockholders are present and voting without protest. "
As correctly pointed out by defendants the applicable provisions of the By-laws of
6. Plaintiff SIMNY G. GUY [herein petitioner] was notified three (3) times by the post Goodland are Art. II, Sec. 2 which provides that the "special meeting of the stockholders
office of the said "Notice of 2005 Annual Meeting of Stockholders" on April 6, 2005, may be called xxx by order of the President and must be called upon the written request
April 11, 2005 and April 20, 2005, respectively, but the same was (sic) ignored by of stockholders registered as the owners of one-third the total outstanding stock" and
plaintiff SIMNY G. GUY [petitioner] and the said "Notice of 2005 Annual Meeting of Art. IV, Section 3 which provides that "the Vice President, if qualified, shall exercise all of
Stockholders" was "UNCLAIMED" x x x. the functions and perform all the duties of the President in the absence or disability, for
any cause, of the latter.24
7. The Notices sent to Paulino Del fin Pe and Benjamin Lim were duly received by them
on April 5, 2005 as evidenced by their respective Registry Return Receipts x x x. Based on the evidence on record and considering the above quoted provisions of
Goodland's By-Laws, we rule in favor of defendants [herein respondents]. The evidence
8. No Notice was sent to plaintiff GRACE GUY CHEU as she is not a stockholder of record conclusively shows that defendant Gilbert is the owner of more than one-third of the
of GOODLAND.15ChanRoblesVirtualawlibrary outstanding stock of Goodland. In fact, it is around 79.99%. Thus, pursuant to Art. II, Sec.
2 of the By-laws of Goodland, defendant Gilbert may validly call such special
stockholders' meeting.25cralawred
On 26 October 2005, the RTC denied the prayer for dismissal and ruled that the case had
not been mooted by the holding of the 2005 annual stockholders' meeting. It said that
Plaintiffs have not disputed defendants' allegation that the then incumbent President of
respondents' issuance and sending of notices were part of the acts arising from the
Goodland Francisco Guy Co Chia was incapacitated by Alzheimer's Disease. Thus,
special stockholders' meeting held on 7 September 2004, the validity of which is being
pursuant to Art. IV, Section 3 of the By-Laws of Goodland, defendant Gilbert, as the duly
assailed in the present case.16
elected Vice President of Goodland (which is likewise not disputed by plaintiffs), shall
exercise all of the functions and perform all the duties of the President in the absence or
In their Manifestation and Motion,17 petitioner and Cheu averred that their application
disability, for any cause of the latter. We likewise rule that the qualifying phrase in Art.
for preliminary injunction had been mooted by supervening events. One of these events
IV, Section 3 of the By-Laws of Goodland that the Vice-President, "if qualified," refers to
was the holding of the 2005 annual stockholders' meeting of the corporation on 11 April
the qualification that the Vice President must also be a director since one of the
2005, during which a new set of directors and officers for the ensuing year was elected. 18
qualifications to become a President of the corporation is that he must first be a director
of the corporation. A Vice President of Goodland who is not also a director is not
In a Decision19 dated 25 June 2007, the RTC dismissed the Complaint filed by petitioner
qualified to act as President. And since defendant Gilbert is both the duly elected Vice
and Cheu. The trial court ruled:
President and an incumbent director, we find that he is qualified to act as President.
Thus, as acting President of Goodland, defendant Gilbert may validly order the calling of
On the issue that there was no previous notice to the plaintiffs, the evidence clearly the said special stockholders' meeting.26
shows that the Notice of the Special Stockholders' meeting was sent to plaintiff Simny
[petitioner] by registered mail on September 2, 2004, or five days before the said In view of the said findings, plaintiffs' prayer for damages against
meeting held on September 7, 2004, in accordance with Art. II, Section 3 of the By-Laws
of Goodland. In fact, plaintiffs admitted in par. 13 of the complaint that plaintiffs were
informed by Paulino Delfin Pe and Benjamin Lim that they received a Notice dated 31
August 2004 calling tor the holding of a special stockholders' meeting on 7 September
2004.20

The evidence on record consisting of the GIS of Goodland, duly filed with SEC, for the
years 1998, 1999, 2001, 2002, and 2003 xxx, show that plaintiff Simny G. Guy
[petitioner] owns 7,982 shares of the total 80,000 subscribed and issued shares of
Goodland or equivalent to around 9.97% of the total subscribed shares of Goodland. 21

Plaintiff Grace Cheu failed to show proof of her alleged ownership of shares in Goodland
G.R. No. 202079 June 10, 2013 RULING OF THE RTC

FIL-ESTATE GOLF AND DEVELOPMENT, INC. and FILESTATE LAND, INC., Petitioners, The RTC dismissed the complaint for insufficiency of evidence. It ruled that delay in the
vs. issuance of stock certificates does not warrant rescission of the contract as this
VERTEX SALES AND TRADING, INC., Respondent. constituted a mere casual or slight breach. It also observed that notwithstanding the
delay in the issuance of the stock certificate, the sale had already been consummated; the
DECISION issuance of the stock certificate is just a collateral matter to the sale and the stock
certificate is not essential to "the creation of the relation of shareholder."6
BRION, J.:
RULING OF THE CA
Before the Court is the petition for review on certiorari1 under Rule 45 of the Rules of
Court, filed by petitioners Fil-Estate Golf and Development, Inc. (FEGDI) and Fil-Estate Vertex appealed the dismissal of its complaint. In its decision, the CA reversed the RTC
Land, Inc. (FELl), assailing the decision2 dated February 22, 2012 and the and rescinded the sale of the share. Citing Section 63 of the Corporation Code, the CA
resolution3 dated May 31, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 89296. held that there can be no valid transfer of shares where there is no delivery of the stock
The assailed CA rulings reversed the decision dated March 1, 2007 of the Regional Trial certificate. It considered the prolonged issuance of the stock certificate a substantial
Court (RTC) of Pasig City, Branch 161, in Civil Case No. 68791.4 breach that served as basis for Vertex to rescind the sale. 7 The CA ordered the
petitioners to return the amounts paid by Vertex by reason of the sale.
THE FACTS
THE PARTIES’ ARGUMENTS
FEGDI is a stock corporation whose primary business is the development of golf courses.
FELI is also a stock corporation, but is engaged in real estate development. FEGDI was FEGDI and FELI filed the present petition for review on certiorari to assail the CA rulings.
the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in They contend that the CA erred when it reversed the RTC’s dismissal of Vertex’s
consideration for its financing support and construction efforts, was issued several complaint, declaring that the delay in the issuance of a stock certificate constituted as
shares of stock of Forest Hills. substantial breach that warranted a rescission.

Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion Construction FEGDI argued that the delay cannot be considered a substantial breach because Vertex
Corporation (RSACC) one Class "C" Common Share of Forest Hills for ₱1,100,000.00. was unequivocally recognized as a shareholder of Forest Hills. In fact, Vertex’s nominees
Prior to the full payment of the purchase price, RSACC sold, on February 11, 1999,5 the became members of Forest Hills and fully enjoyed and utilized all its facilities. It added
Class "C" Common Share to respondent Vertex Sales and Trading, Inc. (Vertex). RSACC that RSACC also used its shareholder rights and eventually sold its share to Vertex
advised FEGDI of the sale to Vertex and FEGDI, in turn, instructed Forest Hills to despite the absence of a stock certificate. In light of these circumstances, delay in the
recognize Vertex as a shareholder. For this reason, Vertex enjoyed membership issuance of a stock certificate cannot be considered a substantial breach.
privileges in Forest Hills.
For its part, FELI stated that it is not a party to the contract sought to be rescinded. It
Despite Vertex’s full payment, the share remained in the name of FEGDI. Seventeen (17) argued that it was just recklessly dragged into the action due to a mistake committed by
months after the sale (or on July 28, 2000), Vertex wrote FEDGI a letter demanding the FEGDI’s staff on two instances. The first was when their counsel used the letterhead of
issuance of a stock certificate in its name. FELI replied, initially requested Vertex to first FELI instead of FEGDI in its reply-letter to Vertex; the second was when they used the
pay the necessary fees for the transfer. Although Vertex complied with the request, no receipt of FELI for receipt of the documentary stamp tax paid by Vertex.
certificate was issued. This prompted Vertex to make a final demand on March 17, 2001.
As the demand went unheeded, Vertex filed on January 7, 2002 a Complaint for In its comment to the petition,8 Vertex alleged that the fulfillment of its obligation to pay
Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It the purchase price called into action the petitioners’ reciprocal obligation to deliver the
averred that the petitioners defaulted in their obligation as sellers when they failed and stock certificate. Since there was delay in the issuance of a certificate for more than three
refused to issue the stock certificate covering the subject share despite repeated years, then it should be considered a substantial breach warranting the rescission of the
demands. On the basis of its rights under Article 1191 of the Civil Code, Vertex prayed for sale. Vertex further alleged that its use and enjoyment of Forest Hills’ facilities cannot be
the rescission of the sale and demanded the reimbursement of the amount it paid (or considered delivery and transfer of ownership.
₱1,100,000.00), plus interest. During the pendency of the rescission action (or on
January 23, 2002), a certificate of stock was issued in Vertex’s name, but Vertex refused THE ISSUE
to accept it.
Given the parties’ arguments, the sole issue for the Court to resolve is whether the delay a substantial breach of their contract that entitles Vertex the right to rescind the sale
in the issuance of a stock certificate can be considered a substantial breach as to warrant under Article 1191 of the Civil Code. It is not entirely correct to say that a sale had
rescission of the contract of sale. already been consummated as Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot suffice where the law, by its express
THE COURT’S RULING terms, requires a specific form to transfer ownership.

The petition lacks merit. "Mutual restitution is required in cases involving rescission under Article 1191" of the
Civil Code; such restitution is necessary to bring back the parties to their original
situation prior to the inception of the contract.10 Accordingly, the amount paid to FEGDI
Physical delivery is necessary to by reason of the sale should be returned to Vertex. On the amount of damages, the CA is
transfer ownership of stocks correct in not awarding damages since Vertex failed to prove by sufficient evidence that
it suffered actual damage due to the delay in the issuance of the certificate of stock.
The factual backdrop of this case is similar to that of Raquel-Santos v. Court of
Appeals,9 where the Court held that in "a sale of shares of stock, physical delivery of a Regarding the involvement of FELI in this case, no privity of contract exists between
stock certificate is one of the essential requisites for the transfer of ownership of the Vertex and FELI. "As a general rule, a contract is a meeting of minds between two
stocks purchased." persons.1âwphi1 The Civil Code upholds the spirit over the form; thus, it deems an
agreement to exist, provided the essential requisites are present. A contract is upheld as
In that case, Trans-Phil Marine Ent., Inc. (Trans-Phil) and Roland Garcia bought Piltel long as there is proof of consent, subject matter and cause. Moreover, it is generally
shares from Finvest Securities Co., Inc. (Finvest Securities) in February 1997. Since obligatory in whatever form it may have been entered into. From the moment there is a
Finvest Securities failed to deliver the stock certificates, Trans-Phil and Garcia filed an meeting of minds between the parties, [the contract] is perfected."11
action first for specific performance, which was later on amended to an action for
rescission. The Court ruled that Finvest Securities’ failure to deliver the shares of stock In the sale of the Class "C" Common Share, the parties are only FEGDI, as seller, and
constituted substantial breach of their contract which gave rise to a right on the part of Vertex, as buyer. As can be seen from the records, FELl was only dragged into the action
Trans-Phil and Garcia to rescind the sale. when its staff used the wrong letterhead in replying to Vertex and issued the wrong
receipt for the payment of transfer taxes. Thus FELl should be absolved from any
Section 63 of the Corporation Code provides: liability.

SEC. 63. Certificate of stock and transfer of shares. – The capital stock of stock WHEREFORE, we hereby DENY the petition. The decision dated February 22, 2012 and
corporations shall be divided into shares for which certificates signed by the president or the resolution dated May 31, 2012 of the Court of Appeals in CA-G.R. CV No. 89296 are
vice-president, countersigned by the secretary or assistant secretary, and sealed with the AFFIRMED with the MODIFICATION that Fil-Estate Land, Inc. is ABSOLVED from any
seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so liability.
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 SO ORDERED.
authorized to make the transfer.1âwphi1 No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation
showing 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.

In this case, Vertex fully paid the purchase price by February 11, 1999 but the stock
certificate was only delivered on January 23, 2002 after Vertex filed an action for
rescission against FEGDI.

Under these facts, considered in relation to the governing law, FEGDI clearly failed to
deliver the stock certificates, representing the shares of stock purchased by Vertex,
within a reasonable time from the point the shares should have been delivered. This was
G.R. No. 204089 (1). Ordering respondent Abra Valley College to allow petitioners to inspect its
corporate books and records and minutes of meetings at reasonable hours on
GRACE BORGONA INSIGNE, DIOSDADO BORGONA, OSBOURNE BORGONA, IMELDA business days, copies of excerpts from said books, records and minutes shall be
BORGONA RIVERA, AND ARISTOTLE BORGONA, Petitioners, allowed reproduction by petitioners at their expense and after written demand
vs. pursuant to Section 74 of the Corporation Code;
ABRA VALLEY COLLEGES, INC. AND FRANCIS BORGONA, Respondent.
(2). Ordering respondent Abra Valley College to furnish petitioners its financial
DECISION statement at their expense within ten (10) days from receipt of a written
request pursuant to Section 75 of the Corporation Code;
BERSAMIN, J.:
(3). Ordering respondent Abra Valley College to pay petitioners the amount of
P2,000.00 as attorney’s fees.
Is the presentation of a stock certificate a condition sine qua non for proving one's
shareholding in a corporation? This is the decisive question to be resolved in this appeal.
SO ORDERED.9
The Case
The RTC denied Abra Valley’s motion for reconsideration on August 7, 2002; 10 hence,
Abra Valley appealed to the CA, which promulgated its decision on December 20,
In this appeal, the petitioners challenge the decision promulgated on June 6, 2012 in C.A.- 2006,11 ordering the RTC to admit Abra Valley’s answer despite its belated filing on May
G.R. SP No. 115203,1whereby the Court of Appeals (CA) affirmed the dismissal of their 10, 2002; and remanding the case for further proceedings.
complaint by the Regional Trial Court (RTC), Branch 1, in Bangued, Abra under the order
dated June 28, 2010 for their failure to comply with the order to present their stock
certificates.2 Thereafter, the petitioners amended their complaint12 to substitute Evelyn Borgoña, the
wife of Romulo Borgoña, as one of the plaintiffs due to Romulo’s intervening death;13 to
implead Francis as an additional defendant, both in his personal capacity and as the
Antecedents president of Abra Valley; and to include the immediate holding of the annual
stockholders’ meeting as the second cause of action. The amended complaint also alleged
Petitioners Grace Borgoña Insigne, Diosdado Borgoña, Osbourne Borgoña, Imelda that they were bona fide stockholders of Abra Valley, attaching copies of stock
Borgoña Rivera, Aristotle Borgoña are siblings of the full blood. Respondent Francis certificates indorsed in their favor on the dorsal portion by the original holders.14
Borgoña (Francis) is their older half-blood brother. The petitioners are the children of
the late Pedro Borgoña (Pedro) by his second wife, Teresita Valeros, while Francis was On November 10, 2009, Abra Valley and Francis filed their respective answers.15
Pedro’s son by his first wife, Humvelina Avila.3 In his lifetime, Pedro was the founder,
president and majority stockholder of respondent Abra Valley Colleges, Inc. (Abra
Valley), a stock corporation. After Pedro’s death, Francis succeeded him as the president In its answer, Abra Valley raised the following special and affirmative defenses, to wit:
of Abra Valley.4
18. Inasmuch as the originals of the above enumerated certificates of stock are
On March 26, 2002, the petitioners, along with their brother Romulo Borgoña and Elmer still in names of the original owners, it is the conclusion that the transfers or
Reyes, filed a complaint (with application for preliminary injunction) and damages in the transactions, if any, that may have transpired between said owners and
RTC against Abra Valley (docketed as Special Civil Action Case No. 2070), 5 praying, plaintiffs are not yet recorded and registered with the corporation issuing the
among others, that the RTC direct Abra Valley to allow them to inspect its corporate same;
books and records, and the minutes of meetings, and to provide them with its financial
statements6 19. If said transaction or transfer was already registered, the stock certificates
in the name of the assignor, transferor or indorses should have been cancelled
Due to Abra Valley’s failure to file its responsive pleading within the reglementary period and replaced with stock certificates in the name of the assignee, transferee or
provided in the Interim Rules of Procedure Governing Intra-Corporate Controversies,7 the indorsee;
RTC rendered judgment on May 7, 2002 in favor of the petitioners,8 disposing thusly:
20. The stocks certificate submitted by the plaintiffs are still not in their
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered: respective names, but still in the name of the supposed assignors, transferors or
indorsers.
xxxx (2) SEC certified true copy of "ISSUANCE OF PART OF AUTHORIZED AND
UNISSUED CAPITAL STOCK" of defendant corporation, declaring that in a
23. To avail of the rights of stockholders, the plaintiffs must present stock Special Meeting of Trustees held on February 1, 1982, a Resolution to make a
certificates already in their names, and not in the names of other persons;16 private offering of its authorized and unissued capital stock to certain
persons, which included the following plaintiffs: Grace B. Insigne, Osbourne v.
Borgoña, Diosdado V. Borgoña, Imelda B. Rivera and Aristotle V.
On his part, Francis averred similar special and affirmative defenses, to wit: Borgoña, was duly adopted. (Annex "B");

10. From the Annexes of the amended complaint filed by plaintiffs, it appears (3) Official Receipts (O.R.) of defendant corporation showing that on August
that not one of them is a stockholder of record of the Abra Valley Colleges, Inc.; 8, 1986, each of the following plaintiffs paid for 36 shares of stock of defendant
corporation, to wit:
11. Be that as it is, plaintiffs are not vested with the rights to vote, to notice, to
inspect, to call for an annual meeting or demand the conduct of one, and such 1. Grace Insigne [O.R. # 62092],
other rights and privileges inherent and available only to stockholders of
record;
2. Osbourne Borgoña [O.R. # 62094],
12. From the copies of Stock Certificate attached to the AMENDED COMPLAINT,
some of the plaintiffs are mere assignees or indorsees, and that the other 3. Diosdado Borgoña [O.R. # 62095],
plaintiffs are not even assignees or indorsee;
4. Imelda B. Rivera [O.R. # 62096], and
13. And the right of an assignee or indorsee of a stock certificate is limited only
to the issuance of stock certificate in his or her name, after the requirements 5. Aristotle Borgoña [O.R. # 62097],
and conditions are complied with;17
(Annexes "C" to "C-4");
The respondents then filed on March 2, 2010 a Motion for Preliminary Hearing of Special
and Affirmative Defenses.18 At the hearing set on March 8, 2010, the RTC ordered the (4) SEC certified copy of "Letter" of defendant corporation’s President
petitioners to present the stock certificates issued by Abra Valley under their names. Pedro V. Borgoña, dated June 17, 1987, addressed to the Securities and
Exchange Commission (SEC), informing the SEC that defendant corporation
On April 7, 2010, the petitioners submitted their Compliance and issued 324 shares of its authorized and unissued capital stocks to certain
Manifestation,19 attaching the following documents: offerees, which included the following plaintiffs: Grace B. Insigne, Osbourne
v. Borgoña, Diosdado V. Borgoña, Imelda B. Rivera and Aristotle V.
(1) Certification of defendant corporation dated April 3, 2001, issued by its Borgoña. (Annex "D");
Corporate Secretary, Jocelyn Bernal, officially stating that "as per Records of
the Stock and Transfer Book of the Abra Valley Collegesthe following (5) SEC certified copy of "Secretary’s Certificate" of defendant corporation,
persons has [sic] a share" in defendant corporation, namely: plaintiffs – dated June 17, 1987, issued by the Corporate Secretary and attested by its
President, stating that at a Special Meeting of the Board of Trustees held on
(a) Grace V. Borgoña [110 shares], February 1, 1982, a Resolution was passed formally confirming and
ratifyingthe issuance of 324 shares from the authorized and unissued capital
stock of the corporation to certain persons, which included the following
(b) Aristotle and Imelda V. Borgoña [30 shares], plaintiffs: Grace B. Insigne, Osbourne V. Borgoña, Diosdado V. Borgoña,
Imelda B. Rivera and Aristotle V. Borgoña, and who subscribed and fully
(c) Diosdado V. Borgoña [15 shares], and paid their respective number of shares. (Annex "E");

(d) Osbourne V. Borgoña [10 shares]. (6) SEC certified copy of the "General Information Sheet" (GIS) of
defendant corporation showing that in 1989, the following plaintiffs,
(Annex "A"); namely: Grace B. Insigne, Diosdado V. Borgoña, Imelda B. Rivera and
Aristotle V. Borgoña, together with then President, Pedro V. Borgoña, were
members of the Board of defendant corporation.
(Annex "F"); and WHEREFORE, premises considered, the Petition is DENIED. The Order dated 28 June
2010 of the Regional Trial Court of Bangued, Abra, Branch 1, in Civil Case No. 2070 is
(7) SEC certified copy of the "MINUTES OF THE ANNUAL MEETING OF hereby AFFIRMED.
DIRECTORS AND STOCKHOLDERS OF THE ABRA VALLEY COLLEGE ON
JANUARY 29, 1989" showing that the following plaintiffs, namely: Grace B. SO ORDERED.24
Insigne, Osbourne V. Borgoña, Diosdado V. Borgoña, Imelda B. Rivera and
Aristotle V. Borgoña, attended said Annual Meeting as stockholders, and the After the CA denied the petitioners’ motion for reconsideration on October 15,
same minutes shows that some of the plaintiffs were elected members of the 2012,25 the petitioners have come to the Court for review.
1989 Board of defendant corporation. (Annex "G")20
Issue
The petitioners likewise filed a Motion for Production/Inspection of Documents,21 asking
that the RTC direct the respondents to produce Abra Valley’s Stock and Transfer Book
(STB); and that petitioners be allowed to inspect the same. To be resolved is whether the RTC properly dismissed Special Civil Action Case No. 2070
on the ground of the petitioners’ failure to comply with the order issued by the RTC on
March 8, 2010 to produce stock certificates. In other words, the Court should determine
On June 28, 2010, the RTC issued the assailed order dismissing Special Civil Action Case whether or not the petitioners were bona fide stockholders of Abra Valley.
No. 2070 pursuant to Section 3, Rule 17 of the Rules of Court, pertinently holding:
Ruling of the Court
As can be gleaned, the documents presented are not Stock Certificates as boldly
announced by the plaintiff’s counsel, hence, plaintiffs failed to comply with the order of
the Court dated March 8, 2010. Hence, this case is dismissible under Rule 17, Sec. 3 of the The appeal is meritorious.
Rules of Court which provides:
At the outset, we stress that the Court’s determination is limited to resolving the issue
Sec. 3. Dismissal due to fault of plaintiff. — "If, for no justifiable cause, the plaintiff fails to concerning the status or relation of the petitioners with Abra Valley. Whether or not the
appear on the date of the presentation of his evidence in chief on the complaint, or to petitioners could exercise their right to inspect Abra Valley’s corporate books, records
prosecute his action for an unreasonable length of time, or to comply with these rules or and minutes of meetings, and be furnished with financial statements, and whether or not
any order of the court, the complaint may be dismissed upon motion of the defendant or they could demand the immediate holding of the annual stockholders’ meeting are
upon the Court's own motion without prejudice to the right of the defendant to matters to be tried and resolved by the RTC.
prosecute his counter-claim in the same or in a separate action. The dismissal shall have
the effect of an adjudication upon the merits, unless otherwise declared by the Court." 1.

Going into the merits, the Court is of the considered opinion that the documents Petitioners were stockholders of Abra Valley
presented in the compliance failed to defeat the challenge of the defendant. "A mere
typewritten statement advising a stockholder of the extent of his ownership in a In their amended complaint, the petitioners alleged that they were bona
corporation xxx cannot be considered a formal Certificate of Stock". (SEC opinion. 20 fide stockholders of Abra Valley. On the other hand, the respondents claimed as an
October 1970, cited in Bitong vs. CA) affirmative defense that the petitioners were not Abra Valley’s stockholders.

Further, in a derivative suit, it is required that stockholder is an owner of a stock In civil cases, the party having the burden of proof must establish his case by a
certificate at the time of the suit. The documents presented are not updated. preponderance of evidence, or evidence that is more convincing to the court as worthy of
belief than that which is offered in opposition thereto. Thus, the party, whether the
WHEREFORE, premises considered this case is ordered DISMISSED. plaintiff or the defendant, who asserts the affirmative of an issue bears the onus to prove
his assertion in order to obtain a favorable judgment. From the plaintiff the burden to
SO ORDERED.22 prove his positive assertions never parts. Yet, for the defendant, an affirmative defense is
one that is not a denial of an essential ingredient in the plaintiff’s cause of action, but
rather one that, if established, will be a good defense – i.e., an "avoidance" of the claim.26
The petitioners appealed the dismissal.
The petitioners’ causes of action against the respondents were premised on Sections 50,
On June 6, 2012, the CA promulgated its assailed decision,23 the dispositive portion of 74 and 75 of the Corporation Code,27 to wit:
which states:
Section 50. Regular and special meetings of stockholders or members. – Regular meetings A stock certificate is prima facie evidence that the holder is a shareholder of the
of stockholders or members shall be held annually on a date fixed in the by-laws, or if corporation,28 but the possession of the certificate is not the sole determining factor of
not so fixed, on any date in April of every year as determined by the board of directors or one’s stock ownership. A certificate of stock is merely: –
trustees: Provided, That written notice of regular meetings shall be sent to all
stockholders or members of record at least two (2) weeks prior to the meeting, unless a x x x the paper representative or tangible evidence of the stock itself and of the various
different period is required by the by-laws. interests therein. The certificate is not stock in the corporation but is merely
evidence of the holder's interest and status in the corporation, his ownership of
Section 74. Books to be kept; stock transfer agent. – x x x the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but
The records of all business transactions of the corporation and the minutes of any it is not essential to the existence of a share in stock or the creation of the relation of
meetings shall be open to inspection by any director, trustee, stockholder or member of shareholder to the corporation.29 (Emphasis supplied.)
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. To establish their stock ownership, the petitioners actually turned over to the trial court
through their Compliance and Manifestation submitted on April 7, 2010 the various
xxxx documents showing their ownership of Abra Valley’s shares,30specifically: the official
receipts of their payments for their subscriptions of the shares of Abra Valley; and the
copies duly certified by the Securities and Exchange Commission (SEC) stating that Abra
Section 75. Right to financial statements. – Within ten (10) days from receipt of a written Valley had issued shares in favor of the petitioners, such as the issuance of part of
request of any stockholder or member, the corporation shall furnish to him its most authorized and unissued capital stock; the letter dated June 17, 1987; the secretary’s
recent financial statement, which shall include a balance sheet as of the end of the last certificate dated June 17, 1987; and the general information sheet.
taxable year and a profit or loss statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations. (Emphasis ours)
And, thirdly, the petitioners adduced competent proof showing that the respondents had
allowed the petitioners to become members of the Board of Directors. According to
xxxx the Minutes of the Annual Meeting of Directors and Stockholders of the Abra Valley College
of January 29, 1989, which was among the documents submitted to the trial court on
Conformably with these provisions, the petitioners had to establish that they were April 7, 2010 through the Compliance and Manifestation, the petitioners attended the
stockholders of Abra Valley. Indeed, the CA concluded that it was the petitioners who annual meeting of January 29, 1989 as stockholders of Abra Valley, and participated in
had failed to discharge the burden of proving their stock ownership because they did not the election of the Board of Directors at which some of them were chosen as members.
produce their stock certificates. Considering that Section 23 of the Corporation Code requires every director to be the
holder of at least one share of capital stock of the corporation of which he is a director,
We reverse the CA. the respondents would not have then allowed any of the petitioners to be elected to sit in
the Board of Directors as members unless they believed that the petitioners so elected
were not disqualified for lack of stock ownership. Neither did the respondents thereafter
First of all, the present issue was the offshoot of the RTC’s resolution of the Motion for assail their acts as Board Directors. Conformably with the doctrine of estoppel, the
Preliminary Hearing of Special and Affirmative Defenses, wherein the respondents alleged respondents could no longer deny the petitioners’ status as stockholders of Abra Valley.
that the petitioners were not stockholders of Abra Valley; and that they had no cause of The application of the doctrine of estoppel, which is based on public policy, fair dealing,
action against the respondents. good faith and justice, is only appropriate because the purpose of the doctrine is to
forbid one from speaking against his own act, representations, or commitments to the
Being the parties who filed the Motion for Preliminary Hearing of Special and Affirmative injury of another to whom he directed such act, representations, or commitments, and
Defenses, the respondents bore the burden of proof to establish that the petitioners who reasonably relied thereon. The doctrine springs from equitable principles and the
were not stockholders of Abra Valley. The respondents’ assertion therein, albeit negative, equities in the case, and is designed to aid the law in the administration of justice where
partook of a good defense that, if established, would result to their "avoidance" of the without its aid injustice might result. The Court has applied the doctrine wherever and
claim. On that basis, the CA erroneously laid the burden of proof on the petitioners. whenever special circumstances of the case so demanded.31

Secondly, the petitioners, assuming that they bore the burden of proving their status as Under the circumstances, the dismissal of Special Civil Action Case No. 2070 on June 28,
stockholders of Abra Valley, nonetheless discharged their burden despite their non- 2010 on the basis that "the documents presented are not Stock Certificates as boldly
production of the stock certificates. announced by the plaintiff’s counsel, hence, plaintiffs failed to comply with the order of
the Court dated March 8, 2010" was unwarranted and unreasonable. Although Section 3,
Rule 17 of the Rules of Court32 expressly empowers the trial court to dismiss the
complaint motu proprio or upon motion of the defendant if, for no justifiable cause, the In this regard, the Court has instructed in Ponce v. Alsons Cement Corporation37 that:
plaintiff fails to comply with any order of the court, the power to dismiss is not to
wielded indiscriminately, but only when the non-compliance constitutes a willful x x x [A] transfer of shares of stock not recorded in the stock and transfer book of the
violation of an order of consequence to the action. Dismissal of the action can be grossly corporation is non-existent as far as the corporation is concerned. As between the
oppressive if it is based on noncompliance with the most trivial order of the court corporation on the one hand, and its shareholders and third persons on the other, the
considering that the dismissal equates to "an adjudication upon the merits, unless corporation looks only to its books for the purpose of determining who its shareholders
otherwise declared by the court."33 A line of demarcation must be drawn between an are. It is only when the transfer has been recorded in the stock and transfer book that a
order whose non-compliance impacts on the case, and an order whose noncompliance corporation may rightfully regard the transferee as one of its stockholders. From this
causes little effect on the case. For example, the non-compliance of an order to the time, the consequent obligation on the part of the corporation to recognize such rights as
plaintiff to amend his complaint to implead an indispensable party as defendant should it is mandated by law to recognize arises.
be sanctioned with dismissal with prejudice unless the non-compliance was upon
justifiable cause, like such party not within the jurisdiction of the court.
Nonetheless, in Lanuza v. Court of Appeals,38 the Court has underscored that the STB is
not the exclusive evidence of the matters and things that ordinarily are or should be
As we have seen, however, the dismissal of Special Civil Action Case No. 2070 by virtue of written therein, for parol evidence may be admitted to supply omissions from the
Section 3, Rule 17 of the Rules of Court should be undone because the petitioners’ records, or to explain ambiguities, or to contradict such records, to wit:
production of the stock certificates was rendered superfluous by their submission of
other competent means of establishing their shareholdings in Abra Valley.
x x x [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
2. 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
Petitioners were entitled to demand made; and such other entries as may be prescribed by law. A stock and transfer book is
the production of the STB of Abra Valley 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
The respondents insist that the petitioners should establish that the indorsement of the transactions and of showing the ownership of stock and like matters. However, a stock
stock certificates by the original holders was registered in their favor in the STB of Abra and transfer book, like other corporate books and records, is not in any sense a
Valley.34 public record, and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein. In fact, it is generally held that the
records and minutes of a corporation are not conclusive even against the
We do not agree with this insistence. corporation but are prima facie evidence only, and may be impeached or even
contradicted by other competent evidence. Thus, parol evidence may be admitted
A person becomes a stockholder of a corporation by acquiring a share through either to supply omissions in the records or explain ambiguities, or to contradict such
purchase or subscription. Here, the petitioners acquired their shares in Abra Valley: (1) records. (Emphasis supplied.)
by subscribing to 36 shares each from Abra Valley’s authorized and unissued capital
stock;35 and (2) by purchasing the shareholdings of existing stockholders, as borne out Considering that Abra Valley’s STB was not in the possession of the petitioners, or at
by the latter’s indorsement on the stock certificates.36 their disposal, they could not be reasonably expected or justly compelled to prove that
their stock subscriptions and purchases were recorded therein. This, more than any
In determining the validity of the transfer of shares through purchase, we resort to other, was precisely why they filed their Motion for Production/Inspection of
Section 63 of the Corporation Code, which pertinently provides: Documents39 to compel the respondents to produce the STB, but the RTC did not act on
the motion.
Section 63. Certificate of stock and transfer of shares. – x x x Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates Unfortunately, the CA concurred with the RTC’s inaction on the ground that "the Stock
indorsed by the owner or his attorney-in-fact or other person legally authorized to make and Transfer Book is one of the corporate books which may be examined only by a
the transfer. No transfer, however, shall be valid, except as between the parties, until the stockholder-of-record."40
transfer is recorded in the books of the corporation showing the names of the parties to
the transaction, the date of the transfer, the number of the certificate or certificates and In our view, the CA thereby grossly erred. The rules of discovery, including Section 1,
the number of shares transferred. Rule 27 of the Rules of Court41 governing the production or inspection of any designated
documents, papers, books, accounts, letters, photographs, objects or tangible things not
No shares of stock against which the corporation holds any unpaid claim shall be privileged, which contain or constitute evidence material to any matter involved in the
transferable in the books of the corporation. action and which are in the other party’s possession, custody or control, are to be
accorded broad and liberal interpretation.42 In Republic v. Sandiganbayan,43 the Court Special Civil Action Case No. 2070 on June 28, 2010 by the Regional Trial Court, Branch 1,
has dwelt on the breadth of discovery in the following tenor: in Bangued, Abra; DECLARES the petitioners as stockholders of respondent Abra Valley
Colleges, Inc.; ORDERS the Regional Trial Court, Branch 1, in Bangued, Abra TO
What is chiefly contemplated is the discovery of every bit of information which may be REINSTATE Special Civil Action Case No. 2070, and TO RESUME its proceedings therein;
useful in the preparation for trial, such as the identity and location of persons having and DIRECTS the respondents to pay the costs of suit.
knowledge of relevant facts; those relevant facts themselves; and the existence,
description, nature, custody, condition, and location of any books, documents, or other SO ORDERED.
tangible things. Hence, the "deposition-discovery rules are to be accorded a broad and
liberal treatment. No longer can the time-honored cry of ‘fishing expedition’ serve to
preclude a party from inquiring into the facts underlying his opponent’s case. Mutual
knowledge of all the relevant facts gathered by both parties is essential to proper
litigation. To that end, either party may compel the other to disgorge whatever facts he
has in his possession. The deposition-discovery procedure simply advances the stage at
which the disclosure can be compelled from the time of trial to the period preceding it,
thus reducing the possibility, of surprise,"...

In light of the foregoing, the RTC should have favorably acted on the petitioners’ Motion
for Production/Inspection of Documents in order to enable the petitioners, consistent
with the recognized privileges and disabilities, to enable them to obtain the fullest
possible knowledge of the issues and facts to be determined in Special Civil Action Case
No. 2070, and thereby prevent the trial from being carried on in the dark, at least from
their side.44 Doing so would not have caused any prejudice to the respondents, for, after
all, even had the petitioners not filed the Motion for Production/Inspection of Documents,
the respondents would themselves also be expected to produce the STB in court in order
to substantiate their affirmative defense that the petitioners were not stockholders-of-
record of Abra Valley. Verily, that there was no entry or record in the STB showing the
petitioners to be stockholders of Abra Valley was no valid justification for the
respondents not to produce the same. Otherwise, the disputable presumption under
Section 3 (e) of Rule 131 of the Rules of Court that "evidence willfully suppressed would
be adverse if produced" could arise against them.1âwphi1

For sure, the transfer of shares in favor of the petitioners was made through the
indorsement by the original holders who were presumably the registered owners of the
shares, coupled with the delivery of the stock certificates. Such procedure conformed to
Section 63 of the Corporation Code. Although Abra Valley did not yet recognize such stock
purchases until the surrender of the stock certificates to the corporate secretary to
enable the latter to exercise the ministerial duty of recording the transfers, 45 there was
no way of avoiding or evading the production of the STB in court on the part of the
respondents. The STB would definitely be relevant and necessary for the purpose of
ascertaining whether or not the petitioners' subscriptions to the authorized and
unissued capital stock of Abra Valley had been duly registered.

Lastly, we take notice of the petitioners' submission of the certification issued on April 3,
2001 by Abra Valley's corporate secretary stating that the petitioners were shareholders
"as per Records of the Stock and Transfer Book of the Abra Valley Colleges" belied the
respondents' claim that no entry or record had been made in the STB.

WHEREFORE, the Court REVERSES and SETS ASIDE the decision promulgated on June
6, 2012 in C.A.-G.R. SP No. 115203; NULLIFIES and SETS ASIDE the order issued in
G.R. No. 160924, August 05, 2015 2. Petitioner had informed the respondent, through demand letter, of her desire to
inspect the records of the corporation, but the same was denied by the respondent.
TERELAY INVESTMENT AND DEVELOPMENT CORPORATION, Petitioner, v. CECILIA Thereafter, the parties stipulated that the ISSUES to be resolved are the
TERESITA J. YULO, Respondent. following:cralawlawlibrary
1. Whether or not petitioner has the right to inspect and examine TERELAY's corporate
DECISION records, books of account and other financial records pursuant to Section 74 of the
Corporation Code of the Philippines;
BERSAMIN, J.:
2. Whether or not petitioner as stockholder and director of TERELAY has been unduly
deprived of her right to inspect and examine TERELAY's corporate records, books of
In its desire to block the inspection of its corporate books by a stockholder holding a accounts and other financial records in clear contravention of law, which warrants her
very insignificant shareholding, the petitioner now seeks to set aside the judgment claim for damages;
promulgated on September 12, 2003,1whereby the Court of Appeals (CA) affirmed
the decision rendered on March 22, 2002 by the Regional Trial Court, Branch 142, in 3. Whether or not Atty. Reynaldo G. Geronimo and/or the principal officers, Ma. Antonia
Makati City (RTC) allowing the inspection, and ordering it to pay attorney's fees of Yulo Loyzaga and Teresa J. Yulo of respondent corporation are indispensable parties and
P50,000.00 to the stockholder.2cralawrednad hence, should be impleaded as respondents;

With the CA having denied the petitioner's motion for reconsideration and motion for 4. As a prejudicial question, whether or not petitioner is a stockholder of respondent
oral argument through the resolution promulgated on November 28, 2003,3 such denial corporation and such being the issue, whether this issue should be threshed out in the
is also the subject of this appeal. probate of the will of the late Luis A. Yulo and settlement of estate now pending with the
Regional Trial Court of Manila;
Antecedents
5. Assuming petitioner is a stockholder, whether or not petitioner's mere desire to
The CA recited the following antecedents:cralawlawlibrary inquire into the financial condition of respondent corporation and conduct of the affairs
Asserting her right as a stockholder, Cecilia Teresita Yulo wrote a letter, dated of the corporation is a just and sufficient ground for inspection of the corporate records.4
September 14, 1999, addressed to Terelay Investment and Development
Following the enactment of Republic Act No. 8799 (The Securities Regulation Code), the
Corporation (TERELAY) requesting that she be allowed to examine its books and records
case was transferred from the Securities and Exchange Commission to the RTC.
on September 17, 1999 at 1:30 o'clock in the afternoon at the latter's office on the 25th
floor, Citibank Tower, Makati City. In its reply-letter, dated September 15, 1999,
On March 22, 2002, the RTC rendered its judgment,5 ruling thusly:cralawlawlibrary
TERELAY denied the request for inspection and instead demanded that she show proof
Accordingly, petitioner's application for inspection of corporate records is granted
that she was a bona fide stockholder.
pursuant to Rule 7 of the Interim Rules in relation to Section 74 and 75 of the
Corporation Code. Defendant, through its officers, is ordered to allow inspection of
On September 16, 1999, Cecilia Yulo again sent another letter clarifying that her request
corporate books and records at reasonable hours on business days and/or
for examination of the corporate records was for the purpose of inquiring into the
furnish petitioner copies thereof all at her expense. In this connection, plaintiff is ordered
financial condition of TERELAY and the conduct of its affairs by the principal officers.
to deposit to the Court the amount of P1,000.00 to cover the estimated cost of the
The following day, Cecilia Yulo received a faxed letter from TERELAY's counsel advising
manpower necessary to produce the books and records and the cost of copying.
her not to continue with the inspection in order to avoid trouble.
Respondent is further ordered to pay petitioner attorney's fees in the amount of
On October 11, 1999, Cecilia Yulo filed with the Securities and Exchange Commission
P50,000.00
(SEC), a Petition for Issuance of a Writ of Mandamus with prayer for Damages against
TERELAY, docketed as SEC Case No. 10-99-6433. In her petition, she prayed that
SO ORDERED.6
judgment be rendered ordering TERELAY to allow her to inspect its corporate records,
books of account and other financial records; to pay her actual damages representing On September 12, 2003, the CA affirmed the RTC.7cralawrednad
attorney's fees and litigation expenses of not less than One Hundred Thousand Pesos
(P100,000.00); to pay her exemplary damages; and to pay the costs of the suit On May The petitioner sought reconsideration, and moved for the holding of oral arguments
16, 2000, in the preliminary conference held before the SEC Hearing Officer, the parties thereon, but the CA denied the motion on November 28, 2003.8cralawrednad
agreed on the following:cralawlawlibrary
1. Petitioner Cecilia Teresita Yulo is registered as a stockholder in the corporation's stock Issues
and transfer book subject to the qualification in the Answer, and
In this appeal, the petitioner insists that the CA committed serious error: (a) in holding
that the respondent was a stockholder entitled to inspect its books and records, and
allowing her to inspect its corporate records despite her shareholding being a measly However, the Court has determined from its review in this appeal that the CA correctly
.001% interest; (b) in declaring that the RTC had the jurisdiction to determine whether disposed of the legal and factual matters and issues presented by the parties.
or not she was a stockholder; (c) in ruling that it did not adduce sufficient proof showing This appeal is not, therefore, under any of the aforecited exceptions.
that she was in bad faith or had an ulterior motive in demanding inspection of the
records; (d) in finding that her purpose for the inspection, which was to inquire into its The Court now adopts with approval the cogent observations of the CA on the matters
financial condition and into the conduct of its affairs by its principal officers, was a valid and issues raised by the petitioner, as follows:cralawlawlibrary
ground to examine the corporate records; (e) in holding that Regarding the issue of jurisdiction, TERELAY avers that it is not within the jurisdiction of
her petition for mandamus was not premature; (f) in not resolving whether or not its the trial court to determine whether or not petitioner-appellee is its stockholder. It
principal officers should be impleaded as indispensable parties; and (g) in not setting contends that a petition for the probate of the will of Cecilia's father, the late Luis A. Yulo,
aside the award of attorney's fees in the amount of P50,000.00.9cralawrednad and the settlement of his estate was filed with the Regional Trial Court of Manila. The
inventory of the estate includes the five (5) shares which Cecilia is claiming. Being a
In her comment,10 the respondent counters that the law does not require substantial court of limited jurisdiction, the court a quo could not decide whether or not Luis A. Yulo
shareholding before she can exercise her right of inspection as a stockholder; that the donated five (5) shares to Cecilia during his lifetime. The position of TERELAY is
issue of the nullity of the donation in her favor of the shareholding was irrelevant untenable. As correctly pointed out by Cecilia Yulo, the main issue in this case is the
because it was the subscription to the shares that granted the statutory and common question of whether or not she is a stockholder and therefore, has the right to inspect the
rights to stockholders; that the RTC, sitting as a corporate court, was the proper court to corporate books and records. We agree with the ruling of the trial court that the
declare that she was a stockholder; that she has just and sufficient grounds to inspect its determination of this issue is within the competence of the Regional Trial Court, acting as
corporate records; that its officers are not indispensable parties; that a special court for intra-corporate controversies, and not in the proceeding for the
her petition for mandamus was not premature; and that the CA correctly upheld the settlement of the estate of the late Luis Yulo.
RTC's order to pay attorney's fees to her.
On the matter of exhaustion of administrative remedies, TERELAY asserts that
Ruling of the Court the petitionfor mandamus filed by Cecilia Yulo was premature because she failed to
exhaust all available remedies before filing the instant petition. The Court disagrees. A
We deny the petition for review on certiorari. writ of mandamus is a remedy provided by law where despite the stockholder's request
for record inspection, the corporation still refuses to allow the stockholder the right to
To start with, it is fundamental that a petition for review on certiorari should raise only inspect. In the instant case, Cecilia Yulo, through counsel, sent a letter request, dated
questions of law.11 In that regard, the findings of fact of the trial court, as affirmed by the September 14, 1999, for inspection of corporate records, books of accounts and other
appellate court, are final and conclusive, and cannot be reviewed on appeal by the Court financial records, but the same was denied by TERELAY through counsel, in its reply-
as long as such findings are supported by the records, or are based on substantial letter, dated September 15, 1999. Appellee Yulo sent another letter, dated September 16,
evidence. In other words, it is not the function of the Court to analyze or weigh all over 1999, reiterating the same request but the same was again denied by TERELAY in a
again the evidence or the factual premises supportive of the lower courts' reply-letter dated September 17, 1999. Clearly then, appellee Yulo's right is not pre-
determinations. mature and may be enforced by a writ of mandamus.

Even when the Court has to review the factual premises, it has consistently held that the On the contention that there was no stipulation that Cecilia Yulo was registered as a
findings of the appellate and the trial courts are accorded great weight, if not binding stockholder, TERELAY asserts that the trial court was misled into believing that there
effect, unless the most compelling and cogent reasons exist to revisit such was a stipulation or admission that Cecilia Yulo is a registered stockholder in its stock
findings.12 Among the compelling and cogent reasons are the following,13 namely: (a) and transfer book. According to TERELAY, the admission or stipulation was that she was
when the findings are grounded entirely on speculation, surmises, or conjectures; (b) registered in the Articles of Incorporation is separate and distinct from being so in the
when the inference made is manifestly mistaken, absurd, or impossible; (c) when there is stock and transfer book. TERELAY's argument cannot be sustained. A careful review of
grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts; the records would show that in the Preliminary Conference Order, dated May 16, 2000,
(e) when the findings of facts are conflicting; (f) when the CA, in making its findings, of the SEC Hearing Officer, both parties represented by their respective counsels, agreed
went beyond the issues of the case, or its findings are contrary to the admissions of both on the fact that petitioner-appellee was "registered as a stockholder in respondent-
the appellant and the appellee; (g) when the CA's findings are contrary to those by the appellant's stock and transfer book subject to the qualifications in the Answer." The
trial court; (h) when the findings are conclusions without citation of specific evidence on records failed to disclose any objection by TERELAY. Neither did TERELAY raise this
which they are based; (i) when the facts set forth in the petition as well as in matter in the SEC hearing held on August 7, 2000 as one of the issues to be determined
the petitioner's main and reply briefs are not disputed by the respondent; (j) when the and resolved.
findings of fact are premised on the supposed absence of evidence and contradicted by
the evidence on record; or (k) when the CA manifestly overlooked certain relevant facts TERELAY further points out that her name as incorporator, stockholder and director in
not disputed by the parties, which, if properly considered, would justify a different the Articles of Incorporation and Amendments were unsigned; that she did not pay for
conclusion. the five (5) shares appearing in the Amended Articles of Incorporation and General
Information Sheet of TERELAY; that she did not subscribe to the shares; that she has
neither been in possession of nor seen the certificate of stock covering the five (5) shares Neither could the petitioner arbitrarily deny the respondent's right to inspect the
of stock; that the donation of the five (5) shares claimed by her was null and void for corporate books and records on the basis that her inspection would be used for a
failure to comply with the requisites of a donation under Art. 748 of the Civil Code; and doubtful or dubious reason. Under Section 74, third paragraph, of the Corporation Code,
that there was no acceptance of the donation by her as donee. TERELAY further contends the only time when the demand to examine and copy the corporation's records and
that Cecilia Yulo's purpose in inspecting the books was to inquire into its financial minutes could be refused is when the corporation puts up as a defense to any action that
condition and the conduct of its affairs by the principal officers which are not sufficient "the person demanding" had "improperly used any information secured through any prior
and valid reasons. Therefore, the presumption of good faith cannot be accorded her. examination of the records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his demand."
TERELAY's position has no merit. The records disclose that the corporate documents
submitted, which include the Articles of Incorporation and the Amended Articles of The right of the shareholder to inspect the books and records of the petitioner should not
Incorporation, as well as the General Information Sheets and the Quarterly Reports all be made subject to the condition of a showing of any particular dispute or of proving any
bear the signatures of the proper parties and their authorized custodians. The signature mismanagement or other occasion rendering an examination proper, but if the right is to
of appellee under the name Cecilia J. Yulo appears in the Articles of Incorporation of be denied, the burden of proof is upon the corporation to show that the purpose of the
TERELAY. Likewise, her signatures under the name Cecilia Y. Blancaflor appear in the shareholder is improper, by way of defense. According to a recognized commentator:16
Amended Articles of Incorporation where she signed as Director and Corporate By early English decisions it was formerly held that there must be something more than
Secretary of TERELAY. The General Information Sheets from December 31, 1977 up to bare suspicion of mismanagement or fraud. There must be some particular controversy
February 20, 2002 all exhibited that she was recognized as director and corporate or question in which the party applying was interested, and inspection would be granted
secretary, and that she had subscribed to five (5) shares of stock. The quarterly reports only so far as necessary for that particular occasion. By the general rule in the United
do not show otherwise. States, however, shareholders have a right to inspect the books and papers of the
corporation without first showing any particular dispute or proving any mismanagement
Verily, petitioner-appellee has presented enough evidence that she is a stockholder of or other occasion rendering an examination proper. The privilege, however, is not
TERELAY. The corporate documents presented support her claim that she is a registered absolute and the corporation may show in defense that the applicant is acting from
stockholder in TERELAY's stock and transfer book thus giving her the right, under wrongful motives.
Section 74 par. 2 and Section 75 of the Philippine Corporation Law, to inspect TERELAY's
books, records, and financial statements. Section 74, par. 2 and Section 75 of our In Guthrie v. Harkness, there was involved the right of a shareholder in a national bank to
Corporation Code reads as follows: x x x inspect its books for the purpose of ascertaining whether the business affairs of the bank
had been conducted according to law, and whether, as suspected, the bank was guilty of
Accordingly, Cecilia Yulo as the right to be fully informed of TERELAY's corporate irregularities. The court said: "The decisive weight of American authority recognizes the
condition and the manner its affairs are being managed. It is well-settled that the right of the shareholder, for proper purposes and under reasonable regulations as to
ownership of shares of stock gives stockholders the right under the law to be protected place and time, to inspect the books of the corporation of which he is a member . . . In
from possible mismanagement by its officers. This right is predicated upon self- issuing the writ of mandamus the court will exercise a sound discretion and grant the
preservation. In any case, TERELAY did not adduce sufficient proof that Cecilia Yulo was right under proper safeguards to protect the interest of all concerned. The writ should
in bad faith or had an ulterior motive in demanding her right under the law. not be granted for speculative purposes or to gratify idle curiosity or to aid a blackmailer,
but it may not be denied to the stockholder who seeks the information for legitimate
In view of the foregoing, the Court finds it unnecessary to discuss the other issues raised purposes."
by TERELAY as they are incapable of defeating the established fact that Cecilia Yulo is a
registered stockholder of respondent-applicant. Among the purposes held to justify a demand for inspection are the following: (1) To
ascertain the financial condition of the company or the propriety of dividends; (2) the
Finally, the Court agrees with the ruling of the court a quo that the petitioner is entitled value of the shares of stock for sale or investment; (3) whether there has been
to the reasonable amount of P50,000.00 representing attorney's fees for having been mismanagement; (4) in anticipation of shareholders' meetings to obtain a mailing list of
compelled to litigate in order to exercise her right of inspection.14 shareholders to solicit proxies or influence voting; (5) to obtain information in aid of
litigation with the corporation or its officers as to corporate transactions. Among the
Secondly, the petitioner's submission that the respondent's "insignificant holding" of
improper purposes which may justify denial of the right of inspection are: (1) Obtaining
only .001% of the petitioner's stockholding did not justify the granting of her application
of information as to business secrets or to aid a competitor; (2) to secure business
for inspection of the corporate books and records is unwarranted.
"prospects" or investment or advertising lists; (3) to find technical defects in corporate
transactions in order to bring "strike suits" for purposes of blackmail or extortion.
The Corporation Code has granted to all stockholders the right to inspect the corporate
books and records, and in so doing has not required any specific amount of interest for
In general, however, officers and directors have no legal authority to close the office
the exercise of the right to inspect.15 Ubi lex non distinguit nee nos distinguere debemos.
doors against shareholders for whom they are only agents, and withhold from them the
When the law has made no distinction, we ought not to recognize any distinction.
right to inspect the books which furnishes the most effective method of gaining
information which the law has provided, on mere doubt or suspicion as to the motives of
the shareholder. While there is some conflict of authority, when an inspection by a
shareholder is contested, the burden is usually held to be upon the corporation to
establish a probability that the applicant is attempting to gain inspection for a purpose
not connected with his interests as a shareholder, or that his purpose is otherwise
improper. The burden is not upon the petitioner to show the propriety of his
examination or that the refusal by the officers or directors was wrongful, except under
statutory provisions.
WHEREFORE, the Court AFFIRMS the judgment promulgated on September 12, 2003;
and ORDERSthe petitioner to pay the costs of suit.

SO ORDERED.chanrobles virtuallawlibrary
G.R. Nos. 163356-57 July 10, 2015 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
JOSE A. BERNAS, CECILE H. CHENG, VICTOR AFRICA, JESUS B. MARAMARA, JOSE T. proper party to cause the ratification;
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 4. All other actions of the [Cinco Group] and stockholders taken during the
BEHALF OF THE BOARD OF DIRECTORS OF MAKATI SPORTS CLUB, Petitioners, Regular Stockholders' Meetings held in April 1998, 1999 and 2000, including
vs. the election of the [Cinco Group] as directors after the expiration of the term of
JOVENCIO F. CINCO, VICENTE R. AYLLON, RICARDO G. LIBREA, SAMUEL L. office of petitioners as directors, are hereby declared valid;
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. 5. No awards for damages and attorney's fees.3
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 The Facts
DOES, Respondents.
Makati Sports Club (MSC) is a domestic corporation duly organized and existing under
G.R. Nos. 163368-69 Philippine laws for the primary purpose of establishing, maintaining, and providing
social, cultural, recreational and athletic . activities among its members.
JOVENCIO F. CINCO, RICARDO G. LIBREA AND ALEX Y. PARDO, Petitioners,
vs. Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor
JOSE A BERNAS, CECILE H. CHENG AND IGNACIO A. MACROHON, Respondents. 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.
DECISION
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea · and Alex Y. Pardo
PEREZ, J.: (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
Before us are two consolidated Petitions for Review on Certiorari1 assailing the 28 April Special Stockholders Meeting.
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 The antecedent events of the meeting and its results, follow:
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: 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
WHEREFORE, foregoing considered, the instant petition for review is hereby GRANTED. respective positions to pave the way for the election of new set of officers.4Resonating
The appealed Decision dated December 12, 2000 of the SEC en bane is SET ASIDE and this clamor were the stockholders of the corporation representing at least 100 shares
the Decision dated April 20, 1998 of the Hearing Officer is REINSTATED and AMENDED who sought the assistance of the MSCOC to call for a special stockholders meeting for the
as follows: 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
1. The supposed Special Stockholders' Meeting of December 17, 1997 was stockholders and members stating therein the time, place and purpose of the meeting.
prematurely or invalidly called by the [Cinco Group]. It therefore failed to For failure of the Bernas Group to secure an injunction before the Securities Commission
produce any legal effects and did not effectively remove [the Bernas Group] as (SEC), the meeting proceeded wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa,
directors of the Makati Sports Club, Inc.; 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,
2. The expulsion of petitioner Jose A. Bernas as well as the public auction of his Alex Y. Pardo, Roger T. Aguiling, Rogelio G. · Villarosa, Armando David, Norberto
share[s] is hereby declared void and without legal effect; Maronilla, Regina de Leon-Herlihy and Claudio B. Altura, were elected.7

3. The ratification of the removal of [the Bernas Group] as directors, the Aggrieved by the turn of events, the Bernas Group initiated an action before the
expulsion of petitioner Bernas and the sale of his share by the defendants and 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 WHEREFORE, in view of the foregoing considerations this Office, through the
Code, the Bernas Group argued that the authority to call a meeting lies with the undersigned Hearing Officer, hereby declares as follows:
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 (1) The supposed Special Stockholders' Meeting of December 17, 1997 was
persons not authorized to do so, the Bernas Group urged the SEC. to declare the 17 prematurely or invalidly called by the [the Cinco Group]. It therefore failed to
December 1997 Special Stockholders' Meeting, including the removal of the sitting produce any legal effects and did not effectively remove [the Bernas Group] as
officers and the election of new ones, be nullified. directors of the Makati Sports Club, Inc.

For their part, the Cinco Group insisted that the 17 December 1997 Special Stockholders' (2) The April 20, 1998 meeting was not attended by a sufficient number of valid
Meeting is sanctioned by the Corporation Code and the MSC by-laws. In justifying the call proxies. No quorum could have been present at the said meeting. No corporate
effected by the MSCOC, they reasoned that Section 258 of the MSC by-laws merely business could have been validly completed and/or transacted during the said
authorized the Corporate Secretary to issue notices of meetings and nowhere does it meeting. Further, it was not called by the validly elected Corporate Secretary
state that such authority solely belongs to him. It was further asseverated by the Cinco Victor Africa nor presided over by the validly elected president Jose A. Bernas.
Group that it would be useless to course the request to call a meeting thru the Corporate Even if the April 20, 1998 meeting was valid, it could not ratify the December
Secretary because he repeatedly refused to call a special stockholders' meeting despite 17, 1997 meeting because being a void meeting, the December 1 7, 1997
demands and even "filed a suit to restrain the holding of a special meeting.9 meeting may not be ratified.

Meanwhile, the newly elected directors initiated an investigation on the alleged (3) The April 1998 meeting was null and void and therefore produced no legal
anomalies in administering the corporate affairs and after finding Bernas guilty of effect.
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: (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
Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting was held dated April 8, 2000. Its legal effects must be the subject of this Decision in order
on 20 April 1998 pursuant to Section 8 of the MSC bylaws.13 During the said meeting, to put an end to the controversy at hand. In the first place, by [the Cinco
which was attended by 1,017 stockholders representing 2/3 of the outstanding shares, Group's] own admission, the alleged attendance at the April 1999 meeting
the majority resolved to approve, confirm and ratify, among others, the calling and · amounted to less than 2/3 of the stockholders entitled to vote, the minimum
holding of 17 December 1997 Special Stockholders' Meeting, the acts and resolutions number required to effect a removal. No removal or ratification of a removal
adopted therein including the removal of Bernas Group from the Board and the election may be effected by less than 2/3 vote of the stockholders. Further, it cannot
of their replacements.14 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
Due to the filing of several petitions for and against the removal of the Bernas Group accompanied by valid proxies, which it was not.
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 (5) The [the Cinco Group], their agents, representatives and all persons acting
supervise the holding of the 1999 Annual Stockholders' Meeting. During the said for and conspiring on their behalf, are hereby permanently enjoined from
meeting, the stockholders once again approved, ratified and confirmed the holding of the carrying into effect the resolutions and actions adopted during the 17
17 December 1997 Special Stockholders' Meeting. December 1997 and April 20, 1998 meetings and of the Board of Directors
and/or other stockholders' meetings resulting therefrom, and from performing
The conduct of the 17 December 1997 Special Stockholders' Meeting was likewise acts of control and management of the club.
ratified by the stockholders during the 2000 Annual Stockholders' Meeting which was
held on 17 April 2000.16 (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
On 9 May 2000, the SICD rendered a Decision17 in SEC Case No. 12-. 97-5840 finding, it is true that [the Cinco Group] were no.t restrained from acting as directors
among others, that the 17 December 1997 Special Stockholders' Meeting and the Annual during the pendency of this case, their tenure as directors prior to this Decision
Stockholders' Meeting conducted on 20 April 1998 and 19 April 1999 are invalid. The is in the nature of de facto directors of a de facto Board. Only the ordinary acts
SICD likewise nullified the expulsion of Bernas from the corporation and the sale of his of administration which [the Cinco Group] carried out de facto in good faith are
share at the public auction. The dispositive portion of the said decision reads: 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 is not complete
and subject to the outcome of this case. (7) No awards for damages and Sec. 28. Removal of directors or trustees. -Any director or trustee of a corporation may
attorney's fees.18 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
On appeal, the SEC En Banc, in its 12 December 2000 Decision19 reversed the findings of corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
the SICD and validated the holding of the 17 December 1997 Special Stockholders' Provided, That such removal shall take place either at a regular meeting of the
Meeting as well as the Annual Stockholders' Meeting held on 20 April 1998 and 19 April corporation or at a special meeting called for the purpose, and in either case, after
1999. 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
On 28 April 2003, the Court of Appeals rendered a Decision 20 declaring the 17 December be called by the secretary on order of the president or on the written demand of the
1997 Special Stockholders' Meeting invalid for being improperly called but affirmed the stockholders representing or holding at least a majority of the outstanding capital stock,
actions taken during the Annual Stockholders' Meeting held on 20 April 1998, 19 April or, if it be a non-stock corporation, on the written demand of a majority of the members
1999 and 17 April 2000. 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
In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its meeting may be addressed directly to the stockholders or members by any stockholder
earlier decision. 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
Aggrieved by the disquisition of the Court of Appeals, both parties elevated the case publication or by written notice prescribed in this Code. Removal may be with or without
before this Court by filing their respective Petitions for Review on Certiorari. While the cause: Provided, That removal without cause may not be used to deprive minority
Bernas Group agrees with the disquisition of the appellate court that the Special stockholders or members of the right of representation to which they may be entitled
Stockholders' Meeting is invalid for being called by the persons not authorized to do so, under Section 24 of this Code. (Emphasis supplied)
they urge the Court to likewise invalidate the holding of the subsequent Annual
Stockholders' Meetings invoking the application of the holdover principle. The Cinco Corollarily, the pertinent provisions of MSC by-laws which govern the manner of calling
Group, for its part, insists that the holding. of 17 December 1997 Special Stockholders' and sending of notices of the annual stockholders' meeting and the special stockholders'
Meeting is valid and binding underscoring the overwhelming ratification made by the meeting provide:
stockholders during the subsequent annual stockholders' meetings and the previous
refusal of the Corporate Secretary to call a special stockholders' meeting despite SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the
demand. For the resolution of the Court are the following issues: 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
The Issues meeting, the President shall render a report to the stockholders of the clubs.

I. xxxx

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the Clubhouse
THE 17 DECEMBER 1997 SPECIAL STOCKHOLDERS' MEETING IS INVALID; AND 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
II. specified in the notice and call will be taken up at special meetings.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO xxxx


NULLIFY THE HOLDING OF THE ANNUAL STOCKHOLDERS' MEETING ON 20 APRIL
1998, 19 APRIL 1999 AND 17 APRIL 2000. 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
The Court's Ruling 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
The Corporation Code laid down the rules on the removal of the Directors of the sign all correspondence pertaining to the Office of the Secretary; shall keep the minutes
corporation by providing, inter alia, the persons authorized to call the meeting and the of all meetings of the stockholders, the Board of Directors and of all committees in a book
number of votes required for the purpose of removal, thus: 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 stockholders is not a matter of statutory or technical law.26 It springs from the fact that
numbers of all stockholders.22 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
Textually, only the President and the Board of Directors are authorized by the by-laws to proprietors of the corporate interests and are ultimately the only beneficiaries
call a special meeting. In cases where the person authorized to call a meeting refuses, thereof.28 Should the board fail to perform its fiduciary duty to safeguard the interest of
fails or neglects to call a meeting, then the stockholders representing at least 100 shares, the stockholders or commit acts prejudicial to their interest, the law and the by-laws
upon written request, may file a petition to call a special stockholder's meeting. provide mechanisms to remove and replace the erring director.29

In the instant case, there is no dispute that the 17 December 1997 Special Stockholders' Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in
Meeting was called neither by the President nor by the Board of Directors but by the the MSC by-laws can it be gathered that the Oversight Committee is authorized to step in
MSCOC. While the MSCOC, as its name suggests, is created for the purpose of overseeing wherever there is breach of fiduciary duty and call a special meeting for the purpose of
the affairs of the corporation, nowhere in the by-laws does it state that it is authorized to removing the existing officers and electing their replacements even if such call was made
exercise corporate powers, such as the power to call a special meeting, solely vested by upon the request of shareholders. Needless to say, the MSCOC is neither · empowered by
law and the MSC by-laws on the President or the Board of Directors. 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 board of directors is the directing and controlling body of the corporation. It is a the call for the meeting. It is apt to recall that illegal acts of a corporation which
creation of the stockholders and derives its power to control and direct the affairs of the contemplate the doing of an act which is contrary to law, morals or public order, or
corporation from them. The board of directors, in drawing to itself the power of the contravenes some rules of public policy or public duty, are, like similar transactions
corporation, occupies a position of trusteeship in relation to the stockholders, in the between individuals, void.30 They cannot serve as basis for a court action, nor acquire
sense that the board should exercise not only care and diligence, but utmost good faith in validity by performance, ratification or estoppel.31 The same principle can apply in the
the management of the corporate affairs.23 present case. The void election of 17 December 1997 cannot be ratified by the
subsequent Annual Stockholders' Meeting.
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 A distinction should be made between corporate acts or contracts which are illegal and
election, and who have actually been elected by the stockholders, on an annual basis. those which are merely ultra vires. The former contemplates the doing of an act which
Only in that way can the continued accountability to shareholders, and the legitimacy of are contrary to law, morals or public policy or public duty, and are, like similar
their decisions that bind the corporation's stockholders, be assured. The shareholder transactions between individuals, void: They cannot serve as basis of a court action nor
vote is critical to the theory that legitimizes the exercise of power by the directors or acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the
officers over the properties that they do not own.24 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
Even the Corporation Code is categorical in stating that a corporation exercises its enforceable when ratified by the stockholders.32 The 1 7 December 1997 Meeting
powers through its board of directors and/or its duly authorized officers and agents, belongs to the category of the latter, that is, it is void ab initio and cannot be validated.
except in instances where the Corporation Code requires stockholders' approval for
certain specific acts: 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
SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the the Cinco Group, effected by the assembly in that improperly called meeting is void, and
corporate powers of all the corporations formed under this Code shall be exercised, all since the Cinco Group has no legal right to sit in the board, their subsequent acts of
business conducted and all property of such corporations controlled and held by the expelling Bernas from the club and the selling of his shares. at the public auction, are
board of directors and trustees x x x. likewise invalid.

A corporation's board of directors is understood to be that body which (1) exercises all The Cinco Group cannot invoke the application of de facto officership doctrine to justify
powers provided for under the Corporation Code; (2) conducts all business of the the actions taken after the invalid election since the operation of the principle is limited
corporation; and (3) controls and holds all the property of the corporation. Its members to third persons who were originally not part of the corporation but became such by
have been characterized as trustees or directors clothed with fiduciary character.25 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
It is ineluctably clear that the fiduciary relation is between the stockholders and the sequestered shares who assumed office in good faith as de facto officers, viz:
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
In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no On the showing of good cause therefore, the court may authorize a stockholder to call a
right to vote the sequestered shares of petitioners including the sequestered corporate meeting and to preside thereat until the majority stockholders representing a majority of
shares. Only their owners, duly authorized representatives or proxies may vote the said the stock present and permitted to be voted shall have chosen one among them to
shares. Consequently, the election of private respondents Adolfo Azcuna, Edison preside it. And this showing of good cause therefor exists when the court is apprised of
Coseteng and Patricio Pineda as members of the board of directors of SMC for 1990-1991 the fact that the by-laws of the corporation require the calling of a general meeting of the
should be set aside. However, petitioners cannot be declared as duly elected members of stockholders to elect the board of directors but the call for such meeting has not been
the board of directors thereby. An election for the purpose should be held where the done.39
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 The same jurisprudential rule resonates in Philippine National Construction Corporation
under the by-laws of SMC. 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
Private respondents in both cases are hereby declared to be de facto officers who in good powers to implement the Corporation Code:
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 SEC's assumption of jurisdiction over this case is proper, as the controversy involves the
including salary, fees and other compensation attached to the office until they vacate the election of PNCC's directors. Petitioner does not really contradict the nature of the
same. (Emphasis supplied) question presented and agrees that there is an intra-corporate question involved.

Apparently, the assumption of office of the Cinco Group did not bear parallelism with the xxxx
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 Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to
persons who acquired the shares of Bernas and such third persons cannot be deemed as hold a stockholders' meeting for the purpose of electing members of the latter's board of
buyer in good faith.35 directors.

The case would have been different if the petitioning stockholders went directly to the xxxx
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 As respondents point out, the SEC's action is also justified by its regulatory and
to call a meeting and that officer refuses, fails, or neglects to call a meeting, the SEC can administrative powers to implement the Corporation Code, specifically to compel the
assume jurisdiction and issue an order to the petitioning stockholder to call a meeting PNCC to hold a stockholders' meeting for election purposes.41
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 Given the broad administrative and regulatory powers of the SEC outlined under Section
quote: 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
Sec. 50. Regular and special meetings of stockholders or members. - x x x 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
xxxx 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
Whenever, for any cause, there is no person authorized to call a meeting, the Securities himself aggrieved by certain corporate actions, could call a special stockholders' meeting
and Exchange Commission, upon petition of a stockholder or member, and on a showing for the purpose of removing the sitting officers in direct violation of the rules pertaining
of good cause therefore, may issue an order to the petitioning stockholder or member to the call of meeting laid down in the by-laws.
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 Every corporation has the inherent power to adopt by-laws for its internal government,
member[s] as presiding officer. 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
As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now the laws of the corporation. They are in effect written into the charter. In this sense they
SEC)38 is empowered to call a meeting upon petition of the stockholder or member and become part of the fundamental law of the corporation with which the corporation and
upon showing of good cause, thus: 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, case at bar, the incongruent findings of the SEC on the one hand, and the Court of Appeals
prescribed in its charter or by the general law. Thus, directors must act as a body in a on the other, constrained the Court to review the records to ascertain which body
meeting called pursuant to the law or the corporation's by-laws, otherwise, any action correctly appreciated the facts vis-a-vis the standing statutory and jurisprudential
taken therein may be questioned by the objecting director or shareholder.44 principles.

Certainly, the rules set in the by-laws are mandatory for every member of the After finding that the ruling of the appellate court was in accordance with the existing
corporation to respect.1âwphi1 They are the fundamental law of the corporation with laws and jurisprudence as exhaustively discussed above, we hereby quote with approval
which the corporation and its officers and members must comply. It is on this score that its disquisition: (1) The supposed Special Stockholders' Meeting of 1 7 December 1997
we cannot upon the other hand sustain the Bernas Group's stance that the subsequent was prematurely or invalidly called by the [Cinco Group]. It therefore failed to produce
annual stockholders' meetings were invalid. any legal effects and did not effectively remove [the Bernas Group] as directors of the
Makati Sports Club, Inc.;
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 (2) The expulsion of [Bernas] as well as the public auction of his shares is
Meeting46 wherein the bylaws mandated that such meeting shall be called by specific hereby declared void and without legal effect;
persons only, no such specific requirement can be obtained under Section 8.
(3) The ratification of the removal of [the Bernas Group] as directors, the
Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in expulsion of Bernas and the sale of his share by the [Cinco Group] and by the
addition to the fact that it was conducted in accordance to Section 8 of the MSC bylaws, stockholders held in their Regular Stockholders' Meeting held in April of 1998,
such meeting was supervised by the SEC in the exercise of its regulatory and 1999 and 2000, is void and produces no effects as they were not the proper
administrative powers to implement the Corporation Code.47 party to cause the ratification;

Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave rise to (4) All other actions of the [Cinco Group] and stockholders taken during the
the presumption that the corporate officers who won the election were duly elected to Regular Stockholders' Meetings held in April 1998, 1999 and 2000, including
their positions and therefore can be rightfully considered as de jure officers. As de jure the election of the [Cinco Group] as directors after the expiration of the term of
officials, they can lawfully exercise functions and legally perform such acts that are office of [Bernas Group] as directors, are hereby declared valid.55
within the scope of the business of the corporation except ratification of actions that are
deemed void from the beginning. 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
Considering that a new set of officers were already duly elected in 1998 and 1999 Annual and authorizing the sale of Bernas' shares at the public auction is likewise null and void.
Stockholders Meetings, the Bernas Group cannot be permitted to use the holdover The subsequent Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and
principle as a shield to perpetuate in office. Members of the group had no right to 17 April 2000 are valid and binding except the ratification of the removal of the Bernas
continue as directors of the corporation unless reelected by the stockholders in a Group and the sale of Bernas' shares at the public auction effected by the body during the
meeting called for that purpose every year.48 They had no right to hold-over brought said meetings. The expulsion of the Bernas Group and the subsequent auction of Bernas'
about by the failure to perform the duty incumbent upon them.49 If they were sure to be shares are void from the very beginning and therefore the ratifications effected during
reelected, why did they fail, neglect, or refuse to call the meeting to elect the members of the subsequent meetings cannot be sustained. A void act cannot be the subject of
the board?50 ratification.56

Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like the WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile. H. Cheng,
SEC, if supported by substantial evidence, are generally accorded not only great respect Victor Africa, Jesus B. Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T.
but even finality, and are binding upon this Court unless it was shown that the quasi- Lim in G.R. Nos. 163356-57 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo in
judicial agencies had arbitrarily disregarded evidence before it had misapprehended G.R. Nos. 163368-69 are hereby DEN~ED. The assailed Decision dated 28 April 2003 and
evidence to such an extent as to compel a contrary conclusion if such evidence had been Resolution dated 27 April 2004 of the Court of Appeals are hereby AFFIRMED.
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, SO ORDERED.
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
G.R. No. 144476 April 8, 2003 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.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, Furthermore, they agreed that the Tius were entitled to nominate the Vice-
WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, President and the Treasurer plus five directors while the Ongs were entitled to
vs. nominate the President, the Secretary and six directors (including the
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN chairman) to the board of directors of FLADC. Moreover, the Ongs were given
YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA the right to manage and operate the mall.
TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND
EXCHANGE COMMISSION, respondents. 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
x-----------------------------x 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 million3 to
G.R. No. 144629 April 8, 2003 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
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN indebtedness of FLADC to PNB.
YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, The business harmony between the Ongs and the Tius in FLADC, however, was
vs. shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares
WILLIE T. ONG, and JULIA ONG ALONZO, respondents. 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
RESOLUTION Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.

CORONA, J.: 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
Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them the
movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and space for their executive offices as Vice-President and Treasurer. Finally, and most
Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15, serious of all, the Ongs refused to give them the shares corresponding to their property
2002, of petitioner movant Willie Ong seeking a reversal of this Court's Decision,1dated contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription
decision2 of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise Agreement with the Ongs who allegedly refused to comply with their undertakings.
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 In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our positions of Vice-President and Treasurer of FLADC but that it was they who refused to
February 1, 2002 Decision. 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
A brief recapitulation of the facts shows that: 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
In 1994, the construction of the Masagana Citimall in Pasay City was threatened Ongs came in. What the Tius really wanted were new offices which were anyway
with stoppage and incompletion when its owner, the First Landlink Asia subsequently provided to them. On the most important issue of their alleged failure to
Development Corporation (FLADC), which was owned by the Tius, encountered credit the Tius with the FLADC shares commensurate to the Tius' property contributions,
dire financial difficulties. It was heavily indebted to the Philippine National the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30
Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the approve the valuation of the Tius' property contribution (as opposed to cash
Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered contribution). This, in turn, would make it impossible to secure a new Transfer
into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: Certificate of Title (TCT) over the property in FLADC's name. In any event, it was easy for
the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each
the Tius to simply pay the said transfer taxes and, after the new TCT was issued in (h) The plaintiff David Tiu to pay individual defendants the sum of
FLADC's name, they could then be given the corresponding shares of stocks. On the 151 P20,000,000.00 representing his loan from said defendants plus legal interest
square-meter property, the Tius never executed a deed of assignment in favor of FLADC. from the date of receipt of such amount.
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 SO ORDERED.5
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 On motion of both parties, the above decision was partially reconsidered but only insofar
Tius were not entitled to the issuance of new shares of stock. 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
The controversy finally came to a head when this case was commenced4 by the Tius on
February 27, 1996 at the Securities and Exchange Commission (SEC), seeking Both parties appealed7 to the SEC en banc which rendered a decision on September 11,
confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19, banc confirmed the rescission of the Pre-Subscription Agreement but reverted to
1997 confirming the rescission sought by the Tius, as follows: 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
WHEREFORE, judgment is hereby rendered confirming the rescission of the
Pre-Subscription Agreement, and consequently ordering: On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

(a) The cancellation of the 1,000,000 shares subscription of the individual WHEREFORE, the Order dated September 11, 1998 issued by the Securities and
defendants in FLADC; 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:
(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;
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and property
(c) The plaintiffs to submit with (sic) the Securities and Exchange Commission contributions of the parties therein.
amended articles of incorporation of FLADC to conform with this decision;
(a) Ong Group – P100,000,000.00 cash contribution for one (1)
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, million shares in First Landlink Asia Development Corporation at a
134066 (formerly 15587), 135325 and 134204 and any other title or deed in par value of P100.00 per share;
the name of FLADC, failing in which said titles are declared void;
(b) Tiu Group:
(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); 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;
(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 2) A four-storey building described in Transfer Certificate of
intervene in the management and affairs of FLADC; Title No. 15587 in the name of Intraland Resources and
Development Corporation valued at P20,000,000.00 for
200,000 shares in First Landlink Asia Development
(g) The individual defendants, jointly and severally, to return to FLADC interest Corporation at a par value of P100.00 per share;
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 3) A 1,902.30 square-meter parcel of land covered by
payment until fully paid; 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 the liquidation of FLADC may not legally be ordered by the appellate court even for so
Corporation at a par value of P100.00 per share. called "practical considerations" or even to prevent "further squabbles and numerous
litigations," since the same are not valid grounds under the Corporation Code. Moreover,
2) Whatever remains of the assets of the First Landlink Asia Development the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20
Corporation and the management thereof is (sic) hereby ordered transferred to million advances to FLADC and David S. Tiu, respectively, and to award costs and
the Tiu Group. damages.

3) First Landlink Asia Development Corporation is hereby ordered to pay the In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the
amount of P70,000,000.00 that was advanced to it by the Ong Group upon the other hand, contended that the rescission should have been limited to the restitution of
finality of this decision. Should the former incur in delay in the payment the parties' respective investments and not the liquidation of FLADC based on the
thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the erroneous perception by the court that: the Masagana Citimall was threatened with
New Civil Code. 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
4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned deed of assignment over the 151 square-meter property commensurate to 49,800 shares
them by the Ongs upon the finality of this decision. Should the former incur in in FLADC thereby failing to pay the price for the said shares; that they did not turn over
delay in the payment thereof, it shall pay the legal interest thereon pursuant to to the Ongs the entire amount of FLADC funds; that they were diverting rentals from
Article 2209 of the New Civil Code. 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
SO ORDERED.9 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
An interesting sidelight of the CA decision was its description of the rescission made by FLADC.
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 On February 1, 2002, this Court promulgated its Decision (the subject of the instant
corporate income to their own MATTERCO account.10 These were findings later on motions), affirming the assailed decision of the Court of Appeals but with the following
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion modifications:
for reconsideration.11
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at
But there was also a strange aspect of the CA decision. The CA concluded that both the twelve percent (12%) per annum to be computed from the time of judicial
Ongs and the Tius were in pari delicto (which would not have legally entitled them to demand which is from April 23, 1996;
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, 2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten
returning the original investment of the Ongs and awarding practically everything else to percent (10%) per annum to be computed from the date of the FLADC Board
the Tius. Resolution which is June 19, 1996; and

Their motions for reconsideration having been denied, both parties filed separate 3. the Tius shall be credited with 49,800 shares in FLADC for their property
petitions for review before this Court. contribution, specifically, the 151 sq. m. parcel of land.

In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that This Court affirmed the fact that both the Ongs and the Tius violated their respective
the Tius may not properly avail of rescission under Article 1191 of the Civil Code obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
considering that the Pre-Subscription Agreement did not provide for reciprocity of assuming the positions of Vice-President and Treasurer of the corporation. On the other
obligations; that the rights over the subject matter of the rescission (capital assets and hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs
properties) had been acquired by a third party (FLADC); that they did not commit a and that the Tius diverted rentals due to FLADC to their MATTERCO account.
substantial and fundamental breach of their agreement since they did not prevent the Consequently, it held that rescission was not possible since both parties were in pari
Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the delicto. However, this Court agreed with the Court of Appeals that the remedy of specific
failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter performance, as espoused by the Ongs, was not practical and sound either and would
property covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius only lead to further "squabbles and numerous litigations" between the parties.
to pay the required transfer taxes to secure the approval of the SEC for the property
contribution and, thereafter, the issuance of title in FLADC's name. They also argued that
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of On their second point (assuming rescission to be proper, the Ongs should be given their
Execution on the grounds that: (a) the SEC order had become executory as early as proportionate share of the mall), movants Ong vehemently take exception to the second
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any item in the dispositive portion of the questioned Decision insofar as it decreed that
further delay would be injurious to the rights of the Tius since the case had been pending whatever remains of the assets of FLADC and the management thereof (after liquidation)
for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under shall be transferred to the Tius. They point out that the mall itself, which would have
RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that been foreclosed by PNB if not for their timely investment of P190 million in 1994 and
the Decision dated February 1, 2002 was not yet final and executory; that no good reason which is now worth about P1 billion mainly because of their efforts, should be included
existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the in any partition and distribution. They (the Ongs) should not merely be given interest on
SEC retained jurisdiction over pending cases involving intra-corporate disputes already their capital investments. The said portion of our Decision, according to them, amounted
submitted for final resolution upon the effectivity of the said law. 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
Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the ingratitude" and an attempt "to pull a fast one" as it would prevent the Ongs from
Ongs filed their own "Motion for Reconsideration; Alternatively, Motion for Modification enjoying the fruits of their P190 million investment in FLADC. It also contravenes this
(of the February 1, 2002 Decision)" on March 15, 2002, raising two main points: (a) that Court's assurance in the questioned Decision that the Ongs and Tius "will have a
specific performance and not rescission was the proper remedy under the premises; and bountiful return of their respective investments derived from the profits of the
(b) that, assuming rescission to be proper, the subject decision of this Court should be corporation."
modified to entitle movants to their proportionate share in the mall.
Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8, 2002,
On their first point (specific performance and not rescission was the proper remedy), pointing out that there was no violation of the Pre-Subscription Agreement on the part of
movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at the Ongs; that, after more than seven years since the mall began its operations, rescission
most, casual which did not justify the rescission of the contract. They stress that had become not only impractical but would also adversely affect the rights of innocent
providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and parties; and that it would be highly inequitable and unfair to simply return the P100
Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription million investment of the Ongs and give the remaining assets now amounting to about P1
Agreement since the said obligation (to provide executive offices) pertained to FLADC billion to the Tius.
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 The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the
failure of the Ongs to credit shares of stock in favor of the Tius for their property arguments therein are a mere re-hash of the contentions in the Ongs' petition for review
contributions also pertained to the corporation and not to the Ongs. Just the same, it and previous motion for reconsideration of the Court of Appeals' decision. The Tius
could not be done in view of the Tius' refusal to pay the necessary transfer taxes which in compare the arguments in said pleadings to prove that the Ongs do not raise new issues,
turn resulted in the inability to secure SEC approval for the property contributions and and, based on well-settled jurisprudence,12 the Ongs' present motion is therefore pro-
the issuance of a new TCT in the name of FLADC. forma and did not prevent the Decision of this Court from attaining finality.

Besides, according to the Ongs, the principal objective of both parties in entering into the On January 29, 2003, the Special Second Division of this Court held oral arguments on the
Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of
the payment of FLADC's loan to PNB. Hence, in this light, the alleged failure to provide the movants Ong filed their respective memoranda. On February 28, 2003, the Tius
office space for the two corporate officers was no more than an inconsequential submitted their memorandum.
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 We grant the Ongs' motions for reconsideration.
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. 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.
The Ongs also allege that, in view of the findings of the Court that both parties were Makasiar, said that its members may and do change their minds, after a re-study of the
guilty of violating the Pre-Subscription Agreement, neither of them could resort to facts and the law, illuminated by a mutual exchange of views.14 After a thorough re-
rescission under the principle of pari delicto. In addition, since the cash and other examination of the case, we find that our Decision of February 1, 2002 overlooked
contributions now sought to be returned already belong to FLADC, an innocent third certain aspects which, if not corrected, will cause extreme and irreparable damage and
party, said remedy may no longer be availed of under the law. prejudice to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly contract filed by the Tius in their personal capacities will not prosper. Assuming it had
applied to meritorious motions for reconsideration. As long as the same adequately valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
raises a valid ground15 (i.e., the decision or final order is contrary to law), this Court has to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
to evaluate the merits of the arguments to prevent an unjust decision from attaining real party in interest therein. Article 1311 of the Civil Code provides that "contracts take
finality. In Security Bank and Trust Company vs. Cuenca,16 we ruled that a motion for effect only between the parties, their assigns and heirs…" Therefore, a party who has not
reconsideration is not pro-forma for the reason alone that it reiterates the arguments taken part in the transaction cannot sue or be sued for performance or for cancellation
earlier passed upon and rejected by the appellate court. We explained there that a thereof, unless he shows that he has a real interest affected thereby.17
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 In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
arguments in the previous pleadings) will not apply if said arguments were not squarely embodied in the Pre-Subscription Agreement: a shareholder's agreement between the
passed upon and answered in the decision sought to be reconsidered. In the case at bar, Tius and the Ongs defining and governing their relationship and a subscription contract
no ruling was made on some of the petitioner Ongs' arguments. For instance, no clear between the Tius, the Ongs and FLADC regarding the subscription of the parties to the
ruling was made on why an order distributing corporate assets and property to the corporation. They point out that these two component parts form one whole agreement
stockholders would not violate the statutory preconditions for corporate dissolution or and that their terms and conditions are intrinsically related and dependent on each
decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain other. Thus, the breach of the shareholders' agreement, which was allegedly the
the subject motion for reconsideration since some important issues therein, although consideration for the subscription contract, was also a breach of the latter.
mere repetitions, were not considered or clearly resolved by this Court.
Aside from the fact that this is an entirely new angle never raised in any of their previous
Going now to the merits, we resolve whether the Tius could legally rescind the Pre- pleadings until after the oral arguments on January 29, 2003, we find this argument too
Subscription Agreement. We rule that they could not. 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-
FLADC was originally incorporated with an authorized capital stock of 500,000 shares interest. Assuming arguendo that there were two "sub-agreements" embodied in the Pre-
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius Subscription Agreement, this Court fails to see how the shareholders agreement between
invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital the Ongs and Tius can, within the bounds of reason, be interpreted as the consideration
stock became necessary to give each group equal (50-50) shareholdings as agreed upon of the subscription contract between FLADC and the Ongs. There was nothing in the Pre-
in the Pre-Subscription Agreement. The authorized capital stock was thus increased from Subscription Agreement even remotely suggesting such alleged interdependence. Be that
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs as it may, however, the Tius are nevertheless not the proper parties to raise this point
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their because they were not parties to the subscription contract between FLADC and the Ongs.
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract Thus, they are not in a position to claim that the shareholders agreement between them
was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these and the Ongs was what induced FLADC and the Ongs to enter into the subscription
were unissued shares, the parties' Pre-Subscription Agreement was in fact a subscription contract. It is the Ongs alone who can say that. Though FLADC was represented by the
contract as defined under Section 60, Title VII of the Corporation Code: 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
Any contract for the acquisition of unissued stock in an existing corporation or a there is no proof that the corporation is being used "as a cloak or cover for fraud or
corporation still to be formed shall be deemed a subscription within the illegality, or to work injustice."18
meaning of this Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract (Italics supplied). 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
A subscription contract necessarily involves the corporation as one of the contracting the separate juridical personality of FLADC.
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 The Tius allege that they were prevented from participating in the management of the
Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer,
shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not Cely Tiu, from exercising her function as such. The records show that the President,
between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their Wilson Ong, supervised the collection and receipt of rentals in the Masagana
personal capacities with the Ongs since they were not selling any of their own shares to Citimall;19 that he ordered the same to be deposited in the bank;20 and that he held on to
them. It was FLADC that did. 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
Considering therefore that the real contracting parties to the subscription agreement rationale behind the provision is to ensure the effective monitoring of each officer's
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of separate functions.
However, although the Tius were adversely affected by the Ongs' unwillingness to let rescission of a subscription agreement is not one of the instances when distribution of
them assume their positions, rescission due to breach of contract is definitely the wrong capital assets and property of the corporation is allowed.
remedy for their personal grievances. The Corporation Code, SEC rules and even the
Rules of Court provide for appropriate and adequate intra-corporate remedies, Contrary to the Tius' allegation, rescission will, in the final analysis, result in the
other than rescission, in situations like this. Rescission is certainly not one of them, premature liquidation of the corporation without the benefit of prior dissolution in
specially if the party asking for it has no legal personality to do so and the requirements accordance with Sections 117, 118, 119 and 120 of the Corporation Code.28 The Tius
of the law therefor have not been met. A contrary doctrine will tread on extremely maintain that rescinding the subscription contract is not synonymous to corporate
dangerous ground because it will allow just any stockholder, for just about any real or liquidation because all rescission will entail would be the simple restoration of the status
imagined offense, to demand rescission of his subscription and call for the distribution of quo ante and a return to the two groups of their cash and property contributions. We
some part of the corporate assets to him without complying with the requirements of the wish it were that simple. Very noticeable is the fact that the Tius do not explain why
Corporation Code. 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%
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on
remedy of rescission of the subject agreement based on a less than substantial breach of the corporation, its creditors and the Ongs.
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 In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
law. 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
All this notwithstanding, granting but not conceding that the Tius possess the legal Corporation Code. Section 122 of the law provides that "(e)xcept by decrease of capital
standing to sue for rescission based on breach of contract, said action will nevertheless stock…, no corporation shall distribute any of its assets or property except upon lawful
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures dissolution and after payment of all its debts and liabilities." The Tius claim that their
for the valid distribution of assets and property under the Corporation Code. 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
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of
Trust Co. vs. Rivera,22provides that subscriptions to the capital stock of a corporation decrease of capital stock and (2) the SEC to approve said decrease. This new argument
constitute a fund to which the creditors have a right to look for the satisfaction of their has no merit.
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 The Tius' case for rescission cannot validly be deemed a petition to decrease capital
corporate capital only in three instances: (1) amendment of the Articles of Incorporation stock because such action never complied with the formal requirements for decrease of
to reduce the authorized capital stock,24 (2) purchase of redeemable shares by the capital stock under Section 33 of the Corporation Code. No majority vote of the board of
corporation, regardless of the existence of unrestricted retained earnings,25and (3) directors was ever taken. Neither was there any stockholders meeting at which the
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is approval of stockholders owning at least two-thirds of the outstanding capital stock was
articulated in Section 41 on the power of a corporation to acquire its own shares 26 and in secured. There was no revised treasurer's affidavit and no proof that said decrease will
Section 122 on the prohibition against the distribution of corporate assets and property not prejudice the creditors' rights. On the contrary, all their pleadings contained were
unless the stringent requirements therefor are complied with.27 alleged acts of violations by the Ongs to justify an order of rescission.

The distribution of corporate assets and property cannot be made to depend on the Furthermore, it is an improper judicial intrusion into the internal affairs of the
whims and caprices of the stockholders, officers or directors of the corporation, or even, corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate
for that matter, on the earnest desire of the court a quo"to prevent further squabbles and of decrease of stock. Decreasing a corporation's authorized capital stock is an
future litigations" unless the indispensable conditions and procedures for the protection amendment of the Articles of Incorporation. It is a decision that only the stockholders
of corporate creditors are followed. Otherwise, the "corporate peace" laudably hoped for and the directors can make, considering that they are the contracting parties thereto. In
by the court will remain nothing but a dream because this time, it will be the creditors' this case, the Tius are actually not just asking for a review of the legality and fairness of a
turn to engage in "squabbles and litigations" should the court order an unlawful corporate decision. They want this Court to make a corporate decision for FLADC. We
distribution in blatant disregard of the Trust Fund Doctrine. decline to intervene and order corporate structural changes not voluntarily agreed upon
by its stockholders and directors.
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 Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since 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 We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull
binding upon the corporation and courts will not interfere unless such a fast one" on the Ongs because that was where the problem precisely started. It is clear
contracts are so unconscionable and oppressive as to amount to wanton that, when the finances of FLADC improved considerably after the equity infusion of the
destruction to the rights of the minority, as when plaintiffs aver that the Ongs, the Tius started planning to take over the corporation again and exclude the Ongs
defendants (members of the board), have concluded a transaction among from it. It appears that the Tius' refusal to pay transfer taxes might not have really been
themselves as will result in serious injury to the plaintiffs stockholders.29 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 reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed the corresponding shares. It was, from every angle, the perfect excuse for blackballing
author in corporate law, thus: 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
Courts and other tribunals are wont to override the business judgment of the (from an investment of only P45 million which was nearly foreclosed by PNB), to the
board mainly because, courts are not in the business of business, and the laissez extreme and irreparable damage of the Ongs, FLADC and its creditors.
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 After all is said and done, no one can close his eyes to the fact that the Masagana Citimall
decisions. More importantly, the social contract in the corporate family to would not be what it has become today were it not for the timely infusion of P190 million
decide the course of the corporate business has been vested in the board and by the Ongs in 1994. There are no ifs or buts about it.
not with courts.30
Without the Ongs, the Tius would have lost everything they originally invested in said
Apparently, the Tius do not realize the illegal consequences of seeking rescission and mall. If only for this and the fact that this Resolution can truly pave the way for both
control of the corporation to the exclusion of the Ongs. Such an act infringes on the law groups to enjoy the fruits of their investments — assuming good faith and honest
on reduction of capital stock. Ordering the return and distribution of the Ongs' capital intentions — we cannot allow the rescission of the subject subscription agreement. The
contribution without dissolving the corporation or decreasing its authorized capital Ongs' shortcomings were far from serious and certainly less than substantial; they were
stock is not only against the law but is also prejudicial to corporate creditors who enjoy in fact remediable and correctable under the law. It would be totally against all rules of
absolute priority of payment over and above any individual stockholder thereof. justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous
grounds.
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 WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong
answer is no because the financial interests of both the Tius and the Ongs will remain Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong
intact and safe within FLADC. On the other hand, if rescission is granted, will any of the Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner
parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the
streets with nothing but the money they had in 1994 while the Tius will not only enjoy a Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby DISMISSED
windfall estimated to be anywhere from P450 million to P900 million 31 but will also take for lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription
over an extremely profitable business without much effort at all. Agreement, dated August 15, 1994, is hereby declared as null and void.

Another very important point follows. The Court of Appeals and, later on, our Decision The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners
dated February 1, 2002, stated that both groups were in pari delicto, meaning, that both David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and
the Tius and the Ongs committed breaches of the Pre-Subscription Agreement. This may Lourdes C. Tiu is hereby DENIED for being moot.
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- Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
à-vis those committed by the Tius in not surrendering FLADC funds to the corporation modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en
and diverting corporate income to their own MATTERCO account. The Ongs were right in banc, dated September 11, 1998, is hereby REVERSED.
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 FLADC's name, owing Costs against the petitioner Tius.
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 SO ORDERED.
shareholdings of the Tius before the Ongs came in?
G.R. No. 172843 September 24, 2014 Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a
stockholder and director of PPC,12wrote a letter addressed to PPC’s directors, petitioners
ALFREDO L. VILLAMOR, JR., Petitioner, inG.R. No. 172881, on April 4, 2005.13 He informed them that Villamor should bemade to
vs. deliver to PPC and account for MC Home Depot’s checks or their equivalent value.14
JOHN S. UMALE, in substitution of HERNANDO F. BALMORES, Respondent.
Due to the alleged inaction of the directors, respondent Balmores filed with the Regional
x-----------------------x Trial Court an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the
Interim Rules for Intra-Corporate Controversies15 (Interim Rules) against petitioners for
their alleged devices or schemes amounting to fraud or misrepresentation "detrimental
G.R. No. 172881 to the interest of the corporation and its stockholders."16

ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners, Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s
vs. assets were ". . . not only in imminent danger, but have actually been dissipated,lost,
HERNANDO F. BALMORES, Respondent. wasted and destroyed."17

DECISION Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He
also prayed for petitioners’ prohibition from "selling, encumbering, transferring or
LEONEN, J.: disposing in any manner any of [PPC’s] properties, including the MC Home [Depot]
checks and/or their proceeds."19 He prayed for the accounting and remittance to PPC of
Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court, the MC Home Depot checks or their proceeds and for the annulment of the board’s
assailing the decision2 of the Court of Appeals dated March 2, 2006 and its resolution waiving PPC’s rights in favor of Villamor’s law firm.20
resolution3 dated May 29, 2006, denying petitioners’ motions for reconsideration. The
Court of Appeals placed Pasig Printing Corporation (PPC) under receivership and Ruling of the Regional Trial Court
appointed an interim management committee for the corporation.4
In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent
MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was Balmores’ prayer for the appointment of a receiver or the creation of a management
part of the area owned by Mid-Pasig Development Corporation (Mid-Pasig).5 committee.The dispositive portion reads:

On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, WHEREFORE, premises considered the appointment of a Receiver and the creation of a
including the Rockland area.6 Management Committee applied for by plaintiff Hernando F. Balmores are, as they are
hereby, DENIED.22 (Emphasis in the original)
On November 11, 2004, PPC’s board of directors issued a resolution7 waiving all its
rights, interests, and participation in the option to lease contract in favor of the law firm According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution
of Atty. Alfredo Villamor, Jr. (Villamor), petitioner in G.R. No. 172843. PPC received no issued by PPC’s board of directors, waiving its rights to the option to lease contract
consideration for this waiver in favor of Villamor’s law firm.8 infavor of Villamor’s law firm, must be accorded prima facie validity.23

On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of The trial court also noted that there was a pending case filed by one Leonardo Umale
agreement (MOA) with MC Home Depot.9 Under the MOA, MC Home Depot would against Villamor, involving the same checks. Umale was also claiming ownership of the
continue to occupy the area as PPC’s sublessee for four (4) years, renewable for another checks.24 This, according to the trial court, weakened respondent Balmores’ claim that
four (4) years, at a monthly rental of ₱4,500,000.00 plus goodwill of ₱18,000,000.00. 10 the checks were properties of PPC.25

In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks The trial court also found that there was "no clear and positive showing of dissipation,
representing rentalpayments for one year and the goodwill money. The checks were loss, wastage, or destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof
given to Villamor who did not turn these or the equivalent amount over to PPC, upon the minority stockholders, partieslitigants or the general public."26 The board’s failure to
encashment.11 recover the disputed amounts was not an indication of mismanagement resulting in the
dissipation of assets.27
The trial court noted that PPC was earning substantial rental income from its other sub- the Court of Appeals considered the danger of dissipation, wastage, and loss of PPC’s
lessees.28 assets if the review of the trial court’s judgment would be delayed.35

The trial court added that the failure to implead PPCwas fatal. PPC should have been The Court of Appeals ruled that the case filed by respondent Balmores with the trial
impleaded as an indispensable party, without which, there would be no final court "[was] a derivative suit because there were allegations of fraud or ultra vires acts . .
determination of the action.29 . by [PPC’s directors]."36

Ruling of the Court of Appeals According to the Court of Appeals,the trial court abandoned its duty to the stockholders
in a derivative suit when it refused to appoint a receiver or create a management
Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule committee, all during the pendency of the proceedings. The assailed order ofthe trial
65 of the Rules of Court.30He assailed the decision of the trial court, which denied his court removed from the stockholders their right, in an intra-corporate controversy, to be
"application for the appointment of a [r]eceiver and the creation ofa [m]anagement allowed the remedy of appointment of a receiverduring the pendency of a derivative suit,
[c]ommittee."31 leaving the corporation under the control of an outsider and its assets prone to
dissipation.37 The Court of Appeals also ruled that this amounts to "despotic, capricious,
or whimsicalexercise of judicial power"38 on the part of the trial court.
In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to
respondent Balmores’ petition. It reversed the trial court’s decision, and issued a new
order placing PPC under receivership and creating an interim management In justifying its decision to place PPCunder receivership and to create a management
committee.32 The dispositive portion reads: committee, the Court of Appeals stated that the board’s waiver of PPC’s rights in favor
ofVillamor’s law firm without any consideration and its inaction on Villamor’s failure to
turn over the proceeds of rental payments to PPC warrant the creation of a management
WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN committee.39 The circumstances resulted in the imminent danger of loss, waste, or
DUE COURSE and the June 15, 2005 Order/Resolution of the commercial court, the dissipation of PPC’s assets.40
Regional Trial Court of Pasig City, Branch 167, in S.E.C. Case No. 05-62, is hereby
REVERSED and SET ASIDE and a NEW ORDER is ISSUED that, during the pendency of the
derivative suit, untiljudgment on the merits is rendered by the commercial court, in Petitioners filed separatemotions for reconsideration. Both motions were denied by the
order toprevent dissipation, loss, wastage or destruction of the assets, in order to Court of Appeals on May 29, 2006. The dispositive portion of the Court of Appeals’
prevent paralization of business operations which may be prejudicial to the interest of resolution reads:
stockholders, parties-litigants or the general public, and in order to prevent violations of
the corporation laws: (1) Pasig Printing Corporation (PPC) is hereby placed under WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006
receivership pursuant to the Rules Governing Intra-Corporate Controversies under R.A. Motions for Reconsideration are hereby DENIED.41
No. 8799;(2) an Interim Management Committee is hereby created for Pasig Printing
Corporation (PPC) composed of Andres Narvasa, Jr., Atty. Francis Gustilo and Ms Petitioners filed separatepetitions for review under Rule 45, raising the following
Rosemarie Salvio-Leonida; (3) the interim management committee is hereby directed to threshold issues:
forthwith, during the pendency of the derivative suit until judgment on the merits is
rendered by the commercial court, to: (a) take over the business of Pasig Printing
Corporation (PPC), (b) take custody and control of all assets and properties owned and I. Whether the Court of Appeals correctly characterized respondent Balmores’
possessed by Pasig Printing Corporation (PPC), (c) take the place of the management and action as a derivative suit
the board of directors of Pasig Printing Corporation (PPC), (d) preserve Pasig Printing
Corporation’s assets and properties, (e) stop and prevent any disposal, in any manner, of II. Whether the Court of Appeals properly placed PPC under receivership and
any of the properties of Pasig Printing Corporation (PPC) including the MC Home Depot created a receiver or management committee
checks and/or their proceeds; and (3) [sic] restore the status quo ante prevailing by
directing respondents their associates and agents to account and return to the Interim PPC’s directors argued that the Court of Appeals erred in characterizing respondent
Management Committee for Pasig Printing Corporation (PPC) all the money proceeds of Balmores’ suit as a derivative suit because of his failure to implead PPC as party in the
the 20 MC Home Depot checks taken by them and to account and surrender to the case. Hence, the appellate court did not acquire jurisdiction over the corporation, and the
Interim Management Committee all subsequent MC Home Depot checks or appointment of a receiver or management committee is not valid.42
proceeds.33(Citation omitted)
The directors further argued that the requirements for the appointment of a receiver or
The Court of Appeals characterizedthe assailed order/resolution of the trial court as an management committee under Rule 943 of the Interim Rules were not satisfied. The
interlocutory order that is not appealable.34 In reversing the trial court order/resolution,
directors pointed out that respondent Balmores failed to prove that the assets of the In this case, petitioners raise issues on the correctness of the Court of Appeals’
corporation were in imminent danger of being dissipated.44 conclusions. Specifically, petitioners ask (1) whether respondent Balmores’ failure to
implead PPC in his action with the trial court was fatal; (2) whether the Court of Appeals
According to the directors, assuming that a receiver or management committee may be correctly characterized respondent Balmores’ action as a derivative suit; (3) whether the
appointed in the case, it is the Regional Trial Court only and not the Court of Appeals that Court of Appeals’ appointment of a management committee was proper; and (4) whether
must appoint them.45 the Court of Appeals may exercise the power to appoint a management committee.

Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was These are questions of law that may be determined without looking into the evidence
still in dispute. In a separate civil case against Villamor, a certain Leonardo Umale was presented. The question of whether the conclusion drawn by the Court of Appeals from a
claiming ownership of the checks.46 set of facts is correct is a question of law, cognizable by this court.55

Villamor also argued that the Court of Appeals’ order to place PPC under receivership Petitioners, therefore, properly filed a petition for review under Rule 45.
and to appoint a management committee does not endanger PPC’s assets because the MC
Home Depot checks were not the only assets of PPC.47 Therefore, it would not affect the II
operation of PPC or result in its paralysation.48
Respondent Balmores’ action
In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions in the trial court is not a derivative suit
raise questions of facts, which cannot be allowed in a petition for review under Rule 45. 49
A derivative suit is an action filed by stockholders to enforce a corporate action. 56 It is an
On the appointment of a receiver or management committee, respondent Balmores exception to the general rule that the corporation’s power to sue 57 is exercised only by
stated that the ". . . very practice of waiving assets and income for no consideration can in the board of directors or trustees.58
factlead, not only to the paralyzation of business, but to the complete loss or cessation of
business of PPC[.] It is Individual stockholders may be allowed to sue on behalf of the corporation whenever the
directors or officers of the corporation refuse to sue to vindicate the rights of the
precisely because of this fraudulent practice that a receiver/management committee corporation or are the ones to be sued and are in control of the corporation.59 It is
must be appointed to protect the assets of PPC from further fraudulent acts, devices and allowed when the "directors [or officers] are guilty of breach of . . . trust, [and] not of
schemes."50 mere error of judgment."60

The petitions have merit. In derivative suits, the real party in interest is the corporation, and the suing stockholder
is a mere nominal party.61
I
Thus, this court noted:
Petition for review on
certiorari under Rule 45 was proper The Court has recognized that a stockholder’s right to institute a derivative suit is not
based on any express provision of the Corporation Code, or even the Securities
First, we rule on the issue of whether petitioners properly filed a petition for review on Regulation Code, but is impliedly recognized when the said laws make corporate
certiorari under Rule 45. directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. In effect, the suit isan action for specific
performance of an obligation, owed by the corporation to the stockholders, to assist its
Respondent Balmores argued that the petition raises questions of fact. rights of action when the corporation has been put in default by the wrongful refusal of
the directors or management to adopt suitable measures for its protection.62
Under Rule 45, only questionsof law may be raised.51 There is a question of law "when
there is doubt or controversy as to what the law is on a certain [set] of facts."52 The test is Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies
"whether the appellate court can determine the issue raised without reviewing or (Interim Rules) provides the five (5) requisites63 for filing derivative suits:
evaluating the evidence."53 Meanwhile, there is a question of fact when there is "doubt . . .
as to the truth or falsehood of facts."54 The question must involve the examination of
probative value of the evidence presented. SECTION 1. Derivative action. – A stockholder or member may bring an action in the
name of a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject (1) . . . "the universally recognized doctrine that a stockholder in a corporation
of the action occurred and at the time the action was filed; has no title legal or equitable to the corporate property; that both of these are
in the corporation itself for the benefit of the stockholders." Inother words, to
(2) He exerted all reasonable efforts, and alleges the same with particularity in allow shareholders to sue separately would conflict with the separate
the complaint, toexhaust all remedies available under the articles of corporate entity principle;
incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires; (2) . . . that the prior rights of the creditors may be prejudiced. Thus, our
Supreme Court held in the case of Evangelista v. Santos, that ‘the stockholders
(3) No appraisal rights are available for the act or acts complained of; and may not directly claim those damages for themselves for that would result in
the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation and the liquidation of its debts
(4) The suit is not a nuisance or harassment suit. and liabilities, something which cannot be legally donein view of Section 16 of
the Corporation Law. . .";
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
(3) the filing of such suits would conflict with the duty of the management to
The fifth requisite for filing derivative suits, while not included in the enumeration, is sue for the protection of all concerned;
implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action
brought by the stockholder or member must be "in the name of [the] corporation or (4) it would produce wasteful multiplicity of suits; and
association. . . ." This requirement has already been settled in jurisprudence.
(5) it would involve confusion in ascertaining the effect of partial recovery by
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al.,64 this court said that an individual on the damages recoverable by the corporation for the same act.72
"[a]mong the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on While it is true that the basis for allowing stockholders to file derivative suits on behalf of
behalf of the corporation and all other shareholders similarly situated who wish to join corporations is based on equity, the above legal requisites for its filing must necessarily
[him]."65 This principle on derivative suits has been repeated in, among other cases, Tam be complied with for its institution.73
Wing Tak v. Hon. Makasiar and De Guia66 and in Chua v. Court of Appeals,67 which was
cited in Hi-Yield Realty, Incorporated v. Court of Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a
derivative suit.
Appeals.68
Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he
Moreover, it is important that the corporation be made a party to the case.69 prayed for. Though he tried to communicate with PPC’s directors about the checks in
Villamor’s possession before he filed an action with the trial court, respondent Balmores
was not able to show that this comprised all the remedies available under the articles of
This court explained in Asset Privatization Trust v. Court of Appeals70 why it is a incorporation, bylaws, laws, or rules governing PPC.
condition sine qua nonthat the corporation be impleaded as party in derivative suits.
Thus:
An allegation that appraisal rights were not available for the acts complained of is
another requisite for filing derivative suits under Rule 8, Section 1(3) of the Interim
Not only is the corporation an indispensible party, but it is also the present rule that it Rules.
must be served with process. The reason given is that the judgment must be made
binding upon the corporation inorder that the corporation may get the benefit of the suit
and may not bring a subsequent suit against the same defendants for the same cause of Section 81 of the Corporation Code provides the instances of appraisal right:
action. In other words the corporation must be joined as party because it is its cause of
action that is being litigated and because judgment must be a res judicata against it.71 SEC. 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
In the same case, this court enumerated the reasons for disallowing a direct individual instances:
suit.
1. In case any amendment to the articles of incorporation has the effect of
The reasons given for not allowing direct individual suit are: changing or restricting the rights of any stockholders or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares derivative suit, it is not always the case that derivative suits are limited to such causes or
of any class, or of extending or shortening the term of corporate existence; that they are necessarily derivative suits. Hence, they are separately enumerated in Rule
1, Section 1(a) of the Interim Rules:
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 SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be observed
provided in this Code; and in civil cases involving the following:

3. In case of merger or consolidation. (1) Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to fraud or
Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if misrepresentation which may be detrimental to the interest of the public
he or she voted against the proposed corporate action and if he made a written demand and/or of the stockholders, partners, or members of any corporation,
for payment on the corporation within thirty (30) days after the date of voting. partnership, or association;

Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his (2) Controversies arising out of intra-corporate, partnership, or association
letter informing themthat Villamor should be made to deliver to PPC and accountfor MC relations, between and among stockholders, members, or associates; and
Home Depot’s checks or their equivalent value. He alleged that these are devices or between, any or all of them and the corporation, partnership, or association of
schemes amounting to fraud or misrepresentation detrimental to the corporation’s and which they are stockholders, members, or associates, respectively;
the stockholders’ interests. He also alleged that the directors’ inaction placed PPC’s
assets in imminent and/or actual dissipation, loss, wastage, and destruction. (3) Controversies in the election orappointment of directors, trustees, officers,
or managers ofcorporations, partnerships, or associations;
Granting that (a) respondent Balmores’ attempt to communicate with the other PPC
directors already comprised all the available remedies that he could have exhausted and (4) Derivative suits;and
(b) the corporation was under full control of petitioners that exhaustion of remedies
became impossible or futile,74 respondent Balmores failed toallege that appraisal rights (5) Inspection of corporate books. (Emphasis supplied)
were not available for the acts complained of here.
Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or
Neither did respondent Balmores implead PPC as party in the case nor did he allege that officers may also beindividual suits or class suits.
he was filing on behalf of the corporation.
Individual suits are filed when the cause of action belongs to the individual stockholder
The non-derivative character of respondent Balmores’ action may also be gleaned from personally, and notto the stockholders as a group or to the corporation, e.g., denial of
his allegations in the trial court complaint. In the complaint, he described the nature right to inspection and denial of dividends to a stockholder.76 If the cause of action
ofhis action as an action under Rule 1, Section 1(a)(1) of the Interim Rules, and not an belongs to a group of stockholders, such as when the rights violated belong to preferred
action under Rule 1, Section 1(a)(4) of the Interim Rules, which refers to derivative suits. stockholders, a class or representative suit may be filed to protect the stockholders in the
Thus, respondent Balmores said: group.77

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for In this case, respondent Balmores filed an individual suit. His intent was very clear from
Intra-corporate Controversies, involving devices or schemes employed by, or acts of, the his manner of describing the nature of his action:
defendants as board of directors, business associates and officers of Pasig Printing
Corporation (PPC), amounting to fraud or misrepresentation, which are detrimental to
the interest of the plaintiff as stockholder of PPC.75 (Emphasis supplied) 1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for
Intra-corporate Controversies, involving devices or schemes employed by, or acts of, the
defendants as board of directors, business associates and officers of Pasig Printing
Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and Corporation (PPC),amounting to fraud or misrepresentation, which are detrimental to
officers, amounting to fraud or misrepresentation, which may be detrimental to the the interest of the plaintiff as stockholder of PPC.78
interest of the stockholders. This is different from a derivative suit.
(Emphasis supplied)
While devices and schemes of the board of directors, business associates, or officers
amounting to fraud under Rule 1, Section 1(a)(1) of the Interim Rules are causes of a
His intent was also explicit from his prayer:
WHEREFORE, plaintiff respectfully prays that the Honorable Court – difficulty of determining the amount of damages that should be paid to each individual
stockholder.82
....
In this case, respondent Balmores did not allege any cause of action that is personal to
2. After notice and due proceedings – him. His allegations are limited to the facts that PPC’s directors waived their rights to
rental income in favor of Villamor’s law firm without consideration and that they failed
to take action when Villamor refused to turn over the amounts to PPC. These are
Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain wrongsthat pertain to PPC. Therefore, the cause of action belongs to PPC — not to
custody of the MC Home checks and encash them upon maturity, as well as their refusal respondent Balmores or any stockholders as individuals.
or failure to take any action against defendant VILLAMOR to make him account and
deliver the MC Home checks and/or their proceeds to Pasig Printing Corporation are
devices, schemes or acts amounting to fraud that are detrimental to plaintiff’s interest as For this reason, respondent Balmoresis not entitled to the reliefs sought in the
a stockholder of PPC;79 (Emphasis supplied) complaint. Only the corporation, or arguably the stockholders as a group, is entitled to
these reliefs, which should have been sought in a proper derivative suit filed on behalf of
the corporation.
Respondent Balmores did not bring the action for the benefit of the corporation. Instead,
hewas alleging that the acts of PPC’s directors, specifically the waiver of rights in favor of
Villamor’s law firm and their failure to take back the MC Home Depot checks from PPC will not be bound by a decision granting the application for the appointment of a
Villamor, were detrimental to his individual interest as a stockholder. In filing an action, receiver or management committee. Since it was not impleaded in the complaint, the
therefore, his intention was to vindicate his individual interest and not PPC’s or a group courtsdid not acquire jurisdiction over it. On this matter, it is an indispensable party,
of stockholders’. without which, no final determination can be had.

The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his
because the cause of action belongs, primarily, to the corporation. The stockholder who action, as petitioners point out. It is the fact that he alleged no cause of action that
sues on behalf of a corporation is merely a nominal party. pertains personally to him that disqualifies him from the reliefs he sought in his
complaint.
Respondent Balmores’ intent to file an individual suit removes it from the coverage of
derivative suits. On this basis alone, the Court of Appeals erred in giving due course to respondent
Balmores’ petition for certiorari, reversing the trial court’s decision, and issuing a new
order placing PPC under receivership and creating an interim management committee.
III
IV
Respondent Balmores has no cause of action that would
entitle him to the reliefs sought
Appointment of a management committee was not proper
Corporations have a personality that is separate and distinct from their stockholders and
directors. A wrong tothe corporation does not necessarily create an individual cause of Assuming that respondent Balmores has an individual cause of action, the Court of
action. "A cause of action is the act or omission by which a party violates the right of Appeals still erred in placing PPC under receivership and in creating and appointing a
another."80 A cause of action must pertain to complainant if he or she is to be entitled to management committee.
the reliefs sought. Thus, in Cua v. Tan,81 this court emphasized:
A corporation may be placed under receivership, or management committees may be
. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of created to preserveproperties involved in a suit and to protect the rights of the parties
action belongs to the corporation and not to the individual stockholder or member. under the control and supervision of the court.83Management committees and receivers
Although in most every case of wrong to the corporation, each stockholder is necessarily are appointed when the corporation is in imminent danger of "(1) [d]issipation, loss,
affected because the value of his interest therein would beimpaired, this fact of itself is wastage or destruction of assets or other properties; and (2) [p]aralysation of its
not sufficient to give him an individual cause of action since the corporation is a person business operations that may be prejudicial to the interest of the minority stockholders,
distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, parties-litigants, or the general public."84
not only would the theory of separate entity be violated, but there would be multiplicity
of suits as well as a violation of the priority rights of creditors. Furthermore, there is the Applicants for the appointment of a receiver or management committee need to
establish the confluence of these two requisites.1âwphi1 This is because appointed
receivers and management committees will immediately take over the management of When respondent Balmores filed his petition for certiorari with the Court of Appeals,
the corporation and will have the management powers specified in law.85 This may have there was still a pending action in the trial court. No less than the Court of Appeals stated
a negative effect on the operations and affairs of the corporation with third parties,86 as that it allowed respondent Balmores’ petition under Rule 65 because the order or
persons who are more familiar with its operations are necessarily dislodged from their resolution in question was an interlocutory one. This means that jurisdiction over the
positions in favor of appointees who are strangers to the corporation’s operations and main case was still lodged with the trial court.
affairs.
The court making the appointment controls and supervises the appointed receiver or
Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said: management committee.1âwphi1Thus, the Court of Appeals’ appointment of a
management committee would result in an absurd scenario wherein while the main case
. . . the creation and appointment of a management committee and a receiver is an extra is still pending before the trial court, the receiver or management committee reports to
ordinary and drastic remedy to be exercised with care and caution; and only when the the Court of Appeals.
requirements under the Interim Rules are shown. It is a drastic course for the benefit of
the minority stockholders, the parties-litigants or the general public are allowed only WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated
under pressing circumstances and, when there is inadequacy, ineffectual or exhaustion March 2, 2006 and its resolution dated May 29, 2006 are SET ASIDE.
of legal or other remedies . . . The powerof the court to continue a business of a
corporation . . . must be exercised with the greatest care and caution. There should be a SO ORDERED.
full consideration ofall the attendant facts, including the interest of all the parties
concerned.88

PPC waived its rights, without any consideration in favor of Villamor. The checks were
already in Villamor’s possession. Some of the checks may have already been encashed.
This court takes judicial notice that the goodwill money of ₱18,000,000.00 and the rental
payments of ₱4,500,000.00 every month are not meager amounts only to be waived
without any consideration. It is, therefore, enough to constitute loss or dissipation of
assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of
paralysis of PPC’s business operations. Apparently, PPC was earning substantial amounts
from its other sub-lessees. Respondent Balmores did not prove otherwise. He, therefore,
failed to show at least one of the requisites for appointment of a receiver or management
committee.

The Court of Appeals had no


jurisdiction to appoint the receiver or management

committee

The Court of Appeals has no power to appoint a receiver or management committee. The
Regional Trial Court has original and exclusive jurisdiction89 to hear and decide intra-
corporate controversies,90 including incidents of such controversies.91 These incidents
include applications for the appointment of receivers or management committees.

"The receiver and members of the management committee . . . are considered officers of
the court and shall be under its control and supervision."92 They are required to report
tothe court on the status of the corporation within sixty (60) days from their
appointment and every three (3) months after.93
G.R. No. 157479 November 24, 2010 Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio Acyatan, the respondent’s
nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third
PHILIP TURNER and ELNORA TURNER, Petitioners, member/chairman.
vs.
LORENZO SHIPPING CORPORATION, Respondent. On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for
an aggregate value of ₱2,565,400.00 for the petitioners.2
DECISION
Subsequently, the petitioners demanded payment based on the valuation of the appraisal
BERSAMIN, J.: 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
This case concerns the right of dissenting stockholders to demand payment of the value
of their shareholdings.
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
In the stockholders’ suit to recover the value of their shareholdings from the corporation, stockholders exercising their appraisal rights could be paid only when the corporation
the Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, had unrestricted retained earnings to cover the fair value of the shares, but that it had no
and ordered the corporation, herein respondent, to pay. Execution was partially carried retained earnings at the time of the petitioners’ demand, as borne out by its Financial
out against the respondent. On the respondent’s petition for certiorari, however, the Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31,
Court of Appeals (CA) corrected the RTC and dismissed the petitioners’ suit on the 1999.
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.
Upon the respondent’s 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
Thus, the petitioners are now before the Court to challenge the CA’s decision Case No. 01-086, was initially assigned to Branch 132.5
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 On June 26, 2002, the petitioners filed their motion for partial summary judgment,
claiming that:
Antecedents
7) xxx the defendant has an accumulated unrestricted retained earnings of
ELEVEN MILLION NINE HUNDRED SEVENTY FIVE THOUSAND FOUR
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation HUNDRED NINETY (P11,975,490.00) PESOS, Philippine Currency, evidenced by
engaged primarily in cargo shipping activities. In June 1999, the respondent decided to its Financial Statement as of the Quarter Ending March 31, 2002; xxx
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 8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal
demanded payment of their shares at the rate of ₱2.276/share based on the book value Committee is final, that the same cannot be disputed xxx
of the shares, or a total of ₱2,298,760.00.
9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are
The respondent found the fair value of the shares demanded by the petitioners entitled, as a matter of right, to a summary judgment. xxx 6
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 ₱0.41/share (or a total of The respondent opposed the motion for partial summary judgment, stating that the
₱414,100.00), considering that its shares were listed in the Philippine Stock Exchange, determination of the unrestricted retained earnings should be made at the end of the
and that the payment could be made only if the respondent had unrestricted retained fiscal year of the respondent, and that the petitioners did not have a cause of action
earnings in its books to cover the value of the shares, which was not the case. against the respondent.

The disagreement on the valuation of the shares led the parties to constitute an appraisal During the pendency of the motion for partial summary judgment, however, the
committee pursuant to Section 82 of the Corporation Code, each of them nominating a Presiding Judge of Branch 133 transmitted the records to the Clerk of Court for re-
representative, who together then nominated the third member who would be chairman raffling to any of the RTC’s special commercial courts in Makati City due to the case being
of the appraisal committee. Thus, the appraisal committee came to be made up of 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. Aggrieved, the respondent commenced a special civil action for certiorari in the CA to
01-086 was ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge challenge the two aforecited orders of Judge Tipon, claiming that:
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 A.
exercising jurisdiction over the place where the principal office of the corporation was
found.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY
JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE TIME THE
After the conference in Civil Case No. 01-086 set on October 23, 2002, which the "COMPLAINT" WAS FILED, LSC HAD NO RETAINED EARNINGS, AND THUS
petitioners’ counsel did not attend, Judge Tipon issued an order,8 granting the WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE
petitioners’ motion for partial summary judgment, stating: SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR
LSC SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE
As to the motion for partial summary judgment, there is no question that the 3-man "COMPLAINT" WAS FILED ARE IRRELEVANT TO THE SPOUSES TURNER’S
committee mandated to appraise the shareholdings of plaintiff submitted its RIGHT TO RECOVER UNDER THE "COMPLAINT", BECAUSE THE WELL-
recommendation on October 27, 2000 fixing the fair value of the shares of stocks of the SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS
plaintiff at P2.54 per share. Under Section 82 of the Corporation Code: "IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE
SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY
"The findings of the majority of the appraisers shall be final, and the award shall be paid HAVE ACCRUED THEREAFTER.
by the corporation within thirty (30) days after the award is made."
B.
"The only restriction imposed by the Corporation Code is–"
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY
"That no payment shall be made to any dissenting stockholder unless the corporation ABUSED HIS DISCRETION, WHEN HE GRANTED AND ISSUED THE
has unrestricted retained earning in its books to cover such payment." QUESTIONED "WRIT OF EXECUTION" DIRECTING THE EXECUTION OF HIS
PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES TURNER,
BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF
The evidence submitted by plaintiffs shows that in its quarterly financial statement it RULE 39 OF THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT OF
submitted to the Securities and Exchange Commission, the defendant has retained EXECUTION UNDER THE SUPREME COURT’S CATEGORICAL HOLDING
earnings of P11,975,490 as of March 21, 2002. This is not disputed by the defendant. Its IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.
only argument against paying is that there must be unrestricted retained earning at the
time the demand for payment is made.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO),
enjoining the petitioners, and their agents and representatives from enforcing the writ of
This certainly is a very narrow concept of the appraisal right of a stockholder. The law execution. By then, however, the writ of execution had been partially enforced.
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 The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the
restriction is that there must be sufficient funds to cover the creditors after the execution. Thereupon, the sheriff resumed the enforcement of the writ of execution.
dissenting stockholder is paid. No such allegations have been made by the defendant.9
The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:
On November 12, 2002, the respondent filed a motion for reconsideration.
However, it is clear from the foregoing that the Turners’ appraisal right is subject to the
On the scheduled hearing of the motion for reconsideration on November 22, 2002, the legal condition that no payment shall be made to any dissenting stockholder unless the
petitioners filed a motion for immediate execution and a motion to strike out motion for corporation has unrestricted retained earnings in its books to cover such payment. Thus,
reconsideration. In the latter motion, they pointed out that the motion for the Supreme Court held that:
reconsideration was prohibited by Section 8 of the Interim Rules. Thus, also on
November 22, 2002, Judge Tipon denied the motion for reconsideration and granted the The requirement of unrestricted retained earnings to cover the shares is based on the
petitioners’ motion for immediate execution.10 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
Subsequently, on November 28, 2002, the RTC issued a writ of execution.11 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 action at the commencement of the suit. There are reasons of public policy why there
corporate funds to the prejudice of creditors is null and void. Creditors of a corporation should be no needless haste in bringing up litigation, and why people who are in no
have the right to assume that so long as there are outstanding debts and liabilities, the default and against whom there is as yet no cause of action should not be summoned
board of directors will not use the assets of the corporation to purchase its own stock. 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
In the instant case, it was established that there were no unrestricted retained earnings cause of action at the time his action iscommenced, the defect cannot be cured or
when the Turners filed their Complaint. In a letter dated 20 August 2000, petitioner remedied by the acquisition or accrual of one while the action is pending, and a
informed the Turners that payment of their shares could only be made if it had supplemental complaint or an amendment setting up such after-accrued cause of action
unrestricted earnings in its books to cover the same. Petitioner reiterated this in a letter is not permissible.
dated 2 January 2001 which further informed the Turners that its Financial Statement
for fiscal year 1999 shows that its retained earnings ending December 31, 1999 was at a The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of
deficit in the amount of ₱72,973,114.00, a matter which has not been disputed by private Appeals.
respondents. Hence, in accordance with the second paragraph of sec. 82, BP 68 supra, the
Turners’ right to payment had not yet accrued when they filed their Complaint on The Turners’ apprehension that their claim for payment may prescribe if they wait for
January 22, 2001, albeit their appraisal right already existed. 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
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme of the period of prescription. Stated otherwise, the prescriptive period is to be reckoned
Court declared that: from the accrual of their right of action.

Now, before an action can properly be commenced all the essential elements of the cause Accordingly, We hold that public respondent exceeded its jurisdiction when it
of action must be in existence, that is, the cause of action must be complete. All valid entertained the herein Complaint and issued the assailed Orders. Excess of jurisdiction is
conditions precedent to the institution of the particular action, whether prescribed by the state of being beyond or outside the limits of jurisdiction, and as distinguished from
statute, fixed by agreement of the parties or implied by law must be performed or the entire absence of jurisdiction, means that the act although within the general power
complied with before commencing the action, unless the conduct of the adverse party of the judge, is not authorized and therefore void, with respect to the particular case,
has been such as to prevent or waive performance or excuse non-performance of the because the conditions which authorize the exercise of his general power in that
condition. particular case are wanting, and hence, the judicial power is not in fact lawfully invoked.

It bears restating that a right of action is the right to presently enforce a cause of action, We find no necessity to discuss the second ground raised in this petition.
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 WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the
precedent to the action and may be taken away by the running of the statute of corresponding Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby
limitations, through estoppel, or by other circumstances which do not affect the cause of ordered DISMISSED without prejudice to refiling by the private respondents of the action
action. Performance or fulfillment of all conditions precedent upon which a right of for enforcement of their right to payment as withdrawing stockholders.
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.
SO ORDERED.
The Turners’ right of action arose only when petitioner had already retained earnings in
the amount of ₱11,975,490.00 on March 21, 2002; such right of action was inexistent on The petitioners now come to the Court for a review on certiorari of the CA’s decision,
January 22, 2001 when they filed the Complaint. submitting that:

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court I.
ruled:
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED
Subject to certain qualifications, and except as otherwise provided by law, an action THE PETITION FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID
commenced before the cause of action has accrued is prematurely brought and should be NOT ACT BEYOND ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN
dismissed. The fact that the cause of action accrues after the action is commenced and GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN GRANTING THE
while it is pending is of no moment. It is a rule of law to which there is, perhaps, no MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;
exception, either at law or in equity, that to recover at all there must be some cause of
II. 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
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED stockholders. It does not vest unless objectionable corporate action is taken.13 It serves
THE DISMISSAL OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY the purpose of enabling the dissenting stockholder to have his interests purchased and
SOUGHT THE ANNULMENT OF THE ORDER GRANTING THE MOTION FOR PARTIAL to retire from the corporation.141avvphil
SUMMARY JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR IMMEDIATE
EXECUTION OF THE JUDGMENT; 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
III. 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
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT by decision or statute the strict English rule forbidding a corporation from purchasing its
THEREFORE DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A own shares. In some American states where the English rule used to be adopted, statutes
WAY NOT IN ACCORD WITH LAW OR WITH JURISPRUDENCE. 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
Ruling 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
The petition fails. against the impairment of its capital needed for the protection of creditors.17

The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the Now, however, a corporation can purchase its own shares, provided payment is made
petitioners’ complaint in Civil Case No. 01-086, and in rendering the summary judgment out of surplus profits and the acquisition is for a legitimate corporate purpose.18 In the
and issuing writ of execution. Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit:

A. 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
Stockholder’s Right of Appraisal, In General unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:
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, 1. To eliminate fractional shares arising out of stock dividends;
is expressly recognized in Section 81 of the Corporation Code, to wit:
2. To collect or compromise an indebtedness to the corporation, arising out of
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the unpaid subscription, in a delinquency sale, and to purchase delinquent shares
right to dissent and demand payment of the fair value of his shares in the following sold during said sale; and
instances:
3. To pay dissenting or withdrawing stockholders entitled to payment for their
1. In case any amendment to the articles of incorporation has the effect of shares under the provisions of this Code. (n)
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; The Corporation Code defines how the right of appraisal is exercised, as well as the
implications of the right of appraisal, as follows:
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 1. The appraisal right is exercised by any stockholder who has voted against the
provided in the Code; and 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
3. In case of merger or consolidation. (n) appraisal right.19
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of Petitioners’ cause of action was premature
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 That the respondent had indisputably no unrestricted retained earnings in its books at
persons, one of whom shall be named by the stockholder, another by the corporation, the time the petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved
and the third by the two thus chosen. The findings and award of the majority of the that the respondent’s legal obligation to pay the value of the petitioners’ shares did not
appraisers shall be final, and the corporation shall pay their award within 30 days after yet arise. Thus, the CA did not err in holding that the petitioners had no cause of action,
the award is made. Upon payment by the corporation of the agreed or awarded price, the and in ruling that the RTC did not validly render the partial summary judgment.
stockholder shall forthwith transfer his or her shares to the corporation.20
A cause of action is the act or omission by which a party violates a right of another. 27 The
3. All rights accruing to the withdrawing stockholder’s shares, including voting and essential elements of a cause of action are: (a) the existence of a legal right in favor of the
dividend rights, shall be suspended from the time of demand for the payment of the fair plaintiff; (b) a correlative legal duty of the defendant to respect such right; and (c) an act
value of the shares until either the abandonment of the corporate action involved or the or omission by such defendant in violation of the right of the plaintiff with a resulting
purchase of the shares by the corporation, except the right of such stockholder to receive injury or damage to the plaintiff for which the latter may maintain an action for the
payment of the fair value of the shares.21 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
4. Within 10 days after demanding payment for his or her shares, a dissenting the right to maintain an action in court for recovery of damages or other appropriate
stockholder shall submit to the corporation the certificates of stock representing his relief.29
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 Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be
Corporation Code. If shares represented by the certificates bearing such notation are based on a cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the
transferred, and the certificates are consequently canceled, the rights of the transferor as beginning for being without any cause of action.
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 The RTC concluded that the respondent’s 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
5. If the proposed corporate action is implemented or effected, the corporation shall pay unrestricted retained earnings must already exist at the time of the demand.
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 The RTC’s 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
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder first make a valid demand that the respondent refused to pay despite having unrestricted
unless the corporation has unrestricted retained earnings in its books to cover the retained earnings. Otherwise, the respondent could not be said to be guilty of any
payment. In case the corporation has no available unrestricted retained earnings in its actionable omission that could sustain their action to collect.
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. 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
The trust fund doctrine backstops the requirement of unrestricted retained earnings to whose cause of action has not yet accrued cannot be cured by an amended or
fund the payment of the shares of stocks of the withdrawing stockholders. Under the supplemental pleading alleging the existence or accrual of a cause of action during the
doctrine, the capital stock, property, and other assets of a corporation are regarded as pendency of the action.30For, only when there is an invasion of primary rights, not
equity in trust for the payment of corporate creditors, who are preferred in the before, does the adjective or remedial law become operative.31 Verily, a premature
distribution of corporate assets.24 The creditors of a corporation have the right to invocation of the court’s intervention renders the complaint without a cause of action
assume that the board of directors will not use the assets of the corporation to purchase and dismissible on such ground.32 In short, Civil Case No. 01-086, being a groundless suit,
its own stock for as long as the corporation has outstanding debts and liabilities.25 There should be dismissed.
can be no distribution of assets among the stockholders without first paying corporate
debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is
null and void.26 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
B.
time of the commencement of Civil Case No. 01-086. The motion for partial summary Costs of suit to be paid by the petitioners.
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 SO ORDERED.
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 respondent’s 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 respondent’s petition for certiorari targeted only the RTC’s orders granting
the motion for partial summary judgment and the motion for immediate execution, the
CA’s 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 respondent’s recourse of a special action for
certiorari was the wrong remedy, in view of the fact that the granting of the motion for
partial summary judgment constituted only an error of law correctible by appeal, not of
jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of
jurisdiction, for it exceeded its jurisdiction by taking cognizance of the complaint that
was not based on an existing cause of action.

WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled
Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge
of Branch 46 of the Regional Trial Court of Manila, et al.
G.R. No. 187872 April 11, 2011 restored into office by this Court’s 29 January 2007 decision in G.R. No. 168639; that
there was misjoinder of causes of action in said amended complaint which incorporated
STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner, claims both civil and intra-corporate in nature; that STRADEC has no clear and
vs. unmistakable right as would entitle it to a writ of preliminary injunction which, at any
STAR INFRASTRUCTURE DEVELOPMENT CORPORATION ET AL., Respondents. rate, cannot be directed against acts which had already been accomplished or
consummated; and, that the preliminary injunction issued in the premises amounted a
prejudgment of the case.14
RESOLUTION
In compliance with the 17 November 2010 decision sought be reconsidered, STRADEC,
PEREZ, J.: on the other hand, seeks the admission and approval of the preliminary injunction bond
issued by the Empire Insurance Company in the sum of ₱10,000,000.00.15 On the ground,
For resolution by the Court are the following motions and incidents filed by the parties, however, that grave and irreparable damage will be wrought by the issuance of the writ
to wit: of preliminary injunction in these premises, CTCII’s motion for reconsideration of the
grant of said writ is accompanied by an offer to post a counterbond in the sum of
1. Initial Motion for Reconsideration of the Grant of the Application for Writ of ₱20,000,000.00. For this purpose, CTCII calls our attention to the supposed fact, among
Preliminary Injunction (With Offer to File Counterbond)1 and Supplemental other matters, that it is currently the principal shareholder of SIDC which, as a public
Motion for Reconsideration of the 17 November 2010 decision, filed by utility company, holds the concession for the construction, operation and maintenance of
respondent Cypress Tree Capital Investment, Inc. (CTCII);2 the STAR toll road; that SIDC is scheduled to expand Stage II, Phase 2 of the STAR toll
road with the construction of two additional new lanes at an estimated cost of
₱2,000,000,000.00; that if it is prevented from exercising proprietary rights over the
2. Motions for Reconsideration of said 17 November 2010 decision filed by subject shares and SIDC is inhibited from implementing the 20 July 2006 stockholders’
respondents Aderito Z. Yujuico and Bonifacio C. Sumbilla,3 Robert L. Wong,4 and resolution increasing its authorized capital stock, CTCII will be unable to infuse the
Star Infrastructure Development Corporation (SIDC);5 equity participation commonly required for bank loans; and, that since the security for
said loans consisting of SIDC’s assets requires the vote of stockholders
3. Motion to Admit and Approve Preliminary Injunction Bond filed by petitioner owning/controlling 2/3 of SIDC’s outstanding capital stock, the writ of preliminary
Strategic Alliance Development Corporation (STRADEC);6 injunction would cause grave and irreparable damage which cannot be indemnified by
the injunction bond to be posted by STRADEC.16 In support of the foregoing arguments,
4. Oppositions to STRADEC’s Motion to Admit and Approve Preliminary CTCII submitted an affidavit of merit executed by its President, Elizabeth Lee.17
Injunction Bond filed by respondents Yujuico and Sumbilla7 as well as CTCII
and respondent Cynthia M. Laureta;8 In their opposition to STRADEC’s motion to admit and approve preliminary injunction
bond, respondents Yujuico and Sumbilla, in turn, question Quiambao’s authority to file
5. Manifestation9 and Reply10 filed by STRADEC and Rejoinder filed by and submit said bond. Calling attention to the fact that the motion did not include a
respondents Yujuico and Sumbilla;11and board resolution authorizing Quiambao to file the same for and in behalf of STRADEC,
respondents Yujuico and Quiambao once again argue that there is no showing in the
record that Quiambao was so authorized by a legitimate Board of Directors which
6. Comment (on CTCII’s Initial Motion for Reconsideration of the Grant of the succeeded the one restored in office by the 29 January 2007 decision in G.R. No.
Application for Writ of Preliminary Injunction (With Offer to File 168639.18 The foregoing arguments having been adopted in the 28 January 2011
Counterbond)12 and Consolidated Comment (on Respondents’ Motion for manifestation filed by SIDC,19 STRADEC filed its reply, contending that the decision in
Reconsideration)13 filed by STRADEC. G.R. No. 168639 had reference only to the election of its Board of Directors for the term
2004-2005; that since then, the annual meetings of its stockholders had resulted in the
In their motions for reconsideration of the Court’s 17 November 2010 decision, consistent re-election of Quiambao as its Corporate President; that said subsequent
respondents essentially argue that the issue of Ceasar Quiambao’s authority to represent elections were recognized in the 2 February 2009 decision rendered by Branch 155 of
STRADEC is a prejudicial question to the resolution of the dispute before the court a quo; the Pasig City RTC in SCA No. 3034-PSG, entitled "Citra Metro Manila Tollways
that a declaration that respondent Yujuico and Sumbilla’s group constitutes STRADEC’s Corporation [CMMTC] vs. Strategic Alliance Development Corporation, et al."; and, that
legitimate Board of Directors would not only discount Quiambao’s authority to represent the decision was effectively affirmed in G.R. No. 188864 when this Court denied the
said corporation but would also validate the authority said respondents were given to petition for review on certiorari filed by respondents Yujuico and Sumbilla.20 In their
execute the 8 October 2004 pledge of said corporation’s SIDC shares; that the record is reply, however, the latter argue that said decision in SCA No. 3034 only referred to the
bereft of any showing that the Board of Directors who authorized Quiambao to file the 31 validity of the proxies issued by STRADEC for the stockholders meetings of CMMTC for
July 2006 amended petition before Branch 2 of the Regional Trial Court (RTC) of the years 2005 and 2006.21
Batangas City was the legitimate successor of STRADEC’s Board of Directors which was
In its comment to CTCII's Initial Motion for Reconsideration of the Grant of the exists in the former case an issue which must be preemptively resolved before the latter
Application for Writ of Preliminary Injunction (With Offer to File Counterbond), case may proceed since the resolution of the issue raised in the civil action is resolved
STRADEC additionally underscores the fact, among other matters, that as its duly elected would be determinative juris et de jure of the guilt or innocence of the accused in the
Corporate President, Quiambao has been duly authorized to file its 31 July 2006 criminal case. Aimed at avoiding two conflicting decisions,28 a prejudicial question
amended petition a quo and to obtain the requisite surety bond for the writ of requires the concurrence of two essential requisites, to wit: (a) the civil action involves
preliminary injunction sought in connection with its petition for review on certiorari an issue similar or intimately related to the issue raised in the criminal action; and, (b)
from the Court of Appeals' (CA) 22 December 2008 decision in CA-G.R. No. 96945; that the resolution of such issue determines whether or not the criminal action may
CTCII's continuing violations of STRADEC's rights over its SIDC shares justify the proceed.29 From the foregoing disquisition, it is evident that a prejudicial question
issuance of the writ of preliminary injunction to which it is entitled as owner of said cannot be appreciated where, as in the case at bench, the subject actions are all civil in
shares; and, that the grave and irreparable damage pleaded by CTCII is attributable to its nature.30
illegal acquisition of the subject shares and its continued usurpation of STRADEC's rights
could only result to instability in the conduct of SIDC's business.22 Reiterating the As an incident to the power inherent in every court to control the disposition of the cases
foregoing arguments in its consolidated comment to respondents' motions for on its dockets, the court in which an action is pending may, concededly, hold the action in
reconsideration, STRADEC maintains that the arguments presently raised by abeyance in the exercise of sound discretion, to abide by the outcome of another case
respondents had already been squarely passed upon in the decision sought to be pending in another court,31 especially where the parties and the issues are the
reconsidered; and, that the suspension of the proceedings regarding its third and fourth same.32 While applicable as between the actions pending before the courts of Pasig City
causes of action is not justified by the pendency of other intra-corporate disputes and Urdaneta City which were supposedly instituted to determine the ownership of the
between STRADEC's corporators.23 controlling shares of stock of STRADEC as well as its legitimate Board of Directors, said
principle cannot, however, apply to said cases vis-à-vis the one at bench which, at
We find respondents’ motions for reconsideration bereft of merit. bottom, seek the nullification of the loan and pledge over said corporation’s
shareholdings in SIDC as well as the subsequent notarial sale thereof. Even then, we find
Having already discussed the matter extensively in the decision sought to be that respondents cannot expediently argue that the defects in the impugned loan, pledge
reconsidered, we no longer find any reason to go into great detail in discussing the and notarial sale would be automatically discounted by a declaration from the Pasay City
reasons why the first and second causes of action pleaded in STRADEC’s 31 July 2006 and Urdaneta City courts that respondents Yujuico and Sumbilla’s group constitute said
amended complaint qualify as intra-corporate disputes cognizable by Branch 2 of the corporation’s legitimate Board of Directors. Assuming, arguendo, that respondents are
RTC of Batangas City, sitting as a Special Commercial Court (SCC). Fundamental is the justified in equating such determination with due authorization for the loan and pledge
rule that nature of the action, as well as the court or body which has jurisdiction over it, over STRADEC's shares in SIDC, we find that it would not still dispose of the issue of the
is determined based on the allegations contained in the complaint, irrespective of alleged lack of consideration for the same transactions and the fraud which supposedly
whether or not plaintiff is entitled to recover upon all or some of the claims asserted attended the execution of the same.
therein.24 It has been held that only ultimate facts and not legal conclusions or
evidentiary facts, which should not be alleged in the complaint in the first place, are We have likewise gone over the Court's 29 January 2007 decision in G.R. No. 168639 and
considered for purposes of applying the test.25 Applying the relationship test and the found no pronouncement therein that would bar the filing of the 31 July 2006 amended
nature of the controversy test already discussed in our 17 November 2010 decision, we petition by STRADEC which, as a corporation with a personality separate and distinct
find that STRADEC’s causes of action for the nullification of the loan and pledge over its from its corporators,33 has a right to protect its rights and interests over the subject SIDC
SIDC shareholdings contracted by respondents Yujuico and Sumbilla as well as the shares. Considered in this light, we find that respondents are out on a limb in asserting
avoidance of the notarial sale conducted by respondent Raymond M. Caraos both qualify that the record is be bereft of any showing that Quiambao's authority to said amended
as intra-corporate disputes.26 It cannot, therefore, be argued that said causes of action petition a quo was granted by the legitimate successor to STRADEC's Board of Directors
were misjoined with STRADEC’s third and fourth causes of action for the cancellation of which was restored into office by this Court’s 29 January 2007 decision in G.R. No.
the transfer of its shares in SIDEC’s books, the invalidation of the 30 July 2005 and 20 168639. To a great extent, this situation is attributable to the fact that Civil Case No. 7956
July 2006 SIDC stockholders’ meetings, attorney’s fees and the costs. was still on its preliminary stages when Branch 2 of the RTC of Batangas City issued its
assailed 30 August 2006 order, withholding action on STRADEC's first and causes of
Neither are we inclined to hospitably entertain respondents’ harping over the supposed action on the ground of improper venue and suspending proceedings regarding the
fact that Quiambao’s authority to represent STRADEC – as litigated in the cases pending corporation's third and fourth causes of action in view of the then pendency of G.R. No.
before the courts of Pasig City and Urdaneta City, involving the question of ownership of 168639 before this Court. Given that responsive pleadings squarely questioning
the controlling shares of stock of STRADEC as well as the legitimacy of the Board of Quiambao's authority to represent STRADEC have yet to be filed by respondents, the
Directors headed by Quiambao – pose a prejudicial question to the resolution of the matter is clearly one better threshed out before the court a quo, alongside such issues as
dispute before Branch 2 of the Batangas City RTC. A prejudicial question is defined as the validity of the transfers of STRADEC’s shares to respondents Wong and CTCII, the
that which arises in a case, the resolution of which is a logical antecedent of the issue propriety of the recording of said transfers in SIDC’s books, STRADEC’s status as a
involved therein, and the cognizance of which pertains to another tribunal.27 It is said to stockholder of SIDC and the legality of the 30 July 2005 and 20 July 2006 SIDC
come into play when a civil action and a criminal action are both pending and there stockholders’ meetings.1avvphi1
As an adjunct to the main action subject to the latter’s outcome,34 on the other hand, a power to carry into effect the foregoing, including the authority to appear on the
writ of preliminary injunction may be issued upon the concurrence of the following Corporation’s behalf, as fully to all intents and purposes as the Corporation might or
essential requisites, to wit: (1) that the invasion of the right is material and substantial; could lawfully do if personally present, and hereby ratifying and confirming all that
(2) that the right of complainant is clear and unmistakable; and, (3) that there is an CEZAR T. QUIAMBAO, or his representatives shall lawfully do by virtue hereof.
urgent and paramount necessity for the writ to prevent serious damage.35 Concurrence
of the foregoing requisites is evident from the fact that STRADEC has been deprived of its IN WITNESS WHEREOF, we have hereunto affixed our signatures this May 21, 2009 at
rights to its shareholdings and to participate in SIDC's corporate affairs as a consequence Quezon City, Philippines.
of the impugned loan and pledge as well as the transfer of the shares to respondent
Wong and CTCII. For these reasons alone, we find that STRADEC is entitled to a writ of
preliminary injunction to restrain: (a) CTCII from further exercising proprietary rights Viewed in the light of the foregoing considerations, we find no merit in CTCII's objections
over the subject shares; (b) SIDC and its officers from recognizing the transfer or further to the writ of preliminary injunction and offer to file a counterbond in the sum of
transfers of the same; (c) the implementation of the resolutions passed during the 20 ₱20,000,000.00, on the ground that the ₱10,000,000.00 injunction bond STRADEC has
July 2006 SIDC stockholders’ special meeting; and, (d) the SEC from acting on any report been required to post is grossly insufficient to cover the grave and irreparable damage
submitted in respect thereto. Far from amounting to a prejudgment of the case, the which would result from the issuance of said writ. Pursuant to Section 6, Rule 58 of the
restraint of said acts is merely in the service of the office of a writ of preliminary 1997 Rules of Civil Procedure,40 "a preliminary injunction may be dissolved if it appears
injunction, i.e., the restoration of the status quo ante as well preservation and protection after hearing that although the applicant is entitled to the injunction or restraining order,
of the rights of the litigant during the pendency of the case.36 the issuance or continuance thereof, as the case may be, would cause irreparable damage
to the party or person enjoined while the applicant can be fully compensated for such
damages as he may suffer, and the former files a bond in an amount fixed by the court on
In view of CTCII's acquisition of STRADEC's shares as well as the changes in SIDC's condition that he will pay all damages which the applicant may suffer by the denial or the
corporate structure which were effected as a consequence thereof, respondents also dissolution of the injunction or restraining order. Two conditions must concur: first, the
argue that the writ of preliminary injunction granted in the decision sought to be court in the exercise of its discretion, finds that the continuance of the injunction would
reconsidered is directed against acts already consummated. Although the general rule is cause great damage to the defendant, while the plaintiff can be fully compensated for
to the effect that a writ of preliminary injunction cannot be issued against acts already such damages as he may suffer; second, the defendant files a counterbond."41
fait accompli,37 it has been held, however, that consummated acts which are continuing
in nature may still be enjoined by the courts.38 The propriety of the grant of the
provisional injunctive writ sought by STRADEC having been established, we find that Aside from the fact that the amount of injunction bond is equivalent to the sum of the
approval of said corporation's Motion to Admit and Approve Preliminary Injunction supposed loan for which STRADEC's shares were pledged by respondents Yujuico and
Bond is in order. Contrary to respondents' harping about the lack of showing thereof in Sumbilla, we find that the projected damage to SIDC's construction, operation and
the record, Quiambao's authority to file said motion is implicit in the following 21 May maintenance of the STAR toll road is, to say the least, speculative. Even when reckoned
2009 Directors’ Certification attached to STRADEC's petition for review on certiorari, to from the commencement of the action a quo on 17 July 2006, the damage STRADEC
wit: suffered and continues to suffer as a consequence of the impugned transactions is, in
contrast, clearly beyond monetary recompense as it not only amounts to a divesture of
its ownership over said shares but, more importantly, translates into a denial of its rights
"WE, as the incumbent members of the Board of Directors of the STRATEGIC ALLIANCE to elect SIDC's officers, to participate in its corporate affairs and, as a major stockholder,
DEVELOPMENT CORPORATION (the "Corporation"), a corporation duly organized and to determine the course of its business dealings, among other matters. Moreover, the
existing under and by virtue of the laws of the Republic of the Philippines, with principal mere offer of a counterbond does not suffice to warrant the dissolution of the
office address at Quezon Boulevard, Poblacion Sur, Bayambang, Pangasinan, Philippines, preliminary writ of injunction42 issued to stop an unauthorized act. A contrary holding
do hereby certify that the following resolutions were approved by the Board, to wit: would open the gates to the use of the counterbond as a vehicle of the commission or
continuance of an unauthorized or illegal act which the injunction precisely is intended
‘RESOLVED, as it is hereby resolved that the Corporation shall file a Petition for Review to prevent.43
on Certiorari under Rule 45 of the Rules of Court to assail the Decision dated 22
December 2008 and Resolution dated 30 April 2009 in CA-G.R. SP No. 96945, entitled WHEREFORE, premises considered, respondents' motions for reconsideration and
‘Strategic Alliance Development Corporation vs. RTC of Batangas City (Branch 2), Star CTCII's offer to file a counter bond are DENIED for lack of merit. Accordingly, STRADEC's
Infrastructure Development Corporation, et al.", with an application for the issuance of a motion to admit and approve injunction bond is GRANTED.
temporary restraining order and/or writ of injunction, if deemed necessary.
SO ORDERED.
WHEREFORE, BE IT RESOLVED, as it is hereby resolved that the Corporation’s President,
CEZAR T. QUIAMBAO, shall be authorized, as he is hereby authorized: to cause the filing
of the Petition before the Supreme Court; to verify the pleadings; and to execute any
affidavit in support thereof, hereby giving and granting to CEZAR T. QUIAMBAO full
G.R. No. 170783 June 18, 2012 On April 13, 2004, petitioners filed a Complaint for the Declaration of Nullity of Elections
with Prayers for the lssuance of Temporary Restraining Orders and Writ of Preliminary
LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI, Injunction and Damages against respondents with the RTC of Manila. Before respondents
GLORIA DOMINGO and RAY VINCENT, Petitioners, could file an Answer to the original Complaint, petitioners filed an Amended
vs. Complaint, which was admitted by the RTC in an Order dated April 14, 2004.
AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG, RUDEL
PANGANIBAN, DOLORES AGBAYANI, ARLENEDAL A. YASUMA, GODOFREDO M. On April 20, 2004, before respondents could submit an Answer to the Amended
CAGUIOA and EDGARDO M. SALANDANAN,Respondents. Complaint, petitioners again filed an Urgent Ex-Parte Motion to Admit Second Amended
Complaint and for the lssuance of Ex-Parte Temporary Restraining Order Effective only for
DECISION Seventy-Two (72) Hours. It was stated in the said pleading that the case was raffled to
Branch 24, but Presiding Judge Antonio Eugenio, Jr. inhibited himself from handling the
case; and when the case was assigned to Branch 46, Presiding Judge Artemio S. Tipon
PERALTA, J.: also inhibited himself from the case.

This is a petition for review on certiorari of the Court of Appeals’ Decision1 dated July 22, On April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of Manila acted on the
2005 in CA-G.R. CV No. 87684, and its Resolution2 dated November 24, 2005, denying Motion for the Issuance of an Ex Parte Temporary Restraining Order, and issued an
petitioners’ motion for reconsideration. Order disposing, thus:

The Court of Appeals held that Judge Antonio I. De Castro of the Regional Trial Court WHEREFORE, pursuant to administrative Circular No. 20-95 of the Supreme Court, a
(RTC) of Manila, Branch 3, did not commit grave abuse of discretion in issuing the Orders seventy-two (72) hour Temporary Restraining Order is hereby issued, enjoining
dated July 21, 2004 and September 24, 2004 in Civil Case No. 04-109655, denying defendants from taking over management, or to maintain a status quo, in order to
petitioners’ Motion to Admit Second Amended Complaint. prevent further irreparable damages and prejudice to the corporation, as day-to-day
activities will be disrupted and will be paralyzed due to the legal controversy.3
The facts, as stated by the Court of Appeals, are as follows:
On the same date, April 21, 2004, respondents filed their Answer4 to the Amended
Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia Marquinez Palanca, Complaint, alleging that the election on April 2, 2004 was lawfully conducted.
Rosanna D. Imai, Gloria Domingo and Ray Vincent, the incumbent Board of Directors, set Respondents cited the Report5 of SEC Counsel Nicanor P. Patricio, who was ordered by
the annual meeting of the members of the condominium corporation and the election of the SEC to attend the annual meeting of Legaspi Towers 300, Inc. on April 2, 2004. Atty.
the new Board of Directors for the years 2004-2005 on April 2, 2004 at 5:00 p.m. at the Patricio stated in his Report that at 5:40 p.m. of April 2, 2004, a representative of the
lobby of Legaspi Towers 300, Inc. Board of the condominium corporation stated that the scheduled elections could not
proceed because the Election Committee was not able to validate the authenticity of the
Out of a total number of 5,723 members who were entitled to vote, 1,358 were supposed proxies prior to the election due to limited time available as the submission was made
to vote through their respective proxies and their votes were critical in determining the only the day before. Atty. Patricio noted that the Board itself fixed the deadline for
existence of a quorum, which was at least 2,863 (50% plus 1). The Committee on submission of proxies at 5:00 p.m. of April 1, 2004. One holder of proxy stood up and
Elections of Legaspi Towers 300, Inc., however, found most of the proxy votes, at its face questioned the motives of the Board in postponing the elections. The Board objected to
value, irregular, thus, questionable; and for lack of time to authenticate the same, this and moved for a declaration of adjournment. There was an objection to the
petitioners adjourned the meeting for lack of quorum. adjournment, which was ignored by the Board. When the Board adjourned the meeting
despite the objections of the unit owners, the unit owners who objected to the
adjournment gathered themselves at the same place of the meeting and proceeded with
However, the group of respondents challenged the adjournment of the meeting. Despite the meeting. The attendance was checked from among the members who stayed at the
petitioners' insistence that no quorum was obtained during the annual meeting held on meeting. Proxies were counted and recorded, and there was a declaration of a quorum –
April 2, 2004, respondents pushed through with the scheduled election and were elected out of a total of 5,721 votes, 2,938 were present either in person or proxy. Thereafter,
as the new Board of Directors and officers of Legaspi Towers 300, Inc. Subsequently, they ballots were prepared, proxies were counterchecked with the number of votes entitled
submitted a General Information Sheet to the Securities and Exchange Commission (SEC) to each unit owner, and then votes were cast. At about 9:30 p.m., canvassing started, and
with the following new set of officers: Amelia P. Muer, President; Samuel M. Tanchoco, by 11:30 p.m., the newly-elected members of the Board of Directors for the years 2004-
Internal Vice President; Romeo V. Tankiang, External Vice-President; Rudel H. 2005 were named.
Panganiban, Secretary; Dolores B. Agbayani, Assistant Secretary; Arlenedal A. Yasuma,
Treasurer; Godofredo M. Caguioa, Assistant Treasurer; and Edgardo M. Salandanan,
Internal Auditor. Respondents contended that from the proceedings of the election reported by SEC
representative, Atty. Patricio, it was clear that the election held on April 2, 2004 was
legitimate and lawful; thus, they prayed for the dismissal of the complaint for lack cause The second separate Order,9 also dated July 21, 2004, reads:
of action against them.
This resolves plaintiffs’ motion to amend complaint to include Legaspi Towers 300, Inc.
This case was scheduled to be re-raffled to regular courts on April 22, 2004, and was as party-plaintiff and defendants’ comment thereto. Finding no merit therein and for the
assigned to Judge Antonio I. De Castro of the RTC of Manila, Branch 3 (trial court). reasons stated in the comment, the motion is hereby DENIED.

On April 26, 2004, the trial court conducted a hearing on the injunction sought by Petitioners filed a Motion for Reconsideration of the Orders dated July 21, 2004. In the
petitioners, and issued an Order clarifying that the TRO issued by Executive Judge Enrico Order10 dated September 24, 2004, the trial court denied the motion for reconsideration
A. Lanzanas, enjoining respondents from taking over management, was not applicable as for lack of merit.
the current Board of Directors (respondents) had actually assumed management of the
corporation. The trial court stated that the status quo mentioned in the said TRO shall Petitioners filed a petition for certiorari with the Court of Appeals alleging that the trial
mean that the current board of directors shall continue to manage the affairs of the court gravely abused its discretion amounting to lack or excess of jurisdiction in issuing
condominium corporation, but the court shall monitor all income earned and expenses the Orders dated July 21, 2004 and September 24, 2004, and praying that judgment be
incurred by the corporation. The trial court stated: rendered annulling the said Orders and directing RTC Judge De Castro to admit their
Second Amended Complaint.
Precisely this complaint seeks to annul the election of the Board due to alleged
questionable proxy votes which could not have produced a quorum. As such, there is In a Decision dated July 22, 2005, the Court of Appeals dismissed the petition for lack of
nothing to enjoin and so injunction shall fail. As an answer has been filed, the case is ripe merit. It held that RTC Judge De Castro did not commit grave abuse of discretion in
for pre-trial and the parties are directed to file their pre-trial briefs by May 3, 2004. denying petitioners' Motion To Admit Second Amended Complaint.

As plaintiffs’ second amended complaint is admitted by the Court, defendants are given The Court of Appeals stated that petitioners’ complaint sought to nullify the election of
up to May 3, 2004 to file a comment thereto. In the meantime, the banks and other the Board of Directors held on April 2, 2004, and to protect and enforce their individual
persons & entities are advised to recognize the Board headed by its president, Amelia right to vote. The appellate court held that as the right to vote is a personal right of a
Muer. All transactions made by the Board and its officers for the corporation are stockholder of a corporation, such right can only be enforced through a direct action;
considered legal for all intents and purposes.6 hence, Legaspi Towers 300, Inc. cannot be impleaded as plaintiff in this case.

On May 3, 2004, respondents filed a Comment on the Motion to Amend Complaint, Petitioners’ motion for reconsideration was denied by the Court of Appeals in a
praying that the name of Legaspi Towers 300, Inc., as party-plaintiff in the Second Resolution dated November 24, 2005.
Amended Complaint, be deleted as the said inclusion by petitioners was made without
the authority of the current Board
Petitioners filed this petition raising the following issues:
of Directors, which had been recognized by the trial court in its Order dated April 26,
2004. I

During the pre-trial conference held on July 21, 2004, the trial court resolved various THE HONORABLE COURT OF APPEALS ERRED IN RESOLVING THAT PUBLIC
incidents in the case and other issues raised by the contending parties. One of the RESPONDENT-APPELLEE DID NOT COMMIT ANY WHIMSICAL, ARBITRARY
incidents acted upon by the trial court was petitioners' motion to amend complaint to AND OPPRESSIVE EXERCISE OF JUDICIAL AUTHORITY WHEN THE LATTER
implead Legaspi Towers 300, Inc. as plaintiff, which motion was denied with the issuance REVERSED HIS EARLIER RULING ALREADY ADMITTING THE SECOND
of two Orders both dated July 21, 2004. The first Order7 held that the said motion could AMENDED COMPLAINT OF PETITIONERS-APPELLANTS.
not be admitted for being improper, thus:
II
xxxx
THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO
On plaintiffs’ motion to admit amended complaint (to include Legaspi Towers 300, Inc. as RESOLVE THAT PETITIONERS-APPELLANTS HAVE NO RIGHT AS BOARD OF
plaintiff), the Court rules to deny the motion for being improper. (A separate Order of DIRECTORS TO BRING AN ACTION IN BEHALF OF LEGASPI TOWERS 300, INC.
even date is issued.) As prayed for, movants are given 10 days from today to file a motion
for reconsideration thereof, while defendants are given 10 days from receipt thereof to III
reply.8
THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO Directors to bring the action in representation of Legaspi Towers 300, Inc. Thus, the
RESOLVE THAT THE ELECTIONS CONDUCTED IN LEGASPI TOWERS 300, INC. Second Amended Complaint was intended by the petitioners as a direct suit by the
FOR THE PERIOD OF 2005 TO 2006 HAVE RENDERED THE ISSUE IN CIVIL corporation joined in by the petitioners to protect and enforce their common rights.
CASE NO. 04-10655 MOOT AND ACADEMIC.11
Petitioners contend that Legaspi Towers 300, Inc. is a real party-in- interest as it stands
Petitioners contend that the Court of Appeals erred in not finding that RTC Judge Antonio to be affected the most by the controversy, because it involves the determination of
I. De Castro committed grave abuse of discretion amounting to lack or excess of whether or not the corporation’s by-laws was properly carried out in the meeting held
jurisdiction in denying the admission of the Second Amended Complaint in the Orders on April 2, 2004, when despite the adjournment of the meeting for lack of quorum, the
dated July 21, 2004 and September 24, 2004, despite the fact that he had already ordered elections were still conducted. Although petitioners admit that the action involves their
its admission in a previous Order dated April 26, 2004. right to vote, they argue that it also involves the right of the condominium corporation to
be managed and run by the duly-elected Board of Directors, and to seek redress against
Petitioners’ contention is unmeritorious. those who wrongfully occupy positions of the corporation and who may mismanage the
corporation.
It is clear that in the Orders dated July 21, 2004, the trial court did not admit the Second
Amended Complaint wherein petitioners made the condominium corporation, Legaspi Petitioners’ argument is unmeritorious.
Towers 300, Inc., the party-plaintiff. In the Order dated September 24, 2004, denying
petitioners’ motion for reconsideration of the Orders dated July 21, 2004, the RTC The Court notes that in the Amended Complaint, petitioners as plaintiffs stated that they
explained its action, thus: are the incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc., and that
defendants, herein respondents, are the newly-elected members of the Board of
x x x The word "admitted" in the 3rd paragraph of the Order dated April 26, 2004 should Directors; while in the Second Amended Complaint, the plaintiff is Legaspi Towers 300,
read "received" for which defendants were told to comment thereon as an answer has Inc., represented by petitioners as the allegedly incumbent reconstituted Board of
been filed. It was an oversight of the clerical error in said Order. Directors of Legaspi Towers 300, Inc.

The Order of July 21, 2004 states "amended complaint" in the 3rd paragraph thereof and The Second Amended Complaint states who the plaintiffs are, thus:
so it does not refer to the second amended complaint. The amended complaint was
admitted by the court of origin – Br. 24 in its Order of April 14, 2004 as there was no 1. That the plaintiffs are: LEGASPI TOWERS 300, INC., non-stock corporation xxx duly
responsive pleading yet. represented by the incumbent reconstituted Board of Directors of Legaspi Towers 300,
Inc., namely: ELIADORA FE BOTE VERA xxx, as President; BRUNO C. HAMAN xxx, as
Nonetheless, admission of the second amended complaint is improper. Why should Director; LILY MARQUINEZ PALANCA xxx, as Secretary; ROSANNA DAVID IMAI xxx, as
Legaspi Towers 300, Inc. x x x be included as party-plaintiff when defendants are Treasurer; and members of the Board of Directors, namely: ELIZABETH GUERRERO xxx,
members thereof too like plaintiffs. Both parties are deemed to be acting in their GLORIA DOMINGO xxx, and RAY VINCENT.15
personal capacities as they both claim to be the lawful board of directors. The motion for
reconsideration for the admission of the second amended complaint is hereby DENIED.12 The Court agrees with the Court of Appeals that the Second Amended Complaint is meant
to be a derivative suit filed by petitioners in behalf of the corporation. The Court of
The courts have the inherent power to amend and control their processes and orders so Appeals stated in its Decision that petitioners justified the inclusion of Legaspi Towers
as to make them conformable to law and justice.13 A judge has an inherent right, while his 300, Inc. as plaintiff in Civil Case No. 0410655 by invoking the doctrine of derivative suit,
judgment is still under his control, to correct errors, mistakes, or injustices.14 as petitioners specifically argued, thus:

Next, petitioners state that the Court of Appeals seems to be under the impression that xxxx
the action instituted by them is one brought forth solely by way of a derivative suit. They
clarified that the inclusion of Legaspi Towers 300, Inc. as a party-plaintiff in the Second x x x [T]he sudden takeover by private respondents of the management of Legaspi
Amended Complaint was, first and foremost, intended as a direct action by the Towers 300, Inc. has only proven the rightfulness of petitioners’ move to include Legaspi
corporation acting through them (petitioners) as the reconstituted Board of Directors of Towers 300, Inc. as party-plaintiff. This is because every resolution passed by private
Legaspi Towers 300, Inc. Petitioners allege that their act of including the corporation as respondents sitting as a board result[s] in violation of Legaspi Towers 300, Inc.’s right to
party-plaintiff is consistent with their position that the election conducted by be managed and represented by herein petitioners.
respondents was invalid; hence, petitioners, under their by-laws, could reconstitute
themselves as the Board of Directors of Legaspi Towers 300, Inc. in a hold-over capacity In short, the amendment of the complaint [to include] Legaspi Towers 300, Inc. was done
for the succeeding term. By so doing, petitioners had the right as the rightful Board of in order to protect the interest and enforce the right of the Legaspi [Towers 300,] Inc. to
be administered and managed [by petitioners] as the duly constituted Board of Directors. The requisites for a derivative suit are as follows:
This is no different from and may in fact be considered as a DERIVATIVE SUIT instituted
by an individual stockholder against those controlling the corporation but is being a) the party bringing suit should be a shareholder as of the time of the act or
instituted in the name of and for the benefit of the corporation whose right/s are being transaction complained of, the number of his shares not being material;
violated.16
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on
Is a derivative suit proper in this case? the board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; and
Cua, Jr. v. Tan17 differentiates a derivative suit and an individual/class suit as follows:
c) the cause of action actually devolves on the corporation, the wrongdoing or
A derivative suit must be differentiated from individual and representative or class suits, harm having been, or being caused to the corporation and not to the particular
thus: stockholder bringing the suit.21

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts In this case, petitioners, as members of the Board of Directors of the condominium
of directors or other persons may be classified into individual suits, class suits, and corporation before the election in question, filed a complaint against the newly-elected
derivative suits. Where a stockholder or member is denied the right of inspection, his members of the Board of Directors for the years 2004-2005, questioning the validity of
suit would be individual because the wrong is done to him personally and not to the the election held on April 2, 2004, as it was allegedly marred by lack of quorum, and
other stockholders or the corporation. Where the wrong is done to a group of praying for the nullification of the said election.
stockholders, as where preferred stockholders' rights are violated, a class or
representative suit will be proper for the protection of all stockholders belonging to the As stated by the Court of Appeals, petitioners’ complaint seek to nullify the said election,
same group. But where the acts complained of constitute a wrong to the corporation and to protect and enforce their individual right to vote. Petitioners seek the nullification
itself, the cause of action belongs to the corporation and not to the individual stockholder of the election of the Board of Directors for the years 2004-2005, composed of herein
or member. Although in most every case of wrong to the corporation, each stockholder is respondents, who pushed through with the election even if petitioners had adjourned
necessarily affected because the value of his interest therein would be impaired, this fact the meeting allegedly due to lack of quorum. Petitioners are the injured party, whose
of itself is not sufficient to give him an individual cause of action since the corporation is rights to vote and to be voted upon were directly affected by the election of the new set
a person distinct and separate from him, and can and should itself sue the wrongdoer. of board of directors. The party-in-interest are the petitioners as stockholders, who
Otherwise, not only would the theory of separate entity be violated, but there would be wield such right to vote. The cause of action devolves on petitioners, not the
multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, condominium corporation, which did not have the right to vote. Hence, the complaint for
there is the difficulty of determining the amount of damages that should be paid to each nullification of the election is a direct action by petitioners, who were the members of the
individual stockholder. Board of Directors of the corporation before the election, against respondents, who are
the newly-elected Board of Directors. Under the circumstances, the derivative suit filed
However, in cases of mismanagement where the wrongful acts are committed by the by petitioners in behalf of the condominium corporation in the Second Amended
directors or trustees themselves, a stockholder or member may find that he has no Complaint is improper.
redress because the former are vested by law with the right to decide whether or not the
corporation should sue, and they will never be willing to sue themselves. The The stockholder’s right to file a derivative suit is not based on any express provision of
corporation would thus be helpless to seek remedy. Because of the frequent occurrence The Corporation Code, but is impliedly recognized when the law makes corporate
of such a situation, the common law gradually recognized the right of a stockholder to directors or officers liable for damages suffered by the corporation and its stockholders
sue on behalf of a corporation in what eventually became known as a "derivative suit." It for violation of their fiduciary duties,22 which is not the issue in this case.
has been proven to be an effective remedy of the minority against the abuses of
management. Thus, 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 Further, petitioners’ change of argument before this Court, asserting that the Second
corporate rights, whenever officials of the corporation refuse to sue or are the ones to be Amended Complaint is a direct action filed by the corporation, represented by the
sued or hold the control of the corporation. In such actions, the suing stockholder is petitioners as the incumbent Board of Directors, is an afterthought, and lacks merit,
regarded as the nominal party, with the corporation as the party-in- interest.18 considering that the newly-elected Board of Directors had assumed their function to
manage corporate affairs.23
Since it is the corporation that is the real party-in-interest in a derivative suit, then the
reliefs prayed for must be for the benefit or interest of the corporation.19 When the In fine, the Court of Appeals correctly upheld the Orders of the trial court dated July 21,
reliefs prayed for do not pertain to the corporation, then it is an improper derivative 2004 and September 24, 2004 denying petitioners’ Motion to Admit Second Amended
suit.20 Complaint.
Lastly, petitioners contend that the Court of Appeals erred in resolving that the recent
elections conducted by Legaspi Towers, 300, Inc. have rendered the issue raised via the
special civil action for certiorari before the appellate court moot and academic.

The Court of Appeals, in its Resolution dated November 24, 2005, stated:

x x x [T]he election of the corporation’s new set of directors for the years 2005-2006 has,
finally, rendered the petition at bench moot and academic. As correctly argued by private
respondents, the nullification of the orders assailed by petitioners would, therefore, be of
little or no practical and legal purpose.24

The statement of the Court of Appeals is correct.

Petitioners question the validity of the election of the Board of Directors for the years
2004-2005, which election they seek to nullify in Civil Case No. 04-109655. However, the
valid election of a new set of Board of Directors for the years 2005-2006 would, indeed,
render this petition moot and academic.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 87684, dated July 22, 2005, and its Resolution dated November 24, 2005 are
AFFIRMED.

Costs against petitioners.

SO ORDERED.
G.R. No. 181416 November 11, 2013 7. Nonetheless, on September 19, 2002, plaintiff was shocked/surprised to
receive a letter from the incumbent Corporate Secretary of the defendant
MEDICAL PLAZA MAKATI CONDOMINIUM CORPORATION, Petitioner, Medical Plaza Makati, demanding payment of alleged unpaid association dues
vs. and assessments arising from plaintiff’s condominium unit no. 1201. The said
ROBERT H. CULLEN, Respondent. letter further stressed that plaintiff is considered a delinquent member of the
defendant Medical Plaza Makati.
DECISION
x x x;
PERALTA, J.:
8. As a consequence, plaintiff was not allowed to file his certificate of candidacy
as director. Being considered a delinquent, plaintiff was also barred from
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing exercising his right to vote in the election of new members of the Board of
the Court of Appeals (CA) Decision1 dated July 10, 2007 and Resolution2 dated January Directors x x x;
25, 2008 in CA-G.R. CV No. 86614. The assailed decision reversed and set aside the
September 9, 2005 Order3 of the Regional Trial Court (RTC) of Makati, Branch 58 in Civil
Case No. 03-1018; while the assailed resolution denied the separate motions for 9. x x x Again, prior to the said election date, x x x counsel for the defendant
reconsideration filed by petitioner Medical Plaza Makati Condominium Corporation [MPMCC] sent a demand letter to plaintiff, anent the said delinquency,
(MPMCC) and Meridien Land Holding, Inc. (MLHI). explaining that the said unpaid amount is a carry-over from the obligation of
defendant Meridien. x x x;
The factual and procedural antecedents are as follows:
10. Verification with the defendant [MPMCC] resulted to the issuance of a
certification stating that Condominium Unit 1201 has an outstanding unpaid
Respondent Robert H. Cullen purchased from MLHI condominium Unit No. 1201 of the obligation in the total amount of ₱145,567.42 as of November 30, 2002, which
Medical Plaza Makati covered by Condominium Certificate of Title No. 45808 of the again, was attributed by defendant [MPMCC] to defendant Meridien. x x x;
Register of Deeds of Makati. Said title was later cancelled and Condominium Certificate of
Title No. 64218 was issued in the name of respondent.
11. Due to the seriousness of the matter, and the feeling that defendant
Meridien made false representations considering that it fully warranted to
On September 19, 2002, petitioner, through its corporate secretary, Dr. Jose Giovanni E. plaintiff that condominium unit 1201 is free and clear from all liens and
Dimayuga, demanded from respondent payment for alleged unpaid association dues and encumbrances, the matter was referred to counsel, who accordingly sent a
assessments amounting to ₱145,567.42. Respondent disputed this demand claiming that letter to defendant Meridien, to demand for the payment of said unpaid
he had been religiously paying his dues shown by the fact that he was previously elected association dues and other assessments imposed on the condominium unit and
president and director of petitioner.4 Petitioner, on the other hand, claimed that being claimed by defendant [MPMCC]. x x x;
respondent’s obligation was a carry-over of that of MLHI.5 Consequently, respondent was
prevented from exercising his right to vote and be voted for during the 2002 election of
petitioner’s Board of Directors.6 Respondent thus clarified from MLHI the veracity of 12. x x x defendant Meridien claimed however, that the obligation does not exist
petitioner’s claim, but MLHI allegedly claimed that the same had already been considering that the matter was already settled and paid by defendant Meridien
settled.7 This prompted respondent to demand from petitioner an explanation why he to defendant [MPMCC]. x x x;
was considered a delinquent payer despite the settlement of the obligation. Petitioner
failed to make such explanation. Hence, the Complaint for Damages8 filed by respondent 13. Plaintiff thus caused to be sent a letter to defendant [MPMCC] x x x. The said
against petitioner and MLHI, the pertinent portions of which read: letter x x x sought an explanation on the fact that, as per the letter of defendant
Meridien, the delinquency of unit 1201 was already fully paid and settled,
xxxx contrary to the claim of defendant [MPMCC]. x x x;

6. Thereafter, plaintiff occupied the said condominium unit no. 1201 and 14. Despite receipt of said letter on April 24, 2003, and to date however, no
religiously paid all the corresponding monthly contributions/association dues explanation was given by defendant [MPMCC], to the damage and prejudice of
and other assessments imposed on the same. For the years 2000 and 2001, plaintiff who is again obviously being barred from voting/participating in the
plaintiff served as President and Director of the Medical Plaza Makati election of members of the board of directors for the year 2003;
Condominium Corporation;
15. Clearly, defendant [MPMCC] acted maliciously by insisting that plaintiff is a
delinquent member when in fact, defendant Meridien had already paid the said
delinquency, if any. The branding of plaintiff as delinquent member was On appeal, the CA reversed and set aside the trial court’s decision and remanded the case
willfully and deceitfully employed so as to prevent plaintiff from exercising his to the RTC for further proceedings. Contrary to the RTC conclusion, the CA held that the
right to vote or be voted as director of the condominium corporation; 16. controversy is an ordinary civil action for damages which falls within the jurisdiction of
Defendant [MPMCC]’s ominous silence when confronted with claim of payment regular courts.14 It explained that the case hinged on petitioner’s refusal to confirm
made by defendant Meridien is tantamount to admission that indeed, plaintiff is MLHI’s claim that the subject obligation had already been settled as early as 1998
not really a delinquent member; causing damage to respondent.15 Petitioner’s and MLHI’s motions for reconsideration
had also been denied.16
17. Accordingly, as a direct and proximate result of the said acts of defendant
[MPMCC], plaintiff experienced/suffered from mental anguish, moral shock, Aggrieved, petitioner comes before the Court based on the following grounds:
and serious anxiety. Plaintiff, being a doctor of medicine and respected in the
community further suffered from social humiliation and besmirched reputation I.
thereby warranting the grant of moral damages in the amount of ₱500,000.00
and for which defendant [MPMCC] should be held liable;
THE COURT A QUO HAS DECIDED A QUESTION OF SUBSTANCE, NOT THERETOFORE
DETERMINED BY THE SUPREME COURT, OR HAS DECIDED IT IN A WAY NOT IN
18. By way of example or correction for the public good, and as a stern warning ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THE SUPREME COURT
to all similarly situated, defendant [MPMCC] should be ordered to pay plaintiff WHEN IT DECLARED THE INSTANT CASE AN ORDINARY ACTION FOR DAMAGES
exemplary damages in the amount of ₱200,000.00; INSTEAD OF AN INTRA-CORPORATE CONTROVERSY COGNIZABLE BY A SPECIAL
COMMERCIAL COURT.
19. As a consequence, and so as to protect his rights and interests, plaintiff was
constrained to hire the services of counsel, for an acceptance fee of II.
₱100,000.00 plus ₱2,500.00 per every court hearing attended by counsel;
THE COURT A QUO HAS DECIDED THE INSTANT CASE IN A WAY NOT IN ACCORD WITH
20. In the event that the claim of defendant [MPMCC] turned out to be true, LAW OR WITH THE APPLICABLE DECISIONS OF THE SUPREME COURT WHEN IT TOOK
however, the herein defendant Meridien should be held liable instead, by COGNIZANCE OF THE APPEAL WHILE RAISING ONLY PURE QUESTIONS OF LAW.17
ordering the same to pay the said delinquency of condominium unit 1201 in the
amount of ₱145,567.42 as of November 30, 2002 as well as the above damages,
considering that the non-payment thereof would be the proximate cause of the The petition is meritorious.
damages suffered by plaintiff;9
It is a settled rule that jurisdiction over the subject matter is determined by the
Petitioner and MLHI filed their separate motions to dismiss the complaint on the ground allegations in the complaint. It is not affected by the pleas or the theories set up by the
of lack of jurisdiction.10MLHI claims that it is the Housing and Land Use Regulatory Board defendant in an answer or a motion to dismiss. Otherwise, jurisdiction would become
(HLURB) which is vested with the exclusive jurisdiction to hear and decide the case. dependent almost entirely upon the whims of the defendant.18 Also illuminating is the
Petitioner, on the other hand, raises the following specific grounds for the dismissal of Court’s pronouncement in Go v. Distinction Properties Development and Construction,
the complaint: (1) estoppel as respondent himself approved the assessment when he Inc.:19
was the president; (2) lack of jurisdiction as the case involves an intra-corporate
controversy; (3) prematurity for failure of respondent to exhaust all intra-corporate Basic as a hornbook principle is that jurisdiction over the subject matter of a case is
remedies; and (4) the case is already moot and academic, the obligation having been conferred by law and determined by the allegations in the complaint which comprise a
settled between petitioner and MLHI.11 concise statement of the ultimate facts constituting the plaintiff’s cause of action. The
nature of an action, as well as which court or body has jurisdiction over it, is determined
On September 9, 2005, the RTC rendered a Decision granting petitioner’s and MLHI’s based on the allegations contained in the complaint of the plaintiff, irrespective of
motions to dismiss and, consequently, dismissing respondent’s complaint. whether or not the plaintiff is entitled to recover upon all or some of the claims asserted
therein. The averments in the complaint and the character of the relief sought are the
ones to be consulted. Once vested by the allegations in the complaint, jurisdiction also
The trial court agreed with MLHI that the action for specific performance filed by remains vested irrespective of whether or not the plaintiff is entitled to recover upon all
respondent clearly falls within the exclusive jurisdiction of the HLURB.12 As to petitioner, or some of the claims asserted therein. x x x20
the court held that the complaint states no cause of action, considering that respondent’s
obligation had already been settled by MLHI. It, likewise, ruled that the issues raised are
intra-corporate between the corporation and member.13 Based on the allegations made by respondent in his complaint, does the controversy
involve intra-corporate issues as would fall within the jurisdiction of the RTC sitting as a
special commercial court or an ordinary action for damages within the jurisdiction of condominium whose condominium project was registered with and licensed by the
regular courts? HLURB, the latter has the exclusive jurisdiction. In sustaining the denial of the motion to
dismiss, the Court held that the dispute as to the validity of the assessments is purely an
In determining whether a dispute constitutes an intra-corporate controversy, the Court intra-corporate matter between petitioner and respondent and is thus within the
uses two tests, namely, the relationship test and the nature of the controversy test. 21 exclusive jurisdiction of the RTC sitting as a special commercial court. More so in this
case as respondent repeatedly questioned his characterization as a delinquent member
and, consequently, petitioner’s decision to bar him from exercising his rights to vote and
An intra-corporate controversy is one which pertains to any of the following be voted for. These issues are clearly corporate and the demand for damages is just
relationships: (1) between the corporation, partnership or association and the public; (2) incidental. Being corporate in nature, the issues should be threshed out before the RTC
between the corporation, partnership or association and the State insofar as its sitting as a special commercial court. The issues on damages can still be resolved in the
franchise, permit or license to operate is concerned; (3) between the corporation, same special commercial court just like a regular RTC which is still competent to tackle
partnership or association and its stockholders, partners, members or officers; and (4) civil law issues incidental to intra-corporate disputes filed before it.28
among the stockholders, partners or associates themselves.22 Thus, under the
relationship test, the existence of any of the above intra-corporate relations makes the
case intra-corporate.23 Moreover, Presidential Decree No. 902-A enumerates the cases over which the Securities
and Exchange Commission (SEC) exercises exclusive jurisdiction:
Under the nature of the controversy test, "the controversy must not only be rooted in the
existence of an intra-corporate relationship, but must as well pertain to the enforcement xxxx
of the parties’ correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation."24 In other words, b) Controversies arising out of intra-corporate or partnership relations,
jurisdiction should be determined by considering both the relationship of the parties as between and among stockholders, members or associates; between any or all of
well as the nature of the question involved.25 them and the corporation, partnership or association of which they are
stockholders, members, or associates, respectively; and between such
Applying the two tests, we find and so hold that the case involves intra-corporate corporation, partnership or association and the State insofar as it concerns
controversy. It obviously arose from the intra-corporate relations between the parties, their individual franchise or right to exist as such entity; and
and the questions involved pertain to their rights and obligations under the Corporation
Code and matters relating to the regulation of the corporation.26 c) Controversies in the election or appointment of directors, trustees, officers,
or managers of such corporations, partnerships, or associations.29
Admittedly, petitioner is a condominium corporation duly organized and existing under
Philippine laws, charged with the management of the Medical Plaza Makati. Respondent, To be sure, this action partakes of the nature of an intra-corporate controversy, the
on the other hand, is the registered owner of Unit No. 1201 and is thus a jurisdiction over which pertains to the SEC. Pursuant to Section 5.2 of Republic Act No.
stockholder/member of the condominium corporation. Clearly, there is an intra- 8799, otherwise known as the Securities Regulation Code, the jurisdiction of the SEC
corporate relationship between the corporation and a stockholder/member. over all cases enumerated under Section 5 of Presidential Decree No. 902-A has been
transferred to RTCs designated by this Court as Special Commercial Courts.30 While the
The nature of the action is determined by the body rather than the title of the CA may be correct that the RTC has jurisdiction, the case should have been filed not with
complaint.1âwphi1 Though denominated as an action for damages, an examination of the the regular court but with the branch of the RTC designated as a special commercial
allegations made by respondent in his complaint shows that the case principally dwells court. Considering that the RTC of Makati City, Branch 58 was not designated as a special
on the propriety of the assessment made by petitioner against respondent as well as the commercial court, it was not vested with jurisdiction over cases previously cognizable by
validity of petitioner’s act in preventing respondent from participating in the election of the SEC.31The CA, therefore, gravely erred in remanding the case to the RTC for further
the corporation’s Board of Directors. Respondent contested the alleged unpaid dues and proceedings.
assessments demanded by petitioner.
Indeed, Republic Act (RA) No. 9904, or the Magna Carta for Homeowners and
The issue is not novel. The nature of an action involving any dispute as to the validity of Homeowners’ Associations, approved on January 7, 2010 and became effective on July
the assessment of association dues has been settled by the Court in Chateau de Baie 10, 2010, empowers the HLURB to hear and decide inter-association and/or intra-
Condominium Corporation v. Moreno.27 In that case, respondents therein filed a association controversies or conflicts concerning homeowners’ associations. However,
complaint for intra-corporate dispute against the petitioner therein to question how it we cannot apply the same in the present case as it involves a controversy between a
calculated the dues assessed against them, and to ask an accounting of association dues. condominium unit owner and a condominium corporation. While the term association as
Petitioner, however, moved for the dismissal of the case on the ground of lack of defined in the law covers homeowners’ associations of other residential real property
jurisdiction alleging that since the complaint was against the owner/developer of a which is broad enough to cover a condominium corporation, it does not seem to be the
legislative intent. A thorough review of the deliberations of the bicameral conference
committee would show that the lawmakers did not intend to extend the coverage of the are usually owned by the condominium corporation. Unlike a subdivision where the
law to such kind of association. We quote hereunder the pertinent portion of the open spaces and/or the common areas are not necessarily owned by the association.
Bicameral Conference Committee’s deliberation, to wit: Because sometimes --- generally these are donated to the municipality or to the city. And
it is only when the city or municipality gives the approval or the conformity that this is
THE CHAIRMAN (SEN. ZUBIRI). Let’s go back, Mr. Chair, very quickly on homeowners. donated to the homeowners’ association. But generally, under PD [Presidential Decree]
957, it’s donated. In the Condominium Corporation, hindi. Lahat ng mga open spaces and
common areas like corridors, the function rooms and everything, are owned by the
THE ACTING CHAIRMAN (REP. ZIALCITA). Ang sa akin lang, I think our views are similar, corporation. So that’s one main issue that can be conflicting.
Your Honor, Senator Zubiri, the entry of the condominium units might just complicate
the whole matters. So we’d like to put it on record that we’re very much concerned about
the plight of the Condominium Unit Homeowners’ Association. But this could very well THE CHAIRMAN (SEN. ZUBIRI). I’ll just ask for a one-minute suspension so we can talk.
be addressed on a separate bill that I’m willing to co-sponsor with the distinguished
Senator Zubiri, to address in the Condominium Act of the Philippines, rather than THE ACTING CHAIRMAN (REP. ZIALCITA). Unless you want to put a catchall phrase like
address it here because it might just create a red herring into the entire thing and it will what we did in the Senior Citizen’s Act. Something like, to the extent --- paano ba iyon?
just complicate matters, hindi ba? To the extent that it is practicable and applicable, the rights and benefits of the
homeowners, are hereby extended to the --- mayroon kaming ginamit na phrase eh...to
THE CHAIRMAN (SEN. ZUBIRI). I also agree with you although I sympathize with them--- the extent that it be practicable and applicable to the unit homeoweners, is hereby
although we sympathize with them and we feel that many times their rights have been extended, something like that. It’s a catchall phrase. But then again, it might create a...
also violated by abusive condominium corporations. However, there are certain things
that we have to reconcile. There are certain issues that we have to reconcile with this MR. JALANDONI. It will become complicated. There will be a lot of conflict of laws
version. between the two laws.

In the Condominium Code, for example, they just raised a very peculiar situation under THE ACTING CHAIRMAN (REP. ZIALCITA). Kaya nga eh. At saka, I don’t know. I think the
the Condominium Code --- Condominium Corporation Act. It’s five years the proxy, --- mayroon naman silang protection sa ano eh, di ba? Buyers decree doon sa
whereas here, it’s three years. So there would already be violation or there will be Condominium Act. I’m sure there are provisions there eh. Huwag na lang, huwag na lang.
already a problem with their version and our version. Sino ang matutupad doon? Will it
be our version or their version? MR. JALANDONI. Mr. Chairman, I think it would be best if your previous comments that
you’d be supporting an amendment.1âwphi1 I think that would be --- Well, that would be
So I agree that has to be studied further. And because they have a law pertaining to the the best course of action with all due respect.
condominium housing units, I personally feel that it would complicate matters if we
include them. Although I agree that they should be looked after and their problems be THE ACTING CHAIRMAN (REP. ZIALCITA). Yeah. Okay. Thank you. So iyon na lang final
looked into. proposal naming ‘yung catchall phrase, "With respect to the..."32

Probably we can ask our staff, Your Honor, to come up already with the bill although we xxxx
have no more time. Hopefully we can tackle this again on the 15th Congress. But I agree
with the sentiments and the inputs of the Honorable Chair of the House panel.
THE CHAIRMAN (SEN. ZUBIRI). xxx And so, what is their final decision on the definition
of homeowners?
May we ask our resource persons to also probably give comments?
THE ACTING CHAIRMAN (REP. ZIALCITA).
Atty. Dayrit.
We stick to the original, Mr. Chairman. We’ll just open up a whole can of worms and a
MR. DAYRIT. whole new ball game will come into play. Besides, I am not authorized, neither are you,
by our counterparts to include the condominium owners.
Yes I agree with you. There are many, I think, practices in their provisions in the
Condominium Law that may be conflicting with this version of ours. THE CHAIRMAN (SEN. ZUBIRI).

For instance, in the case of, let’s say, the condominium, the so-called common areas Basically that is correct. We are not authorized by the Senate nor – because we have
and/or maybe so called open spaces that they may have, especially common areas, they discussed this lengthily on the floor, actually, several months on the floor. And we don’t
have the authority as well for other Bicam members to add a provision to include a
separate entity that has already their legal or their established Republic Act tackling on
that particular issue. But we just like to put on record, we sympathize with the plight of
our friends in the condominium associations and we will just guarantee them that we
will work on an amendment to the Condominium Corporation Code. So with that – we
skipped, that is correct, we have to go back to homeowners’ association definition, Your
Honor, because we had skipped it altogether. So just quickly going back to Page 7
because there are amendments to the definition of homeowners. If it is alright with the
House Panel, adopt the opening phrase of Subsection 7 of the Senate version as opening
phrase of Subsection 10 of the reconciled version.

x x x x33

To be sure, RA 4726 or the Condominium Act was enacted to specifically govern a


condominium. Said law sanctions the creation of the condominium corporation which is
especially formed for the purpose of holding title to the common area, in which the
holders of separate interests shall automatically be members or shareholders, to the
exclusion of others, in proportion to the appurtenant interest of their respective
units.34 The rights and obligations of the condominium unit owners and the
condominium corporation are set forth in the above Act.

Clearly, condominium corporations are not covered by the amendment. Thus, the intra-
corporate dispute between petitioner and respondent is still within the jurisdiction of
the RTC sitting as a special commercial court and not the HLURB. The doctrine laid down
by the Court in Chateau de Baie Condominium Corporation v. Moreno 35 which in turn
cited Wack Wack Condominium Corporation, et al v. CA36 is still a good law.

WHEREFORE, we hereby GRANT the petition and REVERSE the Court of Appeals
Decision dated July 10, 2007 and Resolution dated January 25, 2008 in CA-G.R. CV No.
86614. The Complaint before the Regional Trial Court of Makati City, Branch 58, which is
not a special commercial court, docketed as Civil Case No. 03-1018 is ordered DISMISSED
for lack of jurisdiction. Let the case be REMANDED to the Executive Judge of the Regional
Trial Court of Makati City for re-raffle purposes among the designated special
commercial courts.

SO ORDERED.
G.R. No. 201675 June 19, 2013 issued a check in the amount of $1,000,000.00 payable to "Juanito Ang and/or Anecita
Ang and/or Roberto Ang and/or Rachel Ang." Nancy was a former stockholder of SMBI,
JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), but she no longer appears in SMBI’s General Information Sheets as early as 1996. 7 Nancy
INC.,* Petitioner, and Theodore are now currently residing in the United States. There was no written loan
vs. agreement, in view of the close relationship between the parties. Part of the loan was
SPOUSES ROBERTO and RACHEL ANG, Respondents. also used to purchase real properties for SMBI, for Juanito, and for Roberto.8

DECISION On 22 December 2005, SMBI increased its authorized capital stock to ₱10,000,000.00.
The Certificate of Increase of Capital Stock was signed by Juanito, Anecita, Roberto, and
Rachel as directors of SMBI.9 Juanito claimed, however, that the increase of SMBI’s
CARPIO, J.: capital stock was done in contravention of the Corporation Code.10 According to Juanito,
when he and Anecita left for Canada:
The Case
x x x Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through
This petition for review1 assails the Decision2 of the Court of Appeals-Cebu (CA-Cebu) the employment of sugar coated words, they were able to successfully manipulate the
dated 20 September 2011 in CA-G.R. SP No. 05546. The CA-Cebu reversed and set aside stocks sharings between themselves at 50-50 under the condition that the procedures
the Order3 of the Regional Trial Court, Branch 53, Bacolod City (RTC Bacolod) dated 27 mandated by the Corporation Code on increase of capital stock be strictly observed
September 2010 in Commercial Court Case No. 09-070 entitled Sunrise Marketing (valid Board Meeting). No such meeting of the Board to increase capital stock
(Bacolod), Inc., represented by Juanita Ang -v: Spouses Roberto and Rachel Ang. materialized. It was more of an accommodation to buy peace x x x.11

The Facts Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On
24 November 2008, Nancy and Theodore, through their counsel here in the Philippines,
Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the sent a demand letter to "Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto L.
Ang family.4 Its current stockholders and their respective stockholdings are as follows:5 Ang/Rachel L. Ang" for payment of the principal amounting to $1,000,000.00 plus
interest at ten percent (10%) per annum, for a total of $2,585,577.37 within ten days
from receipt of the letter. 12 Roberto and Rachel then sent a letter to Nancy and
Stockholder Number of Shares Theodore’s counsel on 5 January 2009, saying that they are not complying with the
demand letter because they have not personally contracted a loan from Nancy and
Juanito Ang 8,750 Theodore.

Anecita Ang 1,250


On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and
Jeannevie Ang 2,500 Settlement Agreement (Settlement Agreement) and an Extra-Judicial Real Estate
Mortgage (Mortgage). Under the foregoing instruments, Juanito and Anecita admitted
Roberto Ang 8,750 that they, together with Roberto and Rachel, obtained a loan from Nancy and Theodore
for $1,000,000.00 on 31 July 1995 and such loan shall be secured by:
Rachel Ang 3,750
a) Juanito and Anecita’s fifty percent share over a parcel of land registered in
Total 25,000 the name of SMBI;

Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings. Anecita Limoco-Ang b) a parcel of land registered in the name of Juanito Ang;
(Anecita) is Juanito’s wife and Jeannevie is their daughter. Roberto was elected President
of SMBI, while Juanito was elected as its Vice President. Rachel Lu-Ang (Rachel) and c) Juanito’s fifty percent share in 7 parcels of land registered in his and
Anecita are SMBI’s Corporate Secretary and Treasurer, respectively. Roberto’s name;

On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her husband, d) a parcel of land registered in the name of Roberto;
Theodore Ang (Theodore), agreed to extend a loan to settle the obligations of SMBI and
other corporations owned by the Ang family, specifically Bayshore Aqua Culture
e) a parcel of land registered in the name of Rachel; and
Corporation, Oceanside Marine Resources and JR Aqua Venture.6 Nancy and Theodore
f) Roberto and Rachel’s fifty percent share in 2 parcels of land registered in the application for appointment as Receiver of SMBI, was directed by the RTC Bacolod to
name of their son, Livingstone L. Ang (Livingstone), and in another lot furnish the required Receivership Bond.17 On the same date, Roberto and Rachel moved
registered in the name of Livingstone and Alvin Limoco Ang.13 to quash the writ of attachment and set aside the break open order and appointment of
receiver.18 They claimed that these were issued in violation of their right to due process:
A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy and Theodore, under a
Special Power of Attorney which was not attached as part of the Settlement Agreement Records of this case would show that the complaint was filed before the RTC Bacolod at
or the Mortgage, nor included in the records of this case. 2:50 p.m. of January 29, 2009. x x x Counsel for the defendant-spouses went to the RTC
Bacolod at around 3:00 p.m. on January 29, 2009 to inquire on the status of the case and
Thereafter, Juanito filed a "Stockholder Derivative Suit with prayer for an ex-parte Writ was informed that the last pleading on record is his entry of appearance with the
of Attachment/Receivership" (Complaint) before the RTC Bacolod on 29 January 2009. conformity of the defendant Rachel Ang. Counsel was however informed by the clerk of
He alleged that "the intentional and malicious refusal of defendant Sps. Roberto and court that the Honorable Judge has already issued an order directing the issuance of the
Rachel Ang to settle their 50% share x x x of the total obligation x x x will definitely affect writ of preliminary attachment, receivership and break open order but said order was
the financial viability of plaintiff SMBI."14 Juanito also claimed that he has been "illegally not officially released yet x x x. Due to the undersigned counsel’s insistence, however,
excluded from the management and participation in the business of [SMBI through] said clerk of court of this Honorable Court furnished him a copy of said order x x x. The
force, violence and intimidation" and that Rachel and Roberto have seized and carted clerk of court and the clerk in charge of civil cases assured counsel that no writ of
away SMBI’s records from its office.15 preliminary attachment was prepared or issued x x x. Despite such assurance x x x [and
counsel’s advice that they shall move to quash the order the following morning], that
afternoon, the clerk of court x x x clandestinely, hurriedly and surreptitiously, for
The Complaint sought the following reliefs: reasons known only to her, x x x prepared the writ of attachment x x x.19

a) Issuance of an ex-parte Writ of Attachment and/or Garnishment, with a In her Verified Answer Ad Cautelam which was filed on 10 February 2009, Rachel prayed
Break Open Order covering the assets of the spouses Roberto and Rachel Ang, that the Complaint be dismissed as it was not a bona fide derivative suit as defined under
or any interest they may have against third parties; the Interim Rules of Procedure for Intra-Corporate Controversies20 (Interim Rules).
According to Rachel, the Complaint, although labelled as a derivative suit, is actually a
b) Placement of SMBI under Receivership pending resolution of the case; collection suit since the real party in interest is not SMBI, but Nancy and Theodore:

c) Enforcement of Juanito’s right to actively participate in the management of The cause of action does not devolve on the corporation as the alleged harm or wrong
SMBI; pertains to the right of the Sps. Theodore and Nancy Ang, as creditors, to collect the
amount allegedly owed to them. x x x
d) Issuance of an Order compelling the Spouses Roberto and Rachel Ang to:
xxxx
i. Render an accounting of the utilization of the loan amounting to
$2,585,577.37 or ₱120,229,347.26; That the instant suit is for the benefit of a non-stockholder and not the corporation is
obvious when the primary relief prayed for in the Complaint which is for the defendants
ii. Pay fifty percent of the aforementioned loan, amounting to "to pay the amount of Php 60,114,673.62 plus interest which is 50% of the loan
₱60,114,673.62; obligations of plaintff [SMBI] to its creditor Sps. Theodore and Nancy Ang." Otherwise
stated, the instant suit is nothing but a complaint for sum of money shamelessly masked
as a derivative suit.21
iii. Explain why Nancy was removed as a stockholder as far as SMBI’s
reportorial requirements with the SEC are concerned;
Rachel also argued that the Complaint failed to allege that Juanito "exerted all reasonable
efforts to exhaust all intra-corporate remedies available under the articles of
iv. Restore Juanito’s right to actively manage the affairs of the incorporation, by-laws, laws or rules governing the corporation to obtain the relief he
corporation; and desires," as required by the Interim Rules.

v. Pay attorney’s fees amounting to ₱20,000.00. During cross-examination, Juanito admitted that there was no prior demand for
accounting or liquidation nor any written objection to SMBI’s increase of capital stock.
On 29 January 2009, the RTC Bacolod issued an Order16 granting the application for an He also conceded that the loan was extended by persons who are not stockholders of
ex-parte writ of attachment and break open order. Atty. Jerry Basiao, who filed an SMBI. Thus, Rachel filed a Motion for Preliminary Hearing on Affirmative Defenses on 27
November 2009, arguing that in view of Juanito’s admissions, the Complaint should be The RTC Bacolod found that the issuance of the checks to settle the purported
dismissed pursuant to Section 1 of the Interim Rules. Juanito filed his Opposition thereto obligations to Rachel’s relatives, as well as the removal of Nancy as a stockholder in
on 8 January 2010,22 arguing that applying this Court’s ruling in Hi-Yield Realty, Inc. v. SMBI’s records as filed with the SEC, shows that Rachel and Roberto committed fraud.
Court of Appeals,23 the requirement for exhaustion of intra-corporate remedies is no The Order likewise stated that the requirement of exhaustion of intra-corporate
longer needed when the corporation itself is "under the complete control of the persons remedies is no longer necessary since Rachel and Roberto exercised complete control
against whom the suit is filed." Juanito also alleged that he and Anecita were deceived over SMBI.
into signing checks to pay off bogus loans purportedly extended by Rachel’s relatives in
favor of SMBI. Some of the checks were payable to cash, and were allegedly deposited in Aggrieved, Rachel filed a Petition for Certiorari with the CA-Cebu.
Rachel’s personal account.24 He also claimed that Rachel’s Motion is disallowed under
the Interim Rules.
The Ruling of the CA-Cebu
On 9 February 2009, Juanito moved that Rachel and her daughter, Em Ang (Em), as well
as their counsel, Atty. Filomeno Tan, Jr. (Atty. Tan) be held in contempt. Juanito claimed On 20 September 2011, the CA-Cebu promulgated its Decision which reversed and set
that on the date the writ of attachment and break open order were issued, Atty. Tan, aside the Order of the RTC Bacolod dated 27 September 2010. According to the CA-Cebu,
accompanied by Rachel and Em, "arrogantly demanded from the Clerk in charge of Civil the Complaint filed by Juanito should be dismissed because it is a harassment suit, and
Cases that he be furnished a copy of the [said orders] x x x otherwise he will tear the not a valid derivative suit as defined under the Interim Rules. The CA-Cebu also found
records of the subject commercial case." Juanito also accused Atty. Tan of surreptitiously that Juanito failed to exhaust intra-corporate remedies and that the loan extended by
photocopying the said orders prior to service of the summons, Complaint, Writ of Nancy and Theodore was not SMBI’s corporate obligation. There is nothing on record to
Attachment and Attachment Bond. According to Juanito, the purpose of obtaning a copy show that non-payment of the loan will result in any damage or prejudice to SMBI.
of the orders was to thwart its implementation. Thus, when the authorities proceeded to
the SMBI premises to enforce the orders, they found that the place was padlocked, and Juanito then filed a Motion for Reconsideration with Prayer for Voluntary Inhibition on
that all corporate documents and records were missing. On 14 December 2010, the 28 October 2011. In his Motion, Juanito pointed out that Rachel filed her Petition for
Sheriff and other RTC Bacolod employees then filed a Verified Complaint against Atty. Certiorari without previously filing a Motion for Reconsideration, warranting the
Tan before this Court, which also contained the foregoing allegations.25 dismissal of the said Petition. The CA-Cebu denied the Motion.

Rachel then filed a Reply on 27 January 2010, claiming that Juanito’s reliance on the Hi- Hence, this petition.
Yield case is misplaced:
The Issues
The facts x x x of this case are strikingly different from that in Hi-Yield Realty. In that
case, the Supreme Court noted that the complaining stockholder was a minority The issues raised in the instant petition are:
stockholder. However, in the case at bar, Juanito Ang is one of the biggest stockholders of
[SMBI]. x x x He is a member of [SMBI’s] Board of Directors and is even the vice-
president thereof. Furthermore, in Hi-Yield Realty, the Supreme Court noted that the <
complaining stockholder was excluded from the affairs of the corporation. However, the p align="justify">I. Whether based on the allegations of the complaint, the
evidence thus far presented, particularly Juanito Ang’s admission, show that he and his nature of the case is one of a derivative suit or not.
wife, Anecita, participate in the disbursement of [SMBI’s] funds x x x.26
Corollary to the above, whether the Honorable Court of Appeals erred x x x in
Juanito filed his Rejoinder on 2 March 2010. ordering the dismissal of the Complaint on the ground that the case is not a
derivative suit.
The Ruling of the RTC Bacolod
II. Whether the Honorable Court of Appeals x x x seriously erred in considering
evidence aliunde, that is, other than the four corners of the complaint, in
On 27 September 2010, the RTC Bacolod issued an Order which stated that: determining the nature of the complaint, in utter violation of the doctrine that
the jurisdiction is determined by law and allegations of the complaint alone.
WHEREFORE, premises considered, the court hereby rules that the present action is a
DERIVATIVE SUIT and the Motion to Dismiss based on Affirmative Defenses raised by III. Granting arguendo, but without necessarily admitting that the complaint is
defendants is DENIED for lack of merit.27 not one of a derivative suit, but only an ordinary civil action, whether the
Honorable Court of Appeals x x x gravely erred in dismissing the petition
entirely, when the Regional Trial Court a quo has jurisdiction also over the case (4) The suit is not a nuisance or harassment suit.
as an ordinary civil action, and can just proceed to hear the same as such.28
Applying the foregoing, we find that the Complaint is not a derivative suit. The Complaint
The Ruling of this Court failed to show how the acts of Rachel and Roberto resulted in any detriment to SMBI. The
CA-Cebu correctly concluded that the loan was not a corporate obligation, but a personal
The petition has no merit. debt of the Ang brothers and their spouses. The check was issued to "Juanito Ang and/or
Anecita Ang and/or Roberto Ang and/or Rachel Ang" and not SMBI. The proceeds of the
loan were used for payment of the obligations of the other corporations owned by the
We uphold the CA-Cebu’s finding that the Complaint is not a derivative suit. A derivative Angs as well as the purchase of real properties for the Ang brothers. SMBI was never a
suit is an action brought by a stockholder on behalf of the corporation to enforce party to the Settlement Agreement or the Mortgage. It was never named as a co-debtor
corporate rights against the corporation’s directors, officers or other insiders.29 Under or guarantor of the loan. Both instruments were executed by Juanito and Anecita in their
Sections 2330 and 3631 of the Corporation Code, the directors or officers, as provided personal capacity, and not in their capacity as directors or officers of SMBI. Thus, SMBI is
under the by-laws,32 have the right to decide whether or not a corporation should sue. under no legal obligation to satisfy the obligation.
Since these directors or officers will never be willing to sue themselves, or impugn their
wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in
the name of the corporation to hold these directors and officers accountable.33 In The fact that Juanito and Anecita attempted to constitute a mortgage over "their" share
derivative suits, the real party ininterest is the corporation, while the stockholder is a in a corporate asset cannot affect SMBI. The Civil Code provides that in order for a
mere nominal party. mortgage to be valid, the mortgagor must be the "absolute owner of the thing x x x
mortgaged."35 Corporate assets may be mortgaged by authorized directors or officers on
behalf of the corporation as owner, "as the transaction of the lawful business of the
This Court, in Yu v. Yukayguan,34 explained: corporation may reasonably and necessarily require."36 However, the wording of the
Mortgage reveals that it was signed by Juanito and Anecita in their personal capacity as
The Court has recognized that a stockholder’s right to institute a derivative suit is not the "owners" of a pro-indiviso share in SMBI’s land and not on behalf of SMBI:
based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate This Mortgage is made and executed by and between:
directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement,
waste or dissipation of corporate assets because of a special injury to him for which he is Spouses JUANITO and ANECITA ANG, of legal age, Filipino citizens, residents of Sunrise
otherwise without redress. In effect, the suit is an action for specific performance of an Marketing Building at Hilado Street, Capitol Shopping Center, Bacolod City, hereinafter
obligation owed by the corporation to the stockholders to assist its rights of action when referred to as the MORTGAGORS;
the corporation has been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection. The basis of a stockholder’s Spouses THEODORE and NANCY ANG, x x x hereinafter referred to as the MORTGAGEES
suit is always one in equity. However, it cannot prosper without first complying with the represented in this instance through their attorney-in-fact, Mr. Kenneth Locsin;
legal requisites for its institution. (Emphasis in the original)
xxxx
Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative
suits: In order to ensure payment x x x the MORTGAGORS hereby CONVEY unto the
MORTGAGEES by way of EXTRA-JUDICIAL REAL ESTATE MORTGAGE their 50% rights
(1) The person filing the suit must be a stockholder or member at the time the and interests over the following real properties to wit:
acts or transactions subject of the action occurred and the time the action was
filed; a. Those registered in the name of SUNRISE MARKETING (BACOLOD), INC. x x x

(2) He must have exerted all reasonable efforts, and alleges the same with x x x x37 (Emphasis supplied)
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires; Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets. They do
not own pro-indiviso shares, and therefore, cannot mortgage the same except in their
capacity as directors or officers of SMBI.
(3) No appraisal rights are available for the act or acts complained of; and
We also find that there is insufficient evidence to suggest that Roberto and Rachel (3) Legal and factual basis of the complaint;
fraudulently and wrongfully removed Nancy as a stockholder in SMBI’s reportorial
requirements. As early as 2005, when SMBI increased its capital stock, Juanito and (4) Availability of appraisal rights for the act or acts complained of; and
Anecita already knew that Nancy was not listed as a stockholder of SMBI. However, they
attempted to rectify the error only in 2009, when the Complaint was filed. That it took
four years for them to make any attempt to question Nancy’s exclusion as stockholder (5) Prejudice or damage to the corporation, partnership, or association in
negates their allegation of fraud. relation to the relief sought.

Since damage to the corporation was not sufficiently proven by Juanito, the Complaint In case of nuisance or harassment suits, the court may, motu proprio or upon motion,
cannot be considered a bona fide derivative suit. A derivative suit is one that seeks forthwith dismiss the case.
redress for injury to the corporation, and not the stockholder. No such injury was proven
in this case. Records show that Juanito, apart from being Vice President, owns the highest number of
shares, equal to those owned by Roberto. Also, as explained earlier, there appears to be
The Complaint also failed to allege that all available corporate remedies under the no damage to SMBI if the loan extended by Nancy and Theodore remains unpaid. The CA-
articles of incorporation, by-laws, laws or rules governing the corporation were Cebu correctly concluded that "a plain reading of the allegations in the Complaint would
exhausted, as required under the Interim Rules. The CA-Cebu, applying our ruling in the readily show that the case x x x was mainly filed to collect a debt allegedly extended by
Yu case, pointed out: the spouses Theodore and Nancy Ang to [SMBI]. Thus, the aggrieved party is not SMBI x x
x but the spouses Theodore and Nancy Ang, who are not even x x x stockholders."39
x x x No written demand was ever made for the board of directors to address private
respondent Juanito Ang’s concerns.1âwphi1 WHEREFORE, we DENY the petition. We AFFIRM the 20 September 2011 Decision of the
Court of Appeals-Cebu in CA-G.R. SP No. 05546.
The fact that [SMBI] is a family corporation does not exempt private respondent Juanito
Ang from complying with the Interim Rules. In the x x x Yu case, the Supreme Court held SO ORDERED.
that a family corporation is not exempt from complying with the clear requirements and
formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws
or rules which state that there is a distinction between x x x family corporations x x x and
other types of corporations in the institution by a stockholder of a derivative suit.38

Furthermore, there was no allegation that there was an attempt to remove Rachel or
Roberto as director or officer of SMBI, as permitted under the Corporation Code and the
by-laws of the corporation. Thus, the Complaint failed to satisfy the requirements for a
derivative suit under the

Interim Rules.

The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a
nuisance or harassment suit under Section 1(b) of the Interim Rules. Section 1(b) thereof
provides:

b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits
are prohibited. In determining whether a suit is a nuisance or harassment suit, the court
shall consider, among others, the following:

(1) The extent of the shareholding or interest of the initiating stockholder or


member;

(2) Subject matter of the suit;


G.R. No. 202664, November 20, 2015 case.

MANUEL LUIS C. GONZALES AND FRANCIS MARTIN D. GONZALES, Petitioners, v. GJH Dissatisfied, petitioners filed a motion for reconsideration,16 arguing that they filed the
LAND, INC. (FORMERLY KNOWN AS S.J. LAND, INC.), CHANG HWAN JANG A.K.A. case with the Office of the Clerk of Court of the RTC of Muntinlupa City which assigned
STEVE JANG, SANG RAK KIM, MARIECHU N. YAP, AND ATTY. ROBERTO P. MALLARI the same to Branch 276 by raffle.17 As the raffle was beyond their control, they should
II, Respondent. not be made to suffer the consequences of the wrong assignment of the case, especially
after paying the filing fees in the amount of P235,825.00 that would be for naught if the
dismissal is upheld.18 They further maintained that the RTC has jurisdiction over intra-
DECISION corporate disputes under Republic Act No. (RA) 8799,19 but since the Court selected
specific branches to hear and decide such suits, the case must, at most, be transferred or
PERLAS-BERNABE, J.: raffled off to the proper branch.20

This is a direct recourse to the Court, via a petition for review on certiorari,1 from the In an Order21 dated July 9, 2012, Branch 276 denied the motion for reconsideration,
Orders dated April 17, 20122 and July 9, 20123 of the Regional Trial Court (RTC) of holding that it has no authority or power to order the transfer of the case to the proper
Muntinlupa City, Branch 276 (Branch 276) dismissing Civil Case No. 11-077 for lack of Special Commercial Court, citing Calleja v. Panday22 (Calleja); hence, the present petition.
jurisdiction.
The Issue Before the Court
The Facts
The essential issue for the Court's resolution is whether or not Branch 276 of the RTC of
On August 4, 2011, petitioners Manuel Luis C. Gonzales4 and Francis Martin D. Gonzales Muntinlupa City erred in dismissing the case for lack of jurisdiction over the subject
(petitioners) filed a Complaint5 for "Injunction with prayer for Issuance of Status matter.
Quo Order, Three (3) and Twenty (20)-Day Temporary Restraining Orders, and Writ of
Preliminary Injunction with Damages" against respondents GJH Land, Inc. (formerly The Court's Ruling
known as S.J. Land, Inc.), Chang Hwan Jang, Sang Rak Kim, Mariechu N. Yap, and Atty.
Roberto P. Mallari II6 (respondents) before the RTC of Muntinlupa City seeking to enjoin
the sale of S.J. Land, Inc.'s shares which they purportedly bought from S.J. Global, Inc. on The petition is meritorious.
February 1, 2010. Essentially, petitioners alleged that the subscriptions for the said
shares were already paid by them in full in the books of S.J. Land, Inc.,7 but were At the outset, the Court finds Branch 276 to have correctly categorized Civil Case No. 11-
nonetheless offered for sale on July 29, 2011 to the corporation's stockholders, 8 hence, 077 as a commercial case, more particularly, an intra-corporate dispute,23 considering
their plea for injunction. that it relates to petitioners' averred rights over the shares of stock offered for sale to
other stockholders, having paid the same in full. Applying the relationship test and
The case was docketed as Civil Case No. 11-077 and raffled to Branch 276, which is not the nature of the controversy test, the suit between the parties is clearly rooted in the
a Special Commercial Court. On August 9, 2011, said branch issued a temporary existence of an intra-corporate relationship and pertains to the enforcement of their
restraining order,9 and later, in an Order10 dated August 24, 2011, granted the correlative rights and obligations under the Corporation Code and the internal and intra-
application for a writ of preliminary injunction. corporate regulatory rules of the corporation,24 hence, intra-corporate, which should be
heard by the designated Special Commercial Court as provided under A.M. No. 03-03-03-
After filing their respective answers11 to the complaint, respondents filed a motion to SC25 dated June 17, 2003 in relation to Item 5.2, Section 5 of RA 8799.
dismiss12 on the ground of lack of jurisdiction over the subject matter, pointing out that
the case involves an intra-corporate dispute and should, thus, be heard by the designated The present controversy lies, however, in the procedure to be followed when a
Special Commercial Court of Muntinlupa City.13 commercial case - such as the instant intra-corporate dispute -has been properly
filed in the official station of the designated Special Commercial Court but is,
The RTC Ruling however, later wrongly assigned by raffle to a regular branch of that station.

In an Order14 dated April 17, 2012, Branch 276 granted the motion to dismiss filed by As a basic premise, let it be emphasized that a court's acquisition of jurisdiction over a
respondents. It found that the case involves an intra-corporate dispute that is within the particular case's subject matter is different from incidents pertaining to the exercise of
original and exclusive jurisdiction of the RTCs designated as Special Commercial Courts. its jurisdiction. Jurisdiction over the subject matter of a case is conferred by law,
It pointed out that the RTC of Muntinlupa City, Branch 256 (Branch 256) was specifically whereas a court's exercise of jurisdiction, unless provided by the law itself, is governed
designated by the Court as the Special Commercial Court, hence, Branch 276 had no by the Rules of Court or by the orders issued from time to time by the Court.26 In Lozada
jurisdiction over the case and cannot lawfully exercise jurisdiction on the matter, v. Bracewell,27 it was recently held that the matter of whether the RTC resolves an
including the issuance of a Writ of Preliminary Injunction.15 Accordingly, it dismissed the issue in the exercise of its general jurisdiction or of its limited jurisdiction as a
special court is only a matter of procedure and has nothing to do with the question transferred to the courts of general jurisdiction, that is to say (or, otherwise known as),
of jurisdiction. the proper Regional Trial Courts. This interpretation is supported by San Miguel Corp. v.
Municipal Council,33 wherein the Court held that:
Pertinent to this case is RA 8799 which took effect on August 8, 2000. By virtue of said
law, jurisdiction over cases enumerated in Section 528 of Presidential Decree No. 902- [T]he word "or" may be used as the equivalent of "that is to say" and gives that which
A29 was transferred from the Securities and Exchange Commission (SEC) to the RTCs, precedes it the same significance as that which follows it. It is not always disjunctive and
being courts of general jurisdiction. Item 5.2, Section 5 of RA 8799 provides: is sometimes interpretative or expository of the preceding word.34cralawlawlibrary

SEC. 5. Powers and Functionsof the Commission. - x x x


Further, as may be gleaned from the following excerpt of the Congressional
deliberations:
xxxx

5.2 The Commission's jurisdiction over all cases enumerated under Section 5 of Senator [Raul S.] Roco: x x x.
Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, that the Supreme xxxx
Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over the cases. The Commission shall retain x x x. The first major departure is as regards the Securities and Exchange Commission.
jurisdiction over pending cases involving intra-corporate disputes submitted for final The Securities and Exchange Commission has been authorized under this proposal to
resolution which should be resolved within one (1) year from the enactment of this reorganize itself. As an administrative agency, we strengthened it and at the same time
Code. The Commission shall retain jurisdiction over pending suspension of we take away the quasi-judicial functions. The quasi-judicial functions are now given
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. (Emphasis back to the courts of general jurisdiction - the Regional Trial Court, except for two
supplied)cralawlawlibrary categories of cases.

In the case of corporate disputes, only those that are now submitted for final
The legal attribution of Regional Trial Courts as courts of general jurisdiction stems determination of the SEC will remain with the SEC. So, all those cases, both memos of the
from Section 19 (6), Chapter II of Batas Pambansa Bilang (BP) 129,30 known as "The plaintiff and the defendant, that have been submitted for resolution will continue. At the
Judiciary Reorganization Act of 1980": same time, cases involving rehabilitation, bankruptcy, suspension of payments and
receiverships that were filed before June 30, 2000 will continue with the SEC. in other
Section 19. Jurisdiction in civil cases.- Regional Trial Courts shall exercise exclusive words, we are avoiding the possibility, upon approval of this bill, of people filing cases
original jurisdiction: with the SEC, in manner of speaking, to select their court.35

xxxx x x x x (Emphasis supplied)

(6) In all cases not within the exclusive jurisdiction of any court, tribunal, person or body
Therefore, one must be disabused of the notion that the transfer of jurisdiction was made
exercising jurisdiction or any court, tribunal, person or body exercising judicial or quasi-
only in favor of particular RTC branches, and not the RTCs in general.
judicial functions; x x x x
cralawlawlibrary
Consistent with the foregoing, history depicts that when the transfer of SEC cases to the
RTCs was first implemented, they were transmitted to the Executive Judges of the RTCs
As enunciated in Durisol Philippines, Inc. v. CA:31 for raffle between or among its different branches, unless a specific branch has been
designated as a Special Commercial Court, in which instance, the cases
The regional trial court, formerly the court of first instance, is a court of general were transmitted to said branch.36 It was only on November 21, 2000 that the Court
jurisdiction. All cases, the jurisdiction over which is not specifically provided for by law designated certain RTC branches to try and decide said SEC cases37 without, however,
to be within the jurisdiction of any other court, fall under the jurisdiction of the regional providing for the transfer of the cases already distributed to or filed with the regular
trial court.32ChanRoblesVirtualawlibrary branches thereof. Thus, on January 23, 2001, the Court issued SC Administrative Circular
cralawlawlibrary No. 08-200138 directing the transfer of said cases to the designated courts (commercial
SEC courts). Later, or on June 17, 2003, the Court issued A.M. No. 03-03-03-SC
consolidating the commercial SEC courts and the intellectual property courts39 in one
To clarify, the word "or" in Item 5.2, Section 5 of RA 8799 was intentionally used by the RTC branch in a particular locality, i.e., the Special Commercial Court, to streamline
legislature to particularize the fact that the phrase "the Courts of general jurisdiction" is the court structure and to promote expediency.40 Accordingly, the RTC branch so
equivalent to the phrase "the appropriate Regional Trial Court." In other words, the designated was mandated to try and decide SEC cases, as well as those involving
jurisdiction of the SEC over the cases enumerated under Section 5 of PD 902-A was
violations of intellectual property rights, which were, thereupon, required to be filed in commercial case was wrongly raffled to a regular branch, e.g., Branch 276, instead
the Office of the Clerk of Court in the official station of the designated Special of being assigned44to the sole Special Commercial Court in the RTC of Muntinlupa
Commercial Courts, to wit:chanRoblesvirtualLawlibrary City, which is Branch 256. This error may have been caused by a reliance on the
complaint's caption, i.e., "Civil Case for Injunction with prayer for Status Quo Order, TRO
1. The Regional Courts previously designated as SEC Courts through the: (a) Resolutions and Damages,"45 which, however, contradicts and more importantly, cannot prevail over
of this Court dated 21 November 2000, 4 July 2001, 12 November 2002, and 9 July 2002 its actual allegations that clearly make out an intra-corporate dispute:
all issued in A.M. No. 00-11-03-SC; (b) Resolution dated 27 August 2001 in A.M. No. 01-5-
298-RTC; and (c) Resolution dated 8 July 2002 in A.M. No. 01-12-656-RTC are hereby 16. To the surprise of MLCG and FMDG, however, in two identical letters both dated 13
DESIGNATED and shall be CALLED as Special Commercial Courts to try and decide cases May 2011, under the letterhead of GJH Land, Inc., Yap, now acting as its President, Jang
involving violations of Intellectual Property Rights which fall within their jurisdiction and Kim demanded payment of supposed unpaid subscriptions of MLCG and FMDG
and those cases formerly cognizable by the Securities and Exchange Commission: amounting to P10,899,854.30 and P2,625,249.41, respectively.
xxxx 16.1 Copies of the letters dated 13 May 2011 are attached hereto and made integral parts
hereof as Annexes "J" and "K", repectively.
4. The Special Commercial Courts shall have jurisdiction over cases arising within their
17. On 29 July 2011, MLCG and FMDG received an Offer Letter addressed to stockholders
respective territorial jurisdiction with respect to the National Capital Judicial Region and
of GJH Land, Inc. from Yap informing all stockholders that GJH Land, Inc. is now offering
within the respective provinces with respect to the First to Twelfth Judicial Regions.
for sale the unpaid shares of stock of MLCG and FMDG. The same letter states that the
Thus, cases shall be filed in the Office of the Clerk of Court in the official station of the
offers to purchase these shares will be opened on 10 August 2011 with payments to be
designated Special Commercial Court;41
arranged by deposit to the depository bank of GJH Land, Inc.
17.1 A copy of the undated Offer Letter is attached hereto and made and made an
x x x x (Underscoring supplied)
integral part hereof as Annex "L".
18. The letter of GJH Land, Inc. through Yap, is totally without legal and factual basis
It is important to mention that the Court's designation of Special Commercial Courts was
because as evidenced by the Deeds of Assignment signed and certified by Yap herself, all
made in line with its constitutional authority to supervise the administration of all courts
the S.J. Land, Inc. shares acquired by MLCG and FMDG have been fully paid in the books
as provided under Section 6, Article VIII of the 1987 Constitution:
of S.J. Land, Inc.
Section 6. The Supreme Court shall have administrative supervision over all courts and 19. With the impending sale of the alleged unpaid subscriptions on 10 August
the personnel thereof. 2011, there is now a clear danger that MLCG and FMDG would be deprived of these
shares without legal and factual basis.
The objective behind the designation of such specialized courts is to promote
expediency and efficiency in the exercise of the RTCs' jurisdiction over the cases 20. Furthermore, if they are deprived of these shares through the scheduled sale, both
enumerated under Section 5 of PD 902-A. Such designation has nothing to do with the MLCG and FMDG would suffer grave and irreparable damage incapable of pecuniary
statutory conferment of jurisdiction to all RTCs under RA 8799 since in the first place, estimation.
the Court cannot enlarge, diminish, or dictate when jurisdiction shall be removed, given
that the power to define, prescribe, and apportion jurisdiction is, as a general rule, 21. For this reason, plaintiffs now come to the Honorable Court for injunctive relief so
a matter of legislative prerogative.42 Section 2, Article VIII of the 1987 Constitution that after trial on the merits, a permanent injunction should be issued against the
provides: defendants preventing them from selling the shares of the plaintiffs, there being no basis
for such sale.46cralawlawlibrary
Section 2. The Congress shall have the power to define, prescribe, and apportion the
jurisdiction of the various courts but may not deprive the Supreme Court of its According to jurisprudence, "it is not the caption but the allegations in the complaint or
jurisdiction over cases enumerated in Section 5 hereof. other initiatory pleading which give meaning to the pleading and on the basis of which
such pleading may be legally characterized."47 However, so as to avert any future
xxxx confusion, the Court requires henceforth, that all initiatory pleadings state the action's
nature both in its caption and the body, which parameters are defined in the dispositive
portion of this Decision.
Here, petitioners filed a commercial case, i.e., an intra-corporate dispute, with the Office
of the Clerk of Court in the RTC of Muntinlupa City, which is the official station of the Going back to the case at bar, the Court nonetheless deems that the erroneous raffling to
designated Special Commercial Court, in accordance with A.M. No. 03-03-03-SC. It is, a regular branch instead of to a Special Commercial Court is only a matter of procedure -
therefore, from the time of such filing that the RTC of Muntinlupa City acquired that is, an incident related to the exercise of jurisdiction - and, thus, should not negate
jurisdiction over the subject matter or the nature of the action.43 Unfortunately, the the jurisdiction which the RTC of Muntinlupa City had already acquired. In such a
scenario, the proper course of action was not for the commercial case to be dismissed;
instead, Branch 276 should have first referred the case to the Executive Judge for re- 5.2 The Commission's jurisdiction over all cases enumerated under Section 5 of
docketing as a commercial case; thereafter, the Executive Judge should then assign Presidential Decree No. 902-A is hereby transferred to the Courts of general
said case to the only designated Special Commercial Court in the jurisdiction or the appropriate Regional Trial Court: Provided, that the Supreme
station, i.e.,Branch 256. Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over the cases, x x x.cralawlawlibrary
Note that the procedure would be different where the RTC acquiring jurisdiction over
the case has multiple special commercial court branches; in such a scenario, the
In contrast, the appropriate jurisprudential reference to this case would be Tan v. Bausch
Executive Judge, after re-docketing the same as a commercial case, should proceed to
& Lomb, Inc.,50which involves a criminal complaint for violation of intellectual property
order its re-raffling among the said special branches.
rights filed before the RTC of Cebu City but was raffled to a regular branch thereof
(Branch 21), and not to a Special Commercial Court. As it turned out, the regular branch
Meanwhile, if the RTC acquiring jurisdiction has no branch designated as a Special
subsequently denied the private complainant's motion to transfer the case to the
Commercial Court, then it should refer the case to the nearest RTC with a designated
designated special court of the same RTC, on the ground of lack of jurisdiction. The CA
Special Commercial Court branch within the judicial region.48 Upon referral, the RTC to
reversed the regular branch and, consequently, ordered the transfer of the case to the
which the case was referred to should re-docket the case as a commercial case, and then:
designated special court at that time (Branch 9). The Court, affirming the CA, declared
(a) if the said RTC has only one branch designated as a Special Commercial Court, assign
that the RTC had acquired jurisdiction over the subject matter. In view, however, of the
the case to the sole special branch; or (b) if the said RTC has multiple branches
designation of another court as the Special Commercial Court in the interim (Branch 11
designated as Special Commercial Courts, raffle off the case among those special
of the same Cebu City RTC), the Court accordingly ordered the transfer of the case and
branches.
the transmittal of the records to said Special Commercial Court instead.51Similarly, the
transfer of the present intra-corporate dispute from Branch 276 to Branch 256 of
In all the above-mentioned scenarios, any difference regarding the applicable docket fees
the same RTC of Muntinlupa City, subject to the parameters above-discussed is
should be duly accounted for. On the other hand, all docket fees already paid shall be
proper and will further the purposes stated in A.M. No. 03-03-03-SC of attaining a
duly credited, and any excess, refunded.
speedy and efficient administration of justice.
At this juncture, the Court finds it fitting to clarify that the RTC mistakenly relied on
For further guidance, the Court finds it apt to point out that the same principles apply to
the Calleja case to support its ruling. In Calleja, an intra-corporate dispute49 among
the inverse situation of ordinary civil cases filed before the proper RTCs but
officers of a private corporation with principal address at Goa, Camarines Sur, was filed
wrongly raffled to its branches designated as Special Commercial Courts. In such a
with the RTC of San Jose, Camarines Sur, Branch 58 instead of the RTC of Naga City,
scenario, the ordinary civil case should then be referred to the Executive Judge for
which is the official station of the designated Special Commercial Court for Camarines
re-docketing as an ordinary civil case; thereafter, the Executive Judge should then
Sur. Consequently, the Court set aside the RTC of San Jose, Camarines Sur's order to
order the raffling of the case to all branches of the same RTC, subject to limitations
transfer the case to the RTC of Naga City and dismissed the complaint considering that it
under existing internal rules, and the payment of the correct docket fees in case of
was filed before a court which, having no internal branch designated as a Special
any difference. Unlike the limited assignment/raffling of a commercial case only to
Commercial Court, had no jurisdiction over those kinds of actions, i.e., intra-corporate
branches designated as Special Commercial Courts in the scenarios stated above, the re-
disputes. Calleja involved two different RTCs, i.e., the RTC of San Jose, Camarines Sur
raffling of an ordinary civil case in this instance to all courts is permissible due to the fact
and the RTC of Naga City, whereas the instant case only involves one RTC, i.e., the RTC
that a particular branch which has been designated as a Special Commercial Court does
of Muntinlupa City, albeit involving two different branches of the same
not shed the RTC's general jurisdiction over ordinary civil cases under the imprimatur of
court, i.e.,Branches 256 and 276. Hence, owing to the variance in the facts attending, it
statutory law, i.e., Batas Pambansa Bilang (BP) 129.52To restate, the designation of
was then improper for the RTC to rely on the Calleja ruling.
Special Commercial Courts was merely intended as a procedural tool to expedite the
resolution of commercial cases in line with the court's exercise of jurisdiction. This
Besides, the Court observes that the fine line that distinguishes subject matter
designation was not made by statute but only by an internal Supreme Court rule under
jurisdiction and exercise of jurisdiction had been clearly blurred in Calleja. Harkening
its authority to promulgate rules governing matters of procedure and its constitutional
back to the statute that had conferred subject matter jurisdiction, two things are
mandate to supervise the administration of all courts and the personnel
apparently clear: (a) that the SEC's subject matter jurisdiction over intra-corporate
thereof.53 Certainly, an internal rule promulgated by the Court cannot go beyond the
cases under Section 5 of Presidential Decree No. 902-A was transferred to the Courts of
commanding statute. But as a more fundamental reason, the designation of Special
general jurisdiction, i.e., the appropriate Regional Trial Courts; and (b) the designated
Commercial Courts is, to stress, merely an incident related to the court's exercise of
branches of the Regional Trial Court, as per the rules promulgated by the Supreme Court,
jurisdiction, which, as first discussed, is distinct from the concept of jurisdiction over the
shall exercise jurisdiction over such cases. Item 5.2, Section 5 of RA 8799 provides:
subject matter. The RTC's general jurisdiction over ordinary civil cases is therefore not
abdicated by an internal rule streamlining court procedure.
SEC. 5. Powers and Functions of the Commission. - x x x
In fine, Branch 276's dismissal of Civil Case No. 11-077 is set aside and the transfer of
xxxx
said case to Branch 256, the designated Special Commercial Court of the same RTC of
Muntinlupa City, under the parameters above-explained, is hereby ordered. SO ORDERED.

WHEREFORE, the petition is GRANTED. The Orders dated April 17, 2012 and July 9,
2012 of the Regional Trial Court (RTC) of Muntinlupa City, Branch 276 in Civil Case No.
11-077 are hereby REVERSED and SET ASIDE. Civil Case No. 11-077 is REFERRED to
the Executive Judge of the RTC of Muntinlupa City for re-docketing as a commercial case.
Thereafter, the Executive Judge shall ASSIGNsaid case to Branch 256, the sole designated
Special Commercial Court in the RTC of Muntinlupa City, which is ORDERED to resolve
the case with reasonable dispatch. In this regard, the Clerk of Court of said RTC
shall DETERMINE the appropriate amount of docket fees and, in so doing, ORDER the
payment of any difference or, on the other hand, refund any excess.

Furthermore, the Court hereby RESOLVES that henceforth, the following guidelines shall
be observed:
1. If a commercial case filed before the proper RTC is wrongly raffled to its regular
branch, the proper courses of action are as follows:
1.1 If the RTC has only one branch designated as a Special Commercial Court, then the
case shall be referred to the Executive Judge for re-docketing as a commercial case, and
thereafter, assigned to the sole special branch;

1.2 If the RTC has multiple branches designated as Special Commercial Courts, then the
case shall be referred to the Executive Judge for re-docketing as a commercial case, and
thereafter, raffled off among those special branches; and

1.3 If the RTC has no internal branch designated as a Special Commercial Court, then the
case shall be referred to the nearest RTC with a designated Special Commercial Court
branch within the judicial region. Upon referral, the RTC to which the case was referred
to should re- docket the case as a commercial case, and then: (a) if the said RTC has only
one branch designated as a Special Commercial Court, assign the case to the sole special
branch; or (b) if the said RTC has multiple branches designated as Special Commercial
Courts, raffle off the case among those special branches.
2. If an ordinary civil case filed before the proper RTC is wrongly raffled to its branch
designated as a Special Commercial Court, then the case shall be referred to the
Executive Judge for re-docketing as an ordinary civil case. Thereafter, it shall be raffled
off to all courts of the same RTC (including its designated special branches which, by
statute, are equally capable of exercising general jurisdiction same as regular branches),
as provided for under existing rules.

3. All transfer/raffle of cases is subject to the payment of the appropriate docket fees in
case of any difference. On the other hand, all docket fees already paid shall be duly
credited, and any excess, refunded.

4. Finally, to avert any future confusion, the Court requires that all initiatory pleadings
state the action's nature both in its caption and body. Otherwise, the initiatory pleading
may, upon motion or by order of the court motu proprio, be dismissed without prejudice
to its re-filing after due rectification. This last procedural rule is prospective in
application.

5. All existing rules inconsistent with the foregoing are deemed superseded.

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