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SECOND DIVISION

G.R. No. 131394 March 28, 2005

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, Petitioner,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA
NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT
MARINE SCHOOL, INC., Respondents.

DECISION

TINGA, J.:

Presented in the case at bar is the apparently straight-forward but complicated question: What should be
the basis of quorum for a stockholders’ meeting—the outstanding capital stock as indicated in the articles
of incorporation or that contained in the company’s stock and transfer book?

Petitioners seek to nullify the Court of Appeals’ Decision in CA–G.R. SP No. 414731 promulgated on 18
August 1997, affirming the SEC Order dated 20 June 1996, and the Resolution2 of the Court of Appeals
dated 31 October 1997 which denied petitioners’ motion for reconsideration.

The antecedents are not disputed.

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred
(700) founders’ shares and seventy-six (76) common shares as its initial capital stock subscription
reflected in the articles of incorporation. However, private respondents and their predecessors who were
in control of PMMSI registered the company’s stock and transfer book for the first time in 1978,
recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI.
Sometime in 1979, a special stockholders’ meeting was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3)
of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and
Exchange Commission (SEC) for the registration of their property rights over one hundred (120)
founders’ shares and twelve (12) common shares owned by their father. The SEC hearing officer held that
the heirs of Acayan were entitled to the claimed shares and called for a special stockholders’ meeting to
elect a new set of officers.3 The SEC En Bancaffirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors. Private
respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992
stockholders’ meeting, alleging that the quorum for the said meeting should not be based on the 165
issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital
stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The
petition was dismissed.4 Appeal was made to the SEC En Banc, which granted said appeal, holding that
the shares of the deceased incorporators should be duly represented by their respective administrators
or heirs concerned. The SEC directed the parties to call for a stockholders meeting on the basis of the
stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for
the corporation.5

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals.6 Rebecca
Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI,
earlier filed another petition for review of the same SEC En Banc’s orders. The petitions were thereafter
consolidated.7 The consolidated petitions essentially raised the following issues, viz: (a) whether the
basis the outstanding capital stock and accordingly also for determining the quorum at stockholders’
meetings it should be the 1978 stock and transfer book or if it should be the 1952 articles of
incorporation; and (b) whether the Court of Appeals "gravely erred in applying the Espejo Decision to the
benefit of respondents."8 The "Espejo Decision" is the decision of the SEC en banc in SEC Case No. 2289
which ordered the recording of the shares of Jose Acayan in the stock and transfer book.

The Court of Appeals held that for purposes of transacting business, the quorum should be based on the
outstanding capital stock as found in the articles of incorporation.9 As to the second issue, the Court of
Appeals held that the ruling in the Acayan case would ipso facto benefit the private respondents, since to
require a separate judicial declaration to recognize the shares of the original incorporators would entail
unnecessary delay and expense. Besides, the Court of Appeals added, the incorporators have already
proved their stockholdings through the provisions of the articles of incorporation.10

In the instant petition, petitioners claim that the 1992 stockholders’ meeting was valid and legal. They
submit that reliance on the 1952 articles of incorporation for determining the quorum negates the
existence and validity of the stock and transfer book which private respondents themselves prepared. In
addition, they posit that private respondents cannot avail of the benefits secured by the heirs of Acayan,
as private respondents must show and prove entitlement to the founders and common shares in a
separate and independent action/proceeding.

In private respondents’ Memorandum11 dated 08 March 2000, they point out that the instant petition
raises the same facts and issues as those raised in G.R. No. 13131512, which was denied by the First
Division of this Court on 18 January 1999 for failure to show that the Court of Appeals committed any
reversible error. They add that as a logical consequence, the instant petition should be dismissed on the
ground of res judicata. Furthermore, private respondents claim that in view of the applicability of the rule
on res judicata, petitioners’ counsel should be cited for contempt for violating the rule against forum-
shopping.13

For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They
argue that the instant petition is separate and distinct from G.R. No. 131315, there being no identity of
parties, and more importantly, the parties in the two petitions have their own distinct rights and interests
in relation to the subject matter in litigation. For the same reasons, they claim that counsel for petitioners
cannot be found guilty of forum-shopping.14

In their Manifestation and Motion15 dated 22 September 2004, private respondents moved for the
dismissal of the instant petition in view of the dismissal of G.R. No. 131315. Attached to the said
manifestation is a copy of the Entry of Judgment16 issued by the First Division dated 01 December 1999.

The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No.
131315 it fails to impute reversible error to the challenged Court of Appeals’ Decision.
Res judicata does not apply in
the case at bar.

Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled
by judgment.17 The doctrine of res judicata provides that a final judgment, on the merits rendered by a
court of competent jurisdiction is conclusive as to the rights of the parties and their privies and
constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of
action.18 The elements of res judicata are (a) identity of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on
the same facts; and (c) the identity in the two (2) particulars is such that any judgment which may be
rendered in the other action will, regardless of which party is successful, amount to res judicata in the
action under consideration.19

There is no dispute as to the identity of subject matter since the crucial point in both cases is the
propriety of including the still unproven shares of respondents for purposes of determining the quorum.
Petitioners, however, deny that there is identity of parties and causes of actions between the two
petitions.

The test often used in determining whether causes of action are identical is to ascertain whether the
same facts or evidence would support and establish the former and present causes of action.20 More
significantly, there is identity of causes of action when the judgment sought will be inconsistent with the
prior judgment.21 In both petitions, petitioners assert that the Court of Appeals’ Decision effectively
negates the existence and validity of the stock and transfer book, as well as automatically grants private
respondents’ shares of stocks which they do not own, or the ownership of which remains to be unproved.
Petitioners in the two petitions rely on the entries in the stock and transfer book as the proper basis for
computing the quorum, and consequently determine the degree of control one has over the company.
Essentially, the affirmance of the SEC Order had the effect of diminishing their control and interests in the
company, as it allowed the participation of the individual private respondents in the election of officers of
the corporation.

Absolute identity of parties is not a condition sine qua non for res judicata to apply—a shared identity of
interest is sufficient to invoke the coverage of the principle.22 However, there is no identity of parties
between the two cases. The parties in the two petitions have their own rights and interests in relation to
the subject matter in litigation. As stated by petitioners in their Reply to Respondents’
Memorandum,23 there are no two separate actions filed, but rather, two separate petitions for review
on certiorari filed by two distinct parties with the Court and represented by their own counsels, arising
from an adverse consolidated decision promulgated by the Court of Appeals in one action or
proceeding.24 As such, res judicata is not present in the instant case.

Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against
forum-shopping. In the Verification/Certification25 portion of the petition, petitioners clearly stated that
there was then a pending motion for reconsideration of the 18 August 1997 Decision of the Court of
Appeals in the consolidated cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as
well as a motion for clarification. Moreover, the records indicate that petitioners filed
their Manifestation26 dated 20 January 1998, informing the Court of their receipt of the petition in G.R. No.
131315 in compliance with their duty to inform the Court of the pendency of another similar petition.
The Court finds that petitioners substantially complied with the rules against forum-shopping.
The Decision of the Court of
Appeals must be upheld.

The petition in this case involves the same facts and substantially the same issues and arguments as those
in G.R. No. 131315 which the First Division has long denied with finality. The First Division found the
petition before it inadequate in failing to raise any reversible error on the part of the Court of Appeals.
We reach a similar conclusion as regards the present petition.

The crucial issue in this case is whether it is the company’s stock and transfer book, or its 1952 Articles of
Incorporation, which determines stockholders’ shareholdings, and provides the basis for computing the
quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of the corporation and
the contractual relationships between the State and the corporation, the stockholders and the State, and
between the corporation and its stockholders.27 When PMMSI was incorporated, the prevailing law was
Act No. 1459, otherwise known as "The Corporation Law." Section 6 thereof states:

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the
Philippines, may form a private corporation for any lawful purpose or purposes by filing with the
Securities and Exchange Commission articles of incorporation duly executed and acknowledged
before a notary public, setting forth:

....

(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines,
and the number of shares into which it is divided, and if such stock be in whole or in part without
par value then such fact shall be stated; Provided, however, That as to stock without par value the
articles of incorporation need only state the number of shares into which said capital stock is
divided.

(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock
actually subscribed, the amount or number of shares of no-par stock subscribed by each and the
sum paid by each on his subscription. . . .28

A review of PMMSI’s articles of incorporation29 shows that the corporation complied with the
requirements laid down by Act No. 1459. It provides in part:

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00)
divided into two classes, namely:

FOUNDERS’ STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value – P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00


....

8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE
THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the
number of shares and amount of capital stock set out after their respective names:

SUBSCRIBER SUBSCRIBED AMOUNT


SUBSCRIBED

No. of Shares Par Value

Crispulo J. 120 Founders P 2,400.00


Onrubia

Juan H. Acayan 120 " 2, 400.00

Martin P. 100 " 2, 000.00


Sagarbarria

Mauricio G. 50 " 1, 000.00


Gallaga

Luis Renteria 50 " 1, 000.00

Faustina M. de 140 " 2, 800.00


Onrubia

Mrs. Ramon 40 " 800.00


Araneta

Carlos M. Onrubia 80 " 1,600.00

700 P 14,000.00

SUBSCRIBER SUBSCRIBED AMOUNT


SUBSCRIBED
No. of Shares
Par Value

Crispulo J. 12 Common P 1,200.00


Onrubia

Juan H. Acayan 12 " 1,200.00

Martin P. 8" 800.00


Sagarbarria

Mauricio G. 8" 800.00


Gallaga
Luis Renteria 8" 800.00

Faustina M. de 12 " 1,200.00


Onrubia

Mrs. Ramon 8" 800.00


Araneta

Carlos M. Onrubia 8" 800.00

76 P7,600.0030

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the
corporation, but also on its shareholders. In the instant case, the articles of incorporation indicate that at
the time of incorporation, the incorporators were bona fide stockholders of seven hundred (700)
founders’ shares and seventy-six (76) common shares. Hence, at that time, the corporation had 776
issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment thereof; a statement of every alienation, sale or
transfer of stock made, the date thereof and by and to whom made; and such other entries as may be
prescribed by law.31 A stock and transfer book is necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate method of establishing the various corporate
acts and transactions and of showing the ownership of stock and like matters.32 However, a stock and
transfer book, like other corporate books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or should be written therein.33 In fact, it
is generally held that the records and minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only,34 and may be impeached or even contradicted by other
competent evidence.35 Thus, parol evidence may be admitted to supply omissions in the records or
explain ambiguities, or to contradict such records.36

In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines"
supplanted Act No. 1459. BP Blg. 68 provides:

Sec. 24. Election of directors or trustees.—At all elections of directors or trustees, there must be
present, either in person or by representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a majority of the members
entitled to vote. . . .

Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock
or majority of the members in the case of non-stock corporation.

Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined.— The term "outstanding capital stock" as used in this
code, means the total shares of stock issued to subscribers or stockholders whether or not fully or
partially paid (as long as there is binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be
founders’ shares or common shares.37 In the instant case, two figures are being pitted against each
other— those contained in the articles of incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer
book, and completely disregarding the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors in interest of the said shares. This
case is one instance where resort to documents other than the stock and transfer books is necessary. The
stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does
not reflect the totality of shares which have been subscribed, more so when the articles of incorporation
show a significantly larger amount of shares issued and outstanding as compared to that listed in the
stock and transfer book. As aptly stated by the SEC in its Order dated 15 July 1996:38

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed,
the Stock and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even
reacquisition of the company of its own shares, in which it becomes treasury shares, would not
affect the total number of shares in the Stock and Transfer Book. All that will change are the
entries as to the owners of the shares but not as to the amount of shares already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given probative value. Did
the shares, which were not recorded in the Stock and Transfer Book, but were recorded in the
Articles of Iincorporation just vanish into thin air? . . . .39

As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six
(776) issued and outstanding shares as reflected in the articles of incorporation. No proof was adduced
as to any transaction effected on these shares from the time PMMSI was incorporated up to the time the
instant petition was filed, except for the thirty-three (33) shares which were recorded in the stock and
transfer book in 1978, and the additional one hundred thirty-two (132) in 1982. But obviously, the
shares so ordered recorded in the stock and transfer book are among the shares reflected in the articles
of incorporation as the shares subscribed to by the incorporators named therein.

One who is actually a stockholder cannot be denied his right to vote by the corporation merely because
the corporate officers failed to keep its records accurately.40 A corporation’s records are not the only
evidence of the ownership of stock in a corporation.41 In an American case,42 persons claiming
shareholders status in a professional corporation were listed as stockholders in the amendment to the
articles of incorporation. On that basis, they were in all respects treated as shareholders. In fact, the acts
and conduct of the parties may even constitute sufficient evidence of one’s status as a shareholder or
member.43 In the instant case, no less than the articles of incorporation declare the incorporators to have
in their name the founders and several common shares. Thus, to disregard the contents of the articles of
incorporation would be to pretend that the basic document which legally triggered the creation of the
corporation does not exist and accordingly to allow great injustice to be caused to the incorporators and
their heirs.

Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of
respondents." The Court believes that the more precise statement of the issue is whether in its
assailed Decision, the Court of Appeals can declare private respondents as the heirs of the incorporators,
and consequently register the founders shares in their name. However, this issue as recast is not actually
determinative of the present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in
PMMSI as recorded in the stock and transfer book and instantly created inexistent shares in favor of
private respondents. We do not agree.

The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the
original incorporators would entail unnecessary delay and expense on the part of the litigants,
considering that the incorporators had already proved ownership of such shares as shown in the articles
of incorporation.44 There was no declaration of who the individual owners of these shares were on the
date of the promulgation of the Decision. As properly stated by the SEC in its Order dated 20 June 1996, to
which the appellate court’s Decision should be related, "if at all, the ownership of these shares should only
be subjected to the proper judicial (probate) or extrajudicial proceedings in order to determine the
respective shares of the legal heirs of the deceased incorporators."45

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.

SO ORDERED.

SPECIAL SECOND DIVISION

G.R. No. 144476 April 8, 2003

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and
JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C.
TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF
DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE COMMISSION, respondents.

x-----------------------------x

G.R. No. 144629 April 8, 2003

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C.
TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners,
vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and
JULIA ONG ALONZO, respondents.

RESOLUTION

CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong,
Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2)
motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a
reversal of this Court's Decision,1dated February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with
modification the decision2 of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11, 1998; and (3) motion for
issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D.
Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.

A brief recapitulation of the facts shows that:

In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which
was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the
Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the
two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong,
Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-
Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00
each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition
to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius
were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs
were entitled to nominate the President, the Secretary and six directors (including the chairman)
to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and
operate the mall.

Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while
the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively
valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for
49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another
P70 million3 to FLADC and P20 million to the Tius over and above their P100 million investment, the total
sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to
PNB.

The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the
Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1)
refusing to credit to them the FLADC shares covering their real property contributions; (2) preventing
David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President
and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.

According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and
perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from
doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as Vice-
President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story building, a 1,902.30 square-meter lot and a
151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription
Agreement with the Ongs who allegedly refused to comply with their undertakings.

In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-
President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties
assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the
corporation and undertake their management duties but that the Tius shied away from helping them
manage the corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact already
have existing executive offices in the mall since they owned it 100% before the Ongs came in. What the
Tius really wanted were new offices which were anyway subsequently provided to them. On the most
important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the
Tius' property contributions, the Ongs asserted that, although the Tius executed a deed of assignment for
the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
gains tax and documentary stamp tax. Without the payment thereof, the SEC would not approve the
valuation of the Tius' property contribution (as opposed to cash contribution). This, in turn, would make
it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADC's name. In
any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued
in FLADC's name, they could then be given the corresponding shares of stocks. On the 151 square-meter
property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed that
they could not as yet surrender the TCT because it was "still being reconstituted" by the Lichaucos from
whom the Tius bought it. The Ongs later on discovered that FLADC had in reality owned the property all
along, even before their Pre-Subscription Agreement was executed in 1994. This meant that the 151
square-meter property was at that time already the corporate property of FLADC for which the Tius were
not entitled to the issuance of new shares of stock.

The controversy finally came to a head when this case was commenced4 by the Tius on February 27, 1996
at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-
Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr.,
issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription


Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;

(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the
return of their contribution for 1,000,000 shares of FLADC;

(c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of
incorporation of FLADC to conform with this decision;

(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly
15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in which
said titles are declared void;

(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel
the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066
(formerly 15587);

(f) The individual defendants, individually and collectively, their agents and representatives, to
desist from exercising or performing any and all acts pertaining to stockholder, director or officer
of FLADC or in any manner intervene in the management and affairs of FLADC;

(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the
amount of P8,866,669.00 and all interest payments as well as any payments on principal received
from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of
their receipt of such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing
his loan from said defendants plus legal interest from the date of receipt of such amount.

SO ORDERED.5

On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs'
P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC
and that the imposition of interest on it was correct.6

Both parties appealed7 to the SEC en banc which rendered a decision on September 11, 1998, affirming
the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the Pre-
Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium on
capital and not as a loan or advance to FLADC, hence, not entitled to earn interest. 8

On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange
Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-
Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following
MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation
in accordance with the following cash and property contributions of the parties therein.

(a) Ong Group – P100,000,000.00 cash contribution for one (1) million shares in First
Landlink Asia Development Corporation at a par value of P100.00 per share;

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink


Asia Development Corporation at a par value of P100.00 per share;

2) A four-storey building described in Transfer Certificate of Title No. 15587 in the


name of Intraland Resources and Development Corporation valued at
P20,000,000.00 for 200,000 shares in First Landlink Asia Development Corporation
at a par value of P100.00 per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title


No. 15587 in the name of Masagana Telamart, Inc. valued at P30,000,000.00 for
300,000 shares in First Landlink Asia Development Corporation at a par value of
P100.00 per share.

2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the
management thereof is (sic) hereby ordered transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of
P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this decision. Should
the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs
upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall
pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED.9

An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the
"height of ingratitude" and as "pulling a fast one" on the Ongs. The CA moreover found the Tius guilty of
withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO
account.10 These were findings later on affirmed in our own February 1, 2002 Decision which is the
subject of the instant motion for reconsideration.11

But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the Tius
were in pari delicto (which would not have legally entitled them to rescission) but, "for practical
considerations," that is, their inability to work together, it was best to separate the two groups by
rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and awarding
practically everything else to the Tius.

Their motions for reconsideration having been denied, both parties filed separate petitions for review
before this Court.

In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may
not properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-Subscription
Agreement did not provide for reciprocity of obligations; that the rights over the subject matter of the
rescission (capital assets and properties) had been acquired by a third party (FLADC); that they did not
commit a substantial and fundamental breach of their agreement since they did not prevent the Tius from
assuming the positions of Vice-President and Treasurer of FLADC, and that the failure to credit the
300,000 shares corresponding to the 1,902.30 square-meter property covered by TCT No. 134066
(formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the
approval of the SEC for the property contribution and, thereafter, the issuance of title in FLADC's name.
They also argued that the liquidation of FLADC may not legally be ordered by the appellate court even for
so called "practical considerations" or even to prevent "further squabbles and numerous litigations,"
since the same are not valid grounds under the Corporation Code. Moreover, the Ongs bewailed the
failure of the CA to grant interest on their P70 million and P20 million advances to FLADC and David S.
Tiu, respectively, and to award costs and damages.

In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand,
contended that the rescission should have been limited to the restitution of the parties' respective
investments and not the liquidation of FLADC based on the erroneous perception by the court that: the
Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that the Tius
invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius who executed the deed of
assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC thereby
failing to pay the price for the said shares; that they did not turn over to the Ongs the entire amount of
FLADC funds; that they were diverting rentals from lease contracts due to FLADC to their own
MATTERCO account; that the P70 million paid by the Ongs was an advance and not a premium on capital;
and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle away the management of
the mall and prevent the Ongs from enjoying the profits of their P190 million investment in FLADC.

On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming
the assailed decision of the Court of Appeals but with the following modifications:

1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent
(12%) per annum to be computed from the time of judicial demand which is from April 23, 1996;

2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per
annum to be computed from the date of the FLADC Board Resolution which is June 19, 1996; and

3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution,
specifically, the 151 sq. m. parcel of land.

This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under
the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-
President and Treasurer of the corporation. On the other hand, the Decision established that the Tius
failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their
MATTERCO account. Consequently, it held that rescission was not possible since both parties were in pari
delicto. However, this Court agreed with the Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would only lead to further "squabbles and
numerous litigations" between the parties.

On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the
grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to
Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of
the Tius since the case had been pending for more than six years; and (c) the SEC no longer had quasi-
judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition,
contending that the Decision dated February 1, 2002 was not yet final and executory; that no good reason
existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained
jurisdiction over pending cases involving intra-corporate disputes already submitted for final resolution
upon the effectivity of the said law.

Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs filed their own
"Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision)"
on March 15, 2002, raising two main points: (a) that specific performance and not rescission was the
proper remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of
this Court should be modified to entitle movants to their proportionate share in the mall.

On their first point (specific performance and not rescission was the proper remedy), movants Ong argue
that their alleged breach of the Pre-Subscription Agreement was, at most, casual which did not justify the
rescission of the contract. They stress that providing appropriate offices for David S. Tiu and Cely Y. Tiu
as Vice-President and Treasurer, respectively, had no bearing on their obligations under the Pre-
Subscription Agreement since the said obligation (to provide executive offices) pertained to FLADC itself.
Such obligation arose from the relations between the said officers and the corporation and not any of the
individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares of stock in
favor of the Tius for their property contributions also pertained to the corporation and not to the Ongs.
Just the same, it could not be done in view of the Tius' refusal to pay the necessary transfer taxes which in
turn resulted in the inability to secure SEC approval for the property contributions and the issuance of a
new TCT in the name of FLADC.

Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-Subscription
Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADC's loan to
PNB. Hence, in this light, the alleged failure to provide office space for the two corporate officers was no
more than an inconsequential infringement. For rescission to be justified, the law requires that the
breach of contract should be so "substantial or fundamental" as to defeat the primary objective of the
parties in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty of
fundamental violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO
account.

The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating the
Pre-Subscription Agreement, neither of them could resort to rescission under the principle of pari delicto.
In addition, since the cash and other contributions now sought to be returned already belong to FLADC,
an innocent third party, said remedy may no longer be availed of under the law.

On their second point (assuming rescission to be proper, the Ongs should be given their proportionate
share of the mall), movants Ong vehemently take exception to the second item in the dispositive portion
of the questioned Decision insofar as it decreed that whatever remains of the assets of FLADC and the
management thereof (after liquidation) shall be transferred to the Tius. They point out that the mall
itself, which would have been foreclosed by PNB if not for their timely investment of P190 million in
1994 and which is now worth about P1 billion mainly because of their efforts, should be included in any
partition and distribution. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted to the unjust enrichment of
the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding
the agreement was "the height of ingratitude" and an attempt "to pull a fast one" as it would prevent the
Ongs from enjoying the fruits of their P190 million investment in FLADC. It also contravenes this Court's
assurance in the questioned Decision that the Ongs and Tius "will have a bountiful return of their
respective investments derived from the profits of the corporation."

Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8, 2002, pointing out that
there was no violation of the Pre-Subscription Agreement on the part of the Ongs; that, after more than
seven years since the mall began its operations, rescission had become not only impractical but would
also adversely affect the rights of innocent parties; and that it would be highly inequitable and unfair to
simply return the P100 million investment of the Ongs and give the remaining assets now amounting to
about P1 billion to the Tius.

The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the arguments therein
are a mere re-hash of the contentions in the Ongs' petition for review and previous motion for
reconsideration of the Court of Appeals' decision. The Tius compare the arguments in said pleadings to
prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,12 the Ongs' present
motion is therefore pro-forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective
positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their
respective memoranda. On February 28, 2003, the Tius submitted their memorandum.

We grant the Ongs' motions for reconsideration.

This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine
Consumers Foundation, Inc. vs. National Telecommunications Commission,13 this Court, through then Chief
Justice Felix V. Makasiar, said that its members may and do change their minds, after a re-study of the
facts and the law, illuminated by a mutual exchange of views.14 After a thorough re-examination of the
case, we find that our Decision of February 1, 2002 overlooked certain aspects which, if not corrected,
will cause extreme and irreparable damage and prejudice to the Ongs, FLADC and its creditors.

The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to
meritorious motions for reconsideration. As long as the same adequately raises a valid ground15 (i.e., the
decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,16 we
ruled that a motion for reconsideration is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate court. We explained there that a movant
may raise the same arguments, if only to convince this Court that its ruling was erroneous. Moreover, the
rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not apply
if said arguments were not squarely passed upon and answered in the decision sought to be
reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs' arguments. For
instance, no clear ruling was made on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate dissolution or decrease of
authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere repetitions, were not considered or
clearly resolved by this Court.

Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription
Agreement. We rule that they could not.

FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius
owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in
FLADC as stockholders, an increase of the authorized capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized capital
stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with
the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the
parties' Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title
VII of the Corporation Code:

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to
be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties since the
subject matter of the transaction is property owned by the corporation – its shares of stock. Thus, the
subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not selling any of their own shares to them. It was
FLADC that did.

Considering therefore that the real contracting parties to the subscription agreement were FLADC and
the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their
personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly
not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs
inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that
"contracts take effect only between the parties, their assigns and heirs…" Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he
shows that he has a real interest affected thereby.17

In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the
Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and
governing their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding
the subscription of the parties to the corporation. They point out that these two component parts form
one whole agreement and that their terms and conditions are intrinsically related and dependent on each
other. Thus, the breach of the shareholders' agreement, which was allegedly the consideration for the
subscription contract, was also a breach of the latter.

Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until
after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is
obviously intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement in
which they were personally not parties-in-interest. Assuming arguendo that there were two "sub-
agreements" embodied in the Pre-Subscription Agreement, this Court fails to see how the shareholders
agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged interdependence. Be that as it may,
however, the Tius are nevertheless not the proper parties to raise this point because they were not
parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to
claim that the shareholders agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was
represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the
Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that
the corporation is being used "as a cloak or cover for fraud or illegality, or to work injustice."18

The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is
breach by FLADC. This must also fail because such an argument disregards the separate juridical
personality of FLADC.

The Tius allege that they were prevented from participating in the management of the corporation. There
is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her
function as such. The records show that the President, Wilson Ong, supervised the collection and receipt
of rentals in the Masagana Citimall;19 that he ordered the same to be deposited in the bank;20 and that he
held on to the cash and properties of the corporation.21 Section 25 of the Corporation Code prohibits the
President from acting concurrently as Treasurer of the corporation. The rationale behind the provision is
to ensure the effective monitoring of each officer's separate functions.

However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume their
positions, rescission due to breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and
adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or imagined offense,
to demand rescission of his subscription and call for the distribution of some part of the corporate assets
to him without complying with the requirements of the Corporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of
rescission of the subject agreement based on a less than substantial breach of subscription contract. Not
only are they not parties to the subscription contract between the Ongs and FLADC; they also have other
available and effective remedies under the law.

All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not prosper since rescission will
violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property
under the Corporation Code.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Rivera,22provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.23 This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which
allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of
Incorporation to reduce the authorized capital stock,24 (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings,25and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the
power of a corporation to acquire its own shares26 and in Section 122 on the prohibition against the
distribution of corporate assets and property unless the stringent requirements therefor are complied
with.27

The distribution of corporate assets and property cannot be made to depend on the whims and caprices
of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire
of the court a quo"to prevent further squabbles and future litigations" unless the indispensable
conditions and procedures for the protection of corporate creditors are followed. Otherwise, the
"corporate peace" laudably hoped for by the court will remain nothing but a dream because this time, it
will be the creditors' turn to engage in "squabbles and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.

In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating the
Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of
the instances when distribution of capital assets and property of the corporation is allowed.

Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature liquidation of
the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and
120 of the Corporation Code.28 The Tius maintain that rescinding the subscription contract is not
synonymous to corporate liquidation because all rescission will entail would be the simple restoration of
the status quo ante and a return to the two groups of their cash and property contributions. We wish it
were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant case
will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of
rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable
and disastrous effect on the corporation, its creditors and the Ongs.

In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not
result in an unauthorized liquidation of the corporation because their case is actually a petition to
decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides
that "(e)xcept by decrease of capital stock…, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and liabilities." The Tius claim that their
case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures
under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file
with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said
decrease. This new argument has no merit.

The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such
action never complied with the formal requirements for decrease of capital stock under Section 33 of the
Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurer's affidavit and no proof that said decrease will
not prejudice the creditors' rights. On the contrary, all their pleadings contained were alleged acts of
violations by the Ongs to justify an order of rescission.

Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel
FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a
corporation's authorized capital stock is an amendment of the Articles of Incorporation. It is a decision
that only the stockholders and the directors can make, considering that they are the contracting parties
thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a
corporate decision. They want this Court to make a corporate decision for FLADC. We decline to intervene
and order corporate structural changes not voluntarily agreed upon by its stockholders and directors.

Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's directors and
stockholders is a violation of the "business judgment rule" which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs
aver that the defendants (members of the board), have concluded a transaction among themselves
as will result in serious injury to the plaintiffs stockholders.29
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in
corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board mainly
because, courts are not in the business of business, and the laissez faire rule or the free enterprise
system prevailing in our social and economic set-up dictates that it is better for the State and its
organs to leave business to the businessmen; especially so, when courts are ill-equipped to make
business decisions. More importantly, the social contract in the corporate family to decide the
course of the corporate business has been vested in the board and not with courts.30

Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the
corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock.
Ordering the return and distribution of the Ongs' capital contribution without dissolving the corporation
or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate
creditors who enjoy absolute priority of payment over and above any individual stockholder thereof.

Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If
rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other
hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because the Ongs
will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will
not only enjoy a windfall estimated to be anywhere from P450 million to P900 million31 but will also take
over an extremely profitable business without much effort at all.

Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1,
2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed
breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging from the
comparative gravity of the acts separately committed by each group, we find that the Ongs' acts were
relatively tame vis-à-vis those committed by the Tius in not surrendering FLADC funds to the corporation
and diverting corporate income to their own MATTERCO account. The Ongs were right in not issuing to
the Tius the shares corresponding to the four-story building and the 1,902.30 square-meter lot because
no title for it could be issued in FLADC's name, owing to the Tius' refusal to pay the transfer taxes. And as
far as the 151 square-meter lot was concerned, why should FLADC issue additional shares to the Tius for
property already owned by the corporation and which, in the final analysis, was already factored into the
shareholdings of the Tius before the Ongs came in?

We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one" on
the Ongs because that was where the problem precisely started. It is clear that, when the finances of
FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take over
the corporation again and exclude the Ongs from it. It appears that the Tius' refusal to pay transfer taxes
might not have really been at all unintentional because, by failing to pay that relatively small amount
which they could easily afford, the Tius should have expected that they were not going to be given the
corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other
words, the Tius created a problem then used that same problem as their pretext for showing their
partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between P450
million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by
PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be
what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There
are no ifs or buts about it.

Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this
and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their
investments — assuming good faith and honest intentions — we cannot allow the rescission of the
subject subscription agreement. The Ongs' shortcomings were far from serious and certainly less than
substantial; they were in fact remediable and correctable under the law. It would be totally against all
rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.

WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan
Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for partial
reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for
Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269
is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-
Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.

The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely
Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for
being moot.

Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision
of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby
REVERSED.

Costs against the petitioner Tius.

SO ORDERED.

FIRST DIVISION

G.R. No. 154069, June 06, 2016

INTERPORT RESOURCES CORPORATION, Petitioner, v. SECURITIES SPECIALIST, INC., AND R.C. LEE
SECURITIES INC., Respondents.

DECISION

BERSAMIN, J.:

This appeal assails the decision promulgated on February 11, 2002,1 whereby the Court of Appeals (CA),
in C.A.-G.R. SP No. 66600, affirmed the decision the Securities and Exchange Commission (SEC) rendered
in SEC AC No. 501-5022 ordering Interport Resources Corporation (Interport) to deliver 25% of the
shares of stocks under Subscription Agreements Nos. 1805 and 1808-1811, or the value thereof, and to
pay to respondent Securities Specialist, Inc. (SSI), jointly and severally with R.C. Lee Securities, Inc. (R.C.
Lee), exemplary damages and litigation expenses.
Antecedents

In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription agreement
with R.C. Lee, a domestic corporation engaged in the trading of stocks and other securities, covering
5,000,000 of its shares with par value of P0.01 per share, for a total of P50,000.00. Thereupon, R.C. Lee
paid 25% of the subscription, leaving 75% unpaid. Consequently, Oceanic issued Subscription
Agreements Nos. 1805, 1808, 1809, 1810, and 1811 to R.C. Lee.3chanrobleslaw

On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Interport
was a publicly-listed domestic corporation whose shares of stocks were traded in the stock exchange.
Under the terms of the merger, each share of Oceanic was exchanged for a share of
Interport.4chanrobleslaw

On April 16, 1979 and April 18, 1979, SSI, a domestic corporation registered as a dealer in securities,
received in the ordinary course of business Oceanic Subscription Agreements Nos. 1805, 1808 to 1811,
all outstanding in the name of R.C. Lee, and Oceanic official receipts showing that 25% of the
subscriptions had been paid.5 The Oceanic subscription agreements were duly delivered to SSI through
stock assignments indorsed in blank by R.C. Lee.6chanrobleslaw

Later on, R.C. Lee requested Interport for a list of subscription agreements and stock certificates issued in
the name of R.C. Lee and other individuals named in the request. In response, Atty. Rhodora B. Morales,
Interport1 s Corporate Secretary, provided the requested list of all subscription agreements of Interport
and Oceanic, as well as the requested stock certificates of Interport.7 Upon finding no record showing any
transfer or assignment of the Oceanic subscription agreements and stock certificates of Interport as
contained in the list, R.C. Lee paid its unpaid subscriptions and was accordingly issued stock certificates
corresponding thereto.8chanrobleslaw

On February 8, 1989, Interport issued a call for the full payment of subscription receivables, setting
March 15, 1989 as the deadline. SSI tendered payment prior to the deadline through two stockbrokers of
the Manila Stock Exchange. However, the stockbrokers reported to SSI that Interport refused to honor the
Oceanic subscriptions.9chanrobleslaw

Still on the date of the deadline, SSI directly tendered payment to Interport for the balance of the
5,000,000 shares covered by the Oceanic subscription agreements, some of which were in the name of
R.C. Lee and indorsed in blank. Interport originally rejected the tender of payment for all unpaid
subscriptions on the ground that the Oceanic subscription agreements should have been previously
converted to shares in Interport.10chanrobleslaw

SSI then required Interport to furnish it with a copy of any notice requiring the conversion of Oceanic
shares to Interport shares. However, Interport failed to show any proof of the notice. Thus, through a
letter dated March 30, 1989, SSI asked the SEC for a copy of Interport's board resolution requiring said
conversion. The SEC, through Atty. Fe Eloisa C. Gloria, Director of Brokers and Exchange Department,
informed SSI that the SEC had no record of any such resolution.11chanrobleslaw

Having confirmed the non-existence of the resolution, Francisco Villaroman, President of SSI, met with
Pablo Roman, President and Chairman of the Board of Interport, and Atty. Pineda, Interport's Corporate
Secretary, at which meeting Villaroman formally requested a copy of the resolution. However, Interport
did not produce a copy of the resolution.12chanrobleslaw
Despite that meeting, Interport still rejected SSI's tender of payment for the 5,000,000 shares covered by
the Oceanic Subscription Agreements Nos. 1805, and 1808 to 1811.13chanrobleslaw

On March 31, 1989, or 16 days after its tender of payment, SSI learned that Interport had issued the
5,000,000 shares to R.C. Lee, relying on the latter's registration as the owner of the subscription
agreements in the books of the former, and on the affidavit executed by the President of R.C. Lee stating
that no transfers or encumbrances of the shares had ever been made.14chanrobleslaw

Thus, on April 27, 1989, SSI wrote R.C. Lee demanding the delivery of the 5,000,000 Interport shares on
the basis of a purported assignment of the subscription agreements covering the shares made in 1979.
R.C. Lee failed to return the subject shares inasmuch as it had already sold the same to other parties. SSI
thus demanded that R.C. Lee pay not only the equivalent of the 25% it had paid on the subscription but
the whole 5,000,000 shares at current market value.15chanrobleslaw

SSI also made demands upon Interport and R.C. Lee for the cancellation of the shares issued to R.C. Lee
and for the delivery of the shares to SSI.16chanrobleslaw

On October 6, 1989, after its demands were not met, SSI commenced this case in the SEC to compel the
respondents to deliver the 5,000,000 shares and to pay damages.17 It alleged fraud and collusion between
Interport and R.C. Lee in rejecting the tendered payment and the transfer of the shares covered by the
subscription agreements.

On October 25, 1994, after due hearing, the Hearing Officer of the SEC's Securities Investigation and
Clearing Department (SICD) rendered a decision,18 disposing thusly:ChanRoblesVirtualawlibrary
WHEREFORE, judgment is hereby rendered ordering respondent Interport to deliver the five (5) million
shares covered by Oceanic Oil and Mineral Resources, Inc. subscription agreement TNos. 1805, 1808-
1811 to petitioner SSI; and if the same not be possible to deliver the value thereof, at the market price as
of the date of this judgment; and ordering both respondents, jointly and severally, to indemnify the
complainant in the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of temperate or
moderate damages, to indemnify complainant in the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) by way of exemplary damages; to pay for complainant's litigation expenses, including
attorney's fees, reasonably in the sum of THREE HUNDRED THOUSAND pesos (P300,000.00) and to pay
the costs of suit.19chanroblesvirtuallawlibrary
Both Interport and R.C. Lee appealed to the SEC En Banc, which ultimately ruled as
follows:ChanRoblesVirtualawlibrary
After a careful review of the records of this case, we find basis in partially reversing the decision dated
October 25, 1994.

It is undisputed from the facts presented and evidence adduced that the subject matter of this case
pertains to the subscription agreements for which complainant paid only twenty five percent and the
remaining balance of seventy five percent paid for by respondent RCL. Accordingly, to order the return of
the five million shares or the payment of the entire value thereof to the complainant, without requiring
the latter to pay the balance of seventy five percent will be inequitable. Accordingly, the pertinent portion
of the decision is hereby revised to reflect this.

As regards the portion awarding temperate damages, the same may not be awarded. All evidence
presented by Securities Specialist, Inc. pertaining to its "lost opportunity" seeking for damages for its
supposed failure to sell Interport's shares, when the market was allegedly good, is merely speculative.
Moreover, even if the alleged pecuniary loss of SSI would be considered, the same is again purely
speculative and deserves scant consideration by the Commission. Hence, temperate damages may not be
justly awarded along with the other damages prayed for.

WHEREFORE, premises considered, judgment is hereby rendered, ordering respondent Interport to


deliver the corresponding shares previously covered by Oceanic Oil Mineral Resources Inc. subscription
agreements Nos. 1805-1811 to petitioner SSI, to the extent only of 25% thereof, as duly paid by petitioner
SSI; and if the same will not be possible, to deliver the value thereof at the market price as of the date of
this judgment and ordering both respondents jointly and severally, to indemnify the complainant in the
sum of five hundred thousand pesos (P500,000.00) by way of exemplary damages, to pay for
complainant's litigation expenses, including attorney's fees, reasonably in the sum of three hundred
thousand pesos (P300,000.00) and to pay the costs of the suit.20chanroblesvirtuallawlibrary
Interport appealed to the CA,21 which on February 11, 2002 affirmed the SEC's
decision,22viz.:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered the Petition is hereby DENIED DUE COURSE and ordered DISMISSED
and the challenged decision of the Securities and Exchange Commission AFFIRMED, with costs to
Petitioner.

SO ORDERED.
On June 25, 2002, the CA denied Interport's motion for reconsideration.23chanrobleslaw

Issues

Interport assigns the following errors to the CA, namely:ChanRoblesVirtualawlibrary


I

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN THE
APPRECIATION OF THE FACTS IN HOLDING PETITIONER LIABLE TO DELIVER THE 25% OF THE
SUBJECT 5 MILLION SHARES OR IF THE SAME NOT BE POSSIBLE TO DELIVER THE VALUE THEREOF
DESPITE THE EVIDENCE TO THE CONTRARY.

II

THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS LIABLE FOR EXEMPLARY DAMAGES
IN THE AMOUNT OF P500 000.00 WITHOUT LEGAL BASIS, WHICH IS NOT IN ACCORD WITH LAW AND
APPLICABLE DECISIONS OF THE SUPREME COURT.

III

THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS LIABLE FOR ATTORNEY'S FEES IN
THE AMOUNT OF P300.000.00 AND COSTS THERE BEING NO FACTUAL AND LEGAL BASIS, WHICH IS
NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THE SUPREME
COURT.24chanroblesvirtuallawlibrary
The issues are: (a) whether or not Interport was liable to deliver to SSI the Oceanic shares of stock, or the
value thereof, under Subscriptions Agreement No. 1805, and Nos. 1808 to 1811 to SSI; and (b) whether or
not SSI was entitled to exemplary damages and attorney's fees.

Ruling
The appeal is partly meritorious.

1.

Interport was liable to deliver the Oceanic shares of stock, or the value thereof, under
Subscription Agreements Nos. 1805, and 1808 to 1811 to SSI

Interport argues that R.C. Lee should be held liable for the delivery of 25% of the shares under the subject
subscription agreements inasmuch as R.C. Lee had already received all the 5,000,000 shares upon its
payment of the 75% balance on the subscription price to Interport; that it was only proper for R.C. Lee to
deliver 25% of the shares under the Oceanic subscription agreements because it had already received the
corresponding payment therefor from SSI for the assignment of the shares; that R.C. Lee would be
unjustly enriched if it retained the 5,000,000 shares and the 25% payment of the subscription price made
by SSI in favor of R.C. Lee as a result of the assignment; and that it merely relied on its records, in
accordance with Section 74 of the Corporation Code, when it issued the stock certificates to R.C. Lee upon
its full payment of the subscription price.

Interport's arguments must fail.

In holding Interport liable for the delivery of the Oceanic shares, the SEC
explained:ChanRoblesVirtualawlibrary
x x x [T]he Oceanic subscriptions agreements were duly delivered to the Complainant SSI supported by
stock assignments of respondent R.C. Lee (Exhibits "B" to "B-4" of the petitioner) and by official receipts
of Oceanic showing that twenty five percent of the subscription had been paid (Exhibits "C" to "C-4"). To
this date, respondent R.C. Lee does not deny having subscribed and delivered such stock
assignments to the Oceanic subscription agreements. Therefore, having negotiated them by
allowing to be in street certificates, respondent R.C. Lee, as a broker, cannot now legally and
morally claim any further interests over such subscriptions or the shares of stock they represent.

xxxx

Both respondents seek to be absolved of liability for their machinations by invoking both the rule on
novation of the debtor without the creditor's consent; as well as the Corporation Code rule of non-
registration of transfers in the corporation's stock and transfer book. Neither will avail in the case at bar.
Art. 1293 of the New Civil Code states:

chanRoblesvirtualLawlibrary"Art. 1293. Novation which consists in substituting a new debtor in the


place of the original one may be made even without the knowledge or against the will of the latter but not
without the consent of the creditor" x x x.

More importantly, the allusion by the respondents likening the subscription contracts to the situation of
debtor-creditor finds no basis in law. Indeed, as held by the Supreme Court, shareholders are not
creditors of the corporation with respect to the shareholdings (Garcia vs. Lim Chu Sing, 59 Phil. 562).

The Memorandum of R.C. Lee, likewise cites the Opinion of the SEC dated November 12, 1976, which
states "that since an assignment will involve a substitution of debtor or novation of contract, as such the
consent of the creditor must be obtained" has the same effect. The opinion, however, merely restated the
general rule already embodied in the Codal provision quoted above; it does not preclude previously
authorized transfers. According to Tolentino -
"When the original contract authorizes the debtor to transfer his obligations to a third person, the
novation by substitution of debtor is effected when the creditor is notified that such transfer has been
made" (IV Tolentino 392, 1991 ed, Emphasis supplied)
But even following the argument of the respondents, when complainant SSI tendered the balance
of the unpaid subscription on the subject five (5) million shares on the basis of the existing
subscription agreements covering the same, respondents Interport was bound to accept payment
even as the same were being tendered in the name of the registered subscriber, respondent R.C.
Lee and once the payment is fully accepted in the name of respondent R.C. Lee, respondent
Interport was then bound to recognize the stock assignment also tendered duly executed by
respondent R.C. Lee in favor of complainant SSI.25cralawred(bold Emphasis supplied.)
The SEC correctly categorized the assignment of the subscription agreements as a form of novation by
substitution of a new debtor and which required the consent of or notice to the creditor. We agree. Under
the Civil Code, obligations may be modified by: (1) changing their object or principal conditions; or (2)
substituting the person of the debtor; or (3) subrogating a third person in the rights of the
creditor.26Novation, which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor.27 In this case, the change of debtor took place when R.C. Lee assigned the Oceanic shares under
Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI so that the latter became obliged to settle the
75% unpaid balance on the subscription.

The SEC likewise did not err in appreciating the fact that Interport was duly notified of the assignment
when SSI tendered its payment for the 75% unpaid balance, and that it could not anymore refuse to
recognize the transfer of the subscription that SSI sufficiently established by documentary evidence.

Yet, Interport claims that SSI waived its rights over the 5,000,000 shares due to its failure to register the
assignment in the books of Interport; and that SSI was estopped from claiming the assigned shares,
inasmuch as the assignor, R.C. Lee, had already transferred the same to third parties.

Interport's claim cannot be upheld. It should be stressed that novation extinguished an obligation
between two parties.28 We have stated in that respect that:ChanRoblesVirtualawlibrary
x x x Novation may:

chanRoblesvirtualLawlibrary[E]ither be extinctive or modificatory, much being dependent on the nature


of the change and the intention of the parties. Extinctive novation is never presumed; there must be an
express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate
their intent to dissolve the old obligation as the moving consideration for the emergence of the new one.
Implied novation necessitates that the incompatibility between the old and new obligation be total on
every point such that the old obligation is completely superseded by the new one. The test of
incompatibility is whether they can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation
and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new
contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation.
Novation is merely modificatory where the change brought about by any subsequent agreement is
merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in
this instance, the new agreement will not have the effect of extinguishing the first but would merely
supplement it or supplant some but not all of its provisions.29chanroblesvirtuallawlibrary
Clearly, the effect of the assignment of the subscription agreements to SSI was to extinguish the
obligation of R.C. Lee to Oceanic, now Interport, to settle the unpaid balance on the subscription. As a
result of the assignment, Interport was no longer obliged to accept any payment from R.C. Lee because
the latter had ceased to be privy to Subscription Agreements Nos. 1805, and 1808 to 1811 for having
been extinguished insofar as it was concerned. On the other hand, Interport was legally bound to accept
SSI's tender of payment for the 75% balance on the subscription price because SSI had become the new
debtor under Subscription Agreements Nos. 1805, and 1808 to 1811. As such, the issuance of the stock
certificates in the name of R.C. Lee had no legal basis in the absence of a contractual agreement between
R.C. Lee and Interport.

Under Section 63 of the Corporation Code, no transfer of shares of stock shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred. Hence:ChanRoblesVirtualawlibrary
[A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated
by law to recognize arises.30chanroblesvirtuallawlibrary
This statutory rule cannot be strictly applied herein, however, because Interport had unduly refused to
recognize the assignment of the shares between R.C. Lee and SSI. Accordingly, we adopt with approval
the SEC's following conclusion that -
x x x To say that the ten years since the assignment had been made are a sufficient lapse of time in order
for respondent SSI to be considered to have abandoned its rights under the subscription agreements, is to
ignore the rule -
"The right to have the transfer registered exists from the time of the transfers and it is to the transferee's
benefit that the right be exercised early. However, since the law does not prescribed (sic) any period
within which the registration should be effected the action to be enforced the right does not accrue until
here has been a demand and a refusal to record the transfer." (11 Campus 310, 1990 ed., citing Won v.
Wack Wack Golf, 104 Phil. 466, Emphasis supplied).
Petitioner SSI was denied recognition of its subscription agreement on March 15, 1989; the complaint
against the respondents was filed before the SEC on October 6 of that same year. This is the period of
time that is to be taken into account, not the period between 1979 and 1989. The Commission thus finds
that petitioner acted with sufficient dispatch in seeking to enforce its rights under the subscription
agreements, and sought the intervention of this Commission within a reasonable period.

In the affidavit of respondent R.C. Lee's president, Ramon C. Lee, dated February 22, 1989, there are
several averments that need to be examined, in the light of respondent R.C. Lee's claim of having acted in
good faith.

The first is the statement made in paragraph 3 thereof:ChanRoblesVirtualawlibrary


"That R.C. Lee Securities, Inc. has delivered to Interport its subscription Agreements for Twenty Five
Million (25,000,000) shares of Oceanic for conversion into Interport shares however, as of date, only
twenty million (20,000,000) shares have been duly covered by Interport Subscription Agreements and
the Five million (5,000,000) shares still remains without Subscription Agreements".
No explanation is given for the failure of respondent Interport to convert the five (5) million shares. As
can be seen from the letter of Interport to counsel of R.C. Lee, dated January 27, 1989, already mentioned
above, these five (5) million shares purportedly belonging to respondent R.C. Lee do not seem to be
covered by any properly identified subscription agreements. Yet respondent Interport issued the shares
without respondent R.C. Lee having anything to show for the same. On the other hand, respondent
Interport refused to recognize complainant SSI's claim to five (5) millions (sic) shares inspite of the fact
that its claim was fully supported by duly issued subscription agreements, stock assignment and receipts
of payment of the initial subscription. x x x31chanrobleslaw

Subscription Agreements Nos. 1805, and 1808 to 1811 were now binding between Interport and SSI only,
and only such parties were expected to comply with the terms thereof. Hence, the CA did not err in
relying on the findings of the SEC, which was in a better position to pass judgment on whether or not
Interport was liable to deliver to SSI the Oceanic shares under Subscription Agreements Nos. 1805, and
1808 to 1811.
2.

Interport and R.C. Lee were not liable to pay exemplary damages and attorney's fees

Article 2229 of the Civil Code provides that exemplary damages may be imposed by way of example or
correction for the public good. While exemplary damages cannot be recovered as a matter of right, they
need not be proved, although the plaintiff must show that he is entitled to moral, temperate, or
compensatory damages before the court may consider the question of whether or not exemplary
damages should be awarded. Exemplary damages are imposed not to enrich one party or impoverish
another, but to serve as a deterrent against or as a negative incentive to curb socially deleterious
actions.32chanrobleslaw

SSI was not able to show that it was entitled to moral, temperate, or compensatory damages. In fact, the
SEC pointed out that the award of temperate damages was not proper because SSI's alleged pecuniary
loss was merely speculative in nature. Neither could SSI recover exemplary damages considering that
there was no award of moral damages. Indeed, exemplary damages are to be allowed only in addition to
moral damages, and should not be awarded unless the claimant first establishes a clear right to moral
damages.33chanrobleslaw

Nonetheless, the Court observes that exemplary damages were awarded in the past despite the award of
moral damages being deleted because the defendant party to a contract acted in a wanton, fraudulent,
oppressive or malevolent manner.34chanrobleslaw

In this case, the Court finds that Interport's act of refusing to accept SSI's tender of payment for the 75%
balance of the subscription price was not performed in a wanton, fraudulent, oppressive or malevolent
manner. In doing so, Interport merely relied on its records which did not show that an assignment of the
shares had already been made between R.C. Lee and SSI as early as 1979. R.C. Lee, on the other hand,
persisted in paying the 75% balance on the subscription price simply on the basis of Interport's
representation that no transfer has yet been made in connection with Subscription Agreement Nos. 1805,
and 1808 to 1811. Although Interport and R.C. Lee might have acted in bad faith35 in refusing to recognize
the assignment of the subscription agreements in favor of SSI, their acts certainly did not fall within the
ambit of being performed in a wanton, fraudulent, oppressive or malevolent manner as to entitle SSI to
an award for exemplary damages.

We delete the attorney's fees for lack of legal basis.36chanrobleslaw

WHEREFORE, the Court PARTIALLY GRANTS the petition for review on certiorari; and AFFIRMS the
decision promulgated on February 11, 2002 subject to the following MODIFICATIONS, namely:

chanRoblesvirtualLawlibrary1. ORDERING Interport Resources Corporation: (a) To accept the tender of


payment of Securities Specialist, Inc. corresponding to the 75% unpaid balance of the total subscription
price under Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; (b) To deliver 5,000,000
shares of stock and to issue the corresponding stock certificates to Securities Specialist, Inc. upon receipt
of the payment of the latter under Item No. (a); (c) To cancel the stock certificates issued to R.C. Lee
Securities, Inc. corresponding to the 5,000,000 shares of stock covered by Subscription Agreements Nos.
1805, 1808, 1809, 1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the amounts it paid
representing the 75% unpaid balance of the total subscription price of Subscription Agreements Nos.
1805, 1808, 1809, 1810 and 1811; and (e) In the alternative, if the foregoing is no longer possible,
Interport Resources Corporation shall pay Securities Specialist, Inc. the market value of the 5,000,000
shares of stock covered by Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811 at the time of
the promulgation of this decision; and cralawlawlibrary

2. DELETING the award for exemplary damages and attorney's fees for lack of merit.

No pronouncement on costs of suit.

SO ORDERED.chanRoblesvirtualLawlibrary

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,


vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.


Office of the Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of
liquidation of the assets of the corporation reciting, among other things, that by virtue of a resolution of
the stockholders adopted on September 17, 1960, dissolving the corporation, they have distributed
among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said
corporation, including real properties located in Manila.
The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration
on seven grounds, of which the following were disputed by the stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the disposition of the assets
of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled
ground No. 7 and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three
grounds on which the denial of the registration of the certificate of liquidation was predicated hinges on
whether or not that certificate merely involves a distribution of the corporation's assets or should be
considered a transfer or conveyance.

Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a
distribution of the assets of the corporation which has ceased to exist for having been dissolved. This is
apparent in the minutes for dissolution attached to the document. Not being a conveyance the certificate
need not contain a statement of the number of parcel of land involved in the distribution in the
acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed thereon
should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to require
appellants to pay the amount of P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the
view expressed by the register of deed to the effect that the certificate of liquidation in question, though it
involves a distribution of the corporation's assets, in the last analysis represents a transfer of said assets
from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance.

We agree with the opinion of these two officials. A corporation is a juridical person distinct from the
members composing it. Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of stock constitute personal property they do not
represent property of the corporation. The corporation has property of its own which consists chiefly of
real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share
of stock only typifies an aliquot part of the corporation's property, or the right to share in its proceeds to
that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398,
56 So., 235), but its holder is not the owner of any part of the capital of the corporation (Bradley v.
Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or
assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-
owner or tenant in common of the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).
On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of
the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of
community property, but rather a transfer or conveyance of the title of its assets to the individual
stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the stockholders in proportion to their
shareholdings, — and this is in effect the purpose which they seek to obtain from the Register of Deeds of
Manila, — that transfer cannot be effected without the corresponding deed of conveyance from the
corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as
one in the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. Nos. L-24177-85 June 29, 1968

PHILIPPINE NATIONAL BANK, plaintiff-appellee,


vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE LUMBER CO., INC., NASIPIT
LUMBER CO., INC., WOODWORKS, INC., GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR
LUMBER CO., INC., ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN LUMBER
CO., INC., defendants-appellees.

Tomas Besa, Simplicio N. Angeles and Jose B. Galang for plaintiff-appellee.


Bausa, Ampil and Suarez for defendant-appellant Woodworks, Inc.
Pacifico de Ocampo for defendant-appellant Anakan Lumber Co.
Ross, Selph, Salcedo, Del Rosario, Bito and Misa for defendant-appellant Insular Lumber Co.
Garin, Boquiren and Tamesis for defendant-appellant Nasipit Lumber Co., Inc.
Feria, Manglapus and Associates for defendant-appellant Gonzalo Puyat.
Sycip, Salazar and Associates for defendant-appellant Cantilan Lumber Co., Inc.
Ozaeta, Gibbs and Ozaeta for defendant-appellant Findlay Millar Lumber Co., Inc.
Dominador Alafriz for defendant-appellant Bitulok Sawmill, Inc.
De la Costa and De la Costa for defendant-appellant Tomas B. Morato.

FERNANDO, J.:

In the face of a statutory norm, which, as interpreted in a uniform line of decisions by this Court, speaks
unequivocally and is free from doubt, the lower court with full recognition that the case for the plaintiff
creditor, Philippine National Bank, "is meritorious strictly from the legal standpoint" 1 but apparently
unable to "close its eyes to the equity of the case" 2 dismissed nine (9) cases filed by it, seeking "to recover
from the defendant lumber producers [Bitulok Sawmill, Inc.; Dingalan Lumber Co., Inc., Sierra Madre
Lumber Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay
Millar Lumber Co., Inc.; Insular Lumber Co., Inc.; Anakan Lumber Co., Inc.; and Cantilan Lumber Co., Inc.]
the balance of their stock subscriptions to the Philippine Lumber Distributing Agency, Inc." 3 In essence
then, the crucial question posed by this appeal from such a decision of the lower court is adherence to the
rule of law. Otherwise stated, would non-compliance with a plain statutory command, considering the
persuasiveness of the plea that defendants-appellees would "not have subscribed to [the] capital stock" of
the Philippine Lumber Distributing Agency "were it not for the assurance of the [then] President of the
Republic of the Philippines that the Government would back [it] up by investing P9.00 for every
peso" 4subscribed, a condition which was not fulfilled, such commitment not having been complied with,
be justified? The answer must be in the negative.

It cannot be otherwise even if an element of unfairness and injustice could be predicated, as the lower
court, in a rather sympathetic mood, did find in the plaintiff bank, as creditor, compelling defendant
lumber producers under the above circumstances to pay the balance of their subscriptions. For a plain
and statutory command, if applicable, must be respected. The rule of law cannot be satisfied with
anything less. The appeal must be sustained.

In these various suits decided jointly, the Philippine National Bank, as creditor, and therefore the real
party in interest, was allowed by the lower court to substitute the receiver of the Philippine Lumber
Distributing Agency in these respective actions for the recovery from defendant lumber producers the
balance of their stock subscriptions. The amount sought to be collected from defendants-appellees
Bitulok Sawmill, Inc., Dingalan Lumber Co., Inc., and Sierra Madre Lumber Co., Inc., is P5,000.00,
defendants-appellees having made a partial payment of P15,000.00 of their total subscription worth
P20,000.00; from defendant-appellee Nasipit Lumber Co., Inc., the sum of P10,000.00, defendant-appellee
having made a partial payment of P10,000.00 of its total subscription worth P20,000.00; from defendant-
appellee Woodworks, Inc., the sum of P10,886.00, defendant-appellee having made a partial payment of
P9,114.00 of its total subscription worth P20,000.00; from defendant-appellee Gonzalo Puyat the sum of
P10,000.00, defendant-appellee having made a partial payment of P10,000.00 of his total subscription
worth P20,000.00; from defendant-appellee Tomas Morato the sum of P10,000.00, defendant-appellee
having made a partial payment of P10,000.00 of his total subscription worth P20,000.00; from defendant-
appellee Findlay Millar Lumber Co., Inc., the sum of P10,000.00, defendant-appellee having made a partial
payment of P10,000.00 of its total subscription worth P20,000.00; from defendant-appellee Insular
Lumber Co., Inc., the sum of P5,000.00, defendant-appellee having made a partial payment of P15,000.00
of its total subscription worth P20,000.00; from defendant-appellee Anakan Lumber Co., Inc., the sum of
P15,000.00, defendant-appellee having made a partial payment of P5,000.00 of its total subscription
worth P20,000.00; and from defendant-appellee Cantilan Lumber Co., Inc., the sum of P7,500.00,
defendant-appellee having made a partial payment of P2,500.00 of its total subscription worth
P10,000.00, plus interest at the legal rate from the filing of the suits and the costs of the suits in all the
nine (9) cases.

The Philippine Lumber Distributing Agency, Inc., according to the lower court, "was organized sometime
in the early part of 1947 upon the initiative and insistence of the late President Manuel Roxas of the
Republic of the Philippines who for the purpose, had called several conferences between him and the
subscribers and organizers of the Philippine Lumber Distributing Agency, Inc." 5 The purpose was
praiseworthy, to insure a steady supply of lumber, which could be sold at reasonable prices to enable the
war sufferers to rehabilitate their devastated homes. The decision continues: "He convinced the lumber
producers to form a lumber cooperative and to pool their sources together in order to wrest, particularly,
the retail trade from aliens who were acting as middlemen in the distribution of lumber. At the beginning,
the lumber producers were reluctant to organize the cooperative agency as they believed that it would
not be easy to eliminate from the retail trade the alien middlemen who had been in this business from
time immemorial, but because the late President Roxas made it clear that such a cooperative agency
would not be successful without a substantial working capital which the lumber producers could not
entirely shoulder, and as an inducement he promised and agreed to finance the agency by making the
Government invest P9.00 by way of counterpart for every peso that the members would invest
therein,...." 6

This was the assurance relied upon according to the decision, which stated that the amount thus
contributed by such lumber producers was not enough for the operation of its business especially having
in mind the primary purpose of putting an end to alien domination in the retail trade of lumber products.
Nor was there any appropriation by the legislature of the counterpart fund to be put up by the
Government, namely, P9.00 for every peso invested by defendant lumber producers. Accordingly, "the
late President Roxas instructed the Hon. Emilio Abello, then Executive Secretary and Chairman of the
Board of Directors of the Philippine National Bank, for the latter to grant said agency an overdraft in the
original sum of P250,000.00 which was later increased to P350,000.00, which was approved by said
Board of Directors of the Philippine National Bank on July 28, 1947, payable on or before April 30, 1958,
with interest at the rate of 6% per annum, and secured by the chattel mortgages on the stock of lumber of
said agency." 7 The Philippine Government did not invest the P9.00 for every peso coming from defendant
lumber producers. The loan extended to the Philippine Lumber Distributing Agency by the Philippine
National Bank was not paid. Hence, these suits.

For the lower court, the above facts sufficed for their dismissal. To its mind "it is grossly unfair and unjust
for the plaintiff bank now to compel the lumber producers to pay the balance of their subscriptions ....
Indeed, when the late President Roxas made representations to the plaintiff bank, thru the Hon. Emilio
Abello, who was then the Executive Secretary and Chairman of its Board of Directors, to grant said
overdraft to the agency, it was the only way by which President Roxas could make good his commitment
that the Government would invest in said agency to the extent already mentioned because, according to
said late President Roxas, the legislature had not appropriated any amount for such counterpart.
Consequently, viewing from all considerations of equity in the case, the Court finds that plaintiff bank
should not collect any more from the defendants the balance of their subscriptions to the capital stock of
the Philippine Lumber Distributing Agency, Inc." 8

Even with the case for defendant lumber producers being put forth in its strongest possible light in the
appealed decision, the plaintiff creditor, the Philippine National Bank, should have been the prevailing
party. On the law as it stands, the judgment reached by the lower court cannot be sustained. The appeal,
as earlier made clear, possesses merit.

In Philippine Trust Co. v. Rivera, 9 citing the leading case of Velasco v. Poizat, 10 this Court held: "It is
established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors
have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of its debt.... A
corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under the conditions prescribed by
the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary...." The Poizat doctrine found acceptance in later cases. 11One of the latest
cases, Lingayen Gulf Electric Power v. Baltazar, 12 Speaks to this effect: "In the case of Velasco v.
Poizat, 13 the corporation involved was insolvent, in which case all unpaid stock subscriptions become
payable on demand and are immediately recoverable in an action instituted by the assignee."
It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock
subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be
invested by the Government would not be available. Even if such were the case, however, and such a
promise were in fact made, to further the laudable purpose to which the proposed corporation would be
devoted and the possibility that the lumber producers would lose money in the process, still the plain and
specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a
well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the
prerogative of suspending the operation of any statute or any of its terms.

The emphatic and categorical language of an American decision cited by the late Justice Laurel, in People
v. Vera, 14 comes to mind: "By the twentieth article of the declaration of rights in the constitution of this
commonwealth, it is declared that the power of suspending the laws, or the execution of the laws, ought
never to be exercised but by the legislature, or by authority derived from it, to be exercised in such
particular cases only as the legislature shall expressly provide for...." Nor could it be otherwise
considering that the Constitution specifically enjoins the President to see to it that all laws be faithfully
executed. 15 There may be a discretion as to what a particular legal provision requires; there can be none
whatsoever as to the enforcement and application thereof once its meaning has been ascertained. What it
decrees must be followed; what it commands must be obeyed. It must be respected, the wishes of the
President, to the contrary notwithstanding, even if impelled by the most worthy of motives and the most
persuasive equitable considerations. To repeat, such is not the case here. For at no time did President
Roxas ever give defendant lumber producers to understand that the failure of the Government for any
reason to put up the counterpart fund could terminate their statutory liability.

Such is not the law. Unfortunately, the lower court was of a different mind. That is not to pay homage to
the rule of law. Its decision then, one it is to be repeated influenced by what it considered to be the
"equity of the case", is not legally impeccable.

WHEREFORE, the decision of the lower court is reversed and the cases remanded to the lower court for
judgment according to law, with full consideration of the legal defenses raised by defendants-appellees,
Bitulok Sawmill, Inc.; Dingalan Lumber Co., Inc.; Sierra Madre Lumber Co., Inc.; Nasipit Lumber Co., Inc.;
Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.; Anakan Lumber Co.,
Inc.; and Cantilan Lumber Co., Inc. No pronouncement as to costs.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-57586 October 8, 1986

AQUILINO RIVERA, ISAMU AKASAKO and FUJIYAMA HOTEL & RESTAURANT, INC., petitioners,
vs.
THE HON. ALFREDO C. FLORENDO, as Judge of the Court of First Instance of Manila (Branch
XXXVI), LOURDES JUREIDINI and MILAGROS TSUCHIYA, respondents.

Bobby P. Yuseco for petitioners.


Arthur Canlas for private respondents.

PARAS, J.:

This is a petition for certiorari and prohibition with preliminary injunction seeking the annulment of the
following Orders of the then Court of First Instance of Manila, Branch XXXVI: (a) Order dated June 5, 1981
directing the issuance of a writ of preliminary mandatory injunction requiring petitioners Fujiyama Hotel
& Restaurant, Inc., Isamu Akasako and Aquilino Rivera to allow respondents Lourdes Jureidini and
Milagros Tsuchiya to manage the corporate property upon filing of a bond in the amount of P30,000.00
(Rollo, pp. 43-57) and (b) Order dated July 24, 1981 denying petitioners' motion for reconsideration and
motion to dismiss for lack of jurisdiction but increasing the bond to P120,000.00 (Rollo, p. 81).

Petitioner corporation was organized and register under Philippine laws with a capital stock of
P1,000,000.00 divided into 10,000 shares of P100.00 par value each by the herein petitioner Rivera and
four (4) other incorporators. Sometime thereafter petitioner Rivera increased his subscription from the
original 1,250 to a total of 4899 shares (Rollo, p. 4).

Subsequently, Isamu Akasako, a Japanese national and co-petitioner who is allegedly the real owner of
the shares of stock in the name of petitioner Aquilino Rivera, sold 2550 shares of the same to private
respondent Milagros Tsuchiya for a consideration of P440,000.00 with the assurance that Milagros
Tsuchiya will be made the President and Lourdes Jureidini a director after the purchase. Aquilino Rivera
who was in Japan also assured private respondents by overseas call that he will sign the stock certificates
because Isamu Akasako is the real owner. However, after the sale was consummated and the
consideration was paid with a receipt of payment therefor shown, Aquilino Rivera refused to make the
indorsement unless he is also paid. (Rollo, pp. 51-52).

It also appears that the other incorporators sold their shares to both respondent Jureidini and Tsuchiya
such that both respondents became the owners of a total of 3300 shares or the majority out of 5,649
outstanding subscribed shares of the corporation (Rollo, pp. 4-5), and that there was no dispute as to the
legality of the transfer of the stock certificate Exhibits "B-1" to "B-4" to Jureidini, all of which bear the
signatures of the president and the secretary as required by the Corporation Law with the proper
indorsements of the respective owners appearing thereon. Exhibits "B-1" to "B-4" are specifically
indorsed to her while Exhibits "B-2" and "B-3" are indorsed in blank. Aquilino Rivera admitted the
genuineness of an the signatures of the officers of the corporation and of an the indorsee therein. (Order
dated June 5, 1981, Civil Case No. 13273, Rollo, pp. 51-53).

Nonetheless, private respondents attempted several times to register their stock certificates with the
corporation but the latter refused to register the same. (Ibid., Rollo, pp. 54-55). Thus, private respondents
filed a special civil action for mandamus and damages with preliminary mandatory injunction and/or
receivership naming herein petitioners as respondents, docketed as Special Civil Action No.
13273, "Lourdes Jureidini, et al. v. Fujiyama Hotel et al." of the Court of First Instance of Manila, Branch
XXXVI presided by respondent Judge. Petitioners' counsel Atty. Marcelino A. Bueno, upon receipt of the
summons and a copy of the aforesaid petition, filed an answer thereto with denials, special and
affirmative defenses and counterclaim. Thereafter, a hearing was held on the application for preliminary
mandatory injunction and/or receivership, after which respondent Judge issued an order for a writ of
preliminary mandatory injunction authorizing respondent Jureidini and Tsuchiya to manage the
corporation's hotel and restaurant, upon the filing of a bond in the amount of P30,000.00. Then through
another counsel Atty. Eriberto D. Ignacio in collaboration with their counsel of record, Atty. Marcelino A.
Bueno, petitioners (respondents therein) filed a motion to dismiss the petition on the ground that
respondent Judge has no jurisdiction to entertain the case, while through Atty. Bueno, they filed a motion
for reconsideration of the Order granting the issuance of a writ of mandatory preliminary injunction.
Private respondents filed their opposition to both motions and on July 24, 1981, respondent Judge issued
an Order denying both the motion for reconsideration and the motion to dismiss the petition but
increased the amount of the bond from P30,000.00 to P120,000.00 to sufficiently protect the interests of
herein petitioners. (Rollo, p. 81).

Hence, this petition.

After filing the petition, Atty. Eriberto D. Ignacio withdrew as counsel for petitioners on August 6, 1981.
Such withdrawal was confirmed by petitioner Isamu Akasako (Rollo, p. 83). On August 10, 1981 the
appearance of Isaca & Espiritu Law Offices as counsel in substitution of former counsel Attys. Marcelino
A. Bueno and Eriberto D. Ignacio was received by this Court. (Rollo, p. 84); all of which were noted in the
resolution of the First Division of this Court dated August 17, 1981. (Rollo, p. 160).

The new counsel filed a Manifestation and Motion praying that the therein attached Supplement and
certified copies of the questioned orders and writs be admitted and considered as part of petitioners'
original petition for certiorari and Prohibition with Preliminary injunction. (Rollo, pp. 85-131). On August
14, 1981 petitioners filed an Urgent Motion for Restraining Order and Other Provisional Injunctive
Reliefs (Rollo, pp. 154-159). In the same resolution of August 17, 1981, after deliberating on the petition
and supplemental to the petition, the Court Resolved: (a) to require the respondents to comment thereon
(not to file a motion to dismiss within ten (10) days from notice and (b) upon petitioners' filing of an
injunction bond in the amount of P30,000.00 to issue a Writ of Preliminary Injunction enjoining
respondents from enforcing the writ of preliminary mandatory injunction dated June 23, 1981 issued in
Civil Case No. 132673. (Rollo, p. 160). Said bond was filed on August 20, 1981 (Rollo, p. 161) and
accordingly, a writ of preliminary injunction was issued by this Court on August 21, 1981 (Rollo, pp. 172-
173).

Subsequently, petitioners filed a manifestation and urgent motion on August 28, 1981 praying that
private respondent Lourdes Jureidini and her counsel Atty. Arthur Canlas be declared in contempt of
court for the former's alleged defiant refusal: (a) to acknowledge receipt of the Writ of Preliminary
Injunction of August 21, 1981 and (b) to comply with the said writ issued by this Court. (Rollo, pp. 174-
180).

Comment thereon was filed by private respondents through counsel (Rollo, pp. 185-199) in compliance
with the resolution of the First Division dated August 17, 1981 (Rollo, p. 160), praying for the immediate
lifting of the preliminary injunction. Said comment of private respondents was noted in the resolution of
October 5, 1981 (Rollo, p. 200) which also required respondents to comment on the supplement to the
petition.

On October 2, 1981, comment on the manifestation and urgent motion to declare Jureidini and her
counsel in contempt of court was filed by counsel for private respondent (Reno, pp. 201-214) in
compliance with the resolution of September 14, 1981 (Rollo, p. 181).
In the resolution of October 26, 1981 (Reno, p. 215) the Court Resolved to require petitioners to file a
reply to aforesaid comment. (Rollo, p. 215).

Meanwhile, supplemental comment on the supplement to the petition was filed by private respondents
on October 14, 1981 (Rollo, pp. 216-222) reiterating their stand that it is the ordinary court and not the
Securities and Exchange Commission (SEC) that has jurisdiction to entertain the case as the controversies
did not arise from the intra-corporate relationship among the parties.

On October 21, 1981, petitioner filed: (a) motion for leave to file reply to comment of respondents on the
petition and supplemental petition required in the resolution of August 17, 1981 (Rollo, pp. 223-224) and
(b) the attached Reply (Rollo, pp. 225-241). On November 25, 1981, petitioners filed their Reply to
respondents' Comment on petitioners' manifestation and urgent motion to declare them in contempt.
(Rollo, pp. 246-257).

On December 7, 1981 Atty. Bobby P. Yuseco entered his appearance as collaborating counsel for
petitioners (Rollo, p. 258) and filed an urgent petition for early resolution of petitioners' motion to hold
private respondents in contempt and for issuance of Order clarifying Writ of Injunction dated August 21,
1981. (Rollo, pp. 259-261).

In the resolution of January 18, 1982, this case and all pending incidents were set for hearing on February
3, 1982. (Rollo, p. 268).

On February 1, 1982, Lesaca and Espiritu Law Offices filed a Manifestation and Motion for Leave to
withdraw as counsel for petitioners. (Rollo, pp. 274-275).

When this case was called for hearing on February 3, 1982, counsel for both parties appeared and argued
their causes and both were required by the Court within an unextendible period of ten (10) days to file
their respective memoranda in support of their positions on an pending incidents of the case at bar while
the hearing on the contempt proceedings was reset for February 10, 1982 where the personal
appearance of private respondent Lourdes Jureidini through her counsel was required. (Rollo, p. 279).

On February 9, 1982, counsel for private respondent Jureidini filed an Urgent Motion and Manifestation
that he was informed by his client that she is physically exhausted and is beset with hypertension and
praying that she be excused from appearing at the hearing set for February 10, 1982, that the hearing be
cancelled and the contempt incident be considered submitted for decision on the basis of pleadings
previously filed. (Rollo, pp. 280-282).

On the same date, February 9, 1982, counsel for petitioners filed his Memorandum in support of his oral
argument at the hearing of February 3, 1982, (Rollo, pp. 283-287) while a supplement thereto was filed
on February 12, 1982. (Rollo, pp. 291-294).

At the hearing of February 10, 1982, private respondent Lourdes Jureidini and her counsel failed to
appear. Accordingly the Court Resolved: (a) to IMPOSE on said counsel Atty. Canlas a fine of P200.00 or to
suffer imprisonment if said fine is not paid; (b) to RESET the hearing on the contempt incidents on March
3, 1982 and (c) to REQUIRE the presence of Atty. Canlas and respondent Lourdes Jureidini and of
complainants Attys. Bibiano P. Lasaca, Rodolfo A. Espiritu and Renato T. Paqui. (Resolution of February
10, 1982, Rollo, p. 290).
On February 15, 1982, private respondents file their memorandum in compliance with the resolution of
this Court of February 3, 1982 while petitioners on February 25, 1982 filed their reply thereto.

At the hearing of March 3, 1982, both counsel as well as private respondent Lourdes Jureidini, Attys.
Bibiano P. Lesaca, Rodolfo A. Espiritu and Renato R. Paguio appeared. Atty. Canlas, Lourdes Jureidini,
Atty. Lesaca and a representative of the petitioners were interpellated by the Court. Thereafter, the
incident was declared submitted for resolution. (Resolution of March 3, 1982, Rollo, p. 316).

On March 5, 1982, counsel for private respondents filed his compliance with the resolution of February
10, 1982 enclosing a check payable to this Court in the amount of P200.00 in payment of the fine imposed
with motion for reconsideration explaining why he should not be declared in contempt and praying that
the aforesaid resolution of February 10, 1982 be set aside, (Rollo, pp. 312-314). However, in the
resolution of March 10, 1982, (Rollo, p. 317) the Court acting on the compliance of Atty. Arthur Canlas
with motion for reconsideration, denied the motion and required the Chief of the Docket Division to
return to Atty. Canlas the check in the amount of P200.00 it being an out of town check, and Atty. Canlas
to pay the fine in cash, and to show cause why he should not be disciplinary dealt with or held in
contempt for wilful delay in paying the fine by mail through an out of town check contrary to his
manifestation at the hearing that he had promptly paid the fine, both within forty eight hours from notice.

Meanwhile, counsel for petitioners filed on April 6, 1982 an Urgent Petition for Permission to Implement
Injunction Writ issued on August 21, 1981 (Rollo, pp. 323-325) which was granted in the resolution of
May 26, 1982 (Rollo, p. 313). In the same resolution the Court ordered Lourdes Jureidini and Milagros
Tsuchiya to strictly and immediately comply with the Court's aforesaid writ of preliminary injunction;
indicated that it would resolve the pending incident for contempt against private respondent Lourdes
Jureidini when the Court decides the case on the merits; and gave the parties thirty (30) days from notice
within which to submit simultaneously their respective memoranda on the merits of the case.

On May 31, 1982, counsel for private respondent Atty. Canlas filed in compliance with the resolution of
March 10, 1982, his explanation and manifestation why he should not be disciplinarily dealt with and
held in contempt of Court (Rollo, pp. 316-318). In the resolution of June 2, 1982, the Court Resolved to set
aside and lift the Order of Atty. Canlas' arrest and commitment it had issued on March 31, 1982 but found
the explanation and manifestation of Atty. Canlas dated May 29, 1982 unsatisfactory. In view thereof, he
was reprimanded for negligence and undue delay in complying with the Court's resolution. (Rollo, p.
319).

On June 18, 1982, counsel for petitioners allegedly for purposes of clarification as to the laws involved in
the matter of contempt of Lourdes Jureidini, filed a pleading entitled "Re Incident of Contempt against
Lourdes Jureidini." (Rollo, pp. 320-326) which was noted by the Court in the resolution of July 7, 1982.
(Rollo, p. 328).

Counsel for private respondents manifested (Rollo, p. 329), on July 12, 1982 that they are adopting the
memorandum submitted in the preliminary injunction incident as their memorandum in the main case.
Said manifestation was noted in the resolution of July 26, 1982. (Rollo, p. 331). Counsel for petitioners
manifested (Rollo, p. 333) that they are adopting their memorandum in support of argument last
February 3, 1982 as their combined memoranda on the merits of the case. Said manifestation was noted
in the resolution of September 15, 1982. (Rollo, p. 334). In the resolution of November 29, 1982, this case
was transferred to the Second Division. (Rollo, p. 336).
In their petition and supplemental petition, petitioners raised the following issues:

THE RESPONDENT COURT OF FIRST INSTANCE HAS NO JURISDICTION OVER THE


PETITION FOR mandamus AND RECEIVERSHIP "AS WELL AS IN PLACING THE
CORPORATE ASSETS UNDER PROVISIONAL RECEIVERSHIP IN THE GUISE OF A WRIT OF
PRELIMINARY MANDATORY INJUNCTION.

II

EVEN FALSELY ASSUMING THAT THE RESPONDENT COURT HAD JURISDICTION, THE
PRIVATE RESPONDENTS' PRINCIPAL ACTION OF mandamus IS AN IMPROPER COURSE OF
ACTION.

III

ASSUMING ARGUENDO THAT WHAT THE RESPONDENT COURT FOUND IS TRUE, NAMELY
THAT PRIVATE RESPONDENTS "ARE OUTSIDERS" AND "NOT YET STOCKHOLDERS,"
THUS, HAVING NO PERSONALLY AT ALL, THEN PROVISIONAL RECEIVERSHIP, ALBEIT
CLOTHED AS A "WRIT OF PRELIMINARY MANDATORY INJUNCTION" WAS ILLEGALLY
ISSUED DE HORS ITS JURISDICTION.

IV

ASSUMING ARGUENDO THAT THE RESPONDENT COURT HAD JURISDICTION OVER BOTH
THE PETITION FOR mandamus AS WELL AS THE PROVISIONAL RECEIVERSHIP STILL THE
RESPONDENT COURT ACTED IN EXCESS OF ITS JURISDICTION OR IN GRAVE ABUSE OF
ITS DISCRETION TO GRANT RECEIVERSHIP OVER THE MANAGEMENT OF THE
CORPORATE BUSINESS AND ASSETS WHICH NEVER WAS NOR IS A SUBJECT MATTER OF
LITIGATION.

EVEN GRANTING FOR THE SAKE OF AGRGUMENT THAT THE RESPONDENT COURT HAD
JURISDICTION OVER THE SUBJECT MATTER OF THE CASE; NONETHELESS IT WAS IN
GRAVE ABUSE OF ITS DISCRETION TO UNILATERALLY GRANT TO A "PARTY-IN-
LITIGATION," THE PRIVATE RESPONDENTS HEREIN, THE MANAGEMENT OF THE
CORPORATE BUSINESS. (Petition and Supplemental Petition; Rollo, pp. 2-18; 88-131).

The crucial issue in this case is whether it is the regular court or the Securities and Exchange Commission
that has jurisdiction over the present controversy.

Presidential Decree No. 902-A provides:


Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving

(a) ...

(b) Controversies arising out of intra-corporate or partnership relations and among


stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members, or associates,
respectively and between such corporations, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such entity.

It has already been settled that an intracorporate controversy would call for the jurisdiction of the
Securities and Exchange Commission. (Philippine School of Business Administration v. Lanao, 127 SCRA
781, February 24, 1984). On the other hand, an intra-corporate controversy has been defined as "one
which arises between a stockholder and the corporate. There is no distinction, qualification, nor any
exemption whatsoever." (Philex Mining Corporation v. Reyes, 118 SCRA 605, November 19, 1982). This
Court has also ruled that cases of private respondents who are not shareholders of the corporation,
cannot be a "controversy arising out of intracorporate or partnership relations between and among
stockholders, members or associates; between any or all of them and the corporation, partnership or
association, of which they are stockholders, members or associates, respectively." (Sunset View
Condominium Corporation v. Campos, Jr., 104 SCRA 303, April 27, 1981).

Under Batas Pambansa Blg. 68 otherwise known as "The Corporation Code of the Philippines," shares of
stock are transferred as follows:

SEC. 63. Certificate of stock and transfer of shares. — The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in- fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the book 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.

xxx xxx xxx

As confirmed by this Court, "shares of stock may be transferred by delivery to the transferee of the
certificate properly indorsed. 'Title may be vested in the transferee by delivery of the certificate with a
written assignment or indorsement thereof ' (18 C.J. S. 928). There should be compliance with the mode
of transfer prescribed by law (18 C.J.S. 930)' " (Nava v. Peers Marketing Corp. 74 SCRA 65, 69, Nov. 25,
1976)

As the bone of contention in this case, is the refusal of petitioner Rivera to indorse the shares of stock in
question and the refusal of the Corporation to register private respondents' shares in its books, there is
merit in the findings of the lower court that the present controversy is not an intracorporate controversy;
private respondents are not yet stockholders; they are only seeking to be registered as stockholders
because of an alleged sale of shares of stock to them. Therefore, as the petition is filed by outsiders not
yet members of the corporation, jurisdiction properly belongs to the regular courts.

II

On the other hand, there is merit in petitioners' contention that private respondents' principal action of
mandamus is an improper course of action.

It is evident that mandamus wig not lie in the instant case where the shares of stock in question are not
even indorsed by the registered owner Rivera who is specifically resisting the registration thereof in the
books of the corporation. Under the above ruling, even the shares of stock which were purchased by
private respondents from the other incorporators cannot also be the subject of mandamus on the
strength of mere indorsement of the supposed owners of said shares in the absence of express
instructions from them. The rights of the parties will have to be threshed out in an ordinary action.

III-V

Petitioners insist that what was issued was a provisional receivership, while private respondents
maintain that the trial court issued a Writ of Preliminary Mandatory Injunction. Be that as it may, it
appears obvious that from the abovementioned rulings of this Court, petitioners' contention that
respondent Judge in the issuance thereof committed acts of grave abuse of discretion, is well taken.

In the Order dated June 5, 1981, in Civil Case No. 132673, the basis of aforesaid Writ was as follows:

Finally, the Court, after assessing the evidence, finds that the issuance of a preliminary
mandatory injunction is proper. Respondents Isamu Akasako and Aquilino Rivera, thru
their simulated relationship, have succeeded for two years since 1979 to deprive the
petitioners to participate in the profit and management of the corporation of which they
are the majority stockholders considering that the stocks certificates appearing in the
name of Aquilino Rivera (Exh. "8") is 55% to 75% of the total stocks of the corporation by
Isamu Akasako would only prolong the injustice committed against the petitioners and the
damages they would suffer would be irreparable. The Court is aware that preliminary
mandatory injunction is the exception rather than the rule, but according to the Code
Commission, in its report on page 98, "the writ of preliminary mandatory injunction is
called for by the fact that there are at present prolonged litigation between owner and
usurper and the former is deprived of his possession even when he has an immediate right
thereto." In the instant case, the right of the petitioners is clear and unmistakable on the
law and the facts and there exists an urgent and paramount necessity for the issuing of the
writ in order to prevent extreme or rather serious damage which ensues from withholding
it. (43 C.J.S. 413)

WHEREFORE, in view of the foregoing circumstances, let a writ of preliminary mandatory


injunction issue requiring respondents to allow petitioners to manage the corporate
property known as the Fujiyama Hotel & Restauarant, Inc. upon petitioners' filing of a bond
in the amount of P30,000.00.
A mandatory injunction is granted only on a showing (a) that the invasion of the right is material and
substantial; (b) the right of complainant is clear and unmistakable; and (c) there is an urgent and
permanent necessity for the writ to prevent serious damage. (Pelejo v. Court of Appeals, 117 SCRA 668,
Oct. 18, 1982).

A mandatory injunction which commands the performance of some specific act is regarded as of a more
serious nature than a mere prohibitive injunction, the latter being intended generally to maintain the
status quo only. While our courts, being both of law and equity, have jurisdiction to issue a mandatory
writ, it has always been held that its issuance would be justified only in clear cases; that it is generally
improper to issue it before final hearing because it tends to do more than maintain the status quo; that it
should be issued only where there is a willful and unlawful invasion of plaintiff's right and that the
latter's case is one free from doubt and dispute. (National Marketing v. Cloribel, 22 SCRA 1038, March 13,
1968).

Respondent court in the instant case violated the fundamental rule of injunctions that a mandatory
injunction will not issue in favor of a party whose rights are not clear and free of doubt or as yet
undetermined. (Namarco v. Cloribel, 22 SCRA 1038-1039, March 13, 1968). It will be recalled that the
disputed shares of stock were purchased not from the registered owner but from a Japanese national
who allegedly was the real owner thereof. It was also alleged that the registered owner was only a
dummy of Akasako. it is also true that the trial court has already made findings to that effect at the
hearing for the issuance of the Order of June 5, 1981. Nonetheless, these are contentious issues that
should properly be ventilated at the trial on the merits. As correctly stated in petitioners' motion for
reconsideration, the Order of the trial court is in effect a judgment on the merits, declaring expressly or
impliedly that petitioners are stockholders of the Corporation at the hearing of only the incident for the
issuance of a Writ of Preliminary Injunction. On the other hand if the Order amounts to a judgment on the
merits, the lower court should first rule on what private respondents seek, the registration of their
shareholdings in the books of the corporation and the issuance of new stock certificates. It is only
thereafter that the subsequent act of management may be ordered and the period of finality of such a
judgment should be in accordance with the Rules of Court, giving the respondents the right to an appeal
or review and not be immediately executory as the Writ of Preliminary Mandatory Injunction would
infer. (Rollo, p. 65).

Another fundamental rule which appears to have been violated in the case at bar is that no advantage
may be given to one to the prejudice of the other, a court should not by means of a preliminary injunction
transfer the property in litigation from the possession of one party to another where the legal title is in
dispute and the party having possession asserts ownership thereto. (Rodulfo v. Alonso, 76 Phil. 225),
February 28, 1946). Similarly, the primary purpose of an injunction is to preserve the status quo, that is
the last actual peaceable uncontested status which preceded the controversy. In the instant case,
petitioner Rivera is the registered majority and controlling stockholder of the corporation before the
ensuing events transpired. By the issuance of the Writ in question he appears to have been deprived of
his rights as stockholder thereof apart from his status as Chairman of the Board and President of the
corporation, with Akasako as the Manager of the two restaurants in this case; the same being the last
uncontested status which preceded the controversy. (Rollo, p. 127).

On the contempt incident involving private respondent Lourdes Jureidini, a Manifestation and Urgent
Motion was filed by petitioners to declare her in contempt of Court for allegedly refusing to acknowledge
receipt of the Writ of Preliminary Injunction issued by this Court and for allegedly refusing to comply
therewith. Attributed to her were the following statements: "I will not obey that ... Yes, I am higher than
the Supreme Court ... I will obey only what my lawyer tells me."

In her explanation however, filed through her counsel she denied having uttered the statements alluded
to her, the truth of the matter being that she was alone in the restaurant when this Court's process server,
accompanied by petitioners' lawyers, approached her and demanded that she vacate the premises and
surrender the management of the Restaurant. Fazed by the unusual display of lawyers she requested that
she be given time to confer with her counsel Said request allegedly precipitated the remark from
Petitioners' counsel that neither respondent herself, nor her counsel can be higher than the Supreme
Court and that any conference seeking to clarify the effect of the Writ of Preliminary Injunction would be
futile. (Rollo, pp. 174-175).

It was likewise explained that respondent Jureidini did not sign and acknowledge receipt of the Writ
because it was not addressed to her but to the lower court and to her counsel.

Respondent's counsel says that the incident was concocted and devised by the petitioners and their
counsel to serve no salutary purpose but to scare and harass respondent Jureidini. He also stated that "it
is equally improper, at least in practice, for lawyers to accompany officers of the Court in serving or
otherwise executing processes of said court as to create a seeming suspicion to the public that lawyers
are not involved only professionally in the case they handle but signify their personal interests as well."
(Rollo, pp. 208-209).

When this contempt incident was heard on March 3, 1982, Atty. Arthur A. Canlas, counsel for private
respondent Lourdes Jureidini, Jureidini herself, Atty. Bibiano P. Lesaca a representative of the petitioners
were interpellated by the Court. Thereafter, the incident was declared submitted for resolution.
(Resolution of March 3, 1982; Rollo, p. 316).

Thereafter, counsel for petitioner filed a pleading "The Incident of Contempt of Lourdes Jureidini" in the
form of a summation of the incident and reiteration of petitioners' charges of contempt.

Counsel for petitioner invokes the provisions of: Section 3, Rule 71 on Indirect Contempt and par. (b)
thereof, on Disobedience of or Resistance to a Lawful Writ, Process, Order, Judgement or Command of a
Court; or Injunction granted by a Court or Judge ... ; (2) Section 6, Rule 71 regarding punishment or
penalty thereof and (3) Section 5, Rule 135, par. (e) to compel obedience to its judgments, orders and
processes, and to the lawful orders of a judge out of Court, in a case pending therein.

On the incident itself, petitioners' counsel stressed that present when the writ was served were attorneys
for petitioners Bibiano P. Lesaca, and Renato P. Paguio in the company of petitioners Isamu Akasako,
Akasako's assistants Furnio, Fujihara and Isamu Tajewakai and this Court's process server, before whose
presence the alleged contemptuous acts were committed.

Counsel for petitioners also reminded the Court that the first summons of the Court were answered only
by counsel for private respondent Jureidini while the latter feigned sickness without a medical certificate.
The hearing for the contempt charge was reset but neither counsel for private respondent nor the latter
appeared for which non-appearance Atty. Canlas was fined P200.00 for contempt when finally both
counsel and client appeared on the third day, the hearing was set.
At that hearing, counsel for petitioners narrated that Attys. Lesaca and Paguio and two Japanese nationals
testified in unison that Lourdes Jureidini not only disregarded the writ but distinctly uttered the
complained of statements.

Petitioners' counsel laid emphasis on the fact that Lourdes Jureidini is a graduate of nursing, who speaks
in straight polished English, capable of understanding the Writ of Mandatory Injunction of the
Respondent Court served on petitioners by herself and a Deputy Sheriff of Manila, but incredibly unable
to understand the Writ issued by the Supreme Court. She was assessed as "overbearing to the point of
insolence" and capable of uttering "I am higher than the Supreme Court."

There is no question that disobedience or resistance to a lawful writ, process, order, judgment or
command of a court, or injunction granted by a court or judge, more particularly in this case, the Supreme
Court, constitutes Indirect Contempt punishable under Rule 71 of the Rules of Court. (Rule 71, Section
3(b) and Section 6).

It has been held that contempt of court is a defiance of the authority, justice or dignity of the court, such
conduct as tends to bring the authority and administration of the law into disrespect or to interfere with
or prejudice parties litigant or their witnesses during litigation. It is defined as a disobedience to the
court by setting up an opposition to its authority justice and dignity. It signifies not only a willful
disregard or disobedience of the court's orders but such conduct as tends to bring the authority of the
court and the administration of law into disrepute or in some manner to impede the due administration
of justice (Halili v. Court of Industrial Relations, 136 SCRA 135, April 30, 1985).

However, it is also well settled that "the power to punish for contempt of court should be exercised on the
preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent
power in order to retain that respect without which the administration of justice must falter or fail."
(Villavicencio v. Lukban, 39 Phil. 778 [1919]; Gamboa v. Teodoro, et al., 91 Phil. 274 [1952]; Sulit v.
Tiangco, 115 SCRA 207 [1982]; Lipata v. Tutaan, 124 SCRA 880 [1983]). "Only in cases of clear and
contumacious refusal to obey should the power be exercised. A bona fide misunderstanding of the terms
of the order or of the procedural rules should not immediately cause the institution of contempt
proceedings." "Such power 'being drastic and extra-ordinary in its nature ... should not be resorted to ...
unless necessary in the interest of justice.' " (Gamboa v. Teodoro, et al., supra).

In the case at bar, although private respondent Jureidini did not immediately comply with the Writ of
Injunction issued by this Court, it appears reasonable on her part to request that she be allowed to confer
with her lawyer first before she makes any move of her own. It is likewise reasonable for counsel for
private respondent to request that he be given time to file a motion for clarification with the Supreme
Court.

It will also be noted that the testimonies produced at the hearing to establish the fact that she had uttered
the alleged contemptuous statements alluded to her were those of Attys. Lesaca and Paguio and two
Japanese nationals, a one-sided version for the petitioners.

It appears to Us that the version of counsel for private respondent is more in accord with human
experience: Jureidini who was alone in the Restaurant was fazed by the unusual display of might and by
the presence of lawyers demanding that she vacate premises and surrender the management of the
Restaurant (Rollo, p. 204), this is more believable than the version of counsel for petitioners who
summed her up as a person "overbearing to the point of insolence" and capable of uttering" I am higher
than the Supreme Court." It would therefore be more reasonable to believe that what she uttered in that
situation where she felt threatened, was more in self-defense and not an open defiance of the Supreme
Court.

Jureidini cannot also be faulted for finding it difficult to understand the writ issued against her by the
Supreme Court as she believed that not only have she and her correspondent the legal right to manage
the restaurant but the equitable right as well, having been placed in possession of the corporate property
only after posting a bond of P120,000.00. (Rollo, pp. 197-198).

In connection with this incident, Jureidini through her counsel filed her comment on October 2, 1981
(Rollo, p. 201) contrary to the allegation of petitioners' counsel that it was only Atty. Canlas who filed his
comment.

WHEREFORE, the assailed orders of respondent Judge are SET ASIDE; the complaint (special civil action
for mandamus with damages, etc.) should ordinarily be dismissed without prejudice to the filing of the
proper action; but as all parties are already duly represented, We hereby consider the case as an ordinary
civil action for specific performance, and the case is therefore remanded to the lower court for trial on the
merits; the charge of contempt against respondent Jureidini is DISMISSED but the order of Our Court
restraining respondent from taking over the management of the restaurant remains until after this case is
decided.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 47206 September 27, 1989

GLORIA M. DE ERQUIAGA, administratrix of the estate of the late SANTIAGO DE ERQUIAGA & HON.
FELICIANO S. GONZALES, petitioners,
vs.
HON. COURT OF APPEALS, AFRICA VALDEZ VDA. DE REYNOSO, JOSES V. REYNOSO, JR., EERNESTO ,
SYLVIA REYNOSO, LOURDES REYNOSO, CECILE REYNOSO, EDNA REYNOSO, ERLINDA REYNOSO &
EMILY REYNOSO, respondents.

Agrava, Lucero, Gineta & Roxas for petitioners.

Bausa, Ampil, Suarez, Parades & Bausa for private respondents.

GRINO-AQUINO, J.:

This is a case that began in the Court of First Instance of Sorsogon in 1970. Although the decision dated
September 30, 1972 of the trial court (pp. 79-106, Rollo) became final and executory because none of the
parties appealed, its execution has taken all of the past seventeen (17) years with the end nowhere in
sight. The delay in writing finis to this case is attributable to several factors, not the least of which is the
intransigence of the defeated party. Now, worn down by this attrital suit, both have pleaded for a decision
to end this case.

Assailed in this petition for review are:

(a) the decision of the Court of Appeals dated May 31, 1976 in CA-G.R. No. SP 04811,
entitled "Africa Valdez Vda. de Reynoso et al. vs. Hon. Feliciano S. Gonzales and Santiago de
Erquiaga" (pp. 275-290, Rollo);

(b) its resolution dated August 3, 1976, denying the motion for reconsideration (p. 298,
Rollo);

(c) its resolution of August 24, 1977, ordering entry of judgment (p. 316, Rollo); and

(d) its resolution of October 4, 1977, denying the motion to set aside the entry of judgment.

Santiago de Erquiaga was the owner of 100% or 3,100 paid-up shares of stock of the Erquiaga
Development Corporation which owns the Hacienda San Jose in Irosin, Sorsogon (p. 212, Rollo). On
November 4,1968, he entered into an Agreement with Jose L. Reynoso to sell to the latter his 3,100 shares
(or 100%) of Erquiaga Development Corporation for P900,000 payable in installments on definite dates
fixed in the contract but not later than November 30, 1968. Because Reynoso failed to pay the second and
third installments on time, the total price of the sale was later increased to P971,371.70 payable on or
before December 17, 1969. The difference of P71,371.70 represented brokers' commission and interest
(CFI Decision, pp. 75, 81, 90, 99,Rollo).

As of December 17, 1968, Reynoso was able to pay the total sum of P410,000 to Erquiaga who thereupon
transferred all his shares (3,100 paid-up shares) in Erquiaga Development Corporation to Reynoso, as
well as the possession of the Hacienda San Jose, the only asset of the corporation (p. 100, Rollo).
However, as provided in paragraph 3, subparagraph (c) of the contract to sell, Reynoso pledged 1,500
shares in favor of Erquiaga as security for the balance of his obligation (p. 100, Rollo). Reynoso failed to
pay the balance of P561,321.70 on or before December 17, 1969, as provided in the promissory notes he
delivered to Erquiaga. So, on March 2, 1970, Erquiaga, through counsel, formally informed Reynoso that
he was rescinding the sale of his shares in the Erquiaga Development Corporation (CFI Decision, pp. 81-
100, Rollo).

As recited by the Court of Appeals in its decision under review, the following developments occurred
thereafter:

On March 30, 1970, private respondent Santiago de Erquiaga filed a complaint for
rescission with preliminary injunction against Jose L. Reynoso and Erquiaga Development
Corporation, in the Court of First Instance of Sorsogon, Branch I (Civil Case
No. 2446).** After issues have been joined and after trial on the merits, the lower court
rendered judgment (on September 30, 1972),*** the dispositive portion of which reads as
follows:
In view of the foregoing, judgment is hereby rendered in favor of the plaintiff
and against the defendant Jose L. Reynoso, rescinding the sale of 3,100 paid
up shares of stock of the Erquiaga Development Corporation to the
defendant, and ordering:

(a) The defendant to return and reconvey to the plaintiff the 3,100 paid up shares of stock
of the Erquiaga Development Corporation which now stand in his name in the books of the
corporation;

(b) The defendant to render a full accounting of the fruits he received by virtue of said
3,100 paid up shares of stock of the Erquiaga Development Corporation, as well as to
return said fruits received by him to plaintiff Santiago de Erquiaga;

(c) The plaintiff to return to the defendant the amount of P100,000.00 plus legal interest
from November 4,1968, and the amount of P310,000.00 plus legal interest from December
17, 1968, until paid;

(d) The defendant to pay the plaintiff as actual damages the amount of P12,000.00;

(e) The defendant to pay the plaintiff the amount of P50,000.00 as attorney's fees; and

(f) The defendant to pay the costs of this suit and expenses of litigation. (Annex A-Petition.)

The parties did not appeal therefrom and it became final and executory.

On March 21, 1973, the CFI of Sorsogon issued an Order, pertinent portions of which reads:

It will be noted that both parties having decided not to appeal, the decision
has become final and executory. Nevertheless, the Court finds merit in the
contention of the plaintiff that the payment to the defendant of the total sum of
P410,000.00 plus the interest, should be held in abeyance pending rendition of
the accounting by the defendant of the fruits received by him on account of the
3,100 shares of the capital stock of Erquiaga Development Corporation. The
same may be said with respect to the sums due the plaintiff from the
defendant for damages and attorney's fees. Indeed it is reasonable to
suppose, as contended by the plaintiff, that when such accounting is made
and the accounting, as urged by plaintiff, should refer not only to the
dividends due from the shares of stock but to the products of the hacienda
which is the only asset of the Erquiaga Development Corporation, certain
sums may be found due to the plaintiff from the defendant which may
partially or entirely off set (sic) the amount adjudged against him in the
decision.

It is the sense of the court that the fruits referred to in the decision include not
only the dividends received, if any, on the 3,100 shares of stocks but more
particularly the products received by the defendant from the hacienda. The
hacienda and the products thereon produced constitute the physical assets of
the Erquiaga Development Corporation represented by the shares of stock
and it would be absurd to suppose that any accounting could be made by the
defendant without necessarily taking into account the products received
which could be the only basis for determining whether dividends are due or
not on account of the investment. The hacienda and its natural fruits as
represented by the shares of stock which the defendant received as manager
and controlling stockholder of the Erquiaga Development Corporation can
not be divorced from the certificates of stock in order to determine whether
the defendant has correctly reported the income of the corporation or
concealed part of it for his personal advantage. It is hardly necessary for the
Court to restate an obvious fact that on both legal and equitable grounds, the
Erquiaga Development Corporation and defendant Jose Reynoso are one and
the same persons as far as the obligation to account for the products of the
hacienda is concerned,' (pp. 4-6, Annex 1, Answer.)

In the same Order, the CFI of Sorsogon appointed a receiver upon the filing of a bond in the
amount of P100,000.00. The reasons of the lower court for appointing a receiver 'were that
the matter of accounting of the fruits received by defendant Reynoso as directed in the
decision will take time; that plaintiff Erquiaga has shown sufficient and justifiable ground
for the appointment of a receiver in order to preserve the Hacienda which has obviously
been mismanaged by the defendant to a point where the amortization of the loan with the
Development Bank of the Philippines has been neglected and the arrears in payments have
risen to the amount of P503,510.70 as of October 19, 1972, and there is danger that the
Development Bank of the Philippines may institute foreclosure proceedings to the damage
and prejudice of the plaintiff.' (p. 7, Id.)

On April 26, 1973, defendant Jose L. Reynoso died and he was substituted by his surviving
spouse Africa Valdez Vda. de Reynoso and children, as party defendants.

Defendants filed a petition for certiorari with a prayer for a writ of preliminary injunction
seeking the annulment of the aforementioned Order of March 21, 1973. On June 28, 1973,
the Court of Appeals rendered judgment dismissing the petition with costs against the
petitioners, ruling that said Order is valid and the respondent court did not commit any
grave abuse of discretion in issuing the same (Annex 2, Id.). Petitioners brought the case up
to the Supreme Court on a petition for review on certiorari which was denied by said
tribunal in a Resolution dated February 5, 1974 (Annex 3, Id.). Petitioners' motion for
reconsideration thereof was likewise denied by the Supreme Court on March 29,1974.

Upon motion of Erquiaga, the CFI of Sorsogon issued an order, dated February 12,1975,
dissolving the receivership and ordering the delivery of the possession of the Hacienda San
Jose to Erquiaga, the filing of bond by said Erquiaga in the amount of P410,000.00
conditioned to the payment of whatever may be due to the substituted heirs of deceased
defendant Reynoso (petitioners herein) after the approval of the accounting report
submitted by Reynoso. Said order further directed herein petitioners to allow counsel for
Erquiaga to inspect, copy and photograph certain documents related to the accounting
report (Annex B, Petition).

On March 3,1975, the CFI of Sorsogon approved the P410,000.00 bond submitted by
Erquiaga and the possession, management and control of the hacienda were turned over to
Erquiaga (Annex C, Petition). Petitioners (Reynosos) filed their motion for reconsideration
which the CFI of Sorsogon denied in an Order, dated June 23, 1975 (Annex D, Id.).

In an Omnibus Motion, dated July 25,1975, filed by Erquiaga, and over the objections
interposed thereto by herein petitioners (Reynosos), the CFI of Sorsogon issued an Order,
dated October 9, 1975, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, on the first count, the defendants are
directed (to deliver) to the plaintiff or his counsel within five (5) days from
receipt of this order the 1,600 shares of stock of the Erquiaga Development
Corporation which are in their possession. Should the defendants refuse or
delay in delivering such shares of stock, as prayed for, the plaintiff is
authorized:

(a) To call and hold a special meeting of the stockholders of the Erquiaga Development
Corporation to elect the members of the Board of Directors;

(b) In the said meeting the plaintiff is authorized to vote not only the 1,500 shares of stock
in his name but also the 1,600 shares in the name and possession of the defendants;

(c) The question as to who shall be elected members of the Board of Directors and officers
of the board is left to the discretion of the plaintiff;

(d) The members of the board and the officers who are elected are authorized to execute
any and all contracts or agreements under such conditions as may be required by the
Development Bank for the purpose of restructuring the loan of the Erquiaga Development
Corporation with the said bank.

On the second count, the prayer to strike out all expenses alleged[ly]
incurred by the defendants in the production of the fruits of Hacienda San
Jose and declaring the obligation of the plaintiff under paragraph (c) of the
judgment to pay the defendant the sum of P410,000.00 with interest as fully
compensated by the fruits earned by the defendants from the property, as
well as the issuance of a writ of execution against the defendants to pay the
plaintiffs P62,000.00 under paragraphs (e) and (d) and costs of litigation
under paragraph (f) of the judgment of September 30, 1972, is denied.

The defendants are once more directed to comply with the order of February
12, 1975, by answering the interrogatories propounded by counsel for the
plaintiff and allowing said counsel or his representative to inspect, copy and
photograph the documents mentioned by the plaintiff during reasonable
hours of any working day within twenty (20) days from receipt of this order,
should the defendants persist in their refusal or failure to comply with the
order, the plaintiff may inform the court seasonably so that the proper action
may be taken. (Annex J, Id.)
Hence, the present petition for certiorari, prohibition and mandamus instituted by the
substituted defendants, heirs of the deceased defendant Jose L. Reynoso against the CFI of
Sorsogon and (plaintiff) Santiago de Erquiaga. (pp. 276- 281, Rollo.)

On May 31, 1976, the Court of Appeals rendered judgment holding that:

IN VIEW OF ALL THE FOREGOING, this court finds that the respondent court had acted
with grave abuse of discretion or in excess of jurisdiction in issuing the assailed order of
October 9, 1975 (Annex A, Petition) insofar only as that part of the Order (1) giving private
respondent voting rights on the 3,100 shares of stock of the Erquiaga Development
Corporation without first divesting petitioners of their title thereto and ordering the
registration of the same in the corporation books in the name of private respondent,
pursuant to Section 10, Rule 39 of the Revised Rules of Court; (2) authorizing corporate
meetings and election of members of the Board of Directors of said corporation and (3)
refusing to order the reimbursement of the purchase price of the 3,100 shares of stock in
the amount of P410,000.00 plus interests awarded in said final decision of September 30,
1972 and the set-off therewith of the amount of P62,000.00 as damages and attorney's fees
in favor of herein private respondent are concerned. Let writs of certiorari and prohibition
issue against the aforesaid acts, and the writ of preliminary injunction heretofore issued is
hereby made permanent only insofar as (1), (2) and (3) above are concerned. As to all
other matters involved in said Order of October 9, 1975, the issuance of writs prayed for in
the petition are not warranted and therefore denied.

FINALLY, to give effect to all the foregoing, with a view of putting an end to a much
protracted litigation and for the best interest of the parties, let a writ of mandamus issue,
commanding the respondent Judge to order (1) the Clerk of Court of the CFI of Sorsogon to
execute the necessary deed of conveyance to effect the transfer of ownership of the entire
3,100 shares of stock of the Erquiaga Development Corporation to private respondent
Santiago Erquiaga in case of failure of petitioners to comply with the Order of October 9,
1975 insofar as the delivery of the 1,600 shares of stock to private respondent is
concerned, within five (5) days from receipt hereof; and (2) upon delivery by petitioners or
transfer by the Clerk of Court of said shares of stock to private respondent, as the case may
be, to issue a writ of execution ordering private respondent to pay petitioners the amount
of P410,000.00 plus interests in accordance with the final decision of September 30, 1972
in Civil Case No. 2448, setting-off therewith the amount of P62,000.00 adjudged in favor of
private respondent, and against petitioners' predecessor-in-interest, Jose L. Reynoso, in the
same decision, as damages and attorney's fees. (pp. 289-290, Rollo.)

It may be seen from the foregoing narration of facts that as of the time the Court of Appeals rendered its
decision on May 31, 1976 (now under review) only the following have been done by the parties in
compliance with the final judgment in the main case (Civil Case No. 2446):

1. The Hacienda San Jose was returned to Erquiaga on March 3, 1975 upon approval of
Erquiaga's surety bond of P410,000 in favor of Reynoso;

2. Reynoso has returned to Erquiaga only the pledged 1,500 shares of stock of the Erquiaga
Development Corporation, instead of 3,100 shares, as ordered in paragraph (a) of the final
judgment.
What the parties have not done yet are:

1. Reynoso has not returned 1,600 shares of stock to Erquiaga as ordered in paragraph (a,)
of the decision;

2. Reynoso has not rendered a full accounting of the fruits he has received from Hacienda
San Jose by virtue of the 3,100 shares of stock of the Erquiaga Development Corporation
delivered to him under the sale, as ordered in paragraph (b) of the decision;

3. Erquiaga has not returned the sum of P100,000 paid by Reynoso on the sale, with legal
interest from November 4, 1968 and P310,000 plus legal interest from December 17, 1968,
until paid (total: P410,000) as ordered in paragraph (c) of the decision;

4. Reynoso has not paid the judgment of Pl2,000 as actual damages in favor of Erquiaga,
under paragraph (d) of the judgment;

5. .Reynoso has not paid the sum of P50,000 as attorney's fees to Erquiaga under paragraph
(e) of the judgment; and

6. Reynoso has not paid the costs of suit and expenses of litigation as ordered in paragraph
(f) of the final judgment.

The petitioner alleges, in her petition for review, that:

I. The decision of the Court of Appeals requiring the petitioner to pay the private
respondents the sum of P410,000 plus interest, without first awaiting Reynoso's accounting
of the fruits of the Hacienda San Jose, violates the law of the case and Article 1385 of the
Civil Code, alters the final order dated February 12, 1975 of the trial court, and is
inequitous.

II. The Court of Appeals erroneously applied the Corporation Law.

III. The Court of Appeals erred in ordering entry of its judgment.

We address first the third assignment of error for it will be futile to discuss the first and second if, after
all, the decision complained of is already final, and the entry of judgment which the Court of Appeals
directed to be made in its resolution of August 24,1977 (p. 316, Rollo) was proper. After examining the
records, we find that the Court of Appeals' decision is not yet final. The entry of judgment was
improvident for the Court of Appeals, in its resolution of December 13, 1976, suspended the proceedings
before it "pending the parties' settlement negotiations" as prayed for in their joint motion (p. 313, Rollo).
Without however giving them an ultimatum or setting a deadline for the submission of their compromise
agreement, the Court of Appeals, out of the blue, issued a resolution on August 24, 1977 ordering the
Judgment Section of that Court to enter final judgment in the case (p. 316, Rollo).

We hold that the directive was precipitate and premature. Erquiaga received the order on September 2,
1977 and filed on September 12, 1977 (p. 317, Rollo) a motion for reconsideration which the Court of
Appeals denied on October 4, 1977 (p. 322, Rollo). The order of denial was received on October 14, 1977
(p. 7, Rollo). On October 28, 1977, Erquiaga filed in this Court a timely motion for extension of time to file
a petition for review, and the petition was filed within the extension granted by this Court.

We now address the petitioners' first and second assignments of error.

After deliberating on the petition for review, we find no reversible error in the Court of Appeals' decision
directing the clerk of court of the trial court to execute a deed of conveyance to Erquiaga of the 1,600
shares of stock of the Erquiaga Development Corporation still in Reynoso's name and/or possession, in
accordance with the procedure in Section 10, Rule 39 of the Rules of Court. Neither did it err in annulling
the trial court's order: (1) allowing Erquiaga to vote the 3,100 shares of Erquiaga Development
Corporation without having effected the transfer of those shares in his name in the corporate books; and
(2) authorizing Erquiaga to call a special meeting of the stockholders of the Erquiaga Development
Corporation and to vote the 3,100 shares, without the pre-requisite registration of the shares in his name.
It is a fundamental rule in Corporation Law (Section 35) that a stockholder acquires voting rights only
when the shares of stock to be voted are registered in his name in the corporate books.

Until registration is accomplished, the transfer, though valid between the parties, cannot be
effective as against the corporation. Thus, the unrecorded transferee cannot enjoy the
status of a stockholder; he cannot vote nor be voted for, and he will not be entitled to
dividends. The Corporation will be protected when it pays dividend to the registered
owner despite a previous transfer of which it had no knowledge. The purpose of
registration therefore is two-fold; to enable the transferee to exercise all the rights of a
stockholder, and to inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a stockholder.
(Corporation Code, Comments, Notes and Selected cases by Campos & Lopez-Campos, p.
838,1981 Edition.)

The order of respondent Court directing Erquiaga to return the sum of P410,000 (or net P348,000 after
deducting P62,000 due from Reynoso under the decision) as the price paid by Reynoso for the shares of
stock, with legal rate of interest, and the return by Reynoso of Erquiaga's 3,100 shares with the
fruits(construed to mean not only dividends but also fruits of the corporation's Hacienda San Jose) is in
full accord with Art. 1385 of the Civil Code which provides:

ART. 1385. Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest; consequently, it can
be carried out only when he who demands rescission can return whatever he may be
obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

The Hacienda San Jose and 1,500 shares of stock have already been returned to Erquiaga. Therefore,
upon the conveyance to him of the remaining 1,600 shares, Erquiaga (or his heirs) should return to
Reynoso the price of P410,000 which the latter paid for those shares. Pursuant to the rescission decreed
in the final judgment, there should be simultaneous mutual restitution of the principal object of the
contract to sell (3,100 shares) and of the consideration paid (P410,000). This should not await the mutual
restitution of the fruits, namely: the legal interest earned by Reynoso's P410,000 while in the possession
of Erquiaga and its counterpart: the fruits of Hacienda San Jose which Reynoso received from the time the
hacienda was delivered to him on November 4,1968 until it was placed under receivership by the court
on March 3, 1975. However, since Reynoso has not yet given an accounting of those fruits, it is only fair
that Erquiaga's obligation to deliver to Reynoso the legal interest earned by his money, should await the
rendition and approval of his accounting. To this extent, the decision of the Court of Appeals should be
modified. For it would be inequitable and oppressive to require Erquiaga to pay the legal interest earned
by Reynoso's P410,000 since 1968 or for the past 20 years (amounting to over P400,000 by this time)
without first requiring Reynoso to account for the fruits of Erquiaga's hacienda which he allegedly
squandered while it was in his possession from November 1968 up to March 3, 1975.

WHEREFORE, the petition for review is granted. The payment of legal interest by Erquiaga to Reynoso on
the price of P410,000 paid by Reynoso for Erquiaga's 3,100 shares of stock of the Erquiaga Development
Corporation should be computed as provided in the final judgment in Civil Case No. 2446 up to
September 30,1972, the date of said judgment. Since Reynoso's judgment liability to Erquiaga for
attorney's fees and damages in the total sum of P62,000 should be set off against the price of P410,000
that Erquiaga is obligated to return to Reynoso, the balance of the judgment in favor of Reynoso would be
only P348,000 which should earn legal rate of interest after September 30,1972, the date of the judgment.
However, the payment of said interest by Erquiaga should await Reynoso's accounting of the fruits
received by him from the Hacienda San Jose. Upon payment of P348,000 by Erquiaga to Reynoso,
Erquiaga's P410,000 surety bond shall be deemed cancelled. In all other respects, the decision of the
Court of Appeals in CA-G.R. No, 04811-SP is affirmed. No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 80682 August 13, 1990

EMBASSY FARMS, INC., petitioner,


vs.
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON. ZENAIDA S. BALTAZAR,
Judge of the Regional Trial Court, Branch CLVIII, (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ,
Deputy Sheriff, Branch CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B.
EVANGELISTA, respondents.

Romeo Z. Comia for petitioner.

Manuel Y Macias for private respondents.

PARAS, J.:
This is a petition for certiorari and prohibition with preliminary injunction seeking to set aside the
resolution * dated October 13, 1987 in CA-G.R. SP No. 12817 entitled "Eduardo B. Evangelists v. Honorable
Camilo O. Montesa, et al." and CA G.R. SP No. 12834 entitled "Embassy Farms, Inc. v. Hon. Zenaida S.
Baltazar, et al." lifting the restraining order dated September 22, 1987, and the resolution dated
November 3, 1987 denying petitioner's motion for reconsideration.

It appears on record that sometime on August 2, 1984, Alexander G. Asuncion (AGA for short) and
Eduardo B. Evangelists (EBE for short) entered into a Memorandum of Agreement (Annex "A" of the
petition). Under said agreement EBE obligated himself to transfer to AGA 19 parcels of agricultural land
registered in his name with an aggregate area of 104,447 square meters located in Loma de Gato, Marilao,
Bulacan, together with the stocks, equipment and facilities of a piggery farm owned by Embassy Farms,
Inc., a registered corporation wherein ninety (90) per cent of its shares of stock is owned by EBE. EBE
also obligated himself to cede, transfer and convey "in a manner absolute and irrevocable any and all of
his shares of stocks" in Embassy Farins Inc. to AGA or his nominees "until the total of said shares of stock
so transferred shall constitute 90% of the paid-in-equity of said corporation" within a reasonable time
from signing of the document. Likewise, EBE obligated to turnover to AGA the effective control and
management of the piggery upon the signing of the agreement.

On the other hand, AGA obligated himself, upon signing of the agreement to pay to EBE the total sum of
close to P8,630,000.00. Within reasonable time from signing of the agreement AGA obligated himself to
organize and register a new corporation with an authorized capital stock of P10,000,000.00 which upon
registration will take over all the rights and liabilities of AGA.

Pursuant to clause 8 of the Memorandum of Agreement, on August 2, 1984, EBE turned over to AGA the
effective control and management of the piggery at Embassy Farms. Likewise, in accordance with clause
15 of the Memorandum of Agreement EBE served as President and Chief Executive of the Embassy Farms
with a monthly salary of P15,000. EBE also endorsed in blank all his shares of stock including that of his
wife and three nominees with minor holdings in Embassy Farms Inc. Out of the total 3,125 shares of
stocks EBE has 2,725 shares, his wife Epifania has 250 shares, while Angel Santos, Armando Martin and
Teofilo Mesina had 50 shares, each registered in their names. Said shares of 3,125 correspond to the paid
subscription because as reflected in the Articles of Incorporation (Annexes "B") EBE subscribed 10,900
shares, Epifania Evangelista 1,000 shares, while Angel Santos, Armando Martin and Teofilo Mesina had
200 shares each subscription in the capital stocks of the corporation. However, despite the indorsement,
EBE retained possession of said shares and opted to deliver to AGA only upon full compliance of the latter
of his obligations under the Memorandum of Agreement.

Notwithstanding the non-delivery of the shares of stocks, in a Deed of Transfer of Shares of Stock dated
August 1984, but notarized on June 20, 1985, AGA transferred a total of 8,602 shares to several persons.

For failure to comply with his obligations, EBE intimated the institution of appropriate legal action.

On April 10, 1986, AGA preempted EBE by filing an action for rescission of the Memorandum of
Agreement with damages. The case was docketed as Civil Case No. 53335 and assigned to Branch CLVIII,
Regional Trial Court, National Capital Judicial Region, Pasig, Metro Manila alleging among others, EBE's
misrepresentation on the piggery business since said business is actually losing and EBE's failure to
execute the deeds of conveyance of the 19 parcels of land.
The Pasig Court in its order dated July 30, 1987, granted a writ of preliminary injunction the dispositive
portion of which reads, viz:

WHEREFORE, this Court hereby orders the issuance of a writ of preliminary injunction
whereby restraining the plaintiff, his nominees, agents, security guards, employees and all
persons claiming under him from disposing of in any manner removing and carrying away
the stocks including rights sucklings, equipment and other facilities in Embassy Farms, Inc.
in Bo. Loma de Gato, Marilao, Bulacan; from harrassing defendant and his employees and
associates; and preventing defendant, assisted by his said employees and associates from
discharging, performing and exercising his duties, prerogatives as director, president and
chief executive of Embassy Farms, Inc. until further orders from this Court subject to
defendant's filing a bond with this Court in the amount of P1,750,000.00 executed in favor
of herein plaintiff, Alexander G. Asuncion, conditioned upon defendant's payment to such
plaintiff Asuncion of all damages which the latter may sustain by reason of this injunction
in the event the Court shall finally decide otherwise and in case said plaintiff, Alexander G.
Asuncion is adjudged entitled to such damages.

SO ORDERED.(p. 258, Rollo)

On September 14, 1987, the Pasig Court on EBE's motion issued an order to break open the premises of
Embassy Farms to enforce the writ of preliminary injunction dated July 30, 1987.

On September 18, 1987, Embassy Farms, Inc. filed a petition with the Court of Appeals for prohibition
with preliminary injunction. The case was docketed as CA-G.R. 12834 and entitled "Embassy Farms, Inc. v.
the Hon. Zenaida S. Baltazar, et al." In its resolution dated September 22, 1987, the Fifth Division of the
Court of Appeals enjoined the enforcement of the Pasig Court's order dated July 30, 1987.

Meanwhile, on July 30, 1987, Embassy Farms Incorporated instituted an action for Injunction with
damages against EBE. In its complaint it alleged that sometime on July 11, 1987, EBE forced his way
inside the Embassy Farms and while inside took some cash and cheek amounting to P423,275.45. The
case was docketed as Civil Case No. 348-11-89 and raffled to Branch 19, Regional Trial Court's 3rd
Judicial Region, Malolos, Bulacan.

On August 10, 1987, upon a motion to dismiss filed by EBE, the Malolos Court issued an order, the
dispositive portion provides, viz:

WHEREFORE, the motion to dismiss is hereby denied for lack of merit, and a writ of
preliminary injunction is hereby issued enjoining defendant, his agent and/or any person
claiming right under him to refrain or desist from interfering in the management and
operation of Embassy Farms, Inc. at Barangay Loma de Gato Marilao, Bulacan, until further
orders from this Court, subject to plaintiffs filing of a bond in the amount of P150,000.00
executed in favor of defendant conditioned for the payment of all damages which the latter
may sustain by reason of this injunction and in case said defendant is adjudged entitled
thereto.

SO ORDERED. (p. 296, Rollo)


On August 27, 1987, EBE filed a motion for the reconsideration of the order dated August 10, 1987 of the
Malolos Court.

On September 15, 1987, without awaiting the resolution of his motion for reconsideration, EBE filed a
Petition for certiorari and Prohibition with preliminary injunction with the Court of Appeals, docketed as
CA-G.R. No. 12817.

On October 13, 1987, the Fifth Division of the Court of Appeals issued a consolidated resolution in CA-G.R.
Nos. 12817 and 12834 sustaining the order dated July 30, 1987 of the Pasig Court. Accordingly, it set
aside and lifted the restraining order dated September 22, 1987 it issued in CA-G.R. SP No. 12834. The
appellate court based its resolution on its findings in the hearing that the Board of Directors of Embassy
Farms are nominees of AGA so that it considered AGA and Embassy Farms as one and the same person. It
noted that EBE has not delivered the certificate of stock outstanding in his name in the books of the
corporation to AGA because the latter allegedly has not complied with the terms and conditions of the
memorandum of agreement. Also the appellate court opined that "(I)n the instant case, it will appear that
no transfer of shares of stock has been made by Evangelista to Asuncion as there had been no delivery of
the certificate in order to produce or effect the transfer of such shares of stock." (Rollo, pp. 231-232)

Embassy Farms filed a motion for reconsideration thereto but it was denied in the resolution dated
November 5, 1987 of the appellate court. Hence, this petition.

The primary issue for resolution is whether or not the appellate court committed a reversible error when
it sustained the order dated July 13, 1987 of the Pasig Court and lifted the restraining order it had issued
in CA-G.R. SP No. 12834.

It is the contention of Petitioner that the appellate court acted without jurisdiction or in excess of
jurisdiction and/or gravely abused its discretion when it sustained the order dated July 30, 1987 of the
Pasig Court and lifted the restraining order it had issued on September 22, 1987 in CA-G.R. SP No. 12834.
Petititioner argued that the Pasig Court has no jurisdiction to hear and decide EBE's application for the
issuance of a writ of preliminary injunction in Civil Case No. 53335 because the ouster of EBE and his
reinstatement as President and Chief Executive Officer of Embassy Farms is an intra-corporate matter
within the exclusive and original jurisdiction of the Securities and Exchange Commission. Petitioner also
claimed that the Pasig Court did not acquire jurisdiction over Embassy Farms because it was not made a
party in Civil Case No. 53335. Neither could the orders of the Pasig Court be enforced at Loma de Gato,
Marilao Bulacan, the principal office of the corporati•n, because it is located outside of the National
Capital Judicial Region. Petitioner likewise claimed that the writ of preliminary injunction issued in Civil
Case No. 53335 was irregularly issued because it was issued one day ahead of the injunction bond.

We do not agree with the petitioner.

It must be stressed at the outset that the case at bar is merely an offshoot of a controversy yet to be
decided on the merits by the Pasig Court. The action for rescission filed by AGA in Civil Case No. 53335
now pending before the Pasig Court will ultimately settle the controversy as to whether it is AGA or EBE
or both parties who have reneged on their obligations under the memorandum of agreement. We do not
want to pre-empt the Pasig Court on the main case.

From the pleadings submitted by the parties it is clear that although EBE has indorsed in blank the shares
outstanding in his name he has not delivered the certificate of stocks to AGA because the latter has not
fully complied with his obligations under the memorandum of agreement. There being no delivery of the
indorsed shares of stock AGA cannot therefore effectively transfer to other person or his nominees the
undelivered shares of stock. For an effective transfer of shares of stock the mode and manner of transfer
as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under
Section 3 of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines,
shares of stock may be transferred by delivery to the transferree of the certificate properly indorsed.
Title may be vested in the transferree by the delivery of the duly indorsed certificate of stock (18 C.J.S.
928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between
the parties until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation
Code of the Philippines).

In the case at bar the indorsed certificate of stock was not actually delivered to AGA so that EBE is still the
controlling stockholder of Embassy Farms despite the execution of the memorandum of agreement and
the turn over of control and management of the Embassy Farms to AGA on August 2, 1984.

When AGA filed on April 10, 1986 an action for the rescission of contracts with damages the Pasig Court
merely restored and established the status quo prior to the execution of the memorandum of agreement
by the issuance of a restraining order on July 10, 1987 and the writ of preliminary injunction on July 30,
1987. It would be unjust and unfair to allow AGA and his nominees to control and manage the Embassy
Farms despite the fact that AGA who is the source of their supposed shares of stock in the corporation is
not asking for the delivery of the indorsed certificate of stock but for the rescission of the memorandum
of agreement. Rescission would result in mutual restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so
it is but proper to allow EBE to manage the farm. Compared to AGA or his nominees EBE would be more
interested in the preservation of the assets, equipment and facilities of Embassy Farms during the
pendency of the main case.

Contrary to petitioner's contention the dispute at bar is not an intracorporate controversy within the
exclusive and original jurisdiction of the Securities and Exchange Commission under Presidential Decree
No. 902-A as amended by Presidential Decree No. 1758. To be an intracorporate controversy it must
pertain to any of the following relationships: (1) between the corporation, partnership or association and
the public; (2) between the corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or associates
themselves (Union Glass and Container Corp. v. SEC, 126 SCRA 31; DMRC Enterprises v. Este Del Sol
Mountain Reserve Inc., 132 SCRA 293; Rivera v. Florendo, 144 SCRA 643; Abeijo v. De la Cruz, 149 SCRA
654).

Basically the conflict here is between AGA and EBE arising from a contract denominated as a
memorandum of agreement. Here the controversy in reality involves the contractual rights and
obligations of AGA and EBE under the memorandum of agreement and not to the enforcement of rights
and obligations under the corporation code or the internal or intracorporate affairs of the corporation.
AGA or his nominees are not even the lawful stockholders of Embassy Farms because EBE for a justifiable
reason has withheld the delivery of the indorsed certificate of stocks so that the supposed transfer by
virtue of the memorandum of agreement could not be properly recorded in the book of the corporation.
The dispute therefore does not fall within the special jurisdiction of the Securities and Exchange
Commission but with regular Courts. AGA or his nominees unduly dragged the petitioner Embassy Farms
in order to resist the order of the Pasig Court and to confuse the real and legitimate issue in the case at
bar.
On the enforceability of the order of the Pasig Court, We see no cogent reason to depart from the ruling of
the trial court which was sustained by the Court of Appeals. Generally, an injunction under Section 21 of
Batas Pambansa Bilang 129 is enforceable within the region. The reason is that the trial court has no
jurisdiction to issue a writ of preliminary injunction to enjoin acts being performed or about to be
performed outside its territorial boundaries. (C.F. Tan vs. Sarmiento, L,24971, June 20, 1975). However,
to avoid an irreparable prejudice We allowed in Dagupan Electric Corporation et al. v. Pano (95 SCRA
693) the enforcement of an injunction to restrain acts committed outside the territorial jurisdiction of the
issuing court. In Dagupan case We ruled that a Court of First Instance has jurisdiction to try a case
although the acts sought be restrained are committed outside its territorial jurisdiction where the
principal business addresses of the parties and the decisions on the acts to be restrained are located and
originated within the Court's jurisdiction.

Here to avoid an injustice and irreparable injury We apply the exception rather than the general rule.
Both parties are residents of the National Capital Region. AGA is a resident of 7-A Lake Street, San Juan,
Metro Manila while EBE is residing at 113 R. Tirona Street, BF Homes, Parañaque, Metro Manila. AGA
filed the case with the Pasig Court and the injunction as an equitable remedy intended to preserve the
status quo is directed against AGA, his nominees and agents. Besides, as noted by the Pasig Court all
orders to be enforced and executed at Embassy Farms in Loma de Gato, Marilao, Bulacan emanated from
its main office which is located at the 2nd Floor, Agora Complex, Domingo Street, San Juan, Metro Manila.

Finally, on the issue whether or not the writ of injunction was irregularly issued as it was issued on July
30, 1987 one day ahead of the injunction bond, suffice it to say that aside from the factual findings of the
Court of Appeals that the date July 31, 1987, appearing on the bond is a typographical error it must be
pointed out that with the injunction bond the party enjoined is amply protected against loss or damage in
case it is finally decided that the injunction ought not to have been granted.

WHEREFORE, the instant petition is hereby DENIED for lack of merit.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 95696 March 3, 1992

ALFONSO S. TAN, Petitioner,


vs.
SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL SUPPLY CORP., TAN SU CHING,
ALFREDO B. UY, ANGEL S. TAN and PATRICIA AGUILAR, Respondents.

PARAS, J.:
Petitioner filed a petition for certiorari against the public respondent Securities and Exchange
Commission and its co-respondents, after the former in an en banc Order, overturned with modification,
the decision of its Cebu SEC Extension hearing officer, Felix Chan, in SEC Case No. C-0096, dated May 23,
1989, on October 10, 1990, under SEC-AC No. 263. (Rollo, pp. 3 and 4)

Sought to be reversed by petitioner, is the ruling of the Commission, specifically declaring that:

1. Confirming the validity of the resolution of the board of directors of the Visayan
Educational Supply Corporation so far as it cancelled Stock Certificate No. 2 and split the
same into Stock Certificates No. 6 (for Angel S. Tan) and No. 8 (for Alfonso S. Tan);

2. Invalidating the sale of shares represented under Stock Certificate No. 8 between Alfonso
S. Tan and the respondent corporation which converted the said stocks into treasury
shares, as well as those transactions involved in the withdrawal of the stockholders from
the respondent corporation for being contrary to law, but ordering the neither party may
recover pursuant to Article 1412 (1) Civil Code of the Philippines; and

3. Revoking the Order of Hearing Officer Felix Chan to reinstate complainant's original 400
shares of stock in the books of the corporation in view of the validity of the sale of 50
shares represented under stock certificate No. 6; and the nullity of the sale 350 shares
represented under stock certificate No. 8, pursuant to the "in pari delicto" doctrine
aforecited. (Rollo, p. 4)

The antecedent facts of the case are as follows:

Respondent corporation was registered on October 1, 1979. As incorporator, petitioner had four hundred
(400) shares of the capital stock standing in his name at the par value of P100.00 per share, evidenced by
Certificate of Stock No. 2. He was elected as President and subsequently reelected, holding the position as
such until 1982 but remained in the Board of Directors until April 19, 1983 as director. (Rollo, p. 5)

On January 31, 1981, while petitioner was still the president of the respondent corporation, two other
incorporators, namely, Antonia Y. Young and Teresita Y. Ong, assigned to the corporation their shares,
represented by certificate of stock No. 4 and 5 after which, they were paid the corresponding 40%
corporate stock-in-trade. (Rollo, p. 43)

Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary and respondent Patricia
Aguilar by virtue of Resolution No. 1981 (b), which was passed and approved while petitioner was still a
member of the Board of Directors of the respondent corporation. (Rollo, p. 6)

Due to the withdrawal of the aforesaid incorporators and in order to complete the membership of the five
(5) directors of the board, petitioner sold fifty (50) shares out of his 400 shares of capital stock to his
brother Angel S. Tan. Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of capital
stock to Teodora S. Tan and both new stockholders attended the special meeting, Angel Tan was elected
director and on March 27, 1981, the minutes of said meeting was filed with the SEC. These facts stand
unchallenged. (Rollo, p. 43)

Accordingly, as a result of the sale by petitioner of his fifty (50) shares of stock to Angel S. Tan on April
16, 1981, Certificate of Stock No. 2 was cancelled and the corresponding Certificates Nos. 6 and 8 were
issued, signed by the newly elected fifth member of the Board, Angel S. Tan as Vice-president, upon
instruction of Alfonso S. Tan who was then the president of the Corporation.(Memorandum of the Private
Respondent, p. 15)

With the cancellation of Certificate of stock No. 2 and the subsequent issuance of Stock Certificate No. 6 in
the name of Angel S. Tan and for the remaining 350 shares, Stock Certificate No. 8 was issued in the name
of petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging that:

9. That in view of his having taken 33 1/3 interest, I was personally requested by Mr. Tan
Su Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled
Certificate of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the
cancelled (1981) Certificate of Stock No. 2 and returned only to me Certificate of Stock No.
8, which I delivered to Tan Su Ching.

10. That the cancellation of his stock (Stock No. 2) was known by him in 1981; that it was
Stock No. 8, that was delivered in March 1983 for his endorsement and cancellation. (Ibid,
p. 18)

From the same Affidavit, it was alleged that Atty. Ramirez prepared a Memorandum of Agreement with
respect to the transaction of the fifty (50) shares of stock part of the Stock Certificate No. 2 of petitioner,
which was submitted to its former owner, Alfonso Tan, but which the purposely did not return. (Ibid., p.
18)

On January 29, 1983, during the annual meeting of the corporation, respondent Tan Su Ching was elected
as President while petitioner was elected as Vice-president. He, however, did not sign the minutes of said
meeting which was submitted to the SEC on March 30, 1983. (Rollo, p. 43)

When petitioner was dislodged from his position as president, he withdrew from the corporation on
February 27, 1983, on condition that he be paid with stocks-in-trade equivalent to 33.3% in lieu of the
stock value of his shares in the amount of P35,000.00. After the withdrawal of the stocks, the board of the
respondent corporation held a meeting on April 19, 1983, effecting the cancellation of Stock Certificate
Nos. 2 and 8 (Exh. 278-C) in the corporate stock and transfer book 1 (Exh. 1-1-A) and submitted the
minutes thereof to the SEC on May 18, 1983. (Rollo, p. 44)

Five (5) years and nine (9) months after the transfer of 50 shares to Angel S. Tan, brother of petitioner
Alfonso S. Tan, and three (3) years and seven (7) months after effecting the transfer of Stock Certificate
Nos. 2 and 8 from the original owner (Alfonso S. Tan) in the stock and transfer book of the corporation,
the latter filed the case before the Cebu SEC Extension Office under SEC Case No. C-0096, more
specifically on December 3, 1983, questioning for the first time, the cancellation of his aforesaid Stock
Certificates Nos. 2 and 8. (Rollo, p. 44)

The bone of centention raised by the petitioner is that the deprivation of his shares despite the non-
endorsement or surrender of his Stock Certificate Nos. 2 and 8, was without the process contrary to the
provision of Section 63 of the Corporation Code (Batas Pambansa Blg. 68), which requires that:

. . . No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded to the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.

After hearing, the Cebu SEC Extension Office Hearing Officer, Felix Chan ruled, that:

a) The cancellation of the complainant's shares of stock with the Visayan Educational
Supply Corporation is null and void;

b) The earlier cancellation of stock certificate No. 2 and the subsequent issuance of stock
certificate No. 8 is also hereby declared null and void;

c) The Secretary of the Corporation is hereby ordered to make the necessary corrections in
the books of the corporation reinstating thereto complainant's original 400 shares of stock.
(Rollo, pp. 39-40)

Private respondent in the original complaint went to the Securities and Exchange and Commission on
appeal, and on October 10, 1990, the commission en banc unanimously overturned the Decision of the
Hearing Officer under SEC-AC No. 263. (Order, Rollo, pp. 42-49)

The petition for certiorari centered on three major issues, with other issues considered as subordinate to
them, to wit:

1. The meaning of shares of stock are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. (Rollo, p. 10)

The case of Nava vs. peers Marketing corporation (74 SCRA 65) was cited by petitioner making the
reference to commentaries taken from 18 C.J.S. 928-930, that the transfer by delivery to the transferee of
the certificate should be properly indorsed, and that "There should be compliance with the mode of
transfer prescribed by law." Using Section 35, now Section 63 of the Corporation Code, the provision of
the law, reads:

SEC. 63. Certificate of stock and transfer of shares. — The capital stock and stock and
corporations shall be divided into shares for which certificates signed by the president and
vice president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stocks so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.

No shares of stocks against which the corporation holds any unpaid claim shall be
transferable in the books of the corporations.

There is no doubt that there was delivery of Stock Certificate No. 2 made by the petitioner to the
Corporation before its replacement with the Stock Certificate No. 6 for fifty (50) shares to Angel S. Tan
and Stock Certificate No. 8 for 350 shares to the petitioner, on March 16, 1981. The problem arose when
petitioner was given back Stock Certificate No. 2 for him to endorse and he deliberately witheld it for
reasons of his own. That the Stock Certificate in question was returned to him for his purpose was
attested to by Mr. Buzon in his Affidavit, the pertinent portion of which has been earlier quoted.

The proof that Stock Certificate No. 2 was split into two (2) consisting of Stock Certificate No. 6 for fifty
(50) shares and Stock Certificate No. 8 for 350 shares, is the fact that petitioner surrendered the latter
stock (No. 8) in lieu of P2 million pesos 1 worth of stocks, which the board passed in a resolution in its
meeting on April 19, 1983. Thus, on February 27, 1983, petitioner indicated he was withdrawing from the
corporation on condition that he be paid with stock-in-trade corresponding to 33.3% (Exh. 294), which
had only a par value of P35,000.00. In this same meeting, the transfer of Stock Certificate Nos. 2 and 8
from the original owner, Alfonso S. Tan was ordered to be recorded in the corporate stock and transfer
book (Exh. "I-1-A") thereafter submitting the minutes of said meeting to the SEC on May 18, 1983 (Exhs.
12 and I). (Order, Rollo, p. 44)

It is also doubtless that Stock Certificate No. 8 was exchanged by petitioner for stocks-in-trade since he
was operating his own enterprise engaged in the same business, otherwise, why would a businessman be
interested in acquiring P2,000,000.00 worth of goods which could possibly at that time, fill up
warehouse? In fact, he even padlocked the warehouse of the respondent corporation, after withdrawing
the thirty-three and one-third (33 1/3%) percent stocks. Accordingly, the Memorandum of Agreement
prepared by the respondents' counsel, Atty. Ramirez evidencing the transaction, was also presented to
petitioner for his signature, however, this document was never returned by him to the corporate officer
for the signature of the other officers concerned. (Rollo, p. 28)

At the time the warehouse was padlocked by the petitioner, the remaining stock inventory was valued at
P7,454,189.05 of which 66 2/3 percent thereof belonged to the private respondents. (Ibid., p. 28)

It was very obvious that petitioner devised the scheme of not returning the cancelled Stock Certificate No.
2 which was returned to him for his endorsement, to skim off the largesse of the corporation as shown by
the trading of his Stock Certificate No. 8 for goods of the corporation valued at P2 million when the par
value of the same was only worth P35,000.00. (Ibid., p. 470) He also used this scheme to renege on his
indebtedness to respondent Tan Su Ching in the amount of P1 million. (Decision, p. 6)

It is not remote that if petitioner could have cashed in on Stock Certificate No. 2 with the remainder of the
goods that he padlocked, he would have done so, until the respondent corporation was bled entirely.

Along this line, petitioner put up the argument that he was responsible for the growth of the corporation
by the alleging that during his incumbency, the corporation grew, prospered and flourished in the court
of business as evidenced by its audited financial statements, and grossed the following incomes from:
1980 — P8,658,414.10, 1981 — P8,039,816.67, 1982 — P7,306,168.67, 1983 — P5,874,453.55, 1984 —
P3,911,667.76. (Ibid., Rollo, p. 24)

Moreover, petitioner asserted that he was ousted from the corporation by reason of his efforts to
establish fiscal controls and to demand an accounting of corporate funds which were accordingly being
transferred and diverted to certain of private respondents' personal accounts which were allegedly
misapplied, misappropriated and converted to their own personal use and benefit. (Ibid., p. 125)
2. Petitioner further claims that "(T)he cancellation and transfer of petitioner's shares and Certificate of
Stock No. 2 (Exh. A) as well as the issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was
patently and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And, that Section 63 of
the Corporation Code of the Philippines is "mandatory in nature", meaning that without the actual
delivery and endorsement of the certificate in question, there can be no transfer, or that such transfer is
null and void. (Rollo, p. 10)

These arguments are all motivated by self-interest, using foreign authorities that are slanted in his favor
and even misquoting local authorities to prop up his erroneous posture and all these attempts are
intended to stifle justice, truth and equity.

Contrary to the understanding of the petitioner with respect to the use of the word "may", in the case
of Shauf v. Court of Appeals, (191 SCRA 713, 27 November 1990), this Court held, that "Remedial law
statues are to be construed liberally." The term 'may' as used in adjective rules, is only permissive and
not mandatory. In several earlier cases, the usage of the word "may" was described as follows:

The word "may"is an auxilliary verb showing among others, opportunity or possibility. Under
ordinary circumstances, the phrase "may be" implies the possible existence of something. In
this case, the "something" is a law governing sectoral representation. The phrase in
question should, therefore, be understood to mean as prescribed by such law that governs
the matter at the time . . . The phrase does not and cannot, by its very wording, restrict itself
to the uncertainly of future legislation. (Legaspi v. Estrella, 189 SCRA 58, 24 Aug. 1990, En
Banc)

Years before the above rulings concerning the interpretation of the word "may", this Court held in Chua v.
Samahang Magsasaka, that "the word "may" indicates that the transfer may be effected in a manner
different from that provided for in the law." (62 Phil. 472)

Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of
the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos. 6 and 8
to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the return of the
cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate non-endorsement.

For all intents and purposes, however, since this was already cancelled which cancellation was also
reported to the respondent Commission, there was no necessity for the same certificate to be endorsed
by the petitioner. All the acts required for the transferee to exercise its rights over the acquired stocks
were attendant and even the corporation was protected from other parties, considering that said transfer
was earlier recorded or registered in the corporate stock and transfer book.

Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina, where this Court held,
that:

But delivery is not essential where it appears that the persons sought to be held as
stockholders are officers of the corporation, and have the custody of the stock book . . . (67
Phi. 36).
Furthermore, there is a necessity to delineate the function of the stock itself from the actual delivery or
endorsement of the certificate of stock itself as is the question in the instant case. A certificate of stock is
not necessary to render one a stockholder in corporation.

Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and
of the various 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 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 is not essential to the existence of a share in stock or the nation of the relation of
shareholder to the corporation. (13 Am. Jur. 2d, 769)

Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his
rights and prerogatives as stockholder and was even elected as member of the board of directors in the
respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of
fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent
corporation when he was elected as officer thereof.

Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although it is


sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled
with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner/s or transferror's creditor may have under
the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles
governing estoppel." (De los Santos vs. McGrath, 96 Phil. 577)

To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing
Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of
delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by
petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law
itself as the only law governing transfer of stocks. While Section 47(s) grants a stock corporations the
authority to determine in the by-laws "the manner of issuing certificates" of shares of stock, however,
the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of
stockholders to transfer their shares. (Emphasis supplied)

In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which prohibits a transfer of stock without
the consent or approval of all the stockholders or of the president or board of directors is illegal as
constituting undue limitation on the right of ownership and in restraint of trade. (47 Phil. 583)

3. Attempt to mislead — Petitioner should be held guilty of manipulating the provision of Section 63 of
the Corporation Law for contumaciously withholding the endorsement of Stock Certificate No. 2 which
was returned to him for the purpose, wasting time and resources of the Court, even after he had received
the stocks-in-trade equivalent to P2,000,000.00 in lieu of his 350 shares of stock with a par value of
P35,000.00 only, and thereafter withdrawing from the respondent corporation.

Not content with the fantastic return of his investment in the corporation and bent on sucking out the
corporate resources by filing the instant case for damages and seeking the nullity of the cancellation of
his Certificate of Stock Nos. 2 and 8, petitioner even attempted to mislead the Court by erroneously
quoting the ruling of the Court in C. N. Hodges v. Lezama, which has some parallelism with the instant case
was the parties involved therein were also close relatives as in this case.
The quoted portion appearing on p. 11 of the petition, was cut short in such a way that relevant portions
thereof were purposely left out in order to impress upon the Court that the unendorsed and uncancelled
stock certificate No. 17, was unconditionally declared null and void, flagrantly omitting the justifying
circumstances regarding its acquisition and the reason given by the Court why it was declared so. The
history of certificate No. 17 is quoted below, showing the reason why the certificate in question was
considered null and void, as follows:

(P)etitioner Hodges did not cause to be entered in the books of the corporation as he had
his stock certificate No. 17 which, therefore had not been endorsed by him to anybody or
cancelled and which he considered still subsisting. On September 18, 1958, petitioner
Hodges again sold his aforesaid 2,230 shares of stock covered by his stock certificate No. 17 on
installment basis to his co-petitioner Ricardo Gurrea, but continued keeping the stock
certificate in his possession without endorsing it to Gurrea or causing the sale to be entered in
the books of the corporation, believing that said shares of stock were his until fully paid for.
Up to the present, petitioner Hodges has in his possession and under his control his aforesaid
stock certificate No. 17, unendorsed and uncancelled (Exhs. A & A-1), a fact known to the
respondents. (14 SCRA p. 1032)

The pertinent misquoted portion follows:

Before the stockholders' meeting of the La Paz ice Plant & Cold Storage Co., Inc., —
hereinafter referred to as the Corporation - which was scheduled to be held on August 6,
1959, petitioners C.N. Hodges and Ricardo Gurrea filed with the CFI of Iloilo, a petition —
docketed as Civil Case No. 5261 of said court — for a writ of prohibition with preliminary
injunction, to restrain respondents Jose Manuel Lezama, as president and secretary,
respectively, of said Corporation from allowing their brother-in-law and brother,
respectively, respondent Benjamin L. Borja, to vote in said meeting on the aforementioned
2,230 shares of stock. Upon the filing of said petition and of a bond in the sum of P1,000,
the writ of preliminary injunction prayed for was issued. After due trial, or on March 28,
1960, (start of petitioner's quotation) "The court of origin rendered a decision holding that,
in view of the provision in stock certificate no. 17, in the name of Hodges, to the effect that
he

. . . is the owner of Two Thousand Two Hundred Thirty shares of the capital
stock of La Paz Ice Plant & Cold Storage Co., Inc., transferrable only on the
books of the corporation by the holder hereof in person or by attorney upon
surrender of this certificate properly endorsed.

stock certificate no. 18, issued in favor of Borja and the entry thereof at his instance in the
books of the corporation without stock certificate no. 17 being first properly endorsed,
surrendered and cancelled, is null and void. . . . " (end of quotation by petitioner, but the
ruling, continues without the period after the word void.) "and that it would be
unconscionable and for Borja to vote on said shares of stock, knowing that he had ceased to
have actual interest therein since September 17, 1958, when Hodges bought such interest
at the public auction held in the proceedings for the foreclosure of his chattel was rendered
making said preliminary injunction permanent and declaring Hodges as the one entitled to
vote on the shares of stock in question.
Petitioner ought to have even included the following which was the reason for declaring the following
which was the reason for declaring the unedorsed, unsurrendered and uncancelled stock certificate, null
and void:

. . . It is, moreover, obvious that Hodges retained it (stock certificate no. 17) with Borja's
consent. It was evidently part of their agreement, or implied therein, that Hodges would
keep the stock certificate and thus remain in the records of the Corporation as owner of the
shares, despite the aforementioned sale thereof and the chattel mortgage thereon. In other
words, the parties thereto intended Hodges to continue, for all intents and purposes, as owner
of said share, until Borja shall have fully paid its stipulated price. (Ibid, pp. 1033-1034)

Other issues raised by the petitioner, subordinate to the principal issues above, (except the ruling by the
respondent Commission with respect to the "pari delicto" doctrine which is not acceptable to this Court)
are of no moment.

Considering the circumstances of the case, it appearing that petitioner is guilty of manipulation, and high-
handedness, circumventing the clear provisions of law in shielding himself from his wrongdoing contrary
to the protective mantle that the law intended for innocent parties, the Court finds the excuses of the
petitioner as unworthy of belief.

WHEREFORE, in view of the foregoing, the Order of the Commission under SEC-AC No. 263 dated October
10, 1990 is hereby AFFIRMED but modified with respect to the "nullity of the sale of 350 shares
represented under stock certification No. 8, pursuant to the "in pari delicto" doctrine. The court holds
that the conversion of the 350 shares with a par value of only P35,000.00 at P100.00 per share into
treasury stocks after petitioner exchanged them with P2,000,000.00 worth of stocks-in-trade of the
corporation, is valid and lawful. With regard to the damages being claimed by the petitioner, the
respondent Commission is not empowered to award such, other than the imposition of fine and
imprisonment under Section 56 of the Corporation Code of the Philippines, as amended.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 74306 March 16, 1992

ENRIQUE RAZON, petitioner,


vs.
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his capacity as Administrator of
the Estate of the Deceased JUAN T. CHUIDIAN, respondents.

G.R. No. 74315 March 16, 1992


VICENTE B. CHUIDIAN, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON, INC., respondents.

GUTIERREZ, JR., J.:

The main issue in these consolidated petitions centers on the ownership of 1,500 shares of stock in E.
Razon, Inc. covered by Stock Certificate No. 003 issued on April 23, 1966 and registered under the name
of Juan T. Chuidian in the books of the corporation. The then Court of First Instance of Manila, now
Regional Trial Court of Manila, declared that Enrique Razon, the petitioner in G.R. No. 74306 is the owner
of the said shares of stock. The then Intermediate Appellate Court, now Court of Appeals, however,
reversed the trial court's decision and ruled that Juan T. Chuidian, the deceased father of petitioner
Vicente B. Chuidian in G.R. No. 74315 is the owner of the shares of stock. Both parties filed separate
motions for reconsideration. Enrique Razon wanted the appellate court's decision reversed and the trial
court's decision affirmed while Vicente Chuidian asked that all cash and stock dividends and all the pre-
emptive rights accruing to the 1,500 shares of stock be ordered delivered to him. The appellate court
denied both motions. Hence, these petitions.

The relevant Antecedent facts are as follows:

In his complaint filed on June 29, 1971, and amended on November 16, 1971, Vicente B.
Chuidian prayed that defendants Enrique B. Razon, E. Razon, Inc., Geronimo Velasco,
Francisco de Borja, Jose Francisco, Alfredo B. de Leon, Jr., Gabriel Llamas and Luis M. de
Razon be ordered to deliver certificates of stocks representing the shareholdings of the
deceased Juan T. Chuidian in the E. Razon, Inc. with a prayer for an order to restrain the
defendants from disposing of the said shares of stock, for a writ of preliminary attachment
v. properties of defendants having possession of shares of stock and for receivership of the
properties of defendant corporation . . .

xxx xxx xxx

In their answer filed on June 18, 1973, defendants alleged that all the shares of stock in the
name of stockholders of record of the corporation were fully paid for by defendant, Razon;
that said shares are subject to the agreement between defendants and incorporators; that
the shares of stock were actually owned and remained in the possession of Razon.
Appellees also alleged . . . that neither the late Juan T. Chuidian nor the appellant had paid
any amount whatsoever for the 1,500 shares of stock in question . . .

xxx xxx xxx

The evidence of the plaintiff shown that he is the administrator of the intestate estate of
Juan Telesforo Chuidian in Special Proceedings No. 71054, Court of First Instance of Manila.

Sometime in 1962, Enrique Razon organized the E. Razon, Inc. for the purpose of bidding
for the arrastre services in South Harbor, Manila. The incorporators consisted of Enrique
Razon, Enrique Valles, Luisa M. de Razon, Jose Tuason, Jr., Victor Lim, Jose F. Castro and
Salvador Perez de Tagle.

On April 23, 1966, stock certificate No. 003 for 1,500 shares of stock of defendant
corporation was issued in the name of Juan T. Chuidian.

On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, the
plaintiff-appellant, were elected as directors of E. Razon, Inc. Both of them actually served
and were paid compensation as directors of E. Razon, Inc.

From the time the certificate of stock was issued on April 1966 up to April 1971, Enrique
Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in
question and had not brought any action to have the certificate of stock over the said
shares cancelled.

The certificate of stock was in the possession of defendant Razon who refused to deliver
said shares to the plaintiff, until the same was surrendered by defendant Razon and
deposited in a safety box in Philippine Bank of Commerce.

Defendants allege that after organizing the E. Razon, Inc., Enrique Razon distributed shares
of stock previously placed in the names of the withdrawing nominal incorporators to some
friends including Juan T. Chuidian

Stock Certificate No. 003 covering 1,500 shares of stock upon instruction of the late
Chuidian on April 23, 1986 was personally delivered by Chuidian on July 1, 1966 to the
Corporate Secretary of Attorney Silverio B. de Leon who was himself an associate of the
Chuidian Law Office (Exhs. C & 11). Since then, Enrique Razon was in possession of said
stock certificate even during the lifetime of the late Chuidian, from the time the late
Chuidian delivered the said stock certificate to defendant Razon until the time (sic) of
defendant Razon. By agreement of the parties (sic) delivered it for deposit with the bank
under the joint custody of the parties as confirmed by the trial court in its order of August
7, 1971.

Thus, the 1,500 shares of stook under Stock Certificate No. 003 were delivered by the late
Chuidian to Enrique because it was the latter who paid for all the subscription on the
shares of stock in the defendant corporation and the understanding was that he (defendant
Razon) was the owner of the said shares of stock and was to have possession thereof until
such time as he was paid therefor by the other nominal incorporators/stockholders (TSN.,
pp. 4, 8, 10, 24-25, 25-26, 28-31, 31-32, 60, 66-68, July 22, 1980, Exhs. "C", "11", "13" "14").
(Ro11o — 74306, pp. 66-68)

In G.R. No. 74306, petitioner Enrique Razon assails the appellate court's decision on its alleged
misapplication of the dead man's statute rule under Section 20(a) Rule 130 of the Rules of Court.
According to him, the "dead man's statute" rule is not applicable to the instant case. Moreover, the private
respondent, as plaintiff in the case did not object to his oral testimony regarding the oral agreement
between him and the deceased Juan T. Chuidian that the ownership of the shares of stock was actually
vested in the petitioner unless the deceased opted to pay the same; and that the petitioner was subjected
to a rigid cross examination regarding such testimony.
Section 20(a) Rule 130 of the Rules of Court (Section 23 of the Revised Rules on Evidence) States:

Sec. 20. Disqualification by reason of interest or relationship — The following persons


cannot testify as to matters in which they are interested directly or indirectly, as herein
enumerated.

(a) Parties or assignors of parties to a case, or persons in whose behalf a case is


prosecuted, against an executor or administrator or other representative of a deceased
person, or against a person of unsound mind, upon a claim or demand against the estate of
such deceased person or against such person of unsound mind, cannot testify as to any
matter of fact accruing before the death of such deceased person or before such person
became of unsound mind." (Emphasis supplied)

xxx xxx xxx

The purpose of the rule has been explained by this Court in this wise:

The reason for the rule is that if persons having a claim against the estate of the deceased
or his properties were allowed to testify as to the supposed statements made by him
(deceased person), many would be tempted to falsely impute statements to deceased
persons as the latter can no longer deny or refute them, thus unjustly subjecting their
properties or rights to false or unscrupulous claims or demands. The purpose of the law is
to "guard against the temptation to give false testimony in regard to the transaction in
question on the part of the surviving party." (Tongco v. Vianzon, 50 Phil. 698; Go Chi Gun, et
al. v. Co Cho, et al., 622 [1955])

The rule, however, delimits the prohibition it contemplates in that it is applicable to a case against the
administrator or its representative of an estate upon a claim against the estate of the deceased person.
(See Tongco v. Vianzon, 50 Phil. 698 [1927])

In the instant case, the testimony excluded by the appellate court is that of the defendant (petitioner
herein) to the affect that the late Juan Chuidian, (the father of private respondent Vicente Chuidian, the
administrator of the estate of Juan Chuidian) and the defendant agreed in the lifetime of Juan Chuidian
that the 1,500 shares of stock in E. Razon, Inc. are actually owned by the defendant unless the deceased
Juan Chuidian opted to pay the same which never happened. The case was filed by the administrator of
the estate of the late Juan Chuidian to recover shares of stock in E. Razon, Inc. allegedly owned by the late
Juan T. Chuidian.

It is clear, therefore, that the testimony of the petitioner is not within the prohibition of the rule. The case
was not filed against the administrator of the estate, nor was it filed upon claims against the estate.

Furthermore, the records show that the private respondent never objected to the testimony of the
petitioner as regards the true nature of his transaction with the late elder Chuidian. The petitioner's
testimony was subject to cross-examination by the private respondent's counsel. Hence, granting that the
petitioner's testimony is within the prohibition of Section 20(a), Rule 130 of the Rules of Court, the
private respondent is deemed to have waived the rule. We ruled in the case of Cruz v. Court of
Appeals (192 SCRA 209 [1990]):
It is also settled that the court cannot disregard evidence which would ordinarily be
incompetent under the rules but has been rendered admissible by the failure of a party to
object thereto. Thus:

. . . The acceptance of an incompetent witness to testify in a civil suit, as well as the


allowance of improper questions that may be put to him while on the stand is a matter
resting in the discretion of the litigant. He may assert his right by timely objection or he
may waive it, expressly or by silence. In any case the option rests with him. Once admitted,
the testimony is in the case for what it is worth and the judge has no power to disregard it for
the sole reason that it could have been excluded, if it had been objected to, nor to strike it out
on its own motion (Emphasis supplied). (Marella v. Reyes, 12 Phil. 1.)

The issue as to whether or not the petitioner's testimony is admissible having been settled, we now
proceed to discuss the fundamental issue on the ownership of the 1,500 shares of stock in E. Razon, Inc.

E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose of participating in the
bidding for the arrastre services in South Harbor, Manila. The incorporators were Enrique Razon,
Enrique Valles, Luisa M. de Razon, Jose Tuazon, Jr., Victor L. Lim, Jose F. Castro and Salvador Perez de
Tagle. The business, however, did not start operations until 1966. According to the petitioner, some of the
incorporators withdrew from the said corporation. The petitioner then distributed the stocks previously
placed in the names of the withdrawing nominal incorporators to some friends, among them the late Juan
T. Chuidian to whom he gave 1,500 shares of stock. The shares of stock were registered in the name of
Chuidian only as nominal stockholder and with the agreement that the said shares of stock were owned
and held by the petitioner but Chuidian was given the option to buy the same. In view of this
arrangement, Chuidian in 1966 delivered to the petitioner the stock certificate covering the 1,500 shares
of stock of E. Razon, Inc. Since then, the Petitioner had in his possession the certificate of stock until the
time, he delivered it for deposit with the Philippine Bank of Commerce under the parties' joint custody
pursuant to their agreement as embodied in the trial court's order.

The petitioner maintains that his aforesaid oral testimony as regards the true nature of his agreement
with the late Juan Chuidian on the 1,500 shares of stock of E. Razon, Inc. is sufficient to prove his
ownership over the said 1,500 shares of stock.

The petitioner's contention is not correct.

In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled:

. . . For an effective, transfer of shares of stock the mode and manner of transfer as
prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65).
As provided under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the
Corporation Code of the Philippines, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in the transferee by the
delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo,
144 SCRA 643). However, no transfer shall be valid, except as between the parties until the
transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code of
the Philippines; Section 35 of the Corporation Law)
In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the
name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during
his lifetime Chuidian was ellected member of the Board of Directors of the corporation which clearly
shows that he was a stockholder of the corporation. (See Section 30, Corporation Code) From the point of
view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case,
the petitioner who claims ownership over the questioned shares of stock must show that the same were
transferred to him by proving that all the requirements for the effective transfer of shares of stock in
accordance with the corporation's by laws, if any, were followed (See Nava v. Peers Marketing
Corporation, 74 SCRA 65 [1976]) or in accordance with the provisions of law.

The petitioner failed in both instances. The petitioner did not present any by-laws which could show that
the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's by-laws
or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made
applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be
properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of
the duly indorsedcertificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering
the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed
to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The
petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his
intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure
required by law or the proper conduct of business even among friends. To reiterate, indorsement of the
certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock.

Moreover, the preponderance of evidence supports the appellate court's factual findings that the shares
of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the
legal affairs of the corporation. We give credence to the testimony of the private respondent that the
shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation.
Petitioner Razon failed to overcome this testimony.

In G.R. No. 74315, petitioner Vicente B. Chuidian insists that the appellate court's decision declaring his
deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should have
included all cash and stock dividends and all the pre-emptive rights accruing to the said 1,500 shares of
stock.

The petition is impressed with merit.

The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership.

The rights of stockholders are generally enumerated as follows:

xxx xxx xxx

. . . [F]irst, to have a certificate or other evidence of his status as stockholder issued to him;
second, to vote at meetings of the corporation; third, to receive his proportionate share of
the profits of the corporation; and lastly, to participate proportionately in the distribution
of the corporate assets upon the dissolution or winding up. (Purdy's Beach on Private
Corporations, sec. 554) (Pascual v. Del Saz Orozco, 19 Phil. 82, 87)

WHEREFORE, judgment is rendered as follows:

a) In G.R. No. 74306, the petition is DISMISSED. The questioned decision and resolution of the then
Intermediate Appellate Court, now the Court of Appeals, are AFFIRMED. Costs against the petitioner.

b) In G.R. No. 74315, the petition is GRANTED. The questioned Resolution insofar as it denied the
petitioner's motion to clarify the dispositive portion of the decision of the then Intermediate Appellate
Court, now Court of Appeals is REVERSED and SET ASIDE. The decision of the appellate court is
MODIFIED in that all cash and stock dividends as, well as all pre-emptive rights that have accrued and
attached to the 1,500 shares in E. Razon, Inc., since 1966 are declared to belong to the estate of Juan T.
Chuidian.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 96674 June 26, 1992

RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO
TRIAS, petitioners,

vs.

COURT OF APPEALS*, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ


ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO ,
SR., respondents.

PARAS, J.:

The basic controversy in this case is whether or not the respondent court erred in sustaining the
Securities and Exchange Commission when it compelled by Mandamus the Rural Bank of Salinas to
register in its stock and transfer book the transfer of 473 shares of stock to private respondents.
Petitioners maintain that the Petition for Mandamus should have been denied upon the following
grounds.
(1) Mandamus cannot be a remedy cognizable by the Securities and Exchange Commission when the
purpose is to register certificates of stock in the names of claimants who are not yet stockholders of a
corporation:

(2) There exist valid reasons for refusing to register the transfer of the subject of stock, namely:

(a) a pending controversy over the ownership of the certificates of stock with the Regional
Trial Court;

(b) claims that the Deeds of Assignment covering the subject certificates of stock were
fictitious and antedated; and

(c) claims on a resultant possible deprivation of inheritance share in relation with a


conflicting claim over the subject certificates of stock.

The facts are not disputed.

On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special
Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter
full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank
registered in his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the
proper documents therefor, and to receive and sign receipts for the dispositions.

On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania
Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in
favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco
Guerrero, Jr. (5 shares).

Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980,
private respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of
Assignment for the remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr.

Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two
(2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer
book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente
G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the
name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania
Guerrero.

On December 5, 1980, private respondent Melania Guerrero filed with the Securities and Exchange
Commission" (SEC) an action for mandamus against petitioners Rural Bank of Salinas, its President and
Corporate Secretary. The case was docketed as SEC Case No. 1979.

Petitioners filed their Answer with counterclaim on December 19, 1980 alleging the upon the death of
Clemente G. Guerrero, his 473 shares of stock became the property of his estate, and his property and
that of his widow should first be settled and liquidated in accordance with law before any distribution
can be effected so that petitioners may not be a party to any scheme to evade payment of estate or
inheritance tax and in order to avoid liability to any third persons or creditors of the late Clemente G.
Guerrero.

On January 29, 1981, a motion for intervention was filed by Maripol Guerrero, a legally adopted daughter
of the late Clemente G. Guerrero and private respondent Melania Guerrero, who stated therein that on
November 26, 1980 (almost two weeks before the filing of the petition for Mandamus) a Petition for the
administration of the estate of the late Clemente G. Guerrero had been filed with the Regional Trial Court,
Pasig, Branch XI, docketed as Special Proceedings No. 9400. Maripol Guerrero further claimed that the
Deeds of Assignment for the subject shares of stock are fictitious and antedated; that said conveyances
are donations since the considerations therefor are below the book value of the shares, the
assignees/private respondents being close relatives of private respondent Melania Guerrero; and that the
transfer of the shares in question to assignees/private respondents, other than private respondent
Melania Guerrero, would deprive her (Maripol Guerrero) of her rightful share in the inheritance. The SEC
hearing officer denied the Motion for Intervention for lack of merit. On appeal, the SEC En Banc affirmed
the decision of the hearing officer.

Intervenor Guerrero filed a complaint before the then Court of First Instance of Rizal, Quezon City
Branch, against private respondents for the annulment of the Deeds of Assignment, docketed as Civil Case
No. Q-32050. Petitioners, on the other hand, filed a Motion to Dismiss and/or to Suspend Hearing of SEC
Case No. 1979 until after the question of whether the subject Deeds of Assignment are fictitious, void or
simulated is resolved in Civil Case No. Q-32050. The SEC Hearing Officer denied said motion.

On December 10, 1984, the SEC Hearing Officer rendered a Decision granting the writ
of Mandamus prayed for by the private respondents and directing petitioners to cancel stock certificates
nos. 26, 49 and 65 of the Bank, all in the name of Clemente G. Guerrero, and to issue new certificates in
the names of private respondents, except Melania Guerrero. The dispositive, portion of the decision
reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioners and against the
respondents, directing the latter, particularly the corporate secretary of respondent Rural
Bank of Salinas, Inc., to register in the latter's Stock and Transfer Book the transfer of 473
shares of stock of respondent Bank and to cancel Stock Certificates Nos. 26, 45 and 65 and
issue new Stock Certificates covering the transferred shares in favor of petitioners, as
follows:

1. Luz Andico 457 shares

2. Wilhelmina Rosales 10 shares

3. Francisco Guerrero, Jr. 5 shares

4. Francisco Guerrero, Sr. 1 share

and to pay to the above-named petitioners, the dividends for said shares corresponding to
the years 1981, 1982, 1983 and 1984 without interest.

No pronouncement as to costs.
SO ORDERED. (p. 88, Rollo)

On appeal, the SEC En Banc affirmed the decision of the Hearing Officer. Petitioner filed a petition for
review with the Court of Appeals but said Court likewise affirmed the decision of the SEC.

We rule in favor of the respondents.

Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide
cases involving intracorporate controversies. An intracorporate controversy has been defined as one
which arises between a stockholder and the corporation. There is no distinction, qualification, nor any
exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at bar involves shares of
stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is
therefore within the power of respondent SEC to adjudicate.

Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private
respondent's names. Such ruling finds support under Section 63 of the Corporation Code, to wit:

Sec. 63. . . . Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation
...

In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63 in his wise:

Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no
restriction as to whom the stocks may be transferred. It does not suggest that any
discrimination may be created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property, is at liberty, under said
section to dispose them in favor of whomever he pleases, without limitation in this respect,
than the general provisions of law. . . .

The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds
any unpaid claim against the shares intended to be transferred, which is absent here.

A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers, because:

. . . Restrictions in the traffic of stock must have their source in legislative enactment, as the
corporation itself cannot create such impediment. By-laws are intended merely for the
protection of the corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the absence of such power,
cannot ordinarily inquire into or pass upon the legality of the transactions by which its
stock passes from one person to another, nor can it question the consideration upon which
a sale is based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs. Nolasco, Supra).

The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing
from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock in cases like the
present, mandamus will lie to compel the officers of the corporation to transfer said stock
in the books of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs.
Botica Nolasco, 47 Phil. 583, 594).

The corporation's obligation to register is ministerial.

In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and
does not try to decide the question of ownership. (Fletcher, Sec. 5528, page 434).

The duty of the corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by mandamus. (See. 5518, 12
Fletcher 394)

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and
transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding
the Decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of
the 473 shares in the stock and transfer book in the names of private respondents. At all events, the
registration is without prejudice to the proceedings in court to determine the validity of the Deeds of
Assignment of the shares of stock in question.

WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 120138 September 5, 1997

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S.
JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY &
DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T.
MORALES and DANTE D. MORALES, respondents.

KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioners
seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and
its subsequent resolution dated 10 May 1995 denying petitioners' motion for reconsideration.

The present case involves two separate but interrelated conflicts. The facts leading to the first
controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil
Realty & Development Corporation while private respondents who are the children of Judge
Torres' deceased brother Antonio A. Torres, constituted the minority stockholders. In particular,
their respective shareholdings and positions in the corporation were as follows:

Name of Stockholder Number of Percentage Position(s)


Shares

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair


Milagros P. Torres 33,430 19.10 Dir./Treasurer
Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
Antonio P. Torres, Jr. 8,290 4.73 Director
Ma. Jacinta P. Torres 8,290 4.73 Director
Ma. Luisa T. Morales 7,790 4.45 Director
Dante D. Morales 500 .28 Director1

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate planning" scheme
under which he assigned to Tormil Realty & Development Corporation (Tormil for brevity) various real
properties he owned and his shares of stock in other corporations in exchange for 225,972 Tormil Realty
shares. Hence, on various dates in July and August of 1984, ten (10) deeds of assignment were executed
by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE


ISSUED

1. July 13, 1984 TCT 81834 Quezon City 13,252


TCT 144240 Quezon City

2. July 13, 1984 TCT 77008 Manila


TCT 65689 Manila 78,493
TCT 109200 Manila

3. July 13, 1984 TCT 374079 Makati 8,307

4. July 24, 1984 TCT 41527 Pasay


TCT 41528 Pasay 9,855
TCT 41529 Pasay

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000


6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737

7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283

8. Aug. 07, 1984 China banking Corp. Stocks 6,300

9. Aug. 20, 1984 Ayala Corp. Stocks 7,468

10. Aug. 29, 1984 Ayala Fund Stocks 1,322

———
225,9722

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil Realty
and the revenues generated by the said properties were correspondingly entered in the corporation's
books of account and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective Register of Deeds in
the name of Tormil Realty, except for the ones located in Makati and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares remained
unsubscribed, all of which were duly issued to and received by Judge Torres (as evidenced by stock
certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).3

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of private
respondents to approve the needed increase in the corporation's authorized capital stock (to cover the
shortage of 972 shares due to Judge Torres under the "estate planning" scheme), on 11 September 1986,
Judge Torres revoked the two (2) deeds of assignment covering the properties in Makati and Pasay City.4

Noting the disappearance of the Makati and Pasay City properties from the corporation's inventory of
assets and financial records private respondents, on 31 March 1987, were constrained to file a complaint
with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel Judge
Torres to deliver to Tormil corporation the two (2) deeds of assignment covering the aforementioned
Makati and Pasay City properties which he had unilaterally revoked and to cause the registration of the
corresponding titles in the name of Tormil. Private respondents alleged that following the disappearance
of the properties from the corporation's inventory of assets, they found that on October 24, 1986, Judge
Torres, together with Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel,
respectively, of Tormil, formed and organized a corporation named "Torres-Pabalan Realty and
Development Corporation" and that as part of Judge Torres' contribution to the new corporation, he
executed in its favor a Deed of Assignment conveying the same Makati and Pasay City properties he had
earlier transferred to Tormil.

The second controversy — involving the same parties — concerned the election of the 1987 corporate
board of directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled on
25 March 1987 in compliance with the provisions of its by-laws.
Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to petitioners Tobias,
Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of "qualifying
shares," for the sole purpose of meeting the legal requirement to be able to elect them (Tobias and
company) to the Board of Directors as Torres' nominees.

The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029, 028, 027,
026 and at the back of each certificate the following inscription is found:

The present certificate and/or the one share it represents, conformably to the purpose and
intention of the Deed of Assignment dated March 6, 1987, is not held by me under any
claim of ownership and I acknowledge that I hold the same merely as trustee of Judge
Manuel A. Torres, Jr. and for the sole purpose of qualifying me as Director;

(Signature of Assignee)5

The reason behind the aforestated action was to remedy the "inequitable lopsided set-up obtaining in the
corporation, where, notwithstanding his controlling interest in the corporation, the late Judge held only a
single seat in the nine-member Board of Directors and was, therefore, at the mercy of the minority, a
combination of any two (2) of whom would suffice to overrule the majority stockholder in the Board's
decision making functions."6

On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired therein was
ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official representatives dispatched by
the SEC to observe the proceedings (upon request of the late Judge Torres) in their report dated 27
March 1987:

xxx xxx xxx

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential bungalow in
Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres introduced us to the
stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina
Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our authority and personality
to appear in the meeting claiming subject corporation is a family and private firm. We
explained that our appearance there was merely in response to the request of Manuel
Torres, Jr. and that SEC has jurisdiction over all registered corporations. Manuel Torres, Jr.,
a septuagenarian, argued that as holder of the major and controlling shares, he approved of
our attendance in the meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias, Atty.
Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar Azura
arrived. Atty. Azura told the body that they came as counsels of Manuel Torres, Jr. and as
stockholders having assigned qualifying shares by Manuel Torres, Jr.

The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding after verbally
authorized by Manuel Torres, Jr., the President and Chairman of the Board. The secretary
when asked about the quorum, said that there was more than a quorum. Mr. Pabalan
distributed copies of the president's report and the financial statements. Antonio Torres,
Jr. requested time to study the said reports and brought out the question of auditing the
finances of the corporation which he claimed was approved previously by the board. Heated
arguments ensued which also touched on family matters. Antonio Torres, Jr. moved for the
suspension of the meeting but Manuel Torres, Jr. voted for the continuation of the
proceedings.

Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the
propriety of suspending the meeting but Antonio Torres, Jr. objected reasoning out that we
were just observers.

When the Chairman called for the election of directors, the Secretary refused to write down
the names of nominees prompting Atty. Azura to initiate the appointment of Atty. Jocson, Jr.
as Acting Secretary.

Antonio Torres, Jr. nominated the present members of the Board. At this juncture, Milagros
Torres cried out and told the group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of Ma.
Jacinta Torres in San Miguel Village, Makati, Metro Manila. The undersigned joined them
since the group with Manuel Torres, Jr. the one who requested for S.E.C. observers,
represented the majority of the outstanding capital stock and still constituted a quorum.

At the resumption of the meeting, the following were nominated and elected as directors
for the year 1987-1988:

1. Manuel Torres, Jr.

2. Ma. Jacinta Torres

3. Edgardo Pabalan

4. Graciano Tobias

5. Rodolfo Jocson, Jr.

6. Melvin Jurisprudencia

7. Augustus Cesar Azura

8. Josefina Torres

9. Dante Morales

After the election, it was resolved that after the meeting, the new board of directors shall
convene for the election of officers.

xxx xxx xxx7


Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC Case No.
3161) praying in the main, that the election of petitioners to the Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil
because the assignment of shares to them violated the minority stockholders' right of pre-emption as
provided in the corporation's articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing and
adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of private
respondents. The dispositive portion thereof states, thus:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering and directing the respondents, particularly respondent Manuel A. Torres, Jr., to
turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina T. Carlos: (a)
the originals of the Deeds of Assignment dated July 13 and 24, 1984 together with the
owner's duplicates of Transfer Certificates of Title Nos. 374079 of the Registry of Deeds for
Makati, and 41527, 41528 and 41529 of the Registry of Deeds for Pasay City and/or to
cause the formal registration and transfer of title in and over such real properties in favor
of TORMIL with the proper government agency; (b) all corporate books of account, records
and papers as may be necessary for the conduct of a comprehensive audit examination, and
to allow the examination and inspection of such accounting books, papers and records by
any or all of the corporate directors, officers and stockholders and/or their duly authorized
representatives or auditors;

2. Declaring as permanent and final the writ of preliminary injunction issued by the
Hearing Panel on February 13, 1989;

3. Declaring as null and void the election and appointment of respondents to the Board of
Directors and executive positions of TORMIL held on March 25, 1987, and all their acts and
resolutions made for and in behalf of TORMIL by authority of and pursuant to such invalid
appointment & election held on March 25, 1987;

4. Ordering the respondents jointly and severally, to pay the complainants the sum of ONE
HUNDRED THOUSAND PESOS (P100,000.00) as and by way of attorney's fees.8

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on 3 April
1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died. However, notice thereof
was brought to the attention of the SEC not by petitioners' counsel but by private respondents in a
Manifestation dated 24 April 1991.9

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no administrator or
legal representative of the late Judge Torres' estate has yet been appointed by the Regional Trial Court of
Makati where Sp. Proc. No. M-1768 ("In Matter of the Issuance of the Last Will and Testament of Manuel
A Torres, Jr.") was pending. Two similar motions for suspension were filed by petitioners on 28 June
1993 and 9 July 1993.
On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited motions on the
following ground:

Before the filing of these motions, the Commission en banc had already completed all
proceedings and had likewise ruled on the merits of the appealed cases. Viewed in this
light, we thus feel that there is nothing left to be done except to deny these motions to
suspend proceedings. 10

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads, thus:

WHEREFORE, premises considered, the appealed decision of the hearing panel is hereby
affirmed and all motions pending before us incident to this appealed case are necessarily
DISMISSED.

SO ORDERED. 11

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals by way of
a petition for review (docketed as CA-G.R. SP No. 31748).

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which states:

WHEREFORE, the petition for review is DISMISSED and the appealed decision is
accordingly affirmed.

SO ORDERED. 12

From the said decision, petitioners filed a motion for reconsideration which was denied in a resolution
issued by the Court of Appeals dated 10 May 1995. 13

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of Appeals
committed the following errors in its decision:

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH DECISION,
WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 BEING
PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN OMISSION
RESULTING IN A CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE
HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT S.E.C., WHICH
IS VOID FOR HAVING BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE
DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY,
FOR WANT OF JURISDICTION OVER THE SAID DECEASED'S TESTATE ESTATE, AND
MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS
APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;
(3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL


RECORD OF S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT
S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE
(AS CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A MERE
CASE OF LESION OR INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE)
AS SO ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and,

(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL


RECORD OF S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE
RECORDING BY THE LATE JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED
ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE STOCK
AND TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY AND MOREOVER, THAT
ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER
STOCKHOLDERS. 14

We shall resolve the issues in seriatim.

Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived them of
procedural due process. Without the evidence and the original records of the proceedings before the SEC,
the Court of Appeals, petitioners adamantly state, could not have possibly made a proper appreciation
and correct determination of the issues, particularly the factual issues, they had raised on appeal.
Petitioners also assert that since the Court of Appeals allegedly gave due course to their petition, the
original records should have been forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991) which
provides that:

8. WHEN PETITION GIVEN DUE COURSE. — The Court of Appeals shall give due course to
the petition only when it shows prima facie that the court, commission, board, office or
agency concerned has committed errors of fact or law that would warrant reversal or
modification of the order, ruling or decision sought to be reviewed. The findings of fact of
the court commission, board, office or agency concerned when supported by substantial
evidence shall be final.

xxx xxx xxx

11. TRANSMITTAL OF RECORD. — Within fifteen (15) days from notice that the petition has
been given due course, the court, commission, board, office or agency concerned shall
transmit to the Court of Appeals the original or a certified copy of the entire record of the
proceeding under review. The record to be transmitted may be abridged by agreement of
all parties to the proceeding. The Court of Appeals may require or permit subsequent
correction or addition to the record.
Petitioners contend that the Court of Appeals had given due course to their petition as allegedly indicated
by the following acts:

a) it granted the restraining order applied for by the herein petitioners, and
after hearing, also the writ of preliminary injunction sought by them; under
the original SC Circular No. 1-91, a petition for review may be given due
course at the onset (paragraph 8) upon a mereprima facie finding of errors of
fact or law having been committed, and such prima faciefinding is but
consistent with the grant of the extra-ordinary writ of preliminary
injunction;

b) it required the parties to submit "simultaneous memoranda" in its


resolution dated October 15, 1993 (this is in addition to the comment
required to be filed by the respondents) and furthermore declared in the
same resolution that the petition will be decided "on the merits," instead of
outrightly dismissing the same;

c) it rendered a full length decision, wherein: (aa) it expressly declared the


respondent S.E.C. as having erred in denying the pertinent motions to
suspend proceedings; (bb) it declared the supposed error as having become
a non-issue when the respondent C.A. "proceeded to hear (the) appeal"; (cc) it
formulated and applied its own theory of negotiorum gestio in justifying the
non-substitution of the deceased principal party in S.E.C. — AC No. 339 and
moreover, its theory of di minimis non curat lex (this, without first
determining the true extent of and the correct legal characterization of the
so-called "shortage" of Tormil shares;
and, (dd) it expressly affirmed the assailed decision of respondent S.E.C. 15

Petitioners' contention is unmeritorious.

There is nothing on record to show that the Court of Appeals gave due course to the petition. The fact
alone that the Court of Appeals issued a restraining order and a writ of preliminary injunction and
required the parties to submit their respective memoranda does not indicate that the petition was given
due course. The office of an injunction is merely to preserve the status quo pending the disposition of the
case. The court can require the submission of memoranda in support of the respective claims and
positions of the parties without necessarily giving due course to the petition. The matter of whether or
not to give due course to a petition lies in the discretion of the court.

It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative Circular
No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from quasi-judicial
agencies to the Court of Appeals was clarified thus:

10. Due course. — If upon the filing of the comment or such other pleadings or documents
as may be required or allowed by the Court of Appeals or upon the expiration of the period
for the filing thereof, and on the bases of the petition or the record the Court of Appeals
finds prima facie that the court or agency concerned has committed errors of fact or law
that would warrant reversal or modification of the award, judgment, final order or
resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall
dismiss the same. The findings of fact of the court or agency concerned, when supported by
substantial evidence, shall be binding on the Court of Appeals.

11. Transmittal of record. — Within fifteen (15) days from notice that the petition has been
given due course, the Court of Appeals may require the court or agency concerned to transmit
the original or a legible certified true copy of the entire record of the proceeding under
review. The record to be transmitted may be abridged by agreement of all parties to the
proceeding. The Court of Appeals may require or permit subsequent correction of or
addition to the record. (Emphasis ours.)

The aforecited circular now formalizes the correct practice and clearly states that in resolving appeals
from quasi judicial agencies, it is within the discretion of the Court of Appeals to have the original records
of the proceedings under review be transmitted to it. In this connection petitioners' claim that the Court
of Appeals could not have decided the case on the merits without the records being brought before it is
patently lame. Indubitably, the Court of Appeals decided the case on the basis of the uncontroverted facts
and admissions contained in the pleadings, that is, the petition, comment, reply, rejoinder, memoranda,
etc. filed by the parties.

II

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for being
rendered without the necessary substitution of parties (for the deceased petitioner Manuel A. Torres, Jr.)
as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which provides as follows:

Sec. 17. Death of party. — After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative of the deceased to appear
and to be substituted for the deceased, within a period of thirty (30) days, or within such
time as may be granted. If the legal representative fails to appear within said time, the
court may order the opposing party to procure the appointment of a legal representative of
the deceased within a time to be specified by the court, and the representative shall
immediately appear for and on behalf of the interest of the deceased. The court charges
involved in procuring such appointment, if defrayed by the opposing party, may be
recovered as costs. The heirs of the deceased may be allowed to be substituted for the
deceased, without requiring the appointment of an executor or administrator and the court
may appoint guardian ad litemfor the minor heirs.

Petitioners insist that the SEC en banc should have granted the motions to suspend they filed based as
they were on the ground that the Regional Trial Court of Makati, where the probate of the late Judge
Torres' will was pending, had yet to appoint an administrator or legal representative of his estate.

We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that survives, and no order is issued by
the Court for the appearance of the legal representative or of the heirs of the deceased to be
substituted for the deceased, and as a matter of fact no such substitution has ever been
effected, the trial held by the court without such legal representative or heirs, and the
judgment rendered after such trial, are null and void because the court acquired no
jurisdiction over the persons of the legal representative or of the heirs upon whom the trial
and the judgment are not binding. 16

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the Regional
Trial Court of Makati for the ante-mortem probate of his holographic will which he had executed on 31
October 1986. Testifying in the said proceedings, Judge Torres confirmed his appointment of petitioner
Edgardo D. Pabalan as the sole executor of his will and administrator of his estate. The proceedings,
however, were opposed by the same parties, herein private respondents Antonio P. Torres, Jr., Ma. Luisa
T. Morales and Ma. Cristina T. Carlos, 17 who are nephew and nieces of Judge Torres, being the children of
his late brother Antonio A. Torres.

It can readily be observed therefore that the parties involved in the present controversy are virtually the
same parties fighting over the representation of the late Judge Torres' estate. It should be recalled that
the purpose behind the rule on substitution of parties is the protection of the right of every party to due
process. It is to ensure that the deceased party would continue to be properly represented in the suit
through the duly appointed legal representative of his estate. In the present case, this purpose has been
substantially fulfilled (despite the lack of formal substitution) in view of the peculiar fact that both
proceedings involve practically the same parties. Both parties have been fiercely fighting in the probate
proceedings of Judge Torres' holographic will for appointment as legal representative of his estate. Since
both parties claim interests over the estate, the rights of the estate were expected to be fully protected in
the proceedings before the SEC en banc and the Court of Appeals. In either case, whoever shall be
appointed legal representative of Judge Torres' estate (petitioner Pabalan or private respondents) would
no longer be a stranger to the present case, the said parties having voluntarily submitted to the
jurisdiction of the SEC and the Court of Appeals and having thoroughly participated in the proceedings.

The foregoing rationate finds support in the recent case of Vda. de Salazar v. CA, 18 wherein the Court
expounded thus:

The need for substitution of heirs is based on the right to due process accruing to every
party in any proceeding. The rationale underlying this requirement in case a party dies
during the pendency of proceedings of a nature not extinguished by such death, is that . . .
the exercise of judicial power to hear and determine a cause implicitly presupposes in the
trial court, amongst other essentials, jurisdiction over the persons of the parties. That
jurisdiction was inevitably impaired upon the death of the protestee pending the
proceedings below such that unless and until a legal representative is for him duly named
and within the jurisdiction of the trial court, no adjudication in the cause could have been
accorded any validity or binding effect upon any party, in representation of the deceased,
without trenching upon the fundamental right to a day in court which is the very essence of
the constitutionally enshrined guarantee of due process.

We are not unaware of several cases where we have ruled that a party having died in an
action that survives, the trial held by the court without appearance of the deceased's legal
representative or substitution of heirs and the judgment rendered after such trial, are null
and void because the court acquired no jurisdiction over the persons of the legal
representatives or of the heirs upon whom the trial and the judgment would be binding.
This general rule notwithstanding, in denying petitioner's motion for reconsideration, the
Court of Appeals correctly ruled that formal substitution of heirs is not necessary when the
heirs themselves voluntarily appeared, participated in the case and presented evidence in
defense of deceased defendant. Attending the case at bench, after all, are these particular
circumstances which negate petitioner's belated and seemingly ostensible claim of
violation of her rights to due process. We should not lose sight of the principle underlying
the general rule that formal substitution of heirs must be effectuated for them to be bound
by a subsequent judgment. Such had been the general rule established not because the rule
on substitution of heirs and that on appointment of a legal representative are jurisdictional
requirements per se but because non-compliance therewith results in the undeniable
violation of the right to due process of those who, though not duly notified of the
proceedings, are substantially affected by the decision rendered therein . . . .

It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc had
already fully heard the parties and what remained was the evaluation of the evidence and rendition of the
judgment.

Further, petitioners filed their motions to suspend proceedings only after more than two (2) years from
the death of Judge Torres. Petitioners' counsel was even remiss in his duty under Sec. 16, Rule 3 of the
Revised Rules of Court. 19 Instead, it was private respondents who informed the SEC of Judge Torres'
death through a manifestation dated 24 April 1991.

For the SEC en banc to have suspended the proceedings to await the appointment of the legal
representative by the estate was impractical and would have caused undue delay in the proceedings and
a denial of justice. There is no telling when the probate court will decide the issue, which may still be
appealed to the higher courts.

In any case, there has been no final disposition of the properties of the late Judge Torres before the SEC.
On the contrary, the decision of the SEC en banc as affirmed by the Court of Appeals served to protect and
preserve his estate. Consequently, the rule that when a party dies, he should be substituted by his legal
representative to protect the interests of his estate in observance of due process was not violated in this
case in view of its peculiar situation where the estate was fully protected by the presence of the parties
who claim interests therein either as directors, stockholders or heirs.

Finally, we agree with petitioners' contention that the principle of negotiorum gestio 20 does not apply in
the present case. Said principle explicitly covers abandoned or neglected property or business.

III

Petitioners find legal basis for Judge Torres' act of revoking the assignment of his properties in Makati
and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which provides that:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the findings of SEC,
as affirmed by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-46)
that —

. . . the shortage of 972 shares would not be valid ground for respondent
Torres to unilaterally revoke the deeds of assignment he had executed on
July 13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL
real properties covered by TCT No. 374079 (Makati) and TCT No. 41527,
41528 and 41529 (Pasay) respectively.

A comparison of the number of shares that respondent Torres received from


TORMIL by virtue of the "deeds of assignment" and the stock certificates
issued by the latter to the former readily shows that TORMIL had
substantially performed what was expected of it. In fact, the first two
issuances were in satisfaction to the properties being revoked by respondent
Torres. Hence, the shortage of 972 shares would never be a valid ground for
the revocation of the deeds covering Pasay and Quezon City properties.

In Universal Food Corp. vs. CA, the Supreme Court held:

The general rule is that rescission of a contract will not be


permitted for a slight or carnal breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in making the agreement.

The shortage of 972 shares definitely is not substantial and fundamental


breach as would defeat the very object of the parties in entering into
contract. Art. 1355 of the Civil Code also provides: "Except in cases specified
by law, lesion or inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influences." There being no fraud,
mistake or undue influence exerted on respondent Torres by TORMIL and
the latter having already issued to the former of its 225,000 unissued shares,
the most logical course of action is to declare as null and void the deed of
revocation executed by respondent Torres. (Rollo, pp. 45-46.) 21

The aforequoted Civil Code provision does not apply in this particular situation for the obvious reason
that a specific number of shares of stock (as evidenced by stock certificates) had already been issued to
the late Judge Torres in exchange for his Makati and Pasay City properties. The records thus disclose:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF


ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*
1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd
TCT 144240 Quezon City)

2. July 13, 1984 TCT 77008 Manila)


TCT 65689 Manila) 78,493 2nd
TCT 102200 Manila)

3. July 13, 1984 TCT 374079 Makati 8,307 1st

4. July 24, 1984 TCT 41527 Pasay


TCT 41528 Pasay) 9,855 4th
TCT 41529 Pasay)

5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th

6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th

7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th

8. August 7, 1984 China Banking Corp. Stocks 6,300 6th

9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th

10. August 29, 1984 Ayala Fund Stocks 1,322.1)

—————
TOTAL 225,972.3

*Order of stock certificate issuances by TORMIL to respondent Torres relative to the Deeds
of Assignment he executed sometime in July and August, 1984. 22 (Emphasis ours.)

Moreover, we agree with the contention of the Solicitor General that the shortage of shares should not
have affected the assignment of the Makati and Pasay City properties which were executed in 13 and 24
July 1984 and the consideration for which have been duly paid or fulfilled but should have been applied
logically to the last assignment of property — Judge Torres' Ayala Fund shares — which was executed on
29 August 1984. 23

IV

Petitioners insist that the assignment of "qualifying shares" to the nominees of the late Judge Torres
(herein petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock as
would call for the "imposition of stringent requirements (with respect to the) recording of the transfer of
said shares." Anyway, petitioners add, there was substantial compliance with the above-stated
requirement since said assignments were entered by the late Judge Torres himself in the corporation's
stock and transfer book on 6 March 1987, prior to the 25 March 1987 annual stockholders meeting and
which entries were confirmed on 8 March 1987 by petitioner Azura who was appointed Assistant
Corporate Secretary by Judge Torres.
Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the late
Judge Torres by invalidating the questioned entries in the stock and transfer book, simply
because he initially made those entries (they were later affirmed by an acting corporate
secretary) and because the stock and transfer book was in his possession instead of the
elected corporate secretary, if the background facts herein-before narrated and the serious
animosities that then reigned between the deceased Judge and his relatives are to be taken
into account;

xxx xxx xxx

10.12. Indeed it was a practice in the corporate respondent, a family corporation with only
a measly number of stockholders, for the late judge to have personal custody of corporate
records; as president, chairman and majority stockholder, he had the prerogative of
designating an acting corporate secretary or to himself make the needed entries, in
instances where the regular secretary, who is a mere subordinate, is unavailable or
intentionally defaults, which was the situation that obtained immediately prior to the 1987
annual stockholders meeting of Tormil, as the late Judge Torres had so indicated in the
stock and transfer book in the form of the entries now in question;

10.13. Surely, it would have been futile nay foolish for him to have insisted under those
circumstances, for the regular secretary, who was then part of a group ranged against him,
to make the entries of the assignments in favor of his nominees; 24

Petitioners' contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private respondents — his nephew
and nieces that should have placed Judge Torres on his guard. He should have been more careful in
ensuring that his actions (particularly the assignment of qualifying shares to his nominees) comply with
the requirements of the law. Petitioners cannot use the flimsy excuse that it would have been a vain
attempt to force the incumbent corporate secretary to register the aforestated assignments in the stock
and transfer book because the latter belonged to the opposite faction. It is the corporate secretary's duty
and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the
transferor-stockholder may rightfully bring suit to compel performance. 25 In other words, there are
remedies within the law that petitioners could have availed of, instead of taking the law in their own
hands, as the cliche goes.

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the


Corporation Code, as follows (Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate secretary is


the custodian of corporate records. Corollarily, he keeps the stock and
transfer book and makes proper and necessary entries therein.
Contrary to the generally accepted corporate practice, the stock and transfer
book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate
secretary but by respondent Torres, the President and Chairman of the Board
of Directors of TORMIL. In contravention to the above cited provision, the
stock and transfer book was not kept at the principal office of the corporation
either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and
transfer book on March 8, 1987 by respondent Torres of an alleged transfer
of nominal shares to Pabalan and Co. cannot therefore be given any valid
effect. Where the entries made are not valid, Pabalan and Co. cannot
therefore be considered stockholders of record of TORMIL. Because they are
not stockholders, they cannot therefore be elected as directors of TORMIL. To
rule otherwise would not only encourage violation of clear mandate of Sec.
74 of the Corporation Code that stock and transfer book shall be kept in the
principal office of the corporation but would likewise open the flood gates of
confusion in the corporation as to who has the proper custody of the stock
and transfer book and who are the real stockholders of records of a certain
corporation as any holder of the stock and transfer book, though not the
corporate secretary, at pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding capital
stock of TORMIL is of no moment and is not a license for him to arrogate unto
himself a duty lodged to (sic) the corporate secretary. 26

All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple
family corporation is not an exemption. Such corporations cannot have rules and practices other than
those established by law.

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 117604 March 26, 1997

CHINA BANKING CORPORATION, petitioner,


vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.
KAPUNAN, J.:

Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China
Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994
nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7
December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's motion for reconsideration.

The case unfolds thus:

On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent
Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner
China Banking Corporation (CBC, for brevity).1

On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be
recorded in its books.2

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in
petitioner's favor was duly noted in its corporate books.3

On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was
secured by the aforestated pledge agreement still existing between Calapatia and petitioner.4

Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for
extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to
conduct a public auction sale of the pledged stock.5

On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and
requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded in
the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede
to petitioner's request in view of Calapatia's unsettled accounts with the club.6

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner
emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued
the corresponding certificate of sale.7

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. 8 Said notice was followed by a demand letter dated 12 December 1985 for the
same amount9 and another notice dated 22 November 1986 for P23,483.24. 10

On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction
sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein
was Calapatia's own share of stock (Stock Certificate No. 1219).

Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his
membership due to the sale of his share of stock in the 10 December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No.
1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new
certificate of stock be issued in its name. 12

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public
auction held on 10 December 1986 for P25,000.00. 13

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed
a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and
for the issuance of a new stock certificate in its name. 14

On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over
the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990
denied petitioner's motion for reconsideration.

On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC)
for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate
issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in
the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer
the share in the name of the petitioner in the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the
decision of its hearing officer. It declared thus:

The Commission en banc believes that appellant-petitioner has a prior right over the
pledged share and because of pledgor's failure to pay the principal debt upon maturity,
appellant-petitioner can proceed with the foreclosure of the pledged share.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are
hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December
10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue
another membership certificate in the name of appellant-petitioner bank.

SO ORDERED. 18

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its
resolution dated 7 December 1993. 19

The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the
Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing
officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's
original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not
intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case, the controversy
must pertain to any of the following relationships: (a) between the corporation,
partnership or association and the public; (b) between the corporation, partnership or
association and its stockholders, partners, members, or officers; (c) between the
corporation, partnership or association and the state in so far as its franchise, permit or
license to operate is concerned, and (d) among the stockholders, partners or associates
themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA
31). The establishment of any of the relationship mentioned will not necessarily always
confer jurisdiction over the dispute on the Securities and Exchange Commission to the
exclusion of the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118
SCRA 602, that the rule admits of no exceptions or distinctions is not that absolute. The
better policy in determining which body has jurisdiction over a case would be to consider
not only the status or relationship of the parties but also the nature of the question that is
the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA
308, 322-323).

Indeed, the controversy between petitioner and respondent bank which involves
ownership of the stock that used to belong to Calapatia, Jr. is not within the competence of
respondent Commission to decide. It is not any of those mentioned in the aforecited case.

WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of
respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its
hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all
nullified and set aside for lack of jurisdiction over the subject matter of the case.
Accordingly, the complaint of respondent China Banking Corporation (Annex Q, petition) is
DISMISSED. No pronouncement as to costs in this instance.

SO ORDERED. 20

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution
dated 5 October 1994. 21

Hence, this petition wherein the following issues were raised:

II

ISSUES

WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY


ERRED WHEN:

1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER
DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC,
AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT
VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE
CASE;

2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE


COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE
SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE
NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.

The petition is granted.

The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular
courts or the SEC.

P. D. No. 902-A conferred upon the SEC the following pertinent powers:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to operate in the Philippines, and in
the exercise of its authority, it shall have the power to enlist the aid and support of and to
deputize any and all enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person.

xxx xxx xxx

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts of the board of directors,


business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership relations,


between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;

c) Controversies in the election or appointment of directors, trustees,


officers, or managers of such corporations, partnerships or associations.

d) Petitions of corporations, partnerships or associations to be declared in


the state of suspension of payments in cases where the corporation,
partnership or association possesses property to cover all of its debts but
foresees the impossibility of meeting them when they respectively fall due or
in cases where the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the Management Committee
created pursuant to this Decree.

The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases of Mainland Construction
Co., Inc. v. Movilla 23 and Bernardo v. CA, 24 thus:

. . . .The better policy in determining which body has jurisdiction over a case would be to
consider not only the status or relationship of the parties but also the nature of the
question that is the subject of their controversy.

Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have
to determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature
of the controversy between petitioner and private respondent corporation is intra-corporate.

As to the first query, there is no question that the purchase of the subject share or membership certificate
at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred
ownership of the same to the latter and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has
in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by the
original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate
books. 25 In addition, Calapatia, the original owner of the subject share, has not contested the said
transfer.

By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore,
the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy
between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

An important consideration, moreover, is the nature of the controversy between petitioner and private
respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art
VIII of its by-laws which provides that "after a member shall have been posted as delinquent, the Board
may order his/her/its share sold to satisfy the claims of the Club. . ." 26 It is pursuant to this provision that
VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its
argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the
proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls
for the special competence of the SEC.

We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in
administrative commissions and boards the power to resolve specialized disputes in the
field of labor (as in corporations, public transportation and public utilities) ruled that
Congress in requiring the Industrial Court's intervention in the resolution of labor-
management controversies likely to cause strikes or lockouts meant such jurisdiction to be
exclusive, although it did not so expressly state in the law. The Court held that under the
"sense-making and expeditious doctrine of primary jurisdiction . . . the courts cannot or will
not determine a controversy involving a question which is within the jurisdiction of an
administrative tribunal, where the question demands the exercise of sound administrative
discretion requiring the special knowledge, experience, and services of the administrative
tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is
essential to comply with the purposes of the regulatory statute administered.

In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual matters, subject to judicial
review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in
1984, the Court noted that "between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court
has been committed to the view that unless the law speaks clearly and unequivocably, the
choice should fall on [an administrative agency.]'" The Court in the earlier case of Ebon
v. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and the
NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous
P.D. amendment splitting their jurisdiction with the regular courts, "evidently, . . . had
second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to
award damages in labor cases because that setup would mean duplicity of suits, splitting
the cause of action and possible conflicting findings and conclusions by two tribunals on
one and the same claim."

In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the
meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable
provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC,
therefore, took proper cognizance of the instant case.

VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint
it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between
itself and VGCCI.

VGCCI's contention lacks merit.

In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared that:

It follows that as a rule the filing of a complaint with one court which has no jurisdiction
over it does not prevent the plaintiff from filing the same complaint later with the
competent court. The plaintiff is not estopped from doing so simply because it made a
mistake before in the choice of the proper forum. . . .

We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its
motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the
SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse to the SEC.

Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals,
this Court likewise deems it procedurally sound to proceed and rule on its merits in the same
proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari on the
issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of
the case. In turn, in its responsive pleadings, private respondent duly answered and countered all the
issues raised by petitioner.

Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Y. Gabriel-
Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic Archbishop of Manila
v. Court of Appeals. 31

In the interest of the public and for the expeditious administration of justice the issue on
infringement shall be resolved by the court considering that this case has dragged on for
years and has gone from one forum to another.

It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a
single proceeding leaving no root or branch to bear the seeds of future litigation. No useful
purpose will be served if a case or the determination of an issue in a case is remanded to
the trial court only to have its decision raised again to the Court of Appeals and from there
to the Supreme Court.

We have laid down the rule that the remand of the case or of an issue to the lower court for
further reception of evidence is not necessary where the Court is in position to resolve the
dispute based on the records before it and particularly where the ends of justice would not
be subserved by the remand thereof. Moreover, the Supreme Court is clothed with ample
authority to review matters, even those not raised on appeal if it finds that their
consideration is necessary in arriving at a just disposition of the case.

In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court, through Mr. Justice
Ricardo J. Francisco, ruled in this wise:

At the outset, the Court's attention is drawn to the fact that since the filing of this suit
before the trial court, none of the substantial issues have been resolved. To avoid and gloss
over the issues raised by the parties, as what the trial court and respondent Court of
Appeals did, would unduly prolong this litigation involving a rather simple case of
foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the
rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of
every action or proceeding. The Court, therefore, feels that the central issues of the case,
albeit unresolved by the courts below, should now be settled specially as they involved
pure questions of law. Furthermore, the pleadings of the respective parties on file have
amply ventilated their various positions and arguments on the matter necessitating prompt
adjudication.

In the case at bar, since we already have the records of the case (from the proceedings before the SEC)
sufficient to enable us to render a sound judgment and since only questions of law were raised (the
proper jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule
on the merits of the case.

The procedural niceties settled, we proceed to the merits.


VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends
that the same was null and void for lack of consideration because the pledge agreement was entered into
on 21 August
1974 33 but the loan or promissory note which it secured was obtained by Calapatia much later or only on
3 August 1983. 34

VGCCI's contention is unmeritorious.

A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly
stipulated therein that the said pledge will also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may procure from petitioner:

xxx xxx xxx

This pledge is given as security for the prompt payment when due of all loans, overdrafts,
promissory notes, drafts, bills or exchange, discounts, and all other obligations of every
kind which have heretofore been contracted, or which may hereafter be contracted, by the
PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including
discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further
endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND
(P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided,
plus the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE
may incur in connection with the collection thereof. 35 (Emphasis ours.)

The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by
VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of
P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to
sell the share in question in accordance with the express provision found in its by-laws.

Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending
notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May
1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has
been delinquent in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI
had officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of
these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction. By
doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner
notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.

In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this
wise:

The general rule really is that third persons are not bound by the by-laws of a corporation
since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to
this is when third persons have actual or constructive knowledge of the same. In the case at
bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner
foreclosed the pledge made by Calapatia and when petitioner purchased the share
foreclosed on September 17, 1985. This is proven by the fact that prior thereto, i.e., on May
14, 1985 petitioner even quoted a portion of private respondent's by-laws which is
material to the issue herein in a letter it wrote to private respondent. Because of this actual
knowledge of such by-laws then the same bound the petitioner as of the time when
petitioner purchased the share. Since the by-laws was already binding upon petitioner
when the latter purchased the share of Calapatia on September 17, 1985 then the
petitioner purchased the said share subject to the right of the private respondent to sell the
said share for reasons of delinquency and the right of private respondent to have a first lien
on said shares as these rights are provided for in the by-laws very very clearly. 36

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37

And moreover, the by-law now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by said by-
law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law
cannot operate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in its
adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a purchaser
is not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris
Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an


unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for
the protection of the corporation against worthless stockholders, cannot be made available
to defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs.
Wasson, 48 Iowa, 336.) (Emphasis ours.)

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time
the transaction or agreement between said third party and the shareholder was entered into, in this case,
at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in
Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The
ruling of the SEC en banc is particularly instructive:

By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their
relation to it. In other words, by-laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs, in whole or in
part, in the management and control of its affairs and activities. (9 Fletcher 4166, 1982 Ed.)

The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although
adopted pursuant to statutory authority, have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound by by-laws,
except when they have knowledge of the provisions either actually or constructively. In the
case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law
restricting the transfer of shares cannot have any effect on the transferee of the shares in
question as he "had no knowledge of such by-law when the shares were assigned to him.
He obtained them in good faith and for a valuable consideration. He was not a privy to the
contract created by the by-law between the shareholder . . .and the Botica Nolasco, Inc. Said
by-law cannot operate to defeat his right as a purchaser. (Emphasis supplied.)

By analogy of the above-cited case, the Commission en banc is of the opinion that said case
is applicable to the present controversy. Appellant-petitioner bank as a third party can not
be bound by appellee-respondent's by-laws. It must be recalled that when appellee-
respondent communicated to appellant-petitioner bank that the pledge agreement was
duly noted in the club's books there was no mention of the shareholder-pledgor's unpaid
accounts. The transcript of stenographic notes of the June 25, 1991 Hearing reveals that the
pledgor became delinquent only in 1975. Thus, appellant-petitioner was in good faith when
the pledge agreement was contracted.

The Commission en banc also believes that for the exception to the general accepted rule
that third persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at
the time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of
the Civil Code provides that it is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage consists
maybe alienated for the payment to the creditor.

In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued
an opinion to the effect that:

According to the weight of authority, the pledgee's right is entitled to full


protection without surrender of the certificate, their cancellation, and the
issuance to him of new ones, and when done, the pledgee will be fully
protected against a subsequent purchaser who would be charged with
constructive notice that the certificate is covered by the pledge. (12-A
Fletcher 502)

The pledgee is entitled to retain possession of the stock until the pledgor
pays or tenders to him the amount due on the debt secured. In other words,
the pledgee has the right to resort to its collateral for the payment of the
debts. (Ibid, 502)

To cancel the pledged certificate outright and the issuance of new certificate
to a third person who purchased the same certificate covered by the pledge,
will certainly defeat the right of the pledgee to resort to its collateral for the
payment of the debt. The pledgor or his representative or registered
stockholders has no right to require a return of the pledged stock until the
debt for which it was given as security is paid and satisfied, regardless of the
length of time which have elapsed since debt was created. (12-A Fletcher
409)

A bona fide pledgee takes free from any latent or secret equities or liens in favor either of
the corporation or of third persons, if he has no notice thereof, but not otherwise. He also
takes it free of liens or claims that may subsequently arise in favor of the corporation if it
has notice of the pledge, although no demand for a transfer of the stock to the pledgee on
the corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle
Fruit Co., 75 F2d739) 38

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of
the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of
a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not
applicable:

In applying this provision to the situation before us it must be borne in mind that the
ordinary pawn ticket is a document by virtue of which the property in the thing pledged
passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is,
therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge
acquires domination over the pledge; and it is the holder who must renew the pledge, if it is
to be kept alive.

It is quite obvious from the aforequoted case that a membership share is quite different in
character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia's unpaid
accounts and the restrictive provisions in VGCCI's by-laws.

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be
utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription,
and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any
other transaction." 40 In the case at bar, the subscription for the share in question has been fully paid as
evidenced by the issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation
were merely the monthly dues. Hence, the aforequoted provision does not apply.

WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the
order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 116631 October 28, 1998

MARSH THOMSON, petitioner,


vs.
COURT OF APPEALS and THE AMERICAN CHAMPER OF COMMERCE OF THE PHILIPPINES,
INC, respondents.

QUISUMBING, J.:

This is a petition for review on certiorari seeking the reversal of the Decision 1 of the Court of Appeals
on May 19, 1994, disposing as follows:

WHEREFORE, THE DECISION APPEALED FROM IS HEREBY SET ASIDE. ANOTHER


JUDGMENT IS ENTERED ORDERING DEFENDANT-APPELLEE MARSH THOMSON TO
TRANSFER THE SAID MPC [Manila Polo Club] SHARE TO THE NOMINEE OF THE
APPELLANT.

The facts of the case are:

Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and, later on, the
Management Consultant of private respondent, the American Chamber of Commerce of the
Philippines, Inc. (AmCham) for over ten years, 1979-1989.

While petitioner was still working with private respondent, his superior, A. Lewis Burridge,
retired as AmCham's President. Before Burridge decided to return to his home country, he wanted
to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through
the intercession of Burridge, private respondent paid for the share but had it listed in petitioner's
name. This was made clear in an employment advice dated January 13, 1986, wherein petitioner
was informed by private respondent as follows:

xxx xxx xxx

11. If you so desire, the Chamber is willing to acquire for your use a
membership in the Manila Polo Club. The timing of such acquisition
shall be subject to the discretion of the Board based on the Chamber's
financial position. All dues and other charges relating to such
membership shall be for your personal account. If the membership is
acquired in your name, you would execute such documents as
necessary to acknowledge beneficial ownership thereof by the
Chamber. 2

xxx xxx xxx

On April 25, 1986, Burridge transferred said proprietary share to petitioner, as confirmed in a
letter3 of notification to the Manila Polo Club.

Upon his admission as a new member of the MPC, petitioner paid the transfer fee of P40,000.00
from his own funds; but private respondent subsequently reimbursed this amount. On November
19, 1986, MPC issued Proprietary Membership Certificate Number 3398 in favor of petitioner. But
petitioner, however, failed to execute a document recognizing private respondent's beneficial
ownership over said share.

Following AmCham's policy and practice, there was a yearly renewal of employment contract
between the petitioner and private respondent. Separate letters of employment advice dated
October 1, 19864, as well March 4, 19885 and January 7, 19896, mentioned the MPC share. But
petitioner never acknowledged that private respondent is the beneficial owner of the share as
requested in follow-up requests, particularly one dated March 4, 1988 as follows:

Dear Marsh:

xxx xxx xxx

All other provisions of your compensation/benefit package will remain the same and
are summarized as follows:

xxx xxx xxx

9) The Manila Polo Club membership provided by the Chamber for you
and your family will continue on the same basis, to wit: all dues and
other charges relating to such membership shall be for your personal
account and, if you have not already done so, you will execute such
documents as are necessary to acknowledge that the Chamber is the
beneficial owner of your membership in the
Club. 7

When petitioner's contract of employment was up for renewal in 1989, he notified private
respondent that he would no longer be available as Executive Vice President after September 30,
1989. Still, the private respondent asked the petitioner to stay on for another six (6) months.
Petitioner indicated his acceptance of the consultancy arrangement with a counter-proposal in his
letter dated October 8, 1989, among others as follows:

11.) Retention of the Polo Club share, subject to my reimbursing the


purchase price to the Chamber, or one hundred ten thousand pesos
(P110,000.00).8

Private respondent rejected petitioner's counter-proposal.


Pending the negotiation for the consultancy arrangement, private respondent executed on
September 29, 1989 a Release and Quitclaim,9 stating that "AMCHAM, its directors, officers and
assigns, employees and/or representatives do hereby release, waive, abandon and discharge J.
MARSH THOMSON from any and all existing claims that the AMCHAM, its directors, officers and
assigns, employees and/or representatives may have against J. MARSH THOMSON." 10 The
quitclaim, expressed in general terms, did not mention specifically the MPC share.

On April 5, 1990, private respondent, through counsel sent a letter to the petitioner demanding
the return and delivery of the MPC share which "it (AmCham) owns and placed in your
(Thomson's) name." 11

Failing to get a favorable response, private respondent filed on May 15, 1990, a complaint against
petitioner praying, inter alia, that the Makati Regional Trial Court render judgment ordering
Thomson "to return the Manila Polo Club share to the plaintiff and transfer said share to the
nominee of plaintiff." 12

On February 28, 1992, the trial court promulgated its decision, 13 thus:

The foregoing considered judgment is rendered as follows:

1) The ownership of the contested Manila Polo Club share is


adjudicated in favor of defendant Marsh Thomson; and;

2) Defendant shall pay plaintiff the sum of P300,000.00

Because both parties thru their respective faults have somehow contributed to the
birth of this case, each shall bear the incidental expenses incurred. 14

In said decision, the trial court awarded the MPC share to defendant (petitioner now) on the
ground that the Articles of Incorporation and By-laws of Manila Polo Club prohibit artificial
persons, such as corporations, to be club members, ratiocinating in this manner:

An assessment of the evidence adduced by both parties at the trial will show clearly
that it was the intention of the parties that a membership to Manila Polo Club was to
be secured by plaintiff [herein private respondent] for defendant's [herein
petitioner] use. The latter was to execute the necessary documents to acknowledge
ownership of the Polo membership in favor of plaintiff. (Exh. C par 9) However, when
the parties parted ways in disagreement and with some degree of bitterness, the
defendant had second thoughts and decided to keep the membership for himself.
This is evident from the exhibits (E & G) where defendant asked that he retained the
Polo Club membership upon reimbursement of its purchase price; and where he
showed his "profound disappointment, both at the previous Board's unfair action,
and at what I consider to be harsh terms, after my long years of dedication to the
Chamber's interest."

xxx xxx xxx


Notwithstanding all these evidence in favor of plaintiff, however, defendant may not
be declared the owner of the contested membership be compelled to execute
documents transferring the Polo Membership to plaintiff or the latter's nominee for
the reason that this is prohibited by Polo Club's Articles & By-Laws. . . .

It is for the foregoing reasons that the Court rules that the ownership of the
questioned Polo Club membership be retained by defendant. 15 . . . .

Not satisfied with the trial court's decision, private respondent appealed to the Court of Appeals.

On May 19, 1994, the Court of Appeals (Former Special Sixth Division) promulgated its
decision 16 in said CA-G.R. CV No. 38417, reversing the, trial court's judgment and ordered herein
petitioner to transfer the MPC share to the nominee of private respondent, reasoning thus:

xxx xxx xxx

The significant fact in the instant case is that the appellant [herein private
respondent] purchased the MPC share for the use of the appellee [herein petitioner]
and the latter expressly conformed thereto as shown in Exhibits A-1, B, B-1, C, C-1, D,
D-1. By such express conformity of the appellee, the former was bound to recognize
the appellant as the owner of the said share for a contract has the force of law
between the parties. (Alim vs. CA, 200 SCRA 450; Sasuhura Company, Inc., Ltd. vs. IAC,
205 SCRA 632) Aside from the foregoing, the appellee conceded the true ownership
of the said share to the appellant when (1) he offered to buy the MPC share from the
appellant (Exhs. E and E-1) upon the termination of his employment; (2) he obliged
himself to return the MPC share after his six month consultancy contract had
elapsed, unless its return was earlier requested in writting (Exh. I); and (3) on cross-
examination, he admitted that the proprietary share listed as one of the assets of the
appellant corporation in its 1988 Corporate Income Tax Return, which he signed as
the latter's Executive Vice President (prior to its filing), refers to the Manila Polo
Club Share (tsn., pp. 19-20, August 30, 1991). . . . 17

On 16 June 1994, petitioner filed a motion for reconsideration 18 of said decision. By


resolution 19promulgated on August 4, 1994, the Court of Appeals denied the motion for
reconsideration.

In this petition for review, petitioner alleges the following errors of public respondent as grounds
for our review:

I. The respondent Court of Appeals erred in setting aside the Decision


dated 28 February 1992 of the Regional Trial Court, NCJR, Branch 65,
Makati, Metro Manila, in its Civil Case No. 90-1286, and in not
confirming petitioner's ownership over the MPC membership share.

II. The respondent Court of Appeals erred in ruling that "the Quitclaim
executed by AmCham in favor of petitioner of September 29, 1989 was
superseded by the contractual agreement entered into by the parties on
October 13, 1989 wherein again the appellee acknowledged that the
appellant owned the MPC share, there being absolutely no evidence to
support such a conclusion and/or such inference is manifestly
mistaken.

III. The respondent Court of Appeals erred in rendering judgment


ordering petitioner to transfer the contested MPC share to a nominee of
respondent AmCham notwithstanding that: (a) AmCham has no
standing in the Manila Polo Club (MPG), and being an artificial person, it
is precluded under MPC's Articles of Incorporation and governing rules
and regulations from owning a proprietary share or from becoming a
member thereof: and (b) even under AmCham's Articles of
Incorporation, the purposes for which it is dedicated, becoming a
stockholder or shareholder in other corporation is not one of the
express implied powers fixed in AmCham's said corporate franchise. 20

As posited above, these assigned errors show the disputed matters herein are mainly factual. As
such they are best left to the trial and appellate courts' disposition. And this Court could have
dismissed the petition outright, were it not for the opposite results reached by the courts below.
Moreover, for the enhanced appreciation of the jural relationship between the parties involving
trust, this Court has given due course to the petition, which we now decide.

After carefully considering the pleadings on record, we find there are two main issues to be
resolved: (1) Did respondent court err in holding that private respondent is the beneficial owner
of the disputed share? (2) Did the respondent court err in ordering petitioner to transfer said
share to private respondent's nominees?

Petitioner claims ownership of the MPC share, asserting that he merely incurred a debt to
respondent when the latter advanced the funds for the purchase of the share. On the other hand,
private respondent asserts beneficial ownership whereby petitioner only holds the share in his
name, but the beneficial title belongs to private respondent. To resolve the first issue, we must
clearly distinguish a debt from a trust.

The beneficiary of a trust has beneficial interest in the trust property, while a creditor has merely
a personal claim against the debtor. In trust, there is a fiduciary relation between a trustee and a
beneficiary, but there is no such relation between a debtor and creditor. While a debt implies
merely an obligation to pay a certain sum of money, a trust refers to a duty to deal with a specific
property for the benefit of another. If a creditor-debtor relationship exists, but not a fiduciary
relationship between the parties, there is no express trust. However, it is understood that when
the purported trustee of funds is entitled to use them as his or her own (and commingle them with
his or her own money), a debtor-creditor relationship exists, not a trust. 21

In the present case, as the Executive Vice-President of AmCham, petitioner occupied a fiduciary
position in the business of AmCham. AmCham released the funds to acquire a share in the Club for
the use of petitioner but obliged him to "execute such document as necessary to acknowledge
beneficial ownership thereof by the Chamber". 22 A trust relationship is, therefore, manifestly
indicated.
Moreover, petitioner failed to present evidence to support his allegation of being merely a debtor
when the private respondent paid the purchase price of the MPC share. Applicable here is the rule
that a trust arises in favor of one who pays the purchase money of property in the name of
another, because of the presumption that he who pays for a thing intends a beneficial interest
therein for himself. 23

Although petitioner initiated the acquisition of the share, evidence on record shows that private
respondent acquired said share with its funds. Petitioner did not pay for said share, although he
later wanted to, but according to his own terms, particularly the price thereof.

Private respondent's evident purpose in acquiring the share was to provide additional incentive
and perks to its chosen executive, the petitioner himself. Such intention was repeated in the
yearly employment advice prepared by AmCham for petitioner's concurrence. In the cited
employment advice, dated March 4, 1988, private respondent once again, asked the petitioner to
execute proof to recognize the trust agreement in writing:

The Manila Polo membership provided by the Chamber for you and your family will
continue on the same basis, to wit: all dues and other charges relating to such
membership shall be for your personal account and, if you have not already done so,
you will execute such documents as are necessary to acknowledge that the Chamber
is the beneficial owner of your membership in the Club. 24

Petitioner voluntarily affixed his signature to conform with the employment advice, including his
obligation stated therein — for him to execute the necessary document to recognize his employer
as the beneficial owner of the MPC share. Now, we cannot hear him claiming otherwise, in
derogation of said undertaking, without legal and equitable justification.

For private respondent's intention to hold on to its beneficial ownership is not only presumed; it
was expressed in writing at the very outset. Although the share was placed in the name of
petitioner, his title is limited to the usufruct, that is, to enjoy the facilities and privileges of such
membership in the club appertaining to the share. Such arrangement reflects a trust relationship
governed by law and equity.

While private respondent paid the purchase price for the share, petitioner was given legal title
thereto. Thus, a resulting trust is presumed as a matter of law. The burden then shifted to the
transferee to show otherwise, that it was just a loan. Such resulting trust could have been rebutted
by proof of a contrary intention by a showing that, in fact, no trust was intended. Petitioner could
have negated the trust agreement by contrary, consistent and convincing evidence on rebuttal.
However, on the witness stand, petitioner failed to do so persuasively.

On cross-examination, the petitioner testified as follows:

ATTY. AQUINO (continuing)

Q. Okay, let me go to the cash advance that you mentioned Mr. Witness,
is there any document proving that you claimed cash advance signed by
an officer of the Chamber?
A. I believe the best evidence is the check.

Q. Is there any document?

COURT

Other than the Check?

MR. THOMSON

Nothing more.

ATTY. AQUINO

Is there any application filed in the Chamber to avail of this cash


advance?

A. Verbal only.

Q. Nothing written, and can you tell to this Honorable Court what are
the stipulations or conditions, or terms of this transaction of securing
this cash advance or loan?

xxx xxx xxx

COURT

How are you going to repay the cash advance?

MR. THOMSON

The cash advance, we never stipulate when I have to repay it, but I
presume that I would, when able to repay the money. 25

In deciding whether the property was wrongfully appropriated or retained and what the intent of
the parties was at the time of the conveyance, the court must rely upon its impression of the
credibility of the witnesses. 26 Intent is a question of fact, the determination of which is not
reviewable unless the conclusion drawn by the trier is one which could not reasonably be
drawn. 27 Petitioner's denial is not adequate to rebut the trust. Time and again, we have ruled that
denials, if unsubstantiated by clear and convincing evidence, are deemed negative and self-
serving evidence, unworthy of credence. 28

The trust between the parties having been established, petitioner advanced an alternative
defense that the private respondent waived the beneficial ownership of MPC share by issuing the
Release and Quitclaim in his favor.

This argument is less than persuasive. The quitclaim executed by private respondent does not
clearly show the intent to include therein the ownership over the MPC share. Private respondent
even asserts that at the time the Release and Quitclaim was executed on September 29, 1989, the
ownership of the MPC share was not controversial nor contested. Settled is the rule that a waiver
to be valid and effective must, in the first place, be couched in clear and unequivocal terms which
leave no doubt as to the intention of a party to give up a right or benefit which legally pertains to
him. 29 A waiver may not be attributed to a person when the terms thereof do not explicitly and
clearly evidence an intent to abandon a right vested in such person. 30 If we apply the standard
rule that waiver must be cast in clear and unequivocal terms, then clearly the general terms of the
cited release and quitclaim indicates merely a clearance from general accountability, not
specifically a waiver of AmCham's beneficial ownership of the disputed shares.

Additionally, the intention to waive a right or advantage must be shown clearly and convincingly,
and when the only proof of intention rests in what a party does, his act should be so manifestly
consistent with, and indicative of, an intent to voluntarily relinquish the particular right or
advantage that no other reasonable explanation of his conduct is possible. 31 Considering the
terms of the quitclaim executed by the President of private respondent, the tenor of the document
does not lead to the purported conclusion that be intended to renounce private respondent's
beneficial title over its share in the Manila Polo Club. We, therefore, find no reversible error in the
respondent Court's holding that private respondent, AmCham, is the beneficial owner of the share
in dispute.

Turning now to the second issue, the petitioner contends that the Articles of Incorporation and
By-laws of Manila Polo Club prohibit corporate membership. However, private respondent does
not insist nor intend to transfer the club membership in its name but rather to its designated
nominee. For as properly ruled by the Court of Appeals:

The matter prayed for does not involve the transfer of said share to the appellant, an
artificial person. The transfer sought is to the appellant's nominee. Even if the MPC
By-Laws and Articles prohibit corporate membership, there would be no violation of
said prohibition for the appellant's nominee to whom the said share is sought to be
transferred would certainly be a natural person. . . .

As to whether or not the transfer of said share the appellant's nominee would be
disapproved by the MPC, is a matter that should be raised at the proper time, which
is only if such transfer is disapproved by the MPC. 32

The Manila Polo Club does not necessarily prohibit the transfer of proprietary shares by its
members. The Club only restricts membership to deserving applicants in accordance with its
rules, when the amended Articles of Incorporation states that: "No transfer shall be valid except
between the parties, and shall be registered in the Membership Book unless made in accordance
with these Articles and the By-Laws". 33Thus, as between parties herein, there is no question that
a transfer is feasible. Moreover, authority granted to a corporation to regulate the transfer of its
stock does not empower it to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to be followed in
effecting transfer. 34

In this case, the petitioner was the nominee of the private respondent to hold the share and enjoy
the privileges of the club. But upon the expiration of petitioner's employment as officer and
consultant of AmCham, the incentives that go with the position, including use of the MPC share,
also ceased to exist. It now behooves petitioner to surrender said share to private respondent's
next nominee, another natural person. Obviously this arrangement of trust and confidence cannot
be defeated by the petitioner's citation of the MPC rules to shield his untenable position, without
doing violence to basic tenets of justice and fair dealing.

However, we still have to ascertain whether the rights of herein parties to the trust still subsist. It
has been held that so long as there has been no denial or repudiation of the trust, the possession
of the trustee of an express and continuing trust is presumed to be that of the beneficiary, and the
statute of limitations does not run between them. 35 With regard to a constructive or a resulting
trust, the statute of limitations does not begin to run until the trustee clearly repudiates or
disavows the trust and such disavowal is brought home to the other party, "cestui que
trust". 36 The statute of limitations runs generally from the time when the act was done by which
the party became chargeable as a trustee by operation of law or when the beneficiary knew that
he had a cause of action, 37 in the absence of fraud or concealment.

Noteworthy in the instant case, there was no declared or explicit repudiation of the trust existing
between the parties. Such repudiation could only be inferred as evident when the petitioner
showed his intent to appropriate the MPC share for himself. Specifically, this happened when he
requested to retain the MPC share upon his reimbursing the purchase price of P110,000, a
request denied promptly by private respondent. Eventually, petitioner refused to surrender the
share despite the written demand of private respondent. This act could then be construed as
repudiation of the trust. The statute of limitation could start to set in at this point in time. But
private respondent took immediate positive action. Thus, on May 15, 1990, private respondent
filed an action to recover the MPC share. Between the time of implicit repudiation of the trust on
October 9, 1989, as evidenced by petitioner's letter of said date, and private respondent's
institution of the action to recover the MPC share on May 15, 1990, only about seven months bad
lapsed. Our laws on the matter provide that actions to recover movables shall prescribe eight
years from the time the possession thereof is lot, 38 unless the possessor has acquired the
ownership by prescription for a less period of four years if in good faith. 39 Since the private
respondent filed the necessary action on time and the defense of good faith is not available to the
petitioner, there is no basis for any purported claim of prescription, after repudiation of the trust,
which will entitle petitioner to ownership of the disputed share. As correctly held by the
respondent court, petitioner has the obligation to transfer now said share to the nominee of
private respondent.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Decision of the Court of Appeals
of May 19, 1994, is AFFIRMED.

COSTS against petitioner.

SO ORDERED.

G.R. No. 133969 January 26, 2000

NEMESIO GARCIA, petitioner,


vs.
NICOLAS JOMOUAD, Ex-officio Provincial Sheriff of Cebu and SPOUSES JOSE ATINON & SALLY
ATINON,respondents.
KAPUNAN, J.:

In this petition for review on certiorari, Nemesio Garcia (herein petitioner) seeks the reversal of the
Decision, dated 27 October 1997, of the Court of Appeals in CA G.R. CV No. 52255 and its Resolution,
dated 22 April 1998, denying petitioner's motion for reconsideration of said decision.

Petitioner filed with the Regional Trial Court, Branch 23 of Cebu, an action for injunction with prayer for
preliminary injunction against respondents spouses Jose and Sally Atinon and Nicolas Jomouad, ex-
officio sheriff of Cebu. Said action stemmed from an earlier case for collection of sum of money, docketed
as Civil Case No. CEB-10433, before the RTC, Branch 10 of Cebu, filed by the spouses Atinon against Jaime
Dico. In that case (collection of sum of money), the trial court rendered judgment ordering Dico to pay the
spouses Atinon the sum of P900,000.00 plus interests. After said judgment became final and executory,
respondent sheriff proceeded with its execution. In the course thereof, the Proprietary Ownership
Certificate (POC) No. 0668 in the Cebu Country Club, which was in the name of Dico, was levied on and
scheduled for public auction. Claiming ownership over the subject certificate, petitioner filed the
aforesaid action for injunction with prayer for preliminary injunction to enjoin respondents from
proceeding with the auction.

After trial, the lower court rendered its Decision, dated 28 July 1995, dismissing petitioner's complaint
for injunction for lack of merit. On appeal, the CA affirmed in toto the decision of the RTC upon finding
that it committed no reversible error in rendering the same. Hence, this petition.1âwphi1.nêt

Petitioner avers that Dico, the judgment debtor of the spouses Atinon, was employed as manager of his
(petitioner's) Young Auto Supply. In order to assist him in entertaining clients, petitioner "lent" his POC,
then bearing the number 1459, in the Cebu Country Club to Dico so the latter could enjoy the "signing"
privileges of its members. The Club issued POC No. 0668 in the name of Dico. Thereafter, Dico resigned as
manager of petitioner's business. Upon demand of petitioner, Dico returned POC No. 0668 to him. Dico
then executed a Deed of Transfer, dated 18 November 1992, covering the subject certificate in favor of
petitioner. The Club was furnished with a copy of said deed but the transfer was not recorded in the
books of the Club because petitioner failed to present proof of payment of the requisite capital gains tax.

In assailing the decision of the CA, petitioner mainly argues that the appellate court erroneously relied on
Section 63 of the Corporation Code in upholding the levy on the subject certificate to satisfy the judgment
debt of Dico in Civil Case No. CEB-14033. Petitioner contends that the subject stock of certificate, albeit in
the name of Dico, cannot be levied upon the execution to satisfy his judgment debt because even prior to
the institution of the case for collection of sum of money against him:

1. The spouses Atinon had knowledge that Dico already conveyed back the ownership of the
subject, certificate to petitioner;

2. Dico executed a deed of transfer, dated 18 November 1992, covering the subject certificate in
favor of petitioner and the Club was furnished with a copy thereof; and

3. Dico resigned as a proprietary member of the Club and his resignation was accepted by the
board of directors at their meeting on 4 May 1993.

The petition is without merit.


Sec. 63 of the Corporation Code reads:

Sec. 63 Certificate of stock and transfer of shares. — The capital stock of corporations shall be
divided into shares for which certificates signed by the president or vice-president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued
in accordance with the by-laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation
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.

The sole issue in this case is similar to that raised in Uson vs. Diosomito,1 i.e., "whether a bona fide transfer
of the shares of a corporation, not registered or noted in the books of the corporation, is valid as against a
subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual
notice of said transfer or not."2 In that case, we held that the attachment prevails over the unrecorded
transfer stating thus —

[w]e think that the true meaning of the language is, and the obvious intention of the legislature in
using it was, that all transfers of shares should be entered, as here required, on the books of the
corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as to
attaching or execution creditors of the assignors, as well as to the corporation and to subsequent
purchasers in good faith, and, indeed, as to all persons interested, except the parties to such
transfers. All transfers not so entered on the books of the corporation are absolutely void; not
because they are without notice or fraudulent in law or fact, but because they are made so void by
statute.3

Applying the foregoing jurisprudence in this case, we hold that the transfer of the subject certificate made
by Dico to petitioner was not valid as to the spouses Atinon, the judgment creditors, as the same still
stood in the name of Dico, the judgment debtor, at the time of the levy on execution. In addition, as
correctly ruled by the CA, the entry in the minutes of the meeting of the Club's board of directors noting
the resignation of Dico as proprietary member thereof does not constitute compliance with Section 63 of
the Corporation Code. Said provision of law strictly requires the recording of the transfer in the books of
the corporation, and not elsewhere, to be valid as against third parties. Accordingly, the CA committed no
reversible error in rendering the assailed decision.

IN VIEW OF THE FOREGOING, the Court RESOLVED to DENY the petition.

SO ORDERED.1âwphi1.nêt

FIRST DIVISION

G.R. No. 124535 September 28, 2001


THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO BAUTISTA,
JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE
RURAL BANK OF LIPA CITY, INC., petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND
EXCHANGE COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer,
REYNALDO VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES
GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA
USI, respondents.

YNARES-SANTIAGO, J.:

Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals dated
February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861.

The instant controversy arose from a dispute between the Rural Bank of Lipa City, Incorporated
(hereinafter referred to as the Bank), represented by its officers and members of its Board of Directors,
and certain stockholders of the said bank. The records reveal the following antecedent facts:

Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed
of Assignment,1 wherein he assigned his shares, as well as those of eight (8) other shareholders under his
control with a total of 10,467 shares, in favor of the stockholders of the Bank represented by its directors
Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr.
and his wife, Avelina, executed an Agreement2 wherein they acknowledged their indebtedness to the
Bank in the amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt will be paid out
of the proceeds of the sale of their real property described in the Agreement.

At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses assured
the Board that their debt would be paid on or before December 31 of that same year; otherwise, the Bank
would be entitled to liquidate their shareholdings, including those under their control. In such an event,
should the proceeds of the sale of said shares fail to satisfy in full the obligation, the unpaid balance shall
be secured by other collateral sufficient therefor.

When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the Board sent
them a letter3 demanding: (1) the surrender of all the stock certificates issued to them; and (2) the
delivery of sufficient collateral to secure the balance of their debt amounting to P3,346,898.54. The
Villanuevas ignored the bank's demands, whereupon their shares of stock were converted into Treasury
Stocks. Later, the Villanuevas, through their counsel, questioned the legality of the conversion of their
shares.4

On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers for
the year 1994. The Villanuevas were not notified of said meeting. In a letter dated January 19, 1994, Atty.
Amado Ignacio, counsel for the Villanueva spouses, questioned the legality of the said stockholders'
meeting and the validity of all the proceedings therein. In reply, the new set of officers of the Bank
informed Atty. Ignacio that the Villanuevas were no longer entitled to notice of the said meeting since
they had relinquished their rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and Exchange Commission (SEC), a
petition for annulment of the stockholders' meeting and election of directors and officers on January 15,
1994, with damages and prayer for preliminary injunction5 , docketed as SEC Case No. 02-94-4683.
Joining them as co-petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo,
Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named respondents were the newly-elected officers
and directors of the Rural Bank, namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco
Custodio and Juanita Bautista.

The Villanuevas' main contention was that the stockholders' meeting and election of officers and
directors held on January 15, 1994 were invalid because: (1) they were conducted in violation of the by-
laws of the Rural Bank; (2) they were not given due notice of said meeting and election notwithstanding
the fact that they had not waived their right to notice; (3) they were deprived of their right to vote
despite their being holders of common stock with corresponding voting rights; (4) their names were
irregularly excluded from the list of stockholders; and (5) the candidacy of petitioner Avelina Villanueva
for directorship was arbitrarily disregarded by respondent Bernardo Bautista and company during the
said meeting

On February 16, 1994, the SEC issued a temporary restraining order enjoining the respondents,
petitioners herein, from acting as directors and officers of the Bank, and from performing their duties and
functions as such.6

In their joint Answer,7 the respondents therein raised the following defenses:

1) The petitioners have no legal capacity to sue;

2) The petition states no cause of action;

3) The complaint is insufficient;

4) The petitioners' claims had already been paid, waived, abandoned, or otherwise extinguished;

5) The petitioners are estopped from challenging the conversion of their shares.

Petitioners, respondents therein, thus moved for the lifting of the temporary restraining order and the
dismissal of the petition for lack of merit, and for the upholding of the validity of the stockholders'
meeting and election of directors and officers held on January 15, 1994. By way of counterclaim,
petitioners prayed for actual, moral and exemplary damages.

On April 6, 1994, the Villanuevas' application for the issuance of a writ of preliminary injunction was
denied by the SEC Hearing Officer on the ground of lack of sufficient basis for the issuance thereof.
However, a motion for reconsideration8 was granted on December 16, 1994, upon finding that since the
Villanuevas' have not disposed of their shares, whether voluntarily or involuntarily, they were still
stockholders entitled to notice of the annual stockholders' meeting was sustained by the SEC.
Accordingly, a writ of preliminary injunction was issued enjoining the petitioners from acting as directors
and officers of the bank.9
Thereafter, petitioners filed an urgent motion to quash the writ of preliminary injunction,10 challenging
the propriety of the said writ considering that they had not yet received a copy of the order granting the
application for the writ of preliminary injunction.

With the impending 1995 annual stockholders' meeting only nine (9) days away, the Villanuevas filed an
Omnibus Motion11 praying that the said meeting and election of officers scheduled on January 14, 1995
be suspended or held in abeyance, and that the 1993 Board of Directors be allowed, in the meantime, to
act as such. One (1) day before the scheduled stockholders meeting, the SEC Hearing Officer granted the
Omnibus Motion by issuing a temporary restraining order preventing petitioners from holding the
stockholders meeting and electing the board of directors and officers of the Bank.12

A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and
officers before the SEC en banc,13 naming as respondents therein SEC Hearing Officer Enrique L. Flores,
Jr., and the Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. The said petition alleged that
the orders dated December 16, 1994 and January 13, 1995, which allowed the issuance of the writ of
preliminary injunction and prevented the bank from holding its 1995 annual stockholders' meeting,
respectively, were issued by the SEC Hearing Officer with grave abuse of discretion amounting to lack or
excess of jurisdiction. Corollarily, the Bank, its directors and its officers questioned the SEC Hearing
Officer's right to restrain the stockholders' meeting and election of officers and directors considering that
the Villanueva spouses and the other petitioners in SEC Case No. 02-94-4683 were no longer
stockholders with voting rights, having already assigned all their shares to the Bank.

In their Comment/Opposition, the Villanuevas and other private respondents argued that the filing of the
petition for certiorari was premature and there was no grave abuse of discretion on the part of the SEC
Hearing Officer, nor did he act without or in excess of his jurisdiction.

On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,14 which stated:

In the case now before us, petitioners could not show any proof of despotic or arbitrary exercise of
discretion committed by the hearing officer in issuing the assailed orders save and except the
allegation that the private respondents have already transferred their stockholdings in favor of the
stockholders of the Bank. This, however, is the very issue of the controversy in the case a quo and
which, to our mind, should rightfully be litigated and proven before the hearing officer. This is so
because of the undisputed fact the (sic) private respondents are still in possession of the stock
certificates evidencing their stockholdings and as held by the Supreme Court in Embassy Farms,
Inc. v. Court of Appeals, et al., 188 SCRA 492, citing Nava v. Peers Marketing Corp., the non-delivery
of the stock certificate does not make the transfer of the shares of stock effective. For an effective
transfer of stock, the mode of transfer as prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein petitioner,
particularly Section 83 thereof, to support the claim that the private respondents are no longer
stockholders of the Bank is misplaced. The said law applies to acquisition of shares of stock by the
corporation in the exercise of a stockholder's right of appraisal or when the said stockholder opts
to dissent on a specific corporate act in those instances provided by law and demands the
payment of the fair value of his shares. It does not contemplate a "transfer" whereby the
stockholder, in the exercise of his right to dispose of his shares (jus disponendi) sells or assigns his
stockholdings in favor of another person where the provisions of Section 63 of the same Code
should be complied with.
The hearing officer, therefore, had a basis in issuing the questioned orders since the private
respondents' rights as stockholders may be prejudiced should the writ of injunction not be issued.
The private respondents are presumably stockholders of the Bank in view of the fact that they
have in their possession the stock certificates evidencing their stockholdings. Until proven
otherwise, they remain to be such and the hearing officer, being the one directly confronted with
the facts and pieces of evidence in the case, may issue such orders and resolutions which may be
necessary or reasonable relative thereto to protect their rights and interest in the meantime that
the said case is still pending trial on the merits.

A subsequent motion for reconsideration15 was likewise denied by the SEC en banc in a
Resolution16 dated September 29, 1995.

A petition for review was thus filed before the Court of Appeals, which was docketed as CA-G.R. SP No.
38861, assailing the Order dated June 7, 1995 and the Resolution dated September 29, 1995 of the SEC en
banc in SEC EB No. 440. The ultimate issue raised before the Court of Appeals was whether or not the
SEC en banc erred in finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave abuse of
discretion that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further stated that "it
does not contemplate a transfer" whereby the stockholders, in the exercise of his right to dispose
of his shares (Jus Disponendi) sells or assigns his stockholdings in favor of another person where
the provisions of Sec. 63 of the same Code should be complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the fact that
they have in their possession the stock certificates evidencing their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision17 dismissing the petition for
review for lack of merit. The appellate court found that:

The public respondent is correct in holding that the Hearing Officer did not commit grave abuse of
discretion. The officer, in exercising his judicial functions, did not exercise his judgment in a
capricious, whimsical, arbitrary or despotic manner. The questioned Orders issued by the Hearing
Officer were based on pertinent law and the facts of the case.

Section 63 of the Corporation Code states: "x x x Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by the owner x x x. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation so as to show the names of the parties to the transaction, the date of
the transfer, the number of the certificate or certificates and the number of shares transferred."

In the case at bench, when private respondents executed a deed of assignment of their shares of
stocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by Bernardo
Bautista, Jaime Custodio and Octavio Katigbak, title to such shares will not be effective unless the
duly indorsed certificate of stock is delivered to them. For an effective transfer of shares of stock,
the mode and manner of transfer as prescribed by law should be followed. Private respondents
are still presumed to be the owners of the shares and to be stockholders of the Rural Bank.
We find no reversible error in the questioned orders.

Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an Order18 dated
March 29, 1996.

Hence, the instant petition for review seeking to annul the Court of Appeals' decision dated February 27,
1996 and the resolution dated March 29, 1996. In particular, the decision is challenged for its ruling that
notwithstanding the execution of the deed of assignment in favor of the petitioners, transfer of title to
such shares is ineffective until and unless the duly indorsed certificate of stock is delivered to them.
Moreover, petitioners faulted the Court of Appeals for not taking into consideration the acts of disloyalty
committed by the Villanueva spouses against the Bank.

We find no merit in the instant petition.

The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en banc, which in
turn upheld the order of the SEC Hearing Officer, for the said rulings were in accordance with law and
jurisprudence.

The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares. — The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stocks so issued are personal property and
may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-
in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (Emphasis ours)

Petitioners argue that by virtue of the Deed of Assignment,19 private respondents had relinquished to
them any and all rights they may have had as stockholders of the Bank. While it may be true that there
was an assignment of private respondents' shares to the petitioners, said assignment was not sufficient to
effect the transfer of shares since there was no endorsement of the certificates of stock by the owners,
their attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners
admit that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect.
The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the transferee.20 Thus, title may be vested in the transferee
only by delivery of the duly indorsed certificate of stock.21

We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode
of transfer prescribed by law.22 The requirements are: (a) There must be delivery of the stock certificate:
(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and (c) To be valid against third parties, the transfer must be recorded
in the books of the corporation. As it is, compliance with any of these requisites has not been clearly and
sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsement and delivery, the
assignment was valid between the parties, meaning the private respondents as assignors and the
petitioners as assignees. While the assignment may be valid and binding on the petitioners and private
respondents, it does not necessarily make the transfer effective. Consequently, the petitioners, as mere
assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled
to dividends, insofar as the assigned shares are concerned Parenthetically, the private respondents
cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and
transfer of the shares in question is resolved with finality.

There being no showing that any of the requisites mandated by law23 was complied with, the SEC Hearing
Officer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by
petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC
en banc affirming the ruling of the SEC Hearing Officer, and the Court of Appeals decision upholding the
SEC en banc order, are valid and in accordance with law and jurisprudence, thus warranting the denial of
the instant petition for review.

To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their directors, the
temporary restraining order issued by the SEC Hearing Officer on January 13, 1995 must be lifted.
However, private respondents shall be notified of the meeting and be allowed to exercise their rights as
stockholders thereat.

While this case was pending, Republic Act No. 879924 was enacted, transferring to the courts of general
jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-A.25 One of those cases enumerated is any controversy
"arising out of intra-corporate or partnership relations, between and among stockholders, members, or
associates, between any and/or all of them and the corporation, partnership or association of which they
are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual franchise or right to exist as such entity."
The instant controversy clearly falls under this category of cases which are now cognizable by the
Regional Trial Court.

Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of the Regional Trial
Courts to try and decide cases formerly cognizable by the SEC. For the Fourth Judicial Region, specifically
in the Province of Batangas, the RTC of Batangas City, Branch 32 is the designated court.26

WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari is DENIED. The
Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are hereby AFFIRMED. The case
is ordered REMANDED to the Regional Trial Court of Batangas City, Branch 32, for proper disposition.
The temporary restraining order issued by the SEC Hearing Officer dated January 13, 1995 is ordered
LIFTED.

SO ORDERED.

SECOND DIVISION
G.R. NO. 139802 December 10, 2002

VICENTE C. PONCE, petitioner,


vs.
ALSONS CEMENT CORPORATION, and FRANCISCO M. GIRON, JR., respondents.

DECISION

QUISUMBING, J.:

This petition for review seeks to annul the decision1 of the Court of Appeals, in CA-G.R. SP No. 46692,
which set aside the decision2 of the Securities and Exchange Commission (SEC) En Banc in SEC-AC No.
545 and reinstated the order3 of the Hearing Officer dismissing herein petitioner’s complaint. Also
assailed is the CA’s resolution4 of August 10, 1999, denying petitioner’s motion for reconsideration.

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint5 with the SEC for
mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its
corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that:

xxx

5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having
subscribed to and fully paid 239,500 shares of said corporation.

6. On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of Undertaking" and
"Indorsement" whereby the latter acknowledges that the former is the owner of said shares and
he was therefore assigning/endorsing the same to the plaintiff. A copy of the said
deed/indorsement is attached as Annex "A".

7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity).

8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown
by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex "B".

9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding
to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid
and/or the plaintiff.

10. Despite repeated demands, the defendants refused and continue to refuse without any
justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares
of Gaid, in violation of plaintiff’s right to secure the corresponding certificate of stock in his name.6

Attached to the complaint was the Deed of Undertaking and Indorsement7 upon which petitioner based
his petition for mandamus. Said deed and indorsement read as follows:

DEED OF UNDERTAKING

KNOW ALL MEN BY THESE PRESENTS:


I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement
Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED
(P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription
agreement in favor of Victory Cement Corporation.

(SGD.) VICENTE C. PONCE

February 8, 1968

CONFORME:

(SGD.) FAUSTO GAID

INDORSEMENT

I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE
HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE.

(SGD.) FAUSTO GAID

With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in
his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to
pay him damages.8

Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that: (a) the
complaint states no cause of action; mandamus is improper and not available to petitioner; (b) the
petitioner is not the real party in interest; (c) the cause of action is barred by the statute of limitations;
and (d) in any case, the petitioner’s cause of action is barred by laches.9 They argued, inter alia, that there
being no allegation that the alleged "INDORSEMENT" was recorded in the books of the corporation, said
indorsement by Gaid to the plaintiff of the shares of stock in question—assuming that the indorsement
was in fact a transfer of stocks—was not valid against third persons such as ALSONS under Section 63 of
the Corporation Code.10 There was, therefore, no specific legal duty on the part of the respondents to
issue the corresponding certificates of stock, and mandamus will not lie.11

Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1)
mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to
record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in
interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations
did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on
April 13, 1992.

After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to
dismiss in an Order dated February 29, 1996, which held that:

xxx

Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G. Gaid, or
his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant corporation
who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance with Section 37 of
the old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant corporation was
incorporated, as well as Section 64 of the present Corporation Code (Batas Pambansa Blg. 68), a
stockholder who has fully paid for his subscription together with interest and expenses in case of
delinquent shares, is entitled to the issuance of a certificate of stock for his shares. According to
paragraph 9 of the Complaint, no stock certificate was issued to Gaid.

Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder of the
defendant corporation by demanding issuance of the certificates of stock in his name. This he cannot do,
for two reasons: there is no record of any assignment or transfer in the books of the defendant
corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or
transfer. Indeed, nothing is alleged in the complaint on these two points.

xxx

In the present case, there is not even any indorsement of any stock certificate to speak of. What the
plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming the
document has this effect, nevertheless there is neither any allegation nor any showing that it is recorded
in the books of the defendant corporation, such recording being a prerequisite to the issuance of a stock
certificate in favor of the transferee.12

Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the
appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or
assignment of stocks need not be registered first before it can take cognizance of the case to enforce the
petitioner’s rights as a stockholder, the Commission En Banc cited our ruling in Abejo vs. De la Cruz, 149
SCRA 654 (1987) to the effect that:

xxx As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a
registered one in order that the Securities and Exchange Commission may take cognizance of a suit
seeking to enforce his rights as such stockholder". This is because the SEC by express mandate has
"absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the
provisions of the Corporation Code, among which is the stock purchaser’s right to secure the
corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any
problem encountered in securing the certificates of stock representing the investment made by the buyer
must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather
than through the usual tedious regular court procedure. xxx

Applying this principle in the case on hand, a transfer or assignment of stocks need not be registered first
before the Commission can take cognizance of the case to enforce his rights as a stockholder. Also, the
problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken
up through the so-called administrative mandamus proceedings with the SEC than in the regular courts.13

The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not the
real party in interest.

xxx
As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares of stock
of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him the rightful
owner and holder of a stock certificate to be issued in his name. Moreover, defendant-appellees failed to
show that the transferor nor his heirs have refuted the ownership of the transferee. Assuming these
allegations to be true, the corporation has a mere ministerial duty to register in its stock and transfer
book the shares of stock in the name of the plaintiff-appellant subject to the determination of the validity
of the deed of assignment in the proper tribunal. 14

Their motion for reconsideration having been denied, herein respondents appealed the decision15 of the
SEC En Banc and the resolution16 denying their motion for reconsideration to the Court of Appeals.

In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the
shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of
ALSONS, Ponce failed to state a cause of action. Thus, said the CA, "the complaint for mandamus should be
dismissed for failure to state a cause of action."17 petitioner’s motion for reconsideration was likewise
denied in a resolution18 dated August 10, 1999.

Hence, the instant petition for review on certiorari alleging that:

I. … THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR
ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF
ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER
OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE
CORPORATION, CITING SECTION 63 OF THE CORPORATION CODE.

II. … THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF "ABEJO VS.
DE LA CRUZ", 149 SCRA 654 AND "RURAL BANK OF SALINAS, INC., ET AL VS. COURT OF APPEALS,
ET AL.", G.R. NO. 96674, JUNE 26, 1992.

III. … THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, "HAGER VS.
BRYAN", 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF
STOCK.19

At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause of action for
a writ of mandamus.

Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and
that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus,
when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to
record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the
name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock
certificate need not spell out each and every act that needs to be done by the corporate secretary, as a
request for issuance of stock certificates necessarily includes a request for the recording of the transfer.
Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of
stock certificates.

Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of
stock to first issue express instructions or execute a power of attorney for the transfer of said shares
before a certificate of stock is issued in the name of the transferee and the transfer registered in the
books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo,
144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a
situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock
certificates have been issued even in the name of the original stockholder, Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure
stock certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS
denied his request.

Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existent insofar as the corporation is concerned and no
certificate of stock can be issued in the name of the transferee. Until the recording is made, the transfer
cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party in
interest, the real party in interest being Fausto Gaid since it is his name that appears in the records of the
corporation. They conclude that petitioner’s cause of action is barred by prescription and laches since 24
years elapsed before he made any demand upon ALSONS.

We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner had
no cause of action, and that his petition for mandamus was properly dismissed.

There is no question that Fausto Gaid was an original subscriber of respondent corporation’s 239,500
shares. This is clear from the numerous pleadings filed by either party. It is also clear from the Amended
Articles of Incorporation20 approved on August 9, 199521 that each share had a par value of P1.00 per
share. And, it is undisputed that petitioner had not made a previous request upon the corporate secretary
of ALSONS, respondent Francisco M. Giron Jr., to record the alleged transfer of stocks.

The Corporation Code states that:

SEC. 63. Certificate of stock and transfer of shares.–The capital stock of stock corporations shall be
divided into shares for which certificates signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance
with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of shares
transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation.

Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and transfer
book of the corporation is non-existent as far as the corporation is concerned.22 As between the
corporation on the one hand, and its shareholders and third persons on the other, the corporation looks
only to its books for the purpose of determining who its shareholders are.23 It is only when the transfer
has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee
as one of its stockholders. From this time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the
transferee even when there has been compliance with the requirements of Section 6424 of the
Corporation Code. This is the import of Section 63 which states that "No transfer, however, shall be valid,
except 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." The situation would be different if the petitioner was
himself the registered owner of the stock which he sought to transfer to a third party, for then he would
be entitled to the remedy of mandamus.25

From the corporation’s point of view, the transfer is not effective until it is recorded. Unless and until
such recording is made the demand for the issuance of stock certificates to the alleged transferee has no
legal basis. As between the corporation on the one hand, and its shareholders and third persons on the
other, the corporation looks only to its books for the purpose of determining who its shareholders
are.26 In other words, the stock and transfer book is the basis for ascertaining the persons entitled to the
rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a
stockholder, the corporation is under no specific legal duty to issue stock certificates in the transferee’s
name.

It follows that, as held by the Court of Appeals:

x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective
as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between
Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the
petitioner corporation, the private respondent has failed to state a cause of action.27

Petitioner insists that it is precisely the duty of the corporate secretary, when presented with the
document of fully paid shares, to effect the transfer by recording the transfer in the stock and transfer
book of the corporation and to issue stock certificates in the name of the transferee. On this point, the SEC
En Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals, 28 where we held that:

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and
transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding
the decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of
the 473 shares in the stock and transfer book in the names of private respondents. At all events, the
registration is without prejudice to the proceedings in court to determine the validity of the Deeds of
Assignment of the shares of stock in question.

In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special Power of
Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full
authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente’s name and to
execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473
shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment
covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and
transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on
those circumstances, there was a clear duty on the part of the corporate secretary to register the 473
shares in favor of the new owners, since the person who sought the transfer of shares had express
instructions from and specific authority given by the registered stockholder to cause the disposition of
stocks registered in his name.

That cannot be said of this case. The deed of undertaking with indorsement presented by petitioner does
not establish, on its face, his right to demand for the registration of the transfer and the issuance of
certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for
mandamus fails to state a cause of action where it appears that the petitioner is not the registered
stockholder and there is no allegation that he holds any power of attorney from the registered
stockholder, from whom he obtained the stocks, to make the transfer, thus:

It appears, however, from the original as well as the amended petition, that this petitioner is not the
registered owner of the stock which he seeks to have transferred, and except in so far as he alleges that
he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon
Company, in whose name it is registered on the books of the Visayan Electric Company, there is no
allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing
him to make demand on the secretary of the Visayan Electric Company to make the transfer which
petitioner seeks to have made through the medium of the mandamus of this court.

Without discussing or deciding the respective rights of the parties which might be properly asserted in an
ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that
at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the
stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do,
upon the demand either of the person in whose name the stock is registered, or of some person holding a
power of attorney for that purpose from the registered owner of the stock. There is no allegation in the
petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company
authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself
made such demand upon the Visayan Electric Company, and in the absence of such allegation we are not
able to say that there was such a clear indisputable duty, such a clear legal obligation upon the
respondent, as to justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459),29 the
mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a
transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to
compel the company and its officers to make such transfer at his demand, because, under such
circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of
the writ. As a general rule and especially under the above-cited statute, as between the corporation on
the one hand, and its shareholders and third persons on the other, the corporation looks only to its books
for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate,
claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in
the absence of express instructions of the registered owner to make such transfer to the indorsee, or a
power of attorney authorizing such transfer.30

In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the
supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an
action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. That
Hager and Rivera involved petitions for mandamus to compel the registration of the transfer, while this
case is one for issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee
may ask for the issuance of stock certificates, he must first cause the registration of the transfer and
thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary
may not be compelled to register transfers of shares on the basis merely of an indorsement of stock
certificates. With more reason, in our view, a corporate secretary may not be compelled to issue stock
certificates without such registration.31

Petitioner’s reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the
corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to
registration is misplaced. In this case there is no allegation in the complaint that petitioner ever gave
notice to respondents of the alleged transfer in his favor. Moreover, that case arose between and among
the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to
record the transfers in favor of Telectronics of the corporation’s controlling 56% shares of stock which
were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer
is different from the request for the issuance of stock certificates in the transferee’s name. Finally, in
Abejo we did not say that transfer of shares need not be recorded in the books of the corporation before
the transferee may ask for the issuance of stock certificates. The Court’s statement, that "there is no
requirement that a stockholder of a corporation must be a registered one in order that the Securities and
Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder
among which is the stock purchaser’s right to secure the corresponding certificate in his name,"32 was
addressed to the issue of jurisdiction, which is not pertinent to the issue at hand.

Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent
ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation that can be
imposed upon the respondent corporate secretary, so as to justify the issuance of the writ of mandamus
to compel him to perform the transfer of the shares to petitioner. The test of sufficiency of the facts
alleged in a petition is whether or not, admitting the facts alleged, the court could render a valid judgment
thereon in accordance with the prayer of the petition.33 This test would not be satisfied if, as in this case,
not all the elements of a cause of action are alleged in the complaint.34 Where the corporate secretary is
under no clear legal duty to issue stock certificates because of the petitioner’s failure to record earlier the
transfer of shares, one of the elements of the cause of action for mandamus is clearly missing.

That petitioner was under no obligation to request for the registration of the transfer is not in issue. It
has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock
certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is
not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible
evidence of the stock itself and of the various interests therein. The certificate is the evidence of the
holder’s interest and status in the corporation, his ownership of the share represented thereby. The
certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation
of the relation of shareholder to the corporation.35 In fact, it rests on the will of the stockholder whether
he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won
vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law
does not prescribe a period within which the registration should be effected, the action to enforce the
right does not accrue until there has been a demand and a refusal concerning the transfer. In the present
case, petitioner’s complaint for mandamus must fail, not because of laches or estoppel, but because he
had alleged no cause of action sufficient for the issuance of the writ.
WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-G.R. SP
No. 46692, which set aside that of the Securities and Exchange Commission En Banc in SEC-AC No. 545
and reinstated the order of the Hearing Officer, is hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

G.R. Nos. 107789 & 147214 April 30, 2003

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD


GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION) and VICTOR AFRICA, respondents.
AEROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO, CARLOS NIETO, MANUEL NIETO III,
RAMON NIETO, ROSARIO ARELLANO, VICTORIA LEGARDA, ANGELA LOBREGAT, MA. RITA DE LOS
REYES, CARMEN TUAZON and RAFAEL VALDEZ, intervenors.

x-----------------------------x

G.R. No. 147214 April 30, 2003

VICTOR AFRICA, petitioner,


vs.
THE HONORABLE SANDIGANBAYAN and THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT,respondents.

RESOLUTION

CARPIO MORALES, J.:

These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the second "for Review
on Certiorari" although it is actually one for Certiorari, stem from a Resolution of November 13, 1992
issued by the Sandiganbayan in Civil Case No. 0130,1 on motion of Victor Africa (Africa) who prayed that
said court order the "calling and holding of the Eastern Telecommunications, Philippines, Inc. (ETPI)
annual stockholders meeting for 1992 under the [c]ourt's control and supervision and prescribed
guidelines."

It is gathered that on August 7, 1991, the Presidential Commission on Good Government (PCGG)
conducted an ETPI stockholders meeting during which a PCGG controlled board of directors was elected.
A special stockholders meeting was later convened by the registered ETPI stockholders wherein another
set of board of directors was elected, as a result of which two sets of such board and officers were elected.

Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988 been "illegally 'exercising'
the rights of stockholders of ETPI,"2 especially in the election of the members of the board of directors,
filed the above-said motion before the Sandiganbayan.

The PCGG did not object to Africa's motion provided that:


1. An Order be issued upholding the right of PCGG to vote all the Class "A" shares of ETPI.

2. In the alternative, in the remote event that PCGG's right to vote the sequestered shares be not
upheld, an Order be issued:

a. Disregarding the Stock and Transfer Book and Booklet of Stock Certificates of ETPI in
determining who can vote the shares in an Annual Stockholders Meeting of ETPI,

b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of the total
subscription in ETPI, and

c. Directing the amendment of the Articles of Incorporation and By-laws of ETPI providing
for the minimum safeguards for the conservation of assets . . . prior to the calling of a
stockholders meeting.3

By the assailed Resolution of November 13, 1992,4 the Sandiganbayan resolved Africa's motion, the
dispositive portion of which reads:

WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern Telecommunications,


Philippines, Inc. (ETPI), for 1992 be held on Friday, November 27, 1992, at 2:00 o'clock in the afternoon,
at the ETPI Board Room, Telecoms Plaza, 7th Floor, 316 Gil J. Puyat Avenue, Makati, Metro Manila. The
Executive Clerk of Court of this Division shall issue the call and notice of annual stockholders meeting of
ETPI addressed to all the duly registered/recorded stockholders of ETPI. The stockholders meeting shall
be conducted under the supervision and control of this Court, through Mr. Justice Sabino R. de Leon, Jr. In
accordance with the Supreme Court ruling in Cojuangco et al vs. Azcuna, et al., supra, only the registered
owners, their duly authorized representatives or their proxies may vote their corresponding shares.

The following minimum safeguards must be set in place and carefully maintained until final judicial
resolution of the question of whether or not the sequestered shares of stock (or in a proper case the
underlying assets of the corporation concerned) constitute ill-gotten wealth:

"a. An independent comptroller must be appointed by the Board of Directors upon nomination of
the PCGG as conservator. The comptroller shall not be removable (nor shall his position be
abolished or his compensation changed) without the consent of the conservator. The comptroller
shall, in addition to his other functions as such, have charge of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate secretary ceases
to be acceptable to the conservator, a new one must be appointed by the Board of Directors upon
nomination of the conservator.

c. The external auditors of the corporation must be independent and must be acceptable to the
conservator. The independent external auditors shall not be changed without the consent of the
conservator.

d. The conservator must be represented in the Board of Directors and in the Executive (or
equivalent) and Audit Committees of the corporation involved and of its majority-owned
subsidiaries or affiliates. The representative of the conservator must be a full director (not merely
an honorary or ex-officio director) with the right to vote and all other rights and duties of a
member of the Board of Directors under the Corporation Code. The conservator's representative
shall not be removed from the Board of Directors (or the mentioned Committees) without the
consent of the conservator. The conservator shall, however, have the right to remove and change
its representative at any time, and the new representative shall be promptly elected to the Board
and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5 million must have
the prior approval of the director representing the conservator, in order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds, debentures, commercial
paper or any other form, in excess of P5 million, must have the prior approval of the director
representing the conservator, in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial meaning in excess
of P5 million) shall require the prior approval of the director representing the conservator, in
order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and by-laws of the
company involved. In other words, the articles of incorporation and by-laws of the company must
be amended so as to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will modify in
any way any of the above safeguards, shall need the prior approval of the director representing
the conservator."

SO ORDERED.5 (Emphasis supplied)

Assailing the foregoing resolution, the PCGG filed before this Court the herein first petition, docketed
as G.R. No. 107789, anchored upon the following grounds:

RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF DISCRETION IN RULING THAT THE
REGISTERED STOCKHOLDERS OF ETPI HAD THE RIGHT TO VOTE IN SPITE OF (A) THE RULING OF THIS
HONORABLE COURT IN PCGG V. SEC AND AFRICA (G.R. NO. 82188) AND (B) A CLEAR SHOWING THAT
ETPI'S STOCK AND TRANSFER BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO
DETERMINE WHO CAN VOTE IN A STOCKHOLDERS' MEETING.

II

RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION AND EXCEEDED ITS JURISDICTION
WHEN IT HELD THAT PCGG CANNOT VOTE AT LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OF
ETPI.

III

WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS OF THE REPUBLIC,
RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN ORDERING THE HOLDING OF A
STOCKHOLDERS' MEETING IN ETPI WITHOUT FIRST SETTING IN PLACE — BY AMENDING THE ARTICLES
AND BY-LAWS OF ETPI TO INCORPORATE — THE SAFEGUARDS PRESCRIBED BY THIS HONORABLE
COURT IN COJUANGCO V. ROXAS.

IV

THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR WITH GRAVE ABUSE OF
DISCRETION IN APPOINTING (A) ITS OWN DIVISION CLERK OF COURT TO PERFORM THE DUTIES OF A
CORPORATE SECRETARY, AND (B) ITS OWN JUSTICE SABINO DE LEON, JR. TO CONTROL AND SUPERVISE
THE STOCKHOLDERS' MEETING.6 (Emphasis in the original)

By Resolution of November 26, 1992, this Court enjoined the Sandiganbayan from (a) implementing its
Resolution of November 13, 1992, and (b) holding the stockholders' meeting of ETPI scheduled on
November 27, 1992, at 2:00 p.m.

On December 7, 1992, Aerocom Investors and Managers, Inc. (AEROCOM), Benito Nieto, Carlos Nieto,
Manuel Nieto III, Ramon Nieto, Rosario Arellano, Victoria Legarda, Angela Lobregat, Ma. Rita de los Reyes,
Carmen Tuazon and Rafael Valdez, all stockholders of record of ETPI, filed a motion to intervene in G.R.
No. 107789. Their motion was granted by this Court by Resolution of January 14, 1993.

After the parties submitted their respective memoranda, the PCGG, in early 1995, filed a "VERY URGENT
PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS' MEETING FOR [THE] SOLE PURPOSE
OF INCREASING [ETPI's] AUTHORIZED CAPITAL STOCK," it claiming that the increase in authorized
capital stock was necessary in light of the requirements laid down by Executive Order No. 1097 and
Republic Act No. 7975.8

By Resolution of May 7, 1996,9 this Court resolved to refer the PCGG's very urgent petition to hold the
special stockholders' meeting to the Sandiganbayan for reception of evidence and resolution.

In compliance therewith, the Sandiganbayan issued a Resolution of December 13, 1996,10 which is being
assailed in the herein second petition, granting the PCGG "authority to cause the holding of a special
stockholders' meeting of ETPI for the sole purpose of increasing ETPI's authorized capital stock and to
vote therein the sequestered Class 'A' shares of stock. . . ." In said Resolution, the Sandiganbayan held that
there was an urgent necessity to increase ETPI's authorized capital stock; there existed a prima
facie factual foundation for the issuance of the writ of sequestration covering the Class "A" shares of
stock; and the PCGG was entitled to vote the sequestered shares of stock.

The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair and Corporate Secretary to
call the special stockholders meeting. Notices were sent to those entitled to vote for a meeting on March
17, 1997. The meeting was held as scheduled and the increase in ETPI's authorized capital stock from
P250 Million to P2.6 Billion was "unanimously approved."11

On April 1, 1997, Africa filed before this Court a motion to cite the PCGG "and its accomplices" in
contempt and "to nullify the 'stockholders meeting' called/conducted by PCGG and its accomplices," he
contending that only this Court, and not the Sandiganbayan, has the power to authorize the PCGG to call a
stockholders meeting and vote the sequestered shares. Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of December 13, 1996 authorizing the PCGG to hold the
stockholders meeting had not yet become final because the motions for reconsideration of said resolution
were still pending. Further, Africa alleged that he was not given notice of the meeting, and the PCGG had
no right to vote the sequestered Class "A" shares.

A motion for leave to intervene relative to Africa's "Motion to Cite the PCGG and its Accomplices in
Contempt" was filed by ETPI. This Court granted the motion for leave but ETPI never filed any pleading
relative to Africa's motion to cite the PCGG in contempt.

By Resolution of February 16, 2001, the Sandiganbayan finally resolved to deny the motions for
reconsideration of its Resolution of December 13, 1996, prompting Africa to file on April 6, 2001 before
this Court the herein second petition,12 docketed as G.R. No. 147214, challenging the Sandiganbayan
Resolutions of December 13, 1996 (authorizing the holding of a stockholders meeting to increase ETPI's
authorized capital stock and to vote therein the sequestered Class "A" shares of stock) and February 16,
2001 (denying reconsideration of the December 13, 1996 Resolution).

In his petition in G.R. No. 147214, Africa alleged that the Sandiganbayan committed "grave abuse of
discretion" when, by the assailed Resolutions,

a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS OF THE SHARES [OF "SMALL
STOCKHOLDERS" OF WHICH HE IS ONE AND AEROCOM AND POLYGON] AND/OR OWNERS
THEREOF[;] [AND]

b. IT DID NOT ACCORD TO THE NON-SEQUESTERED SHARES/OWNERS THE RIGHTS


APPURTENANT TO A STOCKHOLDER[.]

He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG to vote the non-
sequestered ETPI Class "A" shares and nullify the votes the PCGG had cast in the stockholders meeting
held on March 17, 1997.

By Resolution of February 24, 2003,13 this Court ordered the consolidation of G.R. No. 147214 with G.R.
No. 107789, now the subject of the present Resolution.

The first issue to be resolved is whether the PCGG can vote the sequestered ETPI Class "A" shares in the
stockholders meeting for the election of the board of directors. The leading case on the matter is Bataan
Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government 14 where this Court
defined the powers of the PCGG as follows:

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion
over property sequestered, frozen or provisionally taken over. As already earlier stressed with no
little insistence, the act of sequestration[,] freezing or provisional takeover of property does not
import or bring about a divestment of title over said property; [it] does not make the PCGG the
owner thereof. In relation to the property sequestered, frozen or provisionally taken over,
the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict ownership; and
this is specially true in the situations contemplated by the sequestration rules where, unlike cases
of receivership, for example, no court exercises effective supervision or can upon due application
and hearing, grant authority for the performance of acts of dominion.

Equally evident is that resort to the provisional remedies in question should entail the least
possible interference with business operations or activities so that, in the event that the
accusation of the business enterprise being "ill-gotten" be not proven, it may be returned to its
rightful owner as far as possible in the same condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, such as to bring
and defend actions in its own name; receive rents; collect debts due; pay outstanding debts due;
and generally do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and academic, or
frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the assistance of any office,
agency or instrumentality of the government. In the case of sequestered businesses generally (i.e.,
going concerns, businesses in current operation), as in the case of sequestered objects, its
essential role, as already discussed, is that of conservator, caretaker, "watchdog" or overseer. It is
not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him;
Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over
by the government of the Marcos Administration or by entities or persons close to former
President Marcos," the PCGG is given power and authority, as already adverted to, to
"provisionally take (it) over in the public interest or to prevent . . . (its) disposal or dissipation;"
and since the term is obviously employed in reference to going concerns, or business enterprises
in operation, something more than mere physical custody is connoted; the PCGG may in this case
exercise some measure of control in the operation, running, or management of the business itself.
But even in this special situation, the intrusion into management should be restricted to the
minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or
dissipation" of the business enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies, particularly in respect
of viable establishments. In fact, such a replacement or substitution should be avoided if at all
possible, and undertaken only when justified by demonstrably tenable grounds and in line with
the stated objectives of the PCGG. And it goes without saying that where replacement of
management officers may be called for, the greatest prudence, circumspection, care and attention
should accompany that undertaking to the end that truly competent, experienced and honest
managers may be recruited. There should be no role to be played in this area by rank amateurs, no
matter how well meaning. The road to hell, it has been said, is paved with good intentions. The
business is not to be experimented or played around with, not run into the ground, not driven to
bankruptcy, not fleeced, not ruined. Sight should never be lost x x x of the ultimate objective of the
whole exercise, which is to turn over the business to the Republic, once judicially established to be
"ill-gotten." Reason dictates that it is only under these conditions and circumstances that the
supervision, administration and control of business enterprises provisionally taken over may
legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may
properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the
President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum
authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of **
(sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of directors, declaration of
dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be
construed in such a manner as to be consistent with, and not contradictory to the Executive
Orders earlier promulgated on the same matter. There should be no exercise of the right to vote
simply because the right exists, or because the stocks sequestered constitute the controlling or a
substantial part of the corporate voting power. The stock is not to be voted to replace directors, or
revise the articles or by-laws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible grounds, and always
in the context of the stated purposes of sequestration or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate assets. Directors are not to be voted out simply
because the power to do so exists. Substitution of directors is not to be done without reason or
rhyme, should indeed be shunned if at all possible, and undertaken only when essential to prevent
disappearance or wastage of corporate property, and always under such circumstances as to
assure that replacements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office
and elect others in their stead because the evidence showed prima facie that the former were just
tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at
all. This is why, in its Resolution of October 28, 1986[,] this Court declared that —

"Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of directors as
authorized by the Memorandum of the President ** (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding in
said corporation."

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in
the management of the company's affairs should henceforth be guided and governed by the norms
herein laid down. They should never for a moment allow themselves to forget they are
conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest
degree of diligence and rectitude is, in the premises, required. (Italics in the original)

The PCGG cannot thus vote sequestered shares, except when there are "demonstrably weighty and
defensible grounds" or "when essential to prevent disappearance or wastage of corporate property."15
The principle laid down in Baseco was further enhanced in the subsequent cases of Cojuangco v.
Calpo16 and Presidential Commission on Good Government v. Cojuangco, Jr.,17 where this Court developed a
"two-tiered" test in determining whether the PCGG may vote sequestered shares:

The issue of whether PCGG may vote the sequestered shares in SMC necessitates a determination
of at least two factual matters:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus
belong to the state; and

2. whether there is an immediate danger of dissipation thus necessitating their continued


sequestration and voting by the PCGG while the main issue pends with the
Sandiganbayan.18

The two-tiered test, however, does not apply in cases involving funds of "public character." In such cases,
the government is granted the authority to vote said shares, namely:

(1) Where government shares are taken over by private persons or entities who/which registered
them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow landed in
private hands.19

This Court, in Republic v. Cocofed,20 explained:

The [public character] exceptions are based on the common-sense principle that legal fiction must
yield to truth; that public property registered in the names of non-owners is affected with trust
relations; and that the prima facie beneficial owner should be given the privilege of enjoying the
rights flowing from the prima faciefact of ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was placed
under sequestration by the PCGG. Explained the Court:

"The facts show that the corporation known as BASECO was owned and controlled by
President Marcos 'during his administration, through nominees, by taking undue advantage
of his public office and/or using his powers, authority, or influence,' and that it was by and
through the same means, that BASECO had taken over the business and/or assets of the
National Shipyard and Engineering Co., Inc., and other government-owned or controlled
entities."

Given this factual background, the Court discussed PCGG's right over BASECO in the following
manner:

"Now, in the special instance of a business enterprise shown by evidence to have been
'taken over by the government of the Marcos Administration or by entities or persons close
to former President Marcos,' the PCGG is given power and authority, as already adverted to,
to provisionally take (it) over in the public interest or to prevent ** (its) disposal or
dissipation;' and since the term is obviously employed in reference to going concerns, or
business enterprises in operation, something more than mere physical custody is
connoted; the PCGG may in this case exercise some measure of control in the operation,
running, or management of the business itself."

Citing an earlier Resolution, it ruled further:

"Petitioner has failed to make out a case of grave abuse of excess of jurisdiction in
respondent's calling and holding of a stockholder's meeting for the election of directors as
authorized by the Memorandum of the President ** (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding in
said corporation." (Emphasis supplied)

The Court granted PCGG the right to vote the sequestered shares because they appeared to be
"assets belonging to the government itself." The Concurring Opinion of Justice Ameurfina A.
Melencio-Herrera, in which she was joined by Justice Florentino P. Feliciano, explained this
principle as follows:

"I have no objection to according the right to vote sequestered stock in case of a take-over
of business actually belonging to the government or whose capitalization comes from
public funds but which, somehow, landed in the hands of private persons, as in the case of
BASECO. To my mind, however, caution and prudence should be exercised in the case of
sequestered shares of an on-going private business enterprise, specially the sensitive ones,
since the true and real ownership of said shares is yet to be determined and proven more
conclusively by the Courts." (Italics supplied)

The exception was cited again by the Court in Cojuangco-Roxas in this wise:

"The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in a
corporation and elect the members of the board of directors. The only conceivable exception
is in a case of a takeover of a business belonging to the government or whose capitalization
comes from public funds, but which landed in private hands as in BASECO." (italics supplied)

The "public character" test was reiterated in many subsequent cases; most recently, in Antiporda
v. Sandiganbayan. Expressly citing Cojuangco-Roxas, this Court said that in determining the issue
of whether the PCGG should be allowed to vote sequestered shares, it was crucial to find out first
whether this were purchased with public funds, as follows:

"It is thus important to determine first if the sequestered corporate shares came from
public funds that landed in private hands."

This Court summed up the rule in the determination of whether the PCGG has the right to vote
sequestered shares as follows:
In short, when sequestered shares registered in the names of private individuals or entities are
alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied. However,
when the sequestered shares in the name of private individuals or entities are shown, prima facie,
to have been (1) originally government shares, or (2) purchased with public funds or those
affected with public interest, then the two-tiered test does not apply. Rather, the public character
exception in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote
the shares.

The PCGG contends, however, that it is entitled to vote the sequestered shares in the election of the board
of directors, it invoking this Court's alleged finding in PCGG et al. v. Securities and Exchange Commission, et
al.21 that Africa had dissipated ETPI's assets, thus:

Under a consultancy contract, Polygon Investors and Managers, Inc. with Jose L. Africa as
Chairman and Victor Africa as President, earned from ETPI as of 1987, more than P57 million.
Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as "professional fees" and Manuel
Nieto, Jr. another P1,200,000.00 as "allowances".22

The PCGG's contention is misleading, This Court made no finding in PCGG v. SEC et al. that Africa
dissipated ETPI's assets. Precisely this Court issued a Resolution of July 28, 1988 in the same case to
clarify, upon motion of Africa, that the narration of facts found in the decision therein did not constitute a
finding of facts:

The categorical statement in the decision of June 30, 1988 that the "relevant background facts of
the case culled from Petitioners' Urgent Consolidated Petition" was not without a reason or
purpose. Precisely this statement was made to impress upon the parties that the narration of
facts is just that — a narration, without necessarily judging its truth or veracity. Being based
on mere allegations, properly controverted, it is not a finding of facts, but more of a
presentation of the complete picture of events which led to the sequestration of Eastern
Telecommunications, Philippines, Inc. as well as to the instant petition. This Court, it must be
remembered, is not a trier of facts, and particularly so in this case where the facts narrated are
precisely the facts in litigation before the Sandiganbayan. (Emphasis supplied.)

Unfortunately, the Sandiganbayan, in its impugned Resolution of November 13, 1992, skirted the
question of whether there is evidence of dissipation of ETPI assets, holding instead that:

The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds of ETPI during
its administration of ETPI is a matter which is not in issue herein. Dissipation by the PCGG Board
of Directors is also charged by the BAN group. An investigation of the anomalies charged by one
against the other may be taken up in another case.23

And it further held that the PCGG could not vote the sequestered shares as "only the owners of the shares
of stock of subject corporation, their duly authorized representatives or their proxies, may vote the said
shares,"24 relying on this Court's ruling in Cojuangco, Jr. v. Roxas25 that:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership of
sequestered property. It is a mere conservator. It may not vote the shares in a corporation and elect
members of the board of directors. The only conceivable exception is in a case of a takeover of a business
belonging to the government or whose capitalization comes from public funds, but which landed in
private hands as in BASECO.

In short, the Sandiganbayan held that the public character exception does not apply, in which case it
should have proceeded to apply the two-tiered test. This it failed to do.

The questions thus remain if there is prima facie evidence showing that the subject shares are ill-gotten
and if there is imminent danger of dissipation. This Court is not, however, a trier of facts, hence, it is not
in a position to rule on the correctness of the PCGG's contention. Consequently, this issue must be
remanded to the Sandiganbayan for resolution.

II

On the PCGG's submission that the Stock and Transfer Book should not be used as the basis for
determining the voting rights of the shareholders because some entries therein were altered "by
substitution": This Court sees no grave abuse of discretion on the part of the Sandiganbayan in ruling
that:

The charge that there were "alterations by substitution" in the Stock and Transfer Book is not a
matter which should preclude the Stock and Transfer Book from being the basis or guide to
determine who the true owners of the shares of stock in ETPI are. If there be any substitution or
alterations, the anomaly, if at all, may be explained by the corporate secretary who made the
entries therein. At any rate, the accuracy of the Stock and Transfer Book may be checked by
comparing the entries therein with the issued stock certificates. The fact is that any transfer of
stock or issuance thereof would necessitate an alteration of the record by substitution. Any
anomaly in any entry which may deprive a person or entity of its right to vote may generate a
controversy personal to the corporation and the stockholder and should not affect the issue as to
whether it is the PCGG or the shareholder who has the right to vote. In other words, should there
be a stockholder who feels aggrieved by any alteration by substitution in the Stock and Transfer
Book, said stockholder may object thereto at the proper time and before the stockholders
meeting.26

Whether the ETPI Stock and Transfer Book was falsified and whether such falsification deprives the true
owners of the shares of their right to vote are thus issues best settled in a different proceeding instituted
by the real parties-in-interest.

III

On the PCGG's submission that the Sandiganbayan gravely abused its discretion when it held that it
cannot vote at least 23.9% of the outstanding capital stock of ETPI, which percentage is broken down as
follows:

Shares ceded to the government - 12.8%


by virtue of the Benedicto
compromise
Shares represented by some - 3.1%
stock certificates found in
Malacañang (at least)
Shares held and admitted by 8.0%
Manuel Nieto to belong to then
President Marcos -

The PCGG alleges that the 12.8% indicated above represents 51% of the combined shareholdings of
Roberto S. Benedicto and his controlled corporations amounting to 12.8% of the total equity of ETPI
which was ceded to the Republic; the 3.1% represents the shares covered by the ETPI stock certificates
endorsed in blank found in Malacañang, now in its (PCGG's) possession, which it submits it may, under
Section 34 of the Negotiable Instruments Law,27 take title thereto and vote the same in the stockholders
meeting; and the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he, in an Affidavit of
May 28, 1986, admitted actually belong to former President Marcos:

5. That in relation to and simultaneously with the board meeting of PHILCOMSAT, on March 21,
1986, I declared my concurrence in the disclosures made on the participation of Mr. Ferdinand E.
Marcos and associates in the companies covered by the sequestration order dated March 14, 1986
i.e., 39,926.2% (sic) of the total subscribed capital stock of Philippine Overseas
Telecommunications Corporation and 40% of the individual shareholdings of Jose L. Africa,
Manuel H. Nieto, Jr., & Roberto S. Benedicto in Eastern Telecommunications Philippines, Inc. 28

On the question of whether the PCGG can vote all the above shares, the Sandiganbayan, finding in the
affirmative, held in its Resolution of November 13, 1992:

Considering the Compromise Agreement entered into by the PCGG and Roberto S. Benedicto in
Civil Case No. 009 wherein Roberto S. Benedicto assigned and transferred to the Government
12.8% of the shares of stock of ETPI, which Compromise Agreement was made the basis of a
judgment of this Court, it is only proper that the PCGG may vote these shares in the stockholders
meeting after said judgment shall have become final and executory. Besides, before the PCGG can
vote these shares, the transfer to the State of the shares of stock must be entered in the Stock and
Transfer Book, the entries therein being the only basis for which the stockholder may vote the said
shares.

The same ruling is made in respect to the shares of stock represented by stock certificates found in
Malacañang (3.1%) and the shares of stock allegedly admitted by Manuel H. Nieto to belong to
former President Ferdinand E. Marcos (8.0%).29 (Emphasis supplied)

The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the shares representing
12.8% of ETPI's outstanding capital stock, the only requirement it imposed being that the transfer of the
shares be registered in the Stock and Transfer Book and that, in the case of the Benedicto shares, the
Compromise Agreement be final and executory.

In requiring that the transfer of the Benedicto shares be first recorded in ETPI's Stock and Transfer Book
before the PCGG may vote them, the Sandiganbayan committed no grave abuse of discretion. For Section
63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock corporations shall
be divided into shares for which the certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by the delivery of the certificate or certificates endorsed by the owner or
his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

xxx xxx xxx.

Explaining why registration is a prerequisite for the voting of shares, this Court, in Batangas Laguna
Tayabas Bus Company, Inc., v. Bitanga,30 discoursed:

Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot
be effective as against the corporation. Thus, the unrecorded transferee x x x cannot vote nor be
voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise
all the rights of a stockholder, including the right to vote and to be voted for, and to inform the
corporation of any change in share ownership so that it can ascertain the persons entitled to the
rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a
stockholder of record has a right to participate in any meeting; his vote can be properly counted to
determine whether a stockholders' resolution was approved, despite the claim of the alleged
transferee. On the other hand, a person who has purchased stock, and who desires to be
recognized as a stockholder for the purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a
stockholder but an outsider.

Whether the PCGG needs to await the finality of the judgment31 based on the Republic-Benedicto
compromise agreement is now moot since it is not disputed that it had long become final and executory.
Accordingly, the PCGG may vote in its name the shares ceded to the Republic by Benedicto pursuant to
the said agreement once they are registered in its name.

With respect to the PCGG's submission that under Section 34 of the Negotiable Instruments Law, it may
take title to the shares represented by the blank stock certificates found in Malacañang and vote the
same, the same is untenable. The PCGG assumes that stock certificates are negotiable. They are not.

x x x [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it


may be transferred by delivery, it is well settled that the instrument is non-negotiable, because the
holder thereof takes it without prejudice to such rights or defenses as the registered owner or
creditor may have under the law, except insofar as such rights or defenses are subject to the
limitations imposed by the principles governing estoppel.32

That the PCGG found the stock certificates endorsed in blank does not necessarily make it the owner of
the shares represented therein. Their true ownership has to be ascertained in a proper proceeding.
Similarly, the ownership of the Nieto shares has yet to be adjudicated. That they allegedly belong to
former President Marcos does not make the PCGG, its owner. The PCGG must, in an appropriate
proceeding, first establish that they truly belong to the former President and that they were ill-gotten.
Pending final judgment over the ownership of these shares, the PCGG may not register and vote the Nieto
and the Malacañang shares in its name. If the Sandiganbayan finds, however, that there is evidence of
dissipation of these shares, the PCGG may vote the same as conservator thereof.

IV
On the PCGG's imputation of grave abuse of discretion upon the Sandiganbayan for ordering the holding
of a stockholders meeting to elect the ETPI board of directors without first setting in place, through the
amendment of the articles of incorporation and the by-laws of ETPI, the safeguards prescribed
in Cojuangco, Jr. v. Roxas.33 This Court laid down those safeguards because of the obvious need to
reconcile the rights of the stockholder whose shares have been sequestered and the duty of the
conservator to preserve what could be ill-gotten wealth.

It is through the right to vote that the stockholder participates in the management of the
corporation. The right to vote, unlike the rights to receive dividends and liquidating distributions,
is not a passive thing because management or administration is, under the Corporation Code,
vested in the board of directors, with certain reserved powers residing in the stockholders
directly. The board of directors and executive committee (or management committee) and the
corporate officers selected by the board may make it very difficult if not impossible for the PCGG
to carry out its duties as conservator if the Board or officers do not cooperate, are hostile or
antagonistic to the conservator's objectives.

Thus, it is necessary to achieve a balancing of or a reconciliation between the stockholders' right


to vote and the conservator's statutory duty to recover and in the process thereof, to conserve
assets, thought to be ill-gotten wealth, until final judicial determination of the character of such
assets or until a final compromise agreement between the parties is reached.

There are, in the main, two (2) types of situations that need to be addressed. The first situation
arises where the sequestered shares of stock constitute a distinct minority of the voting shares of
the corporation involved, such that the registered owners of such sequestered shares would in any
case be able to vote in only a minority of the Board of Directors of the corporation. The second
situation arises where the sequestered shares of stock constitute a majority of the voting shares of
the corporation concerned, such that the registered owners of such shares of stock would in any
case be entitled to elect a majority of the Board of Directors of the corporation involved.

Turning to the first situation, the Court considers and so holds that in order to enable the PCGG to
perform its functions as conservator of the sequestered shares of stock pending final
determination by the courts as to whether or not the same constitute ill-gotten wealth or a final
compromise agreement between the parties, the PCGG must be represented in the Board of
Directors of the corporation and to its majority-owned subsidiaries or affiliates and in the
Executive Committee (or its equivalent) and the Audit Committee thereof, in at least an ex
officio (i.e., non-voting) capacity. The PCGG representative must have a right of full access to and
inspection of (including the right to obtain copies of) the books, records and all other papers of the
corporation relating to its business, as well as a right to receive copies of reports to the Board of
Directors, its Executive (or equivalent) and Audit Committees. By such representation and rights
of full access, the PCGG must be able so to observe and monitor the carrying out of the business of
the corporation as to discover in a timely manner any move or effort on the part of the registered
owners of the sequestered stock alone or in concert with other shareholders, to conceal, waste
and dissipate the assets of the corporation, or the sequestered shares themselves, and seasonably
to bring such move or effort to the attention of the Sandiganbayan for appropriate action.

In the second situation above referred to, the Court considers and so holds that the following
minimum safeguards must be set in place and carefully maintained until final judicial resolution of
the question of whether or not the sequestered shares of stock (or, in a proper case, the
underlying assets of the corporation concerned) constitute ill-gotten wealth or until a final
compromise agreement between the parties is reached:

a. An independent comptroller must be appointed by the Board of Directors upon


nomination of the PCGG as conservator. The comptroller shall not be removable (nor shall
his position be abolished or his compensation changed) without the consent of the
conservator. The comptroller shall, in addition to his other functions as such, have charge
of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate secretary
ceases to be acceptable to the conservator, a new one must be appointed by the Board of
Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be acceptable to
the conservator. The independent external auditors shall not be changed without the
consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the Executive (or
equivalent) and Audit Committees of the corporation involved and of its majority-owned
subsidiaries or affiliates. The representative of the conservator must be a full director (not
merely an honorary or ex officiodirector) with the right to vote and all other rights and
duties of a member of the Board of Directors under the Corporation Code. The
conservator's representative shall not be removed from the Board of Directors (or the
mentioned Committees) without the consent of the conservator. The conservator shall,
however, have the right to remove and change its representative at any time, and the new
representative shall be promptly elected to the Board and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5 million


must have the prior approval of the director representing the conservator, in order to be
valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds, debentures,
commercial paper or any other form, in excess of P5 million, must have the prior approval
of the director representing the conservator, in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial meaning in


excess of P5 million) shall require the prior approval of the director representing the
conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and by-laws of
the company involved. In other words, the articles of incorporation and by-laws of the
company must be amended so as to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will
modify in any way any of the above safeguards, shall need the prior approval of the director
representing the conservator.
The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is intended
merely to be indicative. The precise amount may differ depending upon the size of the
corporation involved and the reasonable operating requirements of its business.

Whether a particular case falls within the first or the second type of situation described above, the
following safeguards are indispensably necessary:

1. The sequestered shares and any stock dividends pertaining to such shares, may not be
sold, transferred, alienated, mortgaged, or otherwise disposed of and no such sale, transfer
or other disposition shall be registered in the books of the corporation, pending final
judicial resolution of the question of ill-gotten wealth or a final compromise agreement
between the parties; and

2. Dividend and liquidating distributions shall not be delivered to the registered


stockholders of the sequestered shares, including stock dividends pertaining to such
shares, but shall instead be deposited in an escrow, interest-bearing, account in a first class
bank or banks, acceptable to the Sandiganbayan, to be held by such banks for the benefit of
whoever is held by final judicial decision or final compromise agreement, to be entitled to
the shares involved. (Emphasis in the original)

There is nothing in the Cojuangco case that would suggest that the above measures should be
incorporated in the articles and by-laws before a stockholders meeting for the election of the board of
directors is held. The PCGG nonetheless insists that those measures should be written in the articles and
by-laws before such meeting, "otherwise, the [Marcos] cronies will elect themselves or their
representatives, control the corporation, and for an appreciable period of time, have every opportunity to
disburse funds, destroy or alter corporate records, and dissipate assets." That could be a possibility, but
the peculiar circumstances of this case require that the election of the board of directors first be held
before the articles of incorporation are amended. Section 16 of the Corporation Code requires the
majority vote of the board of directors to amend the articles of incorporation:

Sec. 16. Amendment of Articles of Incorporation. — Unless otherwise prescribed by this Code or by
special law, and for legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of directors or trustees and the
vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at least two thirds
(2/3) of the members if it be a non-stock corporation.

xxx xxx xxx. (Emphasis supplied)

At the time Africa filed his motion for the holding of the annual stockholders meeting, there were two sets
of ETPI directors, one controlled by the PCGG and the other by the registered stockholders. Which of
them is the legitimate board of directors? Which of them may rightfully vote to amend the articles of
incorporation and integrate the safeguards laid down in Cojuangco? It is essential, therefore, to cure this
aberration of two boards of directors sitting in a single corporation before the articles of incorporation
are amended to set in place the Cojuangco safeguards.
The danger of the so-called Marcos cronies taking control of the corporation and dissipating its assets is,
of course, a legitimate concern of the PCGG, charged as it is with the duties of a conservator. Nevertheless,
such danger may be averted by the "substantially contemporaneous" amendment of the articles after the
election of the board. This Court said as much in Cojuangco:

The Court is aware that the implementation of some of the above safeguards may require
agreement between the registered stockholders and the PCGG as well as action on the part of the
Securities and Exchange Commission. The Court, therefore, directs petitioners and the PCGG to
effect the implementation of this decision under the supervision and control of the Sandiganbayan
so that the right to vote the sequestered shares and the installation and operation of the
safeguards above-specified may be exercised and effected in a substantially contemporaneous
manner and with all deliberate dispatch.

As for the PCGG's contention that the Sandiganbayan gravely abused its discretion in ordering the
Division Clerk of Court to call the stockholders meeting and in appointing then Sandiganbayan Associate
Justice Sabino de Leon, Jr. to control and supervise the same, it is impressed with merit.

The Clerk of Court, who is already saddled with judicial responsibilities, need not be burdened with the
additional duties of a corporate secretary. Moreover, the Clerk of Court may not have the requisite
knowledge and expertise to discharge the functions of a corporate secretary. It is not thus surprising to
find the PCGG complaining that:

x x x ETPI's By-laws provide:

"Sec. 4. Notice of Meeting. — Except as otherwise provided by law, written or printed notice
of all annual and special meetings of stockholders, stating the place and time of the meeting
and the general nature of the business to be considered, shall be transmitted by personal
delivery, registered air-mail, telegraph, or cable to each stockholder of record entitled to
vote thereat at his address last known to the Secretary of the Company, at least ten (10)
days before the date of the meeting, if an annual meeting, or at least five (5) days before the
date of the meeting, if a special meeting."

Here, respondent Victor Africa filed a Motion dated March 30, 1992 asking the Sandiganbayan to
"issue the call and Notice of Annual Stockholder's Meeting in ETPI" because under ETPI's By-laws
such meeting should be held in the month of May. x x x . In the Resolution dated November 13,
1992, the Sandiganbayan granted the Motion and authorized its Division Clerk of Court to issue
such "Notice of Annual Stockholder's Meeting." However, for inexplicable reasons, the Division
Clerk of Court issued a "Notice of Special Stockholder's Meeting". x x x . which requires only a prior
5-day notice, instead of a "notice of (Delayed) Annual Stockholder's Meeting" which requires a
prior 10-day notice.

Instead of sending the Notices to each stockholder at his recorded address, the Division Clerk of
Court whimsically sent all the Notices meant for the Class B stockholders to Atty. Eduardo de los
Angeles (who returned the Notices because he was not authorized to receive such Notices).
According to him . . ., he does not know some of the Class B stockholders for whom notices were
sent to him. As a result, at this late stage, no proper notice has been sent to Class B stockholders.
Yet, the Sandiganbayan has scheduled and is dead set to supervise a stockholder's meeting on
November 27, 1992. This clearly violates the substantial rights of the Class B stockholders who
own 40% of ETPI. Under the Articles of Incorporation . . . and By-laws . . . of ETPI, Class B
stockholders are entitled to vote two members of the Board of Directors. Unless properly notified,
most of the Class B stockholders who reside in the United Kingdom (and whose shares are not
sequestered) will not be able to exercise their right to vote.34 (Emphasis in the original)

The appointment of a sitting member of the Sandiganbayan is particularly unsound for, as the PCGG
points out:

x x x What then is the reason for him to attend and supervise the meeting? To observe so that he
can later testify in the court where he himself sits — in the court which will eventually decide any
controversy which may arise from the meeting?35

Obviously, under such situation, the justice so appointed would be compelled to inhibit himself from any
judicial controversy arising from the stockholders meeting.36 Worse, if he were to preside at the meeting
and rule upon the objections that may be raised by some stockholders, the Sandiganbayan would be faced
with the "anomaly"37 of eventually reviewing the decisions rendered by a member of its court during the
stockholders meeting.

This Court appreciates the quandary that the Sandiganbayan faced when it ordered its Division Clerk of
Court to call the meeting: ETPI has two sets of officers and, presumably, two corporate secretaries. And
given the stakes involved, the stockholders meeting would be contentious, to say the least, hence, the
need for an impartial referee to supervise and control the meeting.

Happily, the case of Board of Directors and Election Committee of SMB Workers Savings and Loan Asso.,
Inc. v. Tan, etc., et al.38 provides a solution to the Sandiganbayan's dilemma. There, this Court upheld the
creation of a committee empowered to call, conduct and supervise the election of the board of directors:

As regards the creation of a committee of three vested with the authority to call, conduct and
supervise the election, and the appointment thereto of Candido C. Viernes as chairman and
representative of the court and one representative each from the parties, the Court in the exercise
of its equity jurisdiction may appoint such committee, it having been shown that the Election
Committee that conducted the election annulled by the respondent court if allowed to act as such
may jeopardize the rights of the respondents.

In a proper proceeding a court of equity may direct the holding of a stockholders' meeting
under the control of a special master, and the action taken at such a meeting will not be set
aside because of a wrongful use of the court's interlocutory decree, where not brought to
the attention of the court prior to the meeting. (18 C.J.S. 1270.)

A court of equity may, on showing of good reason, appoint a master to conduct and
supervise an election of directors when it appears that a fair election cannot otherwise be
had. Such a court cannot make directions contrary to statute and public policy with respect
to the conduct of such election. (19 C.J.S. 41)

This Court also approved a similar action by the Securities and Exchange Commission in Sales v. Securities
and Exchange Commission.39
Such a committee composed of impartial persons knowledgeable in corporate proceedings would
provide the needed expertise and objectivity in the calling and the holding of the meeting without
compromising the Sandiganbayan or its officers. The appointment of the committee members and the
delineation of the scope of the duties of the committee may be made pursuant to an agreement by the
parties or in accordance with the provisions of Rule 9 (Management Committee) of the Interim Rules of
Procedure for Intra-Corporate Controversies insofar as they are applicable.

VI

And now, Africa's motion to cite the PCGG and its "accomplices" in contempt for calling and holding a
stockholders meeting to increase ETPI's authorized capital stock without this Court's authority and
despite the pendency of motions for reconsideration of the Sandiganbayan Resolution of December 13,
1996 granting the PCGG authority to cause the holding of such meeting. In the same motion, Africa asks
this Court to nullify the March 17, 1997 stockholders meeting which increased ETPI's authorized capital
stock on the grounds that he, an ETPI stockholder, was not notified of the meeting, and the PCGG voted
the sequestered ETPI shares despite the absence of evidence of dissipation of assets. Intervenor
AEROCOM has shared Africa's assertions.

As earlier stated, this Court, by Resolution of May 7, 1996, referred the PCGG's "VERY URGENT MOTION
FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS MEETING . . ." to the Sandiganbayan for
reception of evidence and resolution. The dispositive portion of said Resolution reads:

Taking account of all the foregoing, the Court Resolved to REFER the "VERY URGENT PETITION
FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS' MEETING FOR SOLE PURPOSE OF
INCREASING EASTERN'S AUTHORIZED CAPITAL STOCK" to the Sandiganbayan for reception of
evidence and resolution — WITH ALL DELIBERATE DISPATCH but no longer than sixty (60) days
from notice hereof — of the factual issues raised by the parties as herein set out, and such
others, factual or otherwise as are relevant, in order to decide the basic question in this
proceeding of the necessity and propriety of the holding of the special stockholders' meeting of
EASTERN for the "sole purpose of increasing ** (its) authorized capital stock" and the exercise by
the PCGG of the right to vote at said meeting.40 (Emphasis supplied)

Clearly, when the PCGG's "VERY URGENT PETITION TO HOLD SPECIAL STOCKHOLDERS MEETING . . . "
was referred to the Sandiganbayan, this Court gave the latter full authority to decide the issue of whether
a stockholders meeting should be held. Implicit in this authority was the power to grant (or deny) the
petition. There is thus no need for the parties to seek this Court's imprimatur to hold the same.

Africa's motion must thus be denied.

Even assuming arguendo that the holding of the meeting was contemptuous because the December 13,
1996 Sandiganbayan Resolution had not yet attained finality, it was the Sandiganbayan, and not this
Court, which was contemned. Consequently, it is the Sandiganbayan, and not this Court, which has
jurisdiction over the motion to declare the PCGG and "its accomplices" in contempt.

In whatever context it may arise, contempt of court involves the doing of an act, or the failure to
do an act, in such a manner as to create an affront to the court and the sovereign dignity with
which it is clothed. As a matter of practical judicial administration, jurisdiction has been felt
properly to rest in only one tribunal at a time with respect to a given controversy. Partly because
of administrative considerations, and partly to visit the full personal effect of the punishment on a
contemnor, the rule has been that no other court than the one contemned will punish a given
contempt.

The rationale that is usually advanced for the general rule that the power to punish for contempt
rests with the court contemned is that contempt proceedings are sui generic and are triable only
by the court against whose authority the contempts are charged; the power to punish for
contempt exists for the purpose of enabling a court to compel due decorum and respect in its
presence and due obedience to its judgments, orders and processes; and in order that a court may
compel obedience to its orders, it must have the right to inquire whether there has been any
disobedience thereof, for to submit the question of disobedience to another tribunal would
operate to deprive the proceeding of half its efficiency. 41

The above rule is not of course absolute as it admits exception "when the entire case has already been
appealed [in which case] jurisdiction to punish for contempt rests with the appellate court where the
appeal completely transfers to proceedings thereto or where there is a tendency to affect the status
quo or otherwise interfere with the jurisdiction of the appellate court."42 This exception does not,
however, apply to Africa's motion since at the time he filed it on April 1, 1997 before this Court, his
petition in G.R. No. L-147214 assailing the December 17, 1996 Resolution of the Sandiganbayan had not
yet been filed.

The motion to nullify the March 17, 1997 stockholders meeting must likewise be denied for lack of
jurisdiction. Such motion is but an incident to Sandiganbayan Civil Case No. 0130.43 As such, jurisdiction
over it pertains exclusively and originally to the Sandiganbayan.

Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of the
Commission regarding "the Funds, Moneys, Assets, and Properties Illegally Acquired or
Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their
Close Relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees" whether civil
or criminal are lodged within the "exclusive and original jurisdiction of the Sandiganbayan" and
all incidents arising from, incidental to, or related to, such cases necessarily fall likewise
under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari
exclusively by the Supreme Court.44

This is another reason for the denial of the motion to cite the PCGG and its "accomplices" in contempt.

VII

FINALLY, the question on the validity of the PCCG's voting the Class "A" shares to increase the authorized
capital stock of ETPI.

In his petition in G.R. No. 147214, Africa faults the Sandiganbayan for failing to acknowledge, in its
Resolution of February 16, 2001, the Decisions of this Court declaring that his shares in ETPI45 and those
of AEROCOM46 and POLYGON (Polygon Investors & Managers, Inc.)47 were not sequestered. Hence, so he
contends, they, and not the PCGG, should have been allowed to vote their respective shares during the
meeting.
Two matters require clarification at this point. First, that this Court rendered decisions holding that the
shares of Africa, AEROCOM and POLYGON are not or are no longer sequestered is of little consequence
since the decisions were promulgated after the Sandiganbayan issued its resolution granting the PCGG
authority to call and hold the stockholders meeting to increase the authorized capital stock. At that time,
the shares were presumed to have been regularly sequestered. The more fundamental question that
confronts this Court is: Was the PCGG entitled to vote the sequestered shares in the stockholders meeting
of March 17, 1997?

Second, the PCGG correctly argues that Africa has no cause of action to claim on behalf of AEROCOM and
POLYGON that these two companies are entitled to vote their respective shares in the stockholders
meeting to increase ETPI's authorized capital stock. The claim is personal to AEROCOM and POLYGON.
Nevertheless, this does not preclude Africa from invoking his own right as a "small stockholder" of ETPI
to vote in the stockholders meeting for the purpose of increasing ETPI's authorized capital stock. The
PCGG maintains, however, that it is entitled to vote said shares because this Court, by its claim,
recognized in PCGG v. SEC, supra, that ETPI's assets were being dissipated by the BAN (Benedicto, Africa,
Nieto) Group, thus:

Under the Management of Cable and Wireless ETPI grew and prospered. But when its dividends,
which were paid in dollars to the BAN Group, began to run into millions, said group also started to
intervene in the corporation's operations and management. Requests for employment of family
relatives and high salaries for them were made. The BAN Group likewise placed the majority of
their individual stockholdings in three separate companies, namely: Aerocom Investors, Universal
Molasses, and Polygon, so that in 1986, the ownership of the Class "A" stocks of the corporation
was as follows:

Roberto S. Benedicto - 3.3


percent
Universal Molasses Corp. - 16.6
percent
Manuel Nieto, Jr. - 2.2
percent
Nieto's relatives - 3.3
percent
Aerocom Investors and - 17.5
Managers Inc. percent
Jose Africa - 2.2
percent
Africa's relatives - .3
percent
Polygon Investors and - 17.5
Managers Inc. percent

By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and relatives had
grown to the astronomical sum of P784,185,198.00. Cash dividends paid to them as of 1986 had
amounted to P225,845,000.00 even as another P180,000,000.00 is due them for 1987, for a grand
total of P405,845,000.00. In 1984, cash dividends to the BAN Group, et al. in the amount of $1M
were remitted to the United States.

Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as Chairman
and his son, Victor Africa as President, earned from ETPI as of 1987 more than P57M. Likewise in
1987, ETPI paid to Jose L. Africa P1,200,000.00 as "professional fees" and Manuel H. Nieto, Jr.,
another P1,200,000.00 as "allowances".48

As stated early on, however, the foregoing narration does not constitute a finding of fact.

The PCGG further submits that the Sandiganbayan found prima facie evidence for the issuance of the writ
of sequestration covering the Class "A" shares of ETPI. Such reliance on the Sandiganbayan's ruling is
misplaced because the issue is not whether there is prima facie evidence to warrant sequestration of the
shares, but whether there is prima facie evidence showing that the shares are ill-gotten and whether there
is evidence of dissipation of assets to warrant the voting by the PCGG of sequestered shares. As to the latter
issue, the Sandiganbayan held in the affirmative in this wise:

x x x [T]he propriety and legality of allowing the PCGG to cause the holding of a stockholders'
meeting of the ETPI for the purpose of electing a new Board of Directors or effecting changes in
the policy, program and practices of said corporation (except for the specified purpose of
amending the right of first refusal clause in ETPI's Articles of Incorporation and By Laws)
and impliedly to vote the sequestered shares of stocks has been upheld by the Supreme Court in the
case of "PCGG vs. SEC, PCGG vs. Sandiganbayan, et al.", G.R. No. 82188, promulgated June 30, 1988 x
x x.49 (Emphasis supplied)

The Sandiganbayan proceeded to quote the following pronouncement of this Court in PCGG v. SEC:

But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from holding
the stockholders meeting for the specified purpose of amending the "right of first refusal" clause in
ETPI's Articles of Incorporation and By-Laws, We find the general injunction imposed by it on the
PCGG to desist and refrain from calling a stockholders meeting for the purpose of electing a new
Board of Directors of effecting substantial changes in the policy, program or practice of the
corporation to be too broad as to taint said order with grave abuse of discretion. Said order
completely ties the hands of the PCGG, rendering it virtually helpless in the exercise of its power of
conserving and preserving the assets of the corporation. Indeed, of what use is the PCGG if it cannot
even do this? x x x.50 (italics and underscoring supplied)

The Sandiganbayan, however, misread this Court's ruling in the said SEC case. One of the issues raised
therein was whether the Sandiganbayan committed grave abuse of discretion in enjoining the PCGG from
calling and holding stockholders meetings and voting the sequestered ETPI shares for the purpose of
deleting the "right of first refusal" clause in ETPI's articles of incorporation. In its therein assailed Order,
the Sandiganbayan temporarily restrained the PCGG "from calling and/or holding stockholders meetings
and voting the sequestered shares thereat for the purpose of amending the articles or by-laws of ETPI, or
otherwise effecting substantial changes in policy, programs or practices of said corporation."

Clearly, the temporary restraining order was too broad. The Sandiganbayan should have limited itself to
restraining the calling and holding of the stockholders meeting and voting the shares for the sole purpose
of amending the "right of first refusal" clause. It was thus necessary for this Court to make the
underscored ruling above. No declaration therein was made that in all instances the PCGG may vote the
sequestered shares to effect substantial changes in ETPI policy, programs or practices. In lifting the
injunction on that aspect, this Court merely recognized "that situations may arise wherein only through
an act of strict ownership can the PCGG be able to prevent the dissipation of the assets of the sequestered
corporation or business."51

Moreover, if, as the Sandiganbayan assumed, this Court had come to a conclusion in the SEC case that the
BAN Group was guilty of dissipation and that, consequently, the PCGG was entitled to vote the
sequestered shares, this Court would not have bothered, in its Resolution of May 7, 1996, to direct said
court to decide whether the PCGG has the right to vote in the stockholders meeting for the purpose of
increasing ETPI's authorized capital stock.52

This Court notes that, like in Africa's motion to hold a stockholders meeting (to elect a board of
directors), the Sandiganbayan, in the PCGG's petition to hold a stockholders meeting (to amend the
articles of incorporation to increase the authorized capital stock), again failed to apply the two-tiered
test. On such determination hinges the validity of the votes cast by the PCGG in the stockholders meeting
of March 17, 1997. This lapse by the Sandiganbayan leaves this Court with no other choice but to remand
these questions to it for proper determination.

IN SUM, this Court rules that:

(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to amend the
Articles of Incorporation for the purpose of increasing the authorized capital stock unless there is a prima
facie evidence showing that said shares are ill-gotten and there is an imminent danger of dissipation.

(2) The ETPI Stock and Transfer Book should be the basis for determining which persons have the right
to vote in the stockholders meeting for the election of the ETPI Board of Directors.

(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and his controlled
corporations under the Compromise Agreement, provided that the shares are first registered in the name
of the PCGG. The PCGG may not register the transfer of the Malacañang and the Nieto shares in the ETPI
Stock and Transfer Book; however, it may vote the same as conservator provided that the PCGG satisfies
the two-tiered test devised by the Court in Cojuangco v. Calpo, supra.

(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated in the ETPI Articles
of Incorporation substantially contemporaneous to, but not before, the election of the ETPI Board of
Directors.

(5) Members of the Sandiganbayan shall not participate in the stockholders meeting for the election of
the ETPI Board of Directors. Neither shall a Clerk of Court be appointed to call such meeting and issue
notices thereof. The Sandiganbayan shall appoint, or the parties may agree to constitute, a committee of
competent and impartial persons to call, send notices and preside at the meeting for the election of the
ETPI Board of Directors; and

(6) This Court has no jurisdiction over the motion to cite the PCGG and "its accomplices" in contempt and
to nullify the stockholders meeting of March 17, 1997.
WHEREFORE, this Court Resolved to REFER the petitions at bar to the Sandiganbayan for reception of
evidence to determine whether there is a prima facie evidence showing that the sequestered shares in
question are ill-gotten and there is an imminent danger of dissipation to entitle the PCGG to vote them in a
stockholders meeting to elect the ETPI Board of Directors and to amend the ETPI Articles of
Incorporation for the sole purpose of increasing the authorized capital stock of ETPI.

The Sandiganbayan shall render a decision thereon within sixty (60) days from receipt of this Resolution
and in conformity herewith.

The motion to cite the PCGG and its "accomplices" and to nullify the ETPI Stockholders Meeting of March
17, 1997 filed by Victor Africa is DENIED for lack of jurisdiction.

SO ORDERED.

Republic of the Philippines


SUPREME COURT

EN BANC

G.R. No. 152578 November 23, 2005

REPUBLIC OF THE PHILIPPINES, Represented by the Presidential Commission on Good


Government,Petitioner,
vs.
ESTATE OF HANS MENZI (Through its Executor, MANUEL G. MONTECILLO), EMILIO T. YAP,
EDUARDO M. COJUANGCO, JR., ESTATE OF FERDINAND MARCOS, SR., and IMELDA R.
MARCOS, Respondents.

x----------------------------------------- x

G.R. No. 154487

EDUARDO M. COJUANGCO, JR., Petitioner,


vs.
REPUBLIC OF THE PHILIPPINES, Respondent.

x ------------------------------------x

G.R. No. 154518

ESTATE OF HANS M. MENZI (Through its Executor, Manuel G. Montecillo), and HANS M. MENZI
HOLDINGS AND MANAGEMENT, INC. (HMHMI), Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, (represented by the PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT), Respondents.

DECISION
Tinga, J.:

In the hope-filled but problem-laden aftermath of the EDSA Revolution, President Corazon C. Aquino
issued Executive Order (EO) No. 1, creating the Presidential Commission on Good Government (PCGG)
tasked with, among others, the recovery of all ill-gotten wealth accumulated by former President
Ferdinand Marcos, his immediate family, relatives, subordinates and close associates. This was followed
by EO Nos. 2 and 14, respectively freezing all assets and properties in the Philippines in which the former
President, his wife, their close relatives, subordinates, business associates, dummies, agents or nominees
have any interest or participation, and defining the jurisdiction over cases involving the ill-gotten wealth.
Pursuant to the executive orders, several writs of sequestration were issued by the PCGG in pursuit of the
reputedly vast Marcos fortune.

Following a lead that Marcos had substantial holdings in Bulletin Publishing Corporation (Bulletin), the
PCGG issued a Writ of Sequestration dated April 22, 1986, sequestering the shares of Marcos, Emilio T.
Yap (Yap), Eduardo M. Cojuangco, Jr. (Cojuangco), and their nominees and agents in Bulletin.

This was followed by another Writ of Sequestration issued on February 12, 1987, this time sequestering
the shares of stock, assets, properties, records and documents of Hans Menzi Holdings and Management,
Inc. (HMHMI).

The Republic then instituted before the Sandiganbayan on July 29, 1987, a complaint for reconveyance,
reversion, accounting, restitution and damages entitled "Republic of the Philippines v. Emilio T. Yap,
Manuel G. Montecillo, Eduardo M. Cojuangco, Jr., Cesar C. Zalamea, Ferdinand E. Marcos and Imelda R.
Marcos" and docketed as Civil Case No. 0022. The complaint substantially averred that Yap knowingly
and willingly acted as the dummy, nominee or agent of the Marcos spouses in appropriating shares of
stock in domestic corporations such as the Bulletin, and for the purpose of preventing disclosure and
recovery of illegally obtained assets. It also averred that Cesar Zalamea (Zalamea) acted, together with
Cojuangco, as dummies, nominees and/or agents of the Marcos spouses in acquiring substantial shares in
Bulletin in order to prevent disclosure and recovery of illegally obtained assets, and that Zalamea
established, together with third persons, HMHMI which acquired Bulletin.

On March 10, 1988, the complaint was amended joining Cojuangco as Zalamea’s co-actor instead of mere
collaborator. The complaint was amended for the second time on October 17, 1990. The amendment
consisted of dropping Zalamea as defendant in view of the Deed of Assignment dated October 15, 1987
which he executed, assigning, transferring and ceding to the Government the 121,178 Bulletin shares
registered in his name. These shares, as will be explained forthwith, formed part of the 214,424.5 shares
(214 block) which became the subject of a case1 that reached this Court.

The Second Amended Complaint also included the Estate of Hans M. Menzi (Estate of Menzi), through its
executor, Atty. Manuel G. Montecillo (Atty. Montecillo), as one of the defendants.

The issues presented for resolution as stated in the Sandiganbayan’s Pre-Trial Order dated November 11,
1991 were:

1) Whether or not the sale of 154,470 shares of stock of Bulletin Publishing Co., Inc., subject of this case
by the late Hans M. Menzi to the U.S. Automotive Co. Inc. is valid and legal; and
2) Whether or not the shares of stock of Bulletin Publishing Co. Inc. registered and/or issued in the name
of defendants Emilio T. Yap, Eduardo Cojuangco, Jr., Cesar Zalamea and the late Hans M. Menzi (and/or
his estate and/or his holding company, HM Holding & Investment Corp.) are ill-gotten wealth of the
defendants Marcos spouses.

Make of record the oral manifestation of Atty. Estelito Mendoza, counsel for defendant Eduardo
Cojuangco. That: (a) whether or not the said 154,470 shares of stock of Bulletin Publishing Co. Inc. legally
belonged to the late Hans Menzi before he sold the same to U.S. Automotive Co. Inc. and (b) whether or
not plaintiff Republic is entitled to the same, should also be threshed out during the trial on the merits. 2

After protracted proceedings which spawned a number of cases3 that went up to this Court, the
Sandiganbayan rendered a Decision4 dated March 14, 2002,5 the dispositive portion of which states:

WHEREFORE, judgment is hereby rendered:

1. Declaring that the following Bulletin shares are the ill-gotten wealth of the defendant Marcos spouses:

A. The 46,626 Bulletin shares in the name of defendant Eduardo M. Cojuangco, Jr., subject of the
Resolution of the Supreme Court dated April 15, 1988 in G.R. No. 79126.

Pursuant to alternative "A" mentioned therein, plaintiff Republic of the Philippines through the PCGG is
hereby declared the legal owner of these shares, and is further directed to execute, in accordance with
the Agreement which is entered into with Bulletin Publishing Corporation on June 9, 1988, the necessary
documents in order to effect transfer of ownership over these shares to the Bulletin Publishing
Corporation.

B. The 198,052.5 Bulletin shares in the names of:

No. of Shares

Jose Y. Campos 90,866.5

Eduardo M. Cojuangco, Jr. 90,877

Cesar C. Zalamea 16,309

Total 198,052.5

which they transferred to HM Holdings and Management, Inc. on August 17, 1983, and which the latter
sold to Bulletin Publishing Corporation on February 21, 1986. The proceeds from this sale are frozen
pursuant to PCGG’s Writ of Sequestration dated February 12, 1987, and this writ is the subject of the
Decision of the Supreme Court dated January 31, 2002 in G.R. No. 135789.

Accordingly, the proceeds from the sale of these 198,052.5 Bulletin shares, under Philtrust Bank Time
Deposit Certificate No. 136301 dated March 3, 1986 in the amount of P19,390,156.68 plus interest
earned, in the amount of P104,967,112.62 as of February 28, 2002, per Philtrust Bank’s Motion for Leave
to Intervene and to consign the Proceeds of Time Deposits of HMHMI, filed on February 28, 2002 with the
Supreme Court in G.R. No. 135789, are hereby declared forfeited in favor of the plaintiff Republic of the
Philippines.

2. Ordering the defendant Estate of Hans M. Menzi through its Executor, Manuel G. Montecillo, to
surrender for cancellation the original eight Bulletin certificates of stock in its possession, which were
presented in court as Exhibits …., which are part of the 212,424.5 Bulletin shares subject of the
Resolution of the Supreme Court dated April 15, 1988 in G.R. No. 79126.

3. Declaring that the following Bulletin shares are not the ill-gotten wealth of the defendant Marcos
spouses:

a. The 154,472 Bulletin shares sold by the late Hans M. Menzi to U.S. Automotive Co., Inc., the sale thereof
being valid and legal;

b. The 2,617 Bulletin shares in the name of defendant Emilio T. Yap which he owns in his own right; and

c. The 1 Bulletin share in the name of the Estate of Hans M. Menzi which it owns in its own right.

4. Dismissing, for lack of sufficient evidence, plaintiff’s claim for damages, and defendants’ respective
counterclaims.

SO ORDERED.6

In the present consolidated petitions, the foregoing Sandiganbayan Decision is assailed on different
grounds.

The Republic, in G.R. No. 152758, assails the afore-quoted Decision insofar as it declared as not ill-gotten
wealth of the Marcos spouses the 154,472 shares (154 block) sold by Menzi to U.S. Automotive Co., Inc.
(US Automotive) and dismissed the Republic’s claim for damages.

In G.R. No. 154487, Cojuangco questions paragraphs 1 and 2 of the Sandiganbayan Decision.

In G.R. No. 154518, on the other hand, the Estate of Menzi imputes grave error and misinterpretation of
facts and evidence against the Sandiganbayan in declaring that the 46,626 Bulletin shares in the name of
Cojuangco, and the 198,052.5 shares (198 block) in the names of Jose Campos (Campos), Cojuangco and
Zalamea are ill-gotten wealth of the Marcoses.

The three blocks of Bulletin shares of stock subject of these consolidated petitions are:

1. 154,472 shares (154 block) sold by the late Menzi and/or Atty. Montecillo to US Automotive on May 15,
1985 for ₱24,969,200.09;

2. 198,052.50 (198 block) issued and registered in the names of Campos, Cojuangco, and Zalamea which
were transferred to HMHMI and subsequently sold by HMHMI (through Atty. Montecillo) to Bulletin on
February 21, 1986 for ₱23,675,195.85; and

3. 214,424.5 shares (214 block) issued and registered in the names of Campos, Cojuangco, and Zalamea
which were the subject of the unanimous Resolution of this Court, through Mr. Chief Justice Claudio
Teehankee, in Bulletin v. PCGG7 (Teehankee Resolution) dated April 15, 1988 and the Sandiganbayan
Resolutions dated January 2, 1995 and April 25, 1996 in Civil Case No. 0022.

For clarity of presentation, the 154 block, which is the subject of the Republic’s petition in G.R. No.
152578, is treated separately from the 198 and 214 blocks, which are the subjects of the petitions in G.R.
No. 154487 and G.R. No. 154518.

154 Block

In 1957, Menzi purchased the entire interest in Bulletin from its founder and owner, Mr. Carson Taylor. In
1961, Yap, owner of US Automotive, purchased Bulletin shares from Menzi and became one of the
corporation’s major stockholders.

On April 2, 1968, a stock option was executed by and between Menzi and Menzi and Co. on the one hand,
and Yap and US Automotive on the other, whereby the parties gave the each other preferential right to
buy the other’s Bulletin shares.

On April 22, 1968, the stockholders of Bulletin approved certain amendments to Bulletin’s Articles of
Incorporation, consisting of some restrictions on the transfer of Bulletin shares to non-stockholders.8 The
amendments were approved by the Board of Directors of Bulletin and by the Securities and Exchange
Commission (SEC).

Several years later, on June 5, 1984, Atty. Amorsolo V. Mendoza (Atty. Mendoza), Vice President of US
Automotive, executed a promissory note with his personal guarantee in favor of Menzi, promising to pay
the latter the sum of P21,304,921.16 with interest at 18% per annum as consideration for Menzi’s sale of
his 154 block on or before December 31, 1984.

One day after Menzi’s death on June 27, 1984, a petition for the probate of his last will and testament was
filed in the Regional Trial Court (RTC) of Manila, Branch 29, by the named executor, Atty. Montecillo, and
docketed as Special Proceeding No. 84-25244.

On January 10, 1985, Atty. Montecillo filed a motion praying for the confirmation of the sale to US
Automotive of Menzi’s 154 block. The probate court confirmed the sale in its Order dated February 1,
1985.

Accordingly, on May 15, 1985, Atty. Montecillo received from US Automotive two (2) checks in the
amounts of ₱21,304,778.24 and ₱3,664,421.85 in full payment of the agreed purchase price and interest
for the sale of the 154 block. On the same day, Atty. Montecillo signed a company voucher acknowledging
receipt of the payment for the shares, indicating on the dorsal portion thereof the certificate numbers of
the 12 stock certificates covering the 154 block, the number of shares covered by each certificate and the
date of issuance thereof.

Atty. Montecillo also wrote on the lower portion of the promissory note executed by Atty. Mendoza the
words "Paid May 15, 1985 (signed) M.G. Montecillo, Executor of the Estate of Hans M. Menzi."

Upon these facts, the Sandiganbayan ruled that the sale of the 154 block to US Automotive is valid and
legal. According to the Sandiganbayan, the sale was made pursuant to the stock option executed in 1968
between the parties to the sale. Negotiations took place and were concluded before Menzi’s death, and
full payment was made only after the probate court had judicially confirmed the sale.

The Sandiganbayan dismissed the Republic’s claim, based on the affidavit of Mariano B. Quimson, Jr.
(Quimson) dated October 9, 1986, that the sale should be nullified because US Automotive only acted as a
dummy of Marcos who was the real buyer of the shares. According to the court, the Republic failed to
overcome its burden of proof since Quimson’s affidavit was not corroborated by other evidence and was,
in fact, refuted by Atty. Montecillo.

In its Memorandum9 dated July 7, 2003 in G.R. No. 152578, the Republic argues that the Sandiganbayan
failed to take into account the fact that despite Menzi’s claim that he acquired Bulletin in 1957, he did not
include any Bulletin shares in his Last Will and Testament executed in 1977. Atty. Montecillo, the
executor of Menzi’s estate, likewise did not include any Bulletin share in the initial inventory of Menzi’s
properties filed on May 15, 1985. Neither were any Bulletin shares declared by Atty. Montecillo even
after the probate court issued an Order dated November 17, 1992 for the submission of an updated
inventory of Menzi’s assets.

The Republic claims that despite these circumstances, coupled with Quimson’s affidavit detailing how
Marcos used his dummies to conceal his control over Bulletin, as well as the letters and correspondence
between Marcos and Menzi indicating that Menzi consistently updated Marcos on the affairs of Bulletin,
the Sandiganbayan ruled that the 154 block was not ill-gotten wealth of the Marcoses. The
Sandiganbayan’s erroneous inference allegedly warrants a review of its findings.

Moreover, the Republic disputes the Sandiganbayan’s ruling that it heavily leaned on the affidavit of
Quimson without presenting any other corroborating evidence.10 It argues that in the proceedings before
the PCGG, Quimson was subjected to cross-examination by the lawyers of Bulletin which is controlled by
Yap. Further, the evidence it presented before the PCGG purportedly showing that the transfer of Bulletin
shares from Menzi to US Automotive was undertaken due to pressure exerted by Marcos on Menzi should
have been taken into account.

The Republic insists that the sale between Menzi and U.S. Automotive was a sham because the parties
failed to comply with the basic requirement of a deed of sale in the transfer of the subject shares. Further,
a number of questions were allegedly not resolved, such as: (a) Who was the seller of the subject
shares—the late Menzi as the alleged owner or Atty. Montecillo as then special administrator and later
executor of Menzi’s estate; (b) If Menzi sold the shares, was there a need to confirm the sale? If Atty.
Montecillo was the one who sold them, what was his authority to sell the said shares?

The Republic also contends that Menzi and Yap were both dummies of the late President Marcos, used by
the latter in order to conceal his interest in Bulletin. Hence, the 154 block should also have been declared
ill-gotten wealth and forfeited in favor the Government.

The foregoing allegedly warrants the award of damages in favor of the Republic which the Sandiganbayan
erroneously failed to do.

The Republic, therefore, prays that the Sandiganbayan Decision, insofar as it declares the sale of the 154
block to be valid and legal, be reconsidered and judgment accordingly rendered declaring the 154 block
as ill-gotten wealth, forfeiting the same or the proceeds thereof in favor of the Republic, and awarding
actual, temperate and nominal damages in the Court’s discretion, moral damages in the amount of 50
Billion Pesos, exemplary damages of 1 Billion Pesos, attorney’s fees, litigation expenses and treble judicial
costs.

The Estate of Menzi and HMHMI filed a Memorandum11 dated March 10, 2005, averring that the Republic
failed to adduce evidence of any kind that the 154 block was ill-gotten wealth of the Marcoses. They claim
that the requirements for a valid transfer of stocks, namely: (1) there must be delivery of the stock
certificate; (2) the certificate must be indorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (3) the transfer must be recorded in the books of the
corporation in order to be valid against third parties, have all been met.

The parties to the sale allegedly confirm the indorsement and delivery of the Bulletin shares of stock
representing the 154 block. The requirement that the transfer be recorded in the books of the
corporation was also met because US Automotive exercised its rights as shareholder.

It is also allegedly immaterial whether it was Menzi or Atty. Montecillo who indorsed the stock
certificates. If it was Menzi, then his indorsement was an act of ownership; if it was Montecillo, then the
indorsement was pursuant to the duly executed General Power of Attorney filed with the SEC and,
subsequently, on the basis of his authority as Special Administrator and Executor of Menzi’s estate.

In his Memorandum12 dated May 10, 2005, Yap also maintains that the sale of the 154 block was valid and
legal. The non-inclusion of the said block of shares in the inventory of Menzi’s estate was purportedly due
to the fact that the same had, by then, been sold to US Automotive. Yap also claims that Atty. Montecillo
was duly authorized to effect the sale by virtue of the General Power of Authority and the Last Will and
Testament executed by Menzi.

The absence of a deed of sale evidencing the sale is allegedly not irregular because the law itself does not
require any deed for the validity of the transfer of shares of stock, it being sufficient that such transfer be
effected by delivery of the stock certificates duly indorsed. At any rate, a duly notarized Receipt covering
the sale was executed.13

Moreover, the BIR certified that the Estate of Menzi paid the final tax on capital gains derived from the
sale of the 154 block and authorized the Corporate Secretary to register the transfer of the said shares in
the name of US Automotive. Further, a stock certificate covering the 154 block was issued to US
Automotive by Quimson himself as Corporate Secretary.

Sec. 63 of the Corporation Code provides the requisites for a valid transfer of shares:

Sec. 63. Certificate of stock and transfer of shares.—The capital stock of stock corporations shall be
divided into shares for which certificates signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance
with the by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation 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. [Emphasis supplied]

The Corporation Code acknowledges that the delivery of a duly indorsed stock certificate is sufficient to
transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the
parties. In order to bind third persons, however, the transfer must be recorded in the books of the
corporation.

Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid as
the Republic posits. In fact, as has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals,14 the
execution of a deed of sale does not necessarily make the transfer effective.

In that case, petitioners argued that by virtue of the deed of assignment, private respondents had
relinquished to them all their rights as stockholders of the bank. This Court, however, ruled that the
delivery of the stock certificate duly indorsed by the owner is the operative act that transfers the shares.
The absence of delivery is a fatal defect which is not cured by mere execution of a deed of assignment.
Consequently, petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be
voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned.

There appears to be no dispute in this case that the stock certificates covering the 154 block were duly
indorsed and delivered to the buyer, US Automotive. The parties to the sale, in fact, do not question the
validity and legality of the transfer.

The objection raised by the Republic actually concerns the authority of Atty. Montecillo, the executor of
Menzi’s estate, to indorse the said certificates. However, Atty. Montecillo’s authority to negotiate the
transfer and execute the necessary documents for the sale of the 154 block is found in the General Power
of Attorney executed by Menzi on May 23, 1984, which specifically authorizes Atty. Montecillo "[T]o sell,
assign, transfer, convey and set over upon such consideration and under such terms and conditions as he
may deem proper, any and all stocks or shares of stock, now standing or which may thereafter stand in
my name on the books of any and all company or corporation, and for that purpose to make, sign and
execute all necessary instruments, contracts, documents or acts of assignment or transfer."15

Atty. Montecillo’s authority to accept payment of the purchase price for the 154 block sold to US
Automotive after Menzi’s death springs from the latter’s Last Will and Testament and the Order of the
probate court confirming the sale and authorizing Atty. Montecillo to accept payment therefor. Hence,
before and after Menzi’s death, Atty. Montecillo was vested with ample authority to effect the sale of the
154 block to US Automotive.

That the 154 block was not included in the inventory is plausibly explained by the fact that at the time the
inventory of the assets of Menzi’s estate was taken, the sale of the 154 block had already been
consummated. Besides, the non-inclusion of the proceeds of the sale in the inventory does not affect the
validity and legality of the sale itself.

At any rate, the Sandiganbayan’s factual findings that the 154 block was sold to US Automotive while
Menzi was still alive, and that Atty. Montecillo merely accepted payment by virtue of the authority
conferred upon him by Menzi himself are conclusive upon this Court, supported, as they are, by the
evidence on record.16 As held by the Sandiganbayan:
… The sale was made pursuant to the Stock Option executed in 1968 between the parties to the sale,
considering the restrictions contained in Bulletin’s Articles of Incorporation as amended in 1968 limiting
the transferability of its shares. Negotiations for the sale took place and were concluded before the death
of Menzi. After his death, full payment of the entire consideration of the sale, principal and interest, was
made only after judicial confirmation thereof in the Probate Case. The transaction was duly supported by
the corresponding receipt, voucher, cancelled checks, cancelled promissory note, and BIR certification of
payment of the corresponding taxes due thereon.17

The Supreme Court is not a trier of facts. It is not our function to examine and weigh all over again the
evidence presented by the parties in the proceedings before the Sandiganbayan.18

It is also significant that even Quimson’s affidavit does not state, in a categorical manner, that Yap was a
Marcos dummy used by the latter to conceal his Bulletin shareholdings. In contrast, Quimson
unqualifiedly declared that Campos, Cojuangco and Zalamea were the former dictator’s nominees to
Bulletin.19

We, therefore, agree with the Sandiganbayan that the sale of the 154 block to US Automotive was valid
and legal.

198 and 214 blocks

HMHMI was incorporated on May 20, 1982 by Menzi, Campos, Cojuangco, Rolando C. Gapud (Gapud) and
Zalamea, with an authorized capital stock of ₱1,000,000.00 divided into 100,000 shares with par value of
P10.00 each.

A Deed of Transfer and Conveyance was executed by Menzi, Campos, Cojuangco and Zalamea on August
17, 1983, transferring the shares of stock registered in their names in various corporations to HMHMI in
exchange for 6,000,000 shares of the latter’s capital stock, subject to the approval by the SEC of HMHMI’s
Certificate of Increase of Capital Stock. The shares of stock transferred included the 198 block of Bulletin
shares, 90,866.5 of which were registered in the name of Campos; 90,877 in the name of Cojuangco; and
16,309 in the name of Zalamea.

On February 14, 1984, HMHMI amended its Articles of Incorporation by increasing its authorized capital
stock to ₱100,000,000.00 divided into 10,000,000 shares with par value of P10.00 per share.

On January 15, 1986, the law firm of Siguion Reyna, Montecillo & Ongsiako wrote a letter to Bulletin’s
corporate secretary, Atty. Mendoza, requesting that three (3) certificates of stock representing 90,866.5,
90,877, and 16,309 Bulletin shares be issued in favor of HMHMI in exchange for 21 certificates of stock in
HMHMI.

Atty. Mendoza acknowledged receipt of the 21 certificates of stock but replied that the transfer by
Campos, Cojuangco and Zalamea of their Bulletin shares to HMHMI cannot be recorded in the books of
Bulletin because it was made in violation of Bulletin’s Articles of Incorporation which provides
restrictions and limitations on the transferability of the shares of the company by its stockholders.
Bulletin, however, offered to buy the shares at the price fixed in the Articles of Incorporation. The offer
appears to have been accepted by HMHMI through its President, Atty. Montecillo.
Thus, on January 30, 1986, HMHMI’s Board of Directors passed a resolution approving the sale to Bulletin
of the 198 block and authorizing its President or Corporate Secretary to sign and execute the
corresponding deed of sale. Accordingly, a Deed of Sale was executed on February 21, 1986 by Atty.
Montecillo whereby HMHMI sold the 198 block to Bulletin for the amount of ₱23,675,195.85.

On April 22, 1986, the shares of Marcos, Yap, Cojuangco and their nominees or agents in the Bulletin were
sequestered by virtue of a Sequestration Order issued by the PCGG.

The SEC issued a certification to the effect that as of February 21, 1986, the total subscribed shares of
Bulletin was 756,861. Of these, 198,052.5 were treasury shares, leaving the total outstanding shares at
567,808.5. The stockholders of Bulletin and the shares of stock held by each of them were listed as
follows:

Name No. of Shares


Emilio T. Yap 2,617
Menzi Trust Fund 28,977
Estate of Hans M. Menzi 1
U.S. Automotive Co. Inc. 318,084
xxx xxx
Cesar Zalamea 121,178
Jose Campos 46,620.5
Eduardo Cojuangco 46,626
Xxx xxx
Total 567,808.5

On February 12, 1987, another Writ of Sequestration was issued by the PCGG, sequestering all the shares
of stock, as well as the assets, properties, records and documents of HMHMI. Because of this
Sequestration Order, the proceeds from the sale of the 198 block which were deposited with Philtrust
Bank were frozen.20

On March 16, 1987, the sequestration of the 2,617 Bulletin shares of Yap was lifted upon the latter’s
motion.

On April 14, 1987, the PCGG wrote a letter/order to the Corporate Secretary of Bulletin, asking for the
schedule of the annual stockholders’ meeting of the corporation because the sequestered shares
consisting of the 214 block will be voted by the Commission. This letter became the subject of a
petition21 filed by Bulletin with this Court questioning the validity of the PCGG’s letter/order and seeking
to compel PCGG to accept Bulletin’s offer of a cash deposit in the amount of ₱34,592,903.34 representing
the value of the 214 block of sequestered Bulletin shares. The Court issued a temporary restraining order.

On July 31, 1987, the PCGG received from Bulletin the amount of ₱8,173,506.06 as full payment of
46,620.5 Bulletin shares registered in the name of Campos. The receipt stated that "Mr. Jose Y. Campos
has waived the ownership of said shares in favor of the Republic of the Philippines through the
Presidential Commission on Good Government."

A Deed of Assignment was likewise executed by Zalamea on October 15, 1987, assigning and waiving in
favor of the Republic his rights to 121,178 Bulletin shares registered in his name. On the same day,
Bulletin issued in favor of PCGG a check in the amount of ₱21,244,926.96 as full payment of Zalamea’s
shares.

This Court, on April 15, 1988, issued the Teehankee Resolution, the dispositive portion of which
pertinently states:

2. Directing the Commission to accept the cash deposit of P8,174,470.32 offered by petitioner for the
46,626 sequestered shares in the name of Mr. Eduardo M. Cojuangco, Jr. expressly subject to the
alternative conditions (A and B) hereinabove set forth, and likewise directing the Commission to accept
the cash deposit, if it has not actually sold the Cesar C. Zalamea Bulletin shares to petitioner (supra, p. 13,
par [2]) of P21,244,926.96 for the sequestered shares of Bulletin in the name of Mr. Cesar Zalamea under
the same alternatives already mentioned; and

3. Remanding the case regarding the issue of ownership of the said sequestered Bulletin shares for
determination and adjudication to the Sandiganbayan.22

An agreement was thereafter executed between PCGG and Bulletin on June 9, 1988 regarding the 46,626
Bulletin shares of Cojuangco whereby PCGG accepted Bulletin’s deposit in the amount of ₱8,174,470.32,
subject to the alternatives set forth in the Teehankee Resolution, as follows:

Alternative "A"—To standby as full payment plus whatever interest earnings thereon upon final judgment
of the Court declaring the Republic of the Philippines as owners of the 46,626 shares, accompanied by the
corresponding original stock certificates, issued in the name of the government, duly endorsed in favor of
the Bulletin Publishing Corporation, free from liens and encumbrances; or

Alternative "B"—To immediately return to Bulletin Publishing Corporation the cash deposit in the
amount of P8,174,470.32 plus whatever interest earnings thereon upon final judgment by the Court
declaring that Mr. Eduardo Cojuangco, Jr. is the true owner of the 46,626 shares.23

With this factual backdrop, the Sandiganbayan ruled that Campos, Cojuangco and Zalamea were
nominees and dummies of Marcos. Hence, the 198 block which these nominees transferred to HMHMI
and which, in turn, were sold to Bulletin are ill-gotten wealth.

The Sandiganbayan anchored its finding on the Deposition of Campos taken on November 25, 1994
before the Philippine Consulate General in Vancouver, British Columbia, Canada, that he held shares in
Bulletin and HMHMI "per instruction of President Marcos;" that the beneficial owner of these shares
"must be President Marcos;" and that he received three (3) dividend checks from Bulletin "for the benefit
of President Marcos."

Based on the Deed of Assignment executed by Zalamea on October 15, 1987, wherein he manifested that
he "does not claim true and beneficial ownership" of the 121,178 Bulletin shares registered in his name
and that he voluntarily waived and assigned these shares in favor of PCGG, the Sandiganbayan concluded
that Zalamea could not have been a nominee of Menzi, as the latter’s estate claims, but of Marcos.

The Sandiganbayan likewise rejected Cojuangco’s contention that the Bulletin and HMHMI shares
registered in his name "were not acquired and held by him as dummy, nominee and/or agent of
defendants Ferdinand E. Marcos and Imelda Romualdez Marcos, but upon the request, and as nominee, of
the late Hans Menzi who owned and delivered to him said shares." According to the Sandiganbayan,
Cojuangco failed to present evidence necessary to establish his affirmative defense.

As regards the 214 block, the Sandiganbayan ruled that there is no longer any dispute concerning the
ownership of the 46,620.5 shares held by Campos and the 121,178 shares held by Zalamea in view of the
Teehankee Resolution and the fact that these shares have been waived and assigned to PCGG.

The Sandiganbayan went on to declare that the only remaining issue pertaining to Cojuangco’s claim to
his alleged portion of the 214 block should be resolved in favor of the Republic because of Cojuangco’s
consistent disavowal of any "proprietary interest in the shares which are the subject matter of the instant
case" and his claim that he held the shares as nominee of Menzi.

The Sandiganbayan further ruled that Yap’s shares, which were acquired by him in 1961 before Marcos
became President, are not ill-gotten wealth of the Marcoses. Moreover, the one (1) Bulletin share for
which dividend checks were issued to and received by the Estate of Menzi was deemed to belong to the
latter.

In G.R. No. 154487, petitioner Cojuangco assails paragraphs 1 and 2 of the Sandiganbayan Decision.
Allegedly, the Government does not claim that in acquiring the Bulletin shares registered in Cojuangco’s
name, the late President Marcos used government funds or resources. Cojuangco raises several issues,
namely: (a) Were the Bulletin shares, at any time, of government ownership? (b) Were the Bulletin shares
acquired by Marcos and, if so, did he use government funds to acquire them? (c) Did petitioner Cojuangco
act as the "dummy" or "nominee" of Marcos to acquire, or to conceal the acquisition of the shares by the
latter?

In the Memorandum for Eduardo M. Cojuangco, Jr.24 dated May 6, 2005, Cojuangco argues that the
Republic neither alleged nor presented evidence to prove that that the Bulletin shares registered in his
name were owned by the Republic but were taken by the Marcoses "by taking advantage of their public
office and/or using their powers, authority, influence, connections or relationship" or that they were
acquired by the Marcoses from Menzi with the use of government or public funds. Hence, the conclusion
should be sustained that the shares were owned by Menzi and never by the Republic, and no public funds
were used in their acquisition.

Cojuangco attacks the Sandiganbayan’s reliance on Quimson’s affidavit saying that it is hearsay because
Quimson was not presented in court to affirm the contents of his affidavit and was not subjected to cross-
examination as he had already passed away when Civil Case No. 0022 was tried. Quimson’s affidavit is
allegedly double hearsay insofar as it alleges that Marcos owned the Bulletin shares and that Cojuangco
was merely Marcos’ nominee because Quimson had no contact with Marcos and his knowledge of the
latter’s purported ownership of the Bulletin shares was merely relayed to him by Menzi.

Even the supposed corroborating evidence, consisting of the affidavits of Pedro Teodoro, Evelyn S.
Singson, Gapud, and Angelita Reyes, have allegedly been declared as having no probative value inasmuch
as the affiants did not take the witness stand and could not be cross-examined.

The Republic likewise allegedly failed to prove its contention that Bulletin issued checks in favor of
Campos, Cojuangco and Zalamea which were deposited into numbered accounts in Security Bank & Trust
Company owned by the Marcoses. Moreover, the dividend checks supposedly indorsed by Cojuangco in
blank do not conclusively demonstrate that they were indorsed in favor of the Marcoses.
On the other hand, there is allegedly sufficient evidence on record to prove that Cojuangco was a nominee
of Menzi. These documents consist of the testimony of Atty. Montecillo to the effect that, as far as he
knew, Cojuangco "really acted as nominee for the General," and the originals of the stock certificates
covering the Bulletin shares registered in Cojuangco’s name.

Cojuangco further avers that the allegation that the Bulletin shares were registered in his name upon the
request, and as nominee, of Menzi is a specific denial and not an affirmative defense as the
Sandiganbayan declared. As a specific denial, the allegation need not be proven unless the Republic
presents adequate evidence proving the allegations in its complaint which, Cojuangco insists, the
Republic failed to do.

He likewise argues that the Republic is not entitled to damages of any kind because it failed to establish
that it has any proprietary interest in the Bulletin shares registered in his name; that the said shares are
owned by the Marcoses; and that it suffered any pecuniary loss by reason of such ownership.

Based on these allegations, Cojuangco prays that he be declared the owner of the 46,626 Bulletin shares
registered in his name, together with all cash and stock dividends which have accrued in favor of said
shares from October 15, 1987, and ordering the PCGG to return the cash deposit of ₱8,174,470.32 plus
interest to Bulletin.

In its Memorandum25 dated March 17, 2005, the Republic maintains that Cojuangco has consistently
denied any proprietary interest in the Bulletin shares. Hence, he cannot claim ownership of the Bulletin
shares registered in his name. His allegation that that he was a nominee of Menzi was pleaded by way of
defense. Thus, he has the burden of proving this material allegation, set up as new matter, that the shares
were not his but Menzi’s.

Since the Bulletin shares were not included in the inventory of Menzi’s assets, it allegedly follows that
Cojuangco could not have been a nominee of Menzi who did not own the subject Bulletin shares.

As regards the contention that the Republic failed to show that the shares belong to the Government or
were acquired using public funds, the Republic maintains that Marcos acquired the Bulletin shares using
his political clout. His very act of participating in a business enterprise using nominees to conceal his
ownership of Bulletin shares is already a violation of the Constitution.

Furthermore, Campos and Zalamea, who, like Cojuangco, held shares in the 198 and 214 blocks, have
already surrendered and assigned their respective shares to the Government and acknowledged the right
of the Government over the Bulletin registered in their names. Such is allegedly a clear indication that
they acted as dummies of Marcos. The admission of Campos and Zalamea that their shares in the 214
block belonged to Marcos may allegedly be used to prove that the 198 block was likewise held by them as
dummies of the former dictator.

The Sandiganbayan also allegedly did not rely on the Teehankee Resolution to support its conclusion that
the 198 and 214 blocks are ill-gotten wealth but made its own finding after a full-blown trial at which all
the parties, except Cojuangco, presented their respective evidence.

Moreover, the evidence presented by the Republic allegedly preponderates in favor of its theory that the
Bulletin shares in the names of Campos, Cojuangco and Zalamea were actually held in trust for the benefit
of the Marcoses. Notably, the PCGG Resolution dated May 22, 1987, presented by the Republic as its
Exhibit "I" declares that Quimson and Teodoro, close associates of Menzi, stated under oath that when
Marcos allowed the Bulletin to reopen during Martial Law, Menzi was allowed only 20% participation,
and that Marcos put his shares in the names of Campos, Cojuangco and Zalamea.

Besides, Menzi did not execute any deed of trust in his favor as trustor and Campos, Cojuangco and
Zalamea as trustees. Neither did the Estate of Menzi claim that Campos, Cojuangco and Zalamea were
nominees of Menzi as no cross-claim was filed by the Estate of Menzi even as it claimed ownership of the
198 and 214 blocks.

In their Memorandum26 dated March 10, 2005 in G.R. Nos. 154487 and 154518, the Estate of Menzi and
HMHMI argue that the Sandiganbayan erred in not resolving the issue of the ownership of the 198 and
214 blocks. The Sandiganbayan instead allegedly relied on its misinterpretation of the Teehankee
Resolution to the effect that there is no longer any controversy as regards the ownership of the portion of
the 214 block held by Zalamea. According to said respondents, the Teehankee Resolution clearly directed
the Sandiganbayan to resolve the issue of ownership of both the Zalamea and Cojuangco portions of the
214 block.

Respondents Estate of Menzi and HMHMI also contend that the Quimson affidavit should have been
treated as having no probative value with respect to the 154 block and the 198 and 214 blocks alike. The
affidavit was allegedly not at all corroborated by the other documents presented by the Republic and
cited in the assailed Decision.

They insist that Campos, Cojuangco and Zalamea were nominees of Menzi, not dummies of Marcos,
because, as allegedly established during trial, the stock certificates covering the contested blocks of
shares were indorsed in blank and remained in Menzi’s possession. Even Campos allegedly testified that
he was never in possession of the stock certificates.

Assuming that Campos was indeed a Marcos dummy, his admission should apply solely to the Bulletin
shares registered in his name. Likewise, Zalamea allegedly never declared himself to be a Marcos
nominee, only that he does not claim true and beneficial ownership of the Bulletin shares recorded in his
name. The dividend checks for Zalamea’s shareholdings, in fact, allegedly indicate the Estate of Menzi as
the payee, proving that Zalamea was Menzi’s nominee.

Respondents Estate of Menzi and HMHMI further claim that the 198 and 214 blocks were not mentioned
in Menzi’s Last Will and Testament because Menzi knew of the impending promulgation of a decree
which would limit to only 20% the ownership of media enterprises by one person or family. Allegedly, in
order to get around this restriction, Menzi devised the nominee structure whereby he used three (3)
nominees to enable him to retain his 80% stake in Bulletin. Besides, there was allegedly a legal question
as to whether sequestered shares need to be declared for estate tax purposes in the meantime that a case
involving these shares was pending.

Said respondents finally posit that assuming that the 198 and 214 blocks are ill-gotten, the shares
themselves, and not merely the proceeds, should be forfeited in favor of the Government.

Yap, on the other hand, claims in his Memorandum27 dated May 10, 2005 filed in G.R. Nos. 154487 and
154518 that Cojuangco may not raise in his petition a new specific relief consisting of the prayer that he
be declared the owner of the 46,626 Bulletin shares registered in his name which Cojuangco never asked
for during the proceedings before the Sandiganbayan. Cojuangco is allegedly bound by his judicial
admission that he has no proprietary interest over the said Bulletin shares.

Purportedly, because of this judicial admission, Alternative B mentioned in the Teehankee Resolution
was eliminated. The only option which remained was, as held by the Sandiganbayan, to declare that the
Government is the legal owner of the shares and direct the PCGG to execute the necessary documents to
effect the transfer thereof in accordance with Alternative A.

As regards the prayer that the shares themselves be forfeited in favor of the Government, Yap contends
that this cannot be done because the Government is barred by the Constitution from acquiring ownership
of private mass media.

The Estate of Menzi and HMHMI should also not be allowed to claim the portion of the 214 block held by
Campos and Zalamea whose ownership has allegedly been settled by this Court in the Teehankee
Resolution.

Yap also claims that the Estate of Menzi and HMHMI have unlawfully concealed the stock certificates
representing a portion of the shares held by Campos and Zalamea. Their lawyers, specifically Atty.
Montecillo, have also allegedly staked an unfounded claim on the Bulletin shares in violation of their duty,
as lawyers of Bulletin for several years, to protect the latter’s interests.

Cojuangco filed a Reply Memorandum28 dated October 17, 2005, substantially reiterating his argument
that the Sandiganbayan failed to make a finding that the Bulletin shares are ill-gotten as defined by the
pertinent executive orders and that they were owned by the Marcoses. Consequently, he insists that there
is no basis for the Sandiganbayan’s conclusion that the Republic is the legal owner of the said shares.

The Republic also filed a Memorandum29 dated March 17, 2005 in G.R. No. 154518, averring that the
petition raises factual issues not proper in a petition for review under Rule 45 of the Rules of Court.

The Republic insists that the Decision of the Sandiganbayan relative to the 198 and 214 blocks was not
based on Quimson’s affidavit alone but on the totality of the evidence presented to support the complaint.
Quimson’s affidavit was allegedly given prominence because it related in detail how Campos, Cojuangco
and Zalamea came to be nominees of Marcos. The allegations in Quimson’s affidavit were allegedly
confirmed by Menzi’s Last Will and Testament, the initial inventory of his assets, the letters and
correspondence between Marcos and Menzi, Campos’ deposition, and the dividend checks issued to
Campos, Cojuangco and Zalamea even after they have supposedly transferred their Bulletin shares to
HMHMI.

Moreover, Atty. Montecillo did not institute any action against Campos, Cojuangco and Zalamea to
recover the shares. This allegedly indicates that the shares were not owned by Menzi and that Campos,
Cojuangco and Zalamea did not act as Menzi’s nominees.

As regards the claim that Menzi owned the shares registered in the names of Campos, Cojuangco and
Zalamea because the stock certificates covering them were in Menzi’s possession, the Republic maintains
that mere possession of the stock certificates does not operate to vest ownership on Menzi considering
that Campos already declared that Marcos owned those shares and Zalamea surrendered his shares to
the Government.
Furthermore, the Republic alleges that the Sandiganbayan had already ruled with finality that the Estate
of Menzi and HMHMI cannot recover the Campos and Zalamea portions of the 214 block. Specifically, in
the Resolution dated January 2, 1995, the Sandiganbayan declared that the Estate of Menzi cannot
recover the Campos shares because the latter, who was not a co-defendant in the case, had already
voluntarily surrendered the same to the PCGG. Zalamea’s shares could likewise not be recovered because
he was also not a party, either as defendant, cross-defendant or third-party defendant. Moreover, in
another Resolution dated July 10, 1993, the Sandiganbayan held that the Estate of Menzi has not pleaded
any claim of ownership over the Bulletin shares in the names of Campos, Cojuangco and Zalamea, much
less has it intervened to express any prejudice to it should any judgment be rendered for or against
Campos, Cojuangco and Zalamea.

We again affirm the ruling of the Sandiganbayan.

It should be noted at the outset that there is no more dispute as regards the Bulletin shares registered in
the name of Campos. In fact, Campos was not included as a defendant in Civil Case No. 0022. The Bulletin
shares registered in his name have been voluntarily surrendered to the PCGG and the proceeds thereof
have accordingly been forfeited in favor of the Government.

The Pre-Trial Order of the Sandiganbayan dated November 11, 1991 likewise does not mention as an
issue the ownership of the Campos-held Bulletin shares.

The same cannot be said, however, of the Bulletin shares registered in the name of Zalamea. Although he
was dropped as a party-defendant in the Second Amended Complaint dated October 17, 1990
purportedly by reason of the Deed of Assignment he executed on October 15, 1987, the Zalamea-held
shares are clearly still covered by the Teehankee Resolution remanding the issue on the ownership of the
sequestered Cojuangco and Zalamea shares for determination and adjudication by the Sandiganbayan.

Having said that, we now proceed to determine whether the Sandiganbayan committed reversible error
in rendering the assailed Decision.

As with the 154 block, the issues raised by the petitioners assailing the Sandiganbayan’s disposition of
the 198 and 214 blocks are largely factual and, therefore, generally beyond the scope of our review under
Rule 45 of the Rules of Court. Nonetheless, as will be shown in the following disquisition, there is no
cause for this Court to reverse the Sandiganbayan because the evidence on record amply supports its
findings and conclusions.

The 46,626 shares registered in the name of Cojuangco which formed part of the 214 block were declared
to be ill-gotten wealth based on the evidence presented by the Republic to show that Cojuangco acted as a
nominee of Marcos and on Cojuangco’s unsubstantiated allegation that he acted as a nominee not of
Marcos but of Menzi.

Cojuangco counters, however, that the allegation that he acted as Menzi’s nominee is a specific denial
which he does not have the burden of proving.

Notably, in the Answer of Defendant Eduardo M. Cojuangco, Jr. dated March 16, 1989, Cojuangco claimed
as part of his denial that "whatever shares of stock he may have in Bulletin Publishing Corporation
and/or H.M. Holdings and Management, Inc. were not acquired and held by him as dummy, nominee
and/or agent of defendants Ferdinand E. Marcos and Imelda Romualdez Marcos, but upon the request,
and as nominee, of the late Hans Menzi who owned and delivered to him said shares."30

Likewise, in his Pre-Trial Brief dated January 15, 1992, Cojuangco stated that "[I]n regard shares of stock
in the name of defendant Cojuangco in Bulletin Publishing Corporation and/or HM Holdings &
Management, Inc., he was never, and is not, a nominee of any other person but the late Brig. Gen. Hans M.
Menzi. Defendant Cojuangco therefore reiterates that he has no proprietary interest in the shares which
are the subject matter of the instant case. They properly belong to the estate of the late Hans Menzi."31

It is procedurally required for each party in a case to prove his own affirmative allegations by the degree
of evidence required by law. In civil cases such as this one, the degree of evidence required of a party in
order to support his claim is preponderance of evidence, or that evidence adduced by one party which is
more conclusive and credible than that of the other party. It is therefore incumbent upon the plaintiff
who is claiming a right to prove his case. Corollarily, the defendant must likewise prove its own
allegations to buttress its claim that it is not liable.32

The party who alleges a fact has the burden of proving it. The burden of proof33 may be on the plaintiff or
the defendant. It is on the defendant if he alleges an affirmative defense which is not a denial of an
essential ingredient in the plaintiff’s cause of action, but is one which, if established, will be a good
defense – i.e., an "avoidance" of the claim.34

In the instant case, Cojuangco’s allegations are in the nature of affirmative defenses which should be
adequately substantiated. He did not deny that Bulletin shares were registered in his name but alleged
that he held these shares not as nominee of Marcos, as the Republic claimed, but as nominee of Menzi. He
did not, however, present any evidence to support his claim and, in fact, filed a Manifestation dated July
20, 1999 stating that he "sees no need to present any evidence in his behalf."35

In contrast to Cojuangco’s consistent, albeit unsupported, disclaimer, the Sandiganbayan found the
Republic’s evidence to be preponderant. These pieces of evidence consist of: the affidavit of Quimson
detailing how Campos, Cojuangco and Zalamea became Marcos’ nominees in Bulletin; the affidavit
Teodoro relative to the circumstances surrounding the sale of Menzi’s substantial shares in Bulletin to
Marcos’ nominees and Menzi’s retention of only 20% of the corporation; the sworn statement of Gapud
describing the business interests and associates of Marcos and stating that Bulletin checks were
periodically issued to Campos, Cojuangco and Zalamea but were deposited after indorsement to Security
Bank numbered accounts owned by the Marcoses dividend checks issued to Campos, Cojuangco and
Zalamea even after their shares have been transferred to HMHMI; the Certificate of Incorporation,
Articles of Incorporation and Amended Articles of Incorporation of HMHMI showing that Bulletin shares
held by Campos, Cojuangco and Zalamea were used to set up HMHMI; Deed of Transfer and Conveyance
showing that Campos, Cojuangco, Zalamea and Menzi transferred several shares, including Bulletin
shares, to HMHMI in exchange for shares of stock in the latter which shares were not issued; the
Inventory of Menzi’s assets as of May 15, 1985 which does not include Bulletin shares; notes written by
Marcos regarding Menzi’s resignation as aide-de-camp to devote his time to run Bulletin’s operations and
the reduction of his shares in the corporation to 12%; and letters and correspondence between Marcos
and Menzi regarding the affairs of Bulletin.

These pieces of uncontradicted evidence suffice to establish that the 198 and 214 blocks are indeed ill-
gotten wealth as defined under the Rules and Regulations of the PCGG, viz:
Sec. 1. Definition.—(A) "Ill-gotten wealth is hereby defined as any asset, property, business enterprise or
material possession of persons within the purview of Executive Orders Nos. 1 and 2, acquired by them
directly, or indirectly thru dummies, nominees, agents, subordinates and/or business associates by any of
the following means or similar schemes:

(1) Through misappropriation, conversion, misuse or malversation of public funds or raids on the public
treasury;

(2) Through the receipt, directly or indirectly, of any commission, gift, share, percentage, kickbacks or
any other form of pecuniary benefit from any person and/or entity in connection with any government
contract or project or by reason of the office or position of the official concerned;

(3) By the illegal or fraudulent conveyance or disposition of assets belonging to the government or any of
its subdivisions, agencies or instrumentalities or government-owned or controlled corporations;

(4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other
form of interest or participation in any business enterprise or undertaking;

(5) Through the establishment of agricultural, industrial or commercial monopolies or other combination
and/or by the issuance, promulgation and/or implementation of decrees and orders intended to benefit
particular persons or special interests; and

(6) By taking undue advantage of official position, authority, relationship or influence for personal gain or
benefit.

Cojuangco’s disavowal of any proprietary interest in the Bulletin shares is conclusive upon him. His
prayer that he be declared the owner of the said shares, together with all the cash and stock dividends
which have accrued thereto since October 15, 1987, and that the PCGG be ordered to return the cash
deposit of ₱8,174,470.32 to Bulletin, therefore, has no legal basis and should perforce be denied.

In this connection, it should be said that Cojuangco apparently desisted from presenting evidence and
chose instead to stake his claim with the Estate of Menzi and HMHMI. As found by the Sandiganbayan,
however, the Estate of Menzi and HMHMI failed to prove their allegation that Campos, Cojuangco and
Zalamea were Menzi’s nominees. Neither did the Estate of Menzi and HMHMI institute an action to
recover the shares from Menzi’s nominees.

Significantly, even as they claimed ownership of the Bulletin shares in their Answer to the Republic’s
Second Amended Complaint, the Estate of Menzi and HMHMI did not file any cross-claim against the
purported Menzi nominees.

Quite revealing, too, is the fact that Campos, in his Answers to Direct Interrogatories36 taken before the
Consul General at the Philippine Consulate General in Vancouver, British Columbia, Canada on November
25, 1994, repeatedly declared that he owned a portion of the 198 block "per instruction of President
Marcos"37 and that he "became the shareholder, per instruction of President Marcos."38

Likewise, in his Deed of Assignment dated October 15, 1987, Zalamea manifested that he "does not claim
true and beneficial ownership" of the Bulletin shares registered in his name and that he voluntarily
waived and assigned the same in favor of the PCGG.
These declarations should have alerted the Estate of Menzi and HMHMI to file cross-claims against
Campos and Zalamea. The fact that they did not enfeebles their claim of ownership.

It is also important to note that the Estate of Menzi did not include the 198 and 214 blocks in the
inventory of the estate’s assets dated May 15, 1985. If, as it claims, the Bulletin shares of Campos,
Cojuangco and Zalamea were held by them as nominees of Menzi, then these shares should have been
included in the inventory. The justification advanced for the said non-inclusion, which is that the stock
certificates covering them were not in the possession of Atty. Montecillo, is nothing but a hollow pretext
given the fact that even after the certificates came to Atty. Montecillo’s possession in 1987, an updated
inventory declaring the said shares as part of Menzi’s estate was not filed pursuant to the Order of the
probate court dated November 17, 1992.

Further, the claim that Menzi would need dummies because of the impending promulgation of a decree
which would limit to 20% the ownership of media enterprises by one person or family is incredulous
since no such decree was ever issued.

Parenthetically, the fact that the stock certificates covering the shares registered under the names of
Campos, Cojuangco and Zalamea were found in Menzi’s possession does not necessarily prove that the
latter owned the shares. A stock certificate is merely a tangible evidence of ownership of shares of
stock.39 Its presence or absence does not affect the right of the registered owner to dispose of the shares
covered by the stock certificate. Hence, as registered owners, Campos and Zalamea validly ceded their
shares in favor of the Government. This assignment is now a fait accompli for the benefit of the entire
nation.

The contention that the sale of the 214 block to the Bulletin was null and void as the PCGG failed to obtain
approval from the Sandiganbayan is likewise unmeritorious. While it is true that the PCGG is not
empowered to sell sequestered assets without prior Sandiganbayan approval,40 this case presents a clear
exception because this Court itself, in the Teehankee Resolution, directed the PCGG to accept the cash
deposit offered by Bulletin in payment for the Cojuangco and Zalamea sequestered shares subject to the
alternatives mentioned therein and the outcome of the remand to the Sandiganbayan on the question of
ownership of these sequestered shares.

In light of the foregoing, we are not inclined to disturb the Sandiganbayan’s evaluation of the weight and
sufficiency of the evidence presented by the Republic and its finding that the evidence adduced by the
Estate of Menzi and HMHMI do not prove their allegation that Campos, Cojuangco and Zalamea are
Menzi’s nominees, taking into account the express admission of Campos that he owned the shares upon
Marcos’ instruction, the declaration of Zalamea that he does not claim true and beneficial ownership of
the shares, and the absolute dearth of evidence regarding Cojuangco’s assertion that he is Menzi’s
nominee.

With regard to the Republic’s prayer for damages, we find the same not supported by sufficient evidence.

An award of actual or compensatory damages requires proof of pecuniary loss. In this case, the Republic
has not proven with a reasonable degree of certainty, premised on competent proof and the best
evidence obtainable, that it has suffered any actual pecuniary loss by reason of the acts of the defendants.
Hence, actual or compensatory damages may not be awarded.41
On the other hand, while no proof of pecuniary loss is necessary in order that moral, temperate, nominal
and exemplary damages may be adjudicated, proof of damage or injury should nonetheless be adduced.
As found by the Sandiganbayan, however, the Republic failed to show the factual basis for the award of
moral damages and its causal connection to defendants’ acts. Thus, moral damages, which are designed to
compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer,42 may
not be awarded. Temperate, nominal, and exemplary damages, attorney’s fees, litigation expenses and
judicial costs may likewise not be adjudicated for failure to present sufficient evidence to establish
entitlement to these awards.

WHEREFORE, the petitions in G.R. No. 152578, G.R. No. 154487 and G.R. No. 154518 are DENIED.
The Decision of the Sandiganbayan dated March 14, 2002 is AFFIRMED.

SO ORDERED.

Republic of the Philippines


SUPREME COURT

FIRST DIVISION

G.R. No. 164588 October 19, 2005

NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME HOLDINGS, INC. and FERNANDO R.
ARGUELLES, JR., Petitioners
vs.
ROBERTO C. YUMUL, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioners assail the September 26, 2001 Decision1 of the Court of Appeals in CA-G.R. SP No. 61919,
affirming in toto the Decision of the Securities and Exchange Commission (SEC) En Banc in SEC Case No.
10-96-5455, as well as the July 16, 2004 Resolution2 denying the motion for reconsideration.

The facts of the case show that Nautica Canning Corporation (Nautica) was organized and incorporated
on May 11, 1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par
value of P100.00 per share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions
from its incorporators as follows:3

Name No. of Shares Amount Subscribed Amount Paid

ALVIN Y. DEE 89,991 P8,999,100 P4,499,100

JONATHAN Y. DEE 2 200 200

JOANNA D. LAUREL 2 200 200

DARLENE EDSA MARIE


GONZALES 2 200 200

JENNIFER Y. DEE 2 200 200

ROBERTO C. YUMUL 1 100 100

JERRY ANGPING 10,000 1,000,000 500,000

-------------- -------------------- -------------------

100,000 P10,000,000 P5,000,000

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General
Manager of Nautica with a monthly compensation of P85,000 and an additional compensation equal to
5% of the company’s operating profit for the calendar year.4 On the same date, First Dominion Prime
Holdings, Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to
Purchase5 up to 15% of the total stocks it subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment6 was executed between First Dominion Prime Holdings,
Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The
deed stated that the 14,999 "shares were acquired and paid for in the name of the ASSIGNOR only for
convenience, but actually executed in behalf of and in trust for the ASSIGNEE."

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul
representing his 15% share.

After Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter7 to Dee requesting the latter
to formalize his offer to buy Yumul’s 15% share in Nautica on or before August 20, 1996; and demanding
the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same.
Dee, through Atty. Fernando R. Arguelles, Jr., Nautica’s corporate secretary, denied the request claiming
that Yumul was not a stockholder of Nautica.

On September 6, 19968 and September 9, 1996,9 Yumul requested that the Deed of Trust and
Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be
allowed to inspect its books and records.

Yumul’s requests were denied allegedly because he neither exercised the option to purchase the shares
nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend
received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer
that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the
certificate of stocks corresponding thereto be issued in his name.10

On October 12, 2000, the SEC En Banc rendered the Decision,11 the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondents, as
follows:
1. Declaring petitioner as a stockholder of respondent Nautica;

2. Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and
Assignment dated June 22, 1995

3. Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to
the pertinent provisions of the Corporation Code; and

4. Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and
Assignment dated June 22, 1995.

SO ORDERED.12

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners’ motion for
reconsideration was denied in a Resolution dated July 16, 2004.

Hence, this petition.

At the outset, we note that petitioners’ recourse to this Court via a "combined" petition under Rule 65 and
an appeal under Rule 45 of the Rules of Court is irregular. A petition for review under Rule 45 is the
proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a
petition for certiorari under Rule 65. Under Rule 45, decisions, final orders or resolutions of the Court of
Appeals is appealed by filing a petition for review, which is a continuation of the appellate process over
the original case.13 On the other hand, the writ of certiorari under Rule 65 is filed when petitioner has no
plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. A
remedy is considered "plain, speedy and adequate" if it will promptly relieve the petitioner from the
injurious effects of the judgment and the acts of the lower court or agency.

In this case, petitioners’ speedy, available and adequate remedy is appeal via Rule 45, and not certiorari
under Rule 65. Notwithstanding petitioners’ procedural lapse, we shall treat the petition as one filed
under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one
share as the beneficial ownership belonged to Dee who paid for said share when Nautica was
incorporated. They presented China Banking Corporation Check No. A2620636 and Citibank Check No.
B82642 as proof of payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate
secretary of Nautica to issue a certificate of stock in Yumul’s name but in trust for Dee; and Stock
Certificate No. 6 with annotation "ITF Alvin Y. Dee" which means that respondent held said stock "In
Trust For Alvin Y. Dee".

We are not persuaded.

Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation
is not affected when such individual gives nominal ownership of only one share of stock to each of the
other four incorporators. This is not necessarily illegal.14 But, this is valid only between or among the
incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is
made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless,
subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in
interest. As between the corporation on the one hand, and its shareholders and third persons on the
other, the corporation looks only to its books for the purpose of determining who its shareholders are.15

In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of Nautica,
of one share of stock recorded in Yumul’s name, although allegedly held in trust for Dee. Nautica’s
Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC
indicated that Yumul was an incorporator and subscriber of one share.16 Even granting that there was an
agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is
binding only as between them. From the corporation’s vantage point, Yumul is its stockholder with one
share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged
real owner of the share, after Nautica’s incorporation.

We held in Ponce v. Alsons Cement Corp.17 that:

... [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. As between the corporation on one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated
by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of stock certificates[.]

Moreover, the contents of the articles of incorporation bind the corporation and its stockholders. Its
contents cannot be disregarded considering that it was the basic document which legally triggered the
creation of the corporation.18

The Court of Appeals, in affirming the factual findings of SEC, held that:

The evidence submitted by petitioners to establish trust is palpably incompetent, consisting mainly of the
self-serving allegations by the petitioners and the China Banking Corporation checks issued as payment
for the shares of stock of Nautica. Dee did not testify on the supposed trust relationship between him and
Yumul. While Atty. Arguelles testified, his testimony is barren of probative value since he had no first-
hand knowledge of the relationship in question. The isolated fact that Dee might have paid for the share
in the name of Yumul did not by itself make the latter a man of straw. Such act of payment is so nebulous
and equivocal that it can not yield the meaning which the petitioners would want to squeeze from it
without the clarificatory testimony of Dee.19

We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals.
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by
the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the specific
matters under their consideration,20 moreso if the same has been upheld by the appellate court, as in this
case.
Besides, other than petitioners’ self-serving assertion that the beneficial ownership belongs to Dee, they
failed to show that the subscription was transferred to Dee after Nautica’s incorporation. The conduct of
the parties also constitute sufficient proof of Yumul’s status as a stockholder. On April 4, 1995, Yumul was
elected during the regular annual stockholders’ meeting as a Director of Nautica’s Board of
Directors.21 Thereafter, he was elected as president of Nautica.22 Thus, Nautica and its stockholders
knowingly held respondent out to the public as an officer and a stockholder of the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every
director must own at least one share of the capital stock of the corporation of which he is a director.
Before one may be elected president of the corporation, he must be a director.23 Since Yumul was elected
as Nautica’s Director and as President thereof, it follows that he must have owned at least one share of
the corporation’s capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the
SEC correctly ruled that he has the right to inspect the books and records of Nautica,24 pursuant to
Section 74 of BP Blg. 68 which states that the records of all business transactions of the corporation and
the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member
of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of
excerpts from said records or minutes, at his expense.

As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of Nautica, petitioners
allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to
Purchase dated December 19, 1994. However, he failed to exercise the option, thus there was no cause or
consideration for the Deed of Trust and Assignment, which makes it void for being simulated or
fictitious.25

Anent this issue, the SEC did not make a categorical finding on whether Yumul exercised his option and
also on the validity of the Deed of Trust and Assignment. Instead, it held that:

... Although unsubstantiated, the apparent objective of the respondents’ allegation was to refute
petitioners claim over the shares covered by the Deed of Trust and Assignment. This must therefore be
deemed as nothing but a ploy to deprive petitioner of his right over the shares in question, which to us
should not be countenanced.26

Neither did the Court of Appeals rule on the issue as it only held that:

Petitioners also contend that the Deed is a simulated contract.

Simulation is "the declaration of a fictitious will, deliberately made by agreement of the parties, in order
to produce, for the purposes of deception, the appearances of a judicial act which does not exist or is
different with that which was really executed." The characteristic of simulation is that the apparent
contract is not really desired or intended to produce legal effect or in any way alter the juridical situation
of the parties.

The requisites for simulation are: (a) an outward declaration of will different from the will of the parties;
(b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive
third persons. These requisites have not been proven in this case.27
Thus, other than defining and enumerating the requisites of a simulated contract or deed, the Court of
Appeals did not make a determination whether the SEC has the jurisdiction to resolve the issue and
whether the questioned deed was fictitious or simulated.

In Intestate Estate of Alexander T. Ty v. Court of Appeals,28 we held that:

… The question raised in the complaints is whether or not there was indeed a sale in the absence of cause
or consideration. The proper forum for such a dispute is a regular trial court. The Court agrees with the
ruling of the Court of Appeals that no special corporate skill is necessary in resolving the issue of the
validity of the transfer of shares from one stockholder to another of the same corporation. Both actions,
although involving different property, sought to declare the nullity of the transfers of said property to the
decedent on the ground that they were not supported by any cause or consideration, and thus, are
considered void ab initio for being absolutely simulated or fictitious. The determination whether a
contract is simulated or not is an issue that could be resolved by applying pertinent provisions of
the Civil Code, particularly those relative to obligations and contracts. Disputes concerning the
application of the Civil Code are properly cognizable by courts of general jurisdiction. No special
skill is necessary that would require the technical expertise of the SEC. (Emphasis supplied)

Thus, when the controversy involves matters purely civil in character, it is beyond the ambit of the
limited jurisdiction of the SEC. As held in Viray v. Court of Appeals,29 the better policy in determining
which body has jurisdiction over a case would be to consider not only the status or relationship of the
parties, but also the nature of the question that is the subject of their controversy. This, however, is now
moot and academic due to the passage of Republic Act No. 8799 or The Securities Regulation Code which
took effect on August 8, 2000. The Act transferred from the SEC to the regional trial court jurisdiction
over cases involving intra-corporate disputes. Thus, whether or not the issue is intra-corporate, it is now
the regional trial court and no longer the SEC that takes cognizance of the controversy.

Considering that the issue of the validity of the Deed of Trust and Assignment is civil in nature, thus, under
the competence of the regular courts, and the failure of the SEC and the Court of Appeals to make a
determinative finding as to its validity, we are constrained to refrain from ruling on whether or not
Yumul can compel the corporate secretary to register said deed. It is only after an appropriate case is
filed and decision rendered thereon by the proper forum can the issue be resolved.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 26, 2001 Decision of the Court of
Appeals in CA-G.R. SP No. 61919, is AFFIRMED insofar as it declares respondent Roberto C. Yumul as a
subscriber and stockholder of one share of stock of Nautica Canning Corporation. The Decision
is REVERSED and SET ASIDEinsofar as it affirms the validity of the Deed of Trust and Assignment and
orders its registration in the Stock and Transfer Book of Nautica Canning Corporation.

SO ORDERED.

G.R. No. 172556 June 9, 2006

TRANS MIDDLE EAST (PHILS.), Petitioner,


vs.
SANDIGANBAYAN (5th Division) PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG),
The Board of Directors of Equitable PCI Bank, represented by its Chairman, CORAZON DELA PAZ
and SABINO ACUT, JR. (in his capacity as Corporate Secretary of Equitable PCI Bank), Respondents.
DECISION

TINGA, J.:

The integrity of the judicial system is founded on the soundness and rationality of the judgments
emanating from it. Decisions which are blatantly erroneous or founded on oblique reasoning inevitably
foment doubt within the dispirited public as to the impartiality and judiciousness of the magistrates
concerned. A critical eye must especially be cast on rulings which are not only wrong, haphazardly
grounded and obtusely one-sided, but fortuitously timed to engender the most advantage to the victor
and damage to the loser.

This Petition for Certiorari was filed by petitioner Trans Middle East (Phil.) Equities Inc. (TMEE), the
registered owners of erstwhile sequestered shares in Equitable-PCI Bank (EPCIB) assailing a
Resolution1 promulgated by the Sandiganbayan on 22 May 2006. The Resolution declared that a
Temporary Restraining Order (TRO) initially issued 14 years ago by this Court in cases that were closed
and terminated ten years ago, remained in effect, thus disqualifying TMEE from voting on its shares. The
annual stockholders meeting of EPCIB was scheduled on 23 May 2006, or the day after the Resolution
was promulgated, leaving questions as to the timing of the promulgation. In any event, the Resolution is
rooted in dubious and erroneous legal premises. The writ of certiorari lies.

A narration of the relevant antecedents ensues.

TMEE is the registered owner of 6,119,067 common shares of stock in the then PCBank, now Equitable-
PCI Bank. On 15 April 1986, these shares were sequestered by the Presidential Commission on Good
Government (PCGG) on the theory that as they actually belong to Benjamin Romualdez they constitute
illegally acquired wealth. Thereafter, a complaint, docketed as Civil Case No. 0035, was filed against
Romualdez by the PCGG before the Sandiganbayan for the recovery of these shares. Upon motion, TMEE
was allowed to intervene by the Sandiganbayan, and it sought to enjoin the PCGG from voting these
shares.

In 1991, the Sandiganbayan, upon motion of TMEE, issued resolutions that enjoined the PCGG from
voting the shares of TMEE and authorized TMEE in exercising its voting rights. These resolutions were
challenged before the Supreme Court, through petitions docketed as G.R. Nos. 105808 and 105809. The
Court then issued a TRO enjoining the implementation of the Sandiganbayan resolutions. Subsequently,
G.R. Nos. 105808 and 105809 were consolidated with several other cases, which were collectively
resolved the Court in a 23 January 1995 consolidated decision entitled Republic v. Sandiganbayan.2 The
Court resolved to maintain the TRO it issued enjoining the implementation of the 1991 orders of the
Sandiganbayan, decreeing as follows:

WHEREFORE, judgment is hereby rendered:

xxxx

B. CONFIRMING AND MAINTAINING the temporary restraining orders issued in G.R. Nos. 104883,
105170, 105206, 105808, 105809, 107233, and 107908, which shall continue in force and effect during
the continuation of the proceedings in the corresponding civil actions in the Sandiganbayan, subject to
the latter’s power to modify or terminate the same in the exercise of its sound discretion in light of such
evidence as may subsequently be adduced.3 (Emphasis supplied)
In a subsequent Resolution dated 22 July 1997, concerning pending motions for contempt against PCI
Bank and TMEE, the Court found it necessary to render the following rulings:

WHEREFORE, the Court Resolved:

xxxx

II. To DIRECT the Sandiganbayan, in reiteration of this Court’s prior directives, promptly to adjudicate
after due trial and proper proceedings the ultimate factual issue of whether or not the movant’s are the
legitimate, bona fide owners of the sequestered shares of stock (or the same constitute ill-gotten wealth
which should revert to and be forefeited in favor of the Republic, represented by the PCGG); and pending
such adjudication, resolve, with all deliberate dispatch but not later than sixty (60) days from notice of
this Resolution, the preliminary questions of whether there is prima facie factual foundation for the
sequestration of said stock, and for reasonable ground for apprehension of dissipation, loss or wastage of
assets if the holders of the sequestered stock are permitted to vote them;

III. To COMMAND TMEE and the PCGG forthwith to formally request the Sandiganbayan to set Civil Case
No. 0035 for hearing so that the issues set out in the immediately preceding paragraph hereof may be
determined with all deliberate dispatch; and

IV. To PROHIBIT from this date and until completion by the Sandiganbayan of its determination of the
preliminary questions set out in paragraph II hereof, the exercise of the right to vote pertaining to the
sequestered PCIB shares of stock in question by either the PCGG or TMEE at any meeting of the PCIB.4

Meanwhile, in January and February of 1997, TMEE filed two motions before the Sandiganbayan, both
urging the nullification or lifting of the writ of sequestration. It contended that no valid writ of
sequestration was ever issued, the sequestration having been effected through a letter dated 15 April
1986 addressed to EPCIB signed by only one PCGG commissioner, in violation of the PCGG Rules and
Regulations promulgated on 11 April 1986 that required writs of sequestration to be issued by at least
two commissioners. While TMEE argued that it was entitled to the actual custody and control of the
shares, it nonetheless manifested that it was willing to deposit these shares in escrow to allay any fear of
dissipation, loss or wastage of the subject shares, as well as on all future cash and stock dividends to be
declared on the said shares.

In April of 1998, PCGG filed with the Sandiganbayan a Motion for Issuance of Restraining Order, seeking
to enjoin the holding of the EPCIB stockholders meeting on 30 April 1998, on the ground that since the
1997 Supreme Court Resolution enjoined both the PCGG and TMEE from voting the sequestered stocks,
these shares stood to be diluted considering a proposal in the agenda to increase the authorized capital
stock of EPCIB, among others.

In a Resolution dated 29 April 1998, the Sandiganbayan dismissed these fears of the PCGG as unfounded.
Moreover, in the same Resolution the Sandiganbayan acknowledged that this Court had granted it the
power to modify or terminate this Court’s temporary restraining order in the exercise of its sound
discretion in the light of subsequent evidence. Accordingly, the Sandiganbayan proceeded to recognize
the right of TMEE to vote the shares of stock registered in its name, and to allow it to vote at the
stockholders meeting of 30 April 1998. The Sandiganbayan justified such recognition based on the
following premises: (a) that the PCGG which bore the burden of proof to show prima facie foundation for
the sequestration of TMEE shares had failed to timely do so; (b) that no damage or dissipation of the
sequestered shares would result should TMEE be allowed to vote them; and (c) that on its face, the writ
of sequestration was issued only by one PCGG Commissioner, in violation of the PCGG’s rules and
regulations promulgated on 11 April 1986. Thus, the Sandiganbayan ruled:

UNDER THE PREMISES:

(2) Philippine Commercial and Industrial Bank’s (PCIB) Chairman of the meeting and the secretary
thereof are directed to acknowledge the right of intervenor Trans Middle East (Phil.) Equities, Inc.
(TMEE) to vote the shares of stocks registered in its name and allow it to vote at the Stockholders’
Meeting scheduled on April 30, 1998 at 9:00 o’clock in the morning or at any other time to which said
stockholders’ meeting may be continued or reset. TMEE shall post a bond of ONE HUNDRED FIFTY
THOUSAND (P150,000.00) PESOS to answer for any undue damage that the plaintiff PCGG or the PCIB
shall suffer by reason of the sequestered shares of stock having been voted by and for said intervenor.5

The pending motion for nullification of the writ of sequestration was left unresolved then. On 10 January
2003, the Sandiganbayan issued a Resolution on the motions filed by TMEE in 1997 assailing the
sequestration order. The Sandiganbayan granted the motion to nullify the writ of sequestration of TMEE
shares, ruling that the sequestration order null and void as it was issued only by one PCGG Commissioner.
It cited the decision of this Court in Republic v. Sandiganbayan6 wherein it was ruled that a writ of
sequestration signed by only one PCGG commissioner was an obvious transgression of the PCGG
rules.7 At the same time, based on TMEE’s manifestation that it was willing to deposit the subject shares
in escrow to allay any fear of dissipation, loss or wastage of the subject shares, the Sandiganbayan
ordered that the shares be deposited in escrow with the Land Bank of the Philippines.

The Resolution decreed:

WHEREFORE, in view of the foregoing:

1) The "URGENT MOTION TO NULLIFY WRIT OF SEQUESTRATION" dated January 28, 1997 filed by
movant Trans Middle East (Phils.) Equities, Inc., is hereby GRANTED. Accordingly, Sequestration Order
No. 86-0056 dated April 15, 1986 is hereby declared null and void for having been issued by one PCGG
Commissioner only in direct contravention of Section 3 of the PCGG’s own Rules and Regulations.
Conformably, however, with the manifestation of the movant trans Middle East (Phils.) Equities, Inc.
itself, the Court will not order the return of its shares of stocks sequestered per Sequestration Order No.
86-0056 dated April 15, 1986, but orders that the same, including the interests earned thereon, to be
deposited with the Land Bank of the Philippines in escrow for the persons, natural or judicial, who shall
eventually be adjudged lawfully entitled thereto.8 (emphasis supplied)

PCGG filed motions for the reconsideration of both the 1998 and 2003 resolutions of the Sandiganbayan.
These motions have not yet been resolved to date. In the meantime, TMEE alleged that it has voted the
subject shares from 1998 up to 2005.9

On 2 May 2006, the PCGG filed a Motion for Execution of this Court’s Decision in G.R. Nos. 105808 and
105809, which was promulgated on 23 January 1995, or more than ten (10) years earlier. It was argued
therein that the 1995 Decision became final and executory by virtue of an entry of judgment dated 2 April
1996 which was allegedly received by the PCGG only on 2 March 2006.10 The purported receipt then only
of the entry of judgment came one (1) day after the EPCIB’s proxy validation deadline with closure of the
Record Book of EPCIB. Desiring to "exercise its voting rights as upheld by the Supreme Court", the PCGG
prayed of the Sandiganbayan to issue the appropriate order permitting it to vote the sequestered shares
or, in the alternative, to order "re-enforced and/or reissued" the TRO affirmed by the Supreme Court in
the 1995 Decision, which enjoined TMEE from voting the sequestered shares.

The Motion for Execution was heard on 5 May 2006, with TMEE making no appearance therein. The
Sandiganbayan ordered TMEE to comment on the said motion within ten (10) days.

Then on May 9, 2006, the PCGG filed an Urgent Ex-Parte Motion to Reinforce/Re-issue TRO, praying that
the Sandiganbayan issue an order re-enforcing and/or re-issuing the TRO issued by this Court in G.R. Nos.
105808 and 105809 and to execute the TRO under the Decision of the Supreme Court dated January 13,
1995. The PCGG argued that due to the fact that the stockholders meeting of EPCIB was scheduled on 23
May 2006, there was an urgent need for the re-enforcement or reissuance of the TRO affirmed by the
Supreme Court in its 1995 Decision. The PCGG also alleged that they had received reports that "the
Romualdezes are bent on disposing of their shares in EPCIB," and that should they "gain control of the
bank of (sic) electing themselves and/or their dummies/nominees to the helm of the bank, there is a
danger that the sequestered Equitable-PCI Bank shares might dissipate or be disposed of."11

On 22 May 2006, the Sandiganbayan issued the Resolution now assailed before the Court. The
Sandiganbayan acknowledged that the 1998 and 2003 Resolutions it earlier issued had indeed modified
the TRO issued by this Court, and that it had the authority, as granted by the Court, to modify or
terminate such TRO. Nevertheless, the Sandiganbayan ruled that both resolutions had not yet attained
finality since it itself still had to resolve the motions for reconsideration respectively related thereto filed
by the PCGG in 1998 and 2003. The Sandiganbayan opined that it could not re-issue the TRO since it was
this Court which issued the same. Still, the Sandiganbayan ruled that it could state that the two
resolutions modifying this Court’s TRO "have not attained finality as the motions for reconsiderations
thereto have not been resolved by [the Sandiganbayan]." The dispositive portion of the Resolution read:

WHEREFORE, pertinent to the instant motion, this Court hereby declares that considering that two
resolutions modifying the Supreme Court’s TRO have not attained finality as the motions for
reconsiderations filed thereto have not been resolved by this Court, the TRO, which was issued by the
Supreme Court disqualifying both the PCGG nominees, TMEE, PAH and PAR, from voting the sequestered
shares in the Equitable PCI Bank and Benguet Corporation, respectively is still existing and in full force
and effect.12

On the following day, 23 May 2003, TMEE filed the instant petition with this Court, with a prayer for the
issuance of a Temporary Restraining Order or a Writ of Preliminary Injunction "to preserve and maintain
the status quo wherein TMEE [was] allowed to vote the shares registered in its name and restraining the
respondents from enforcing the [22 May 2003 Sandiganbayan] Resolution granting the motion to re-
enforce/re-issue TRO, until the final resolution" of this Court.

In the absence of an injunctive order restraining the holding of the stockholders’ meeting on 23 May
2006, the meeting was held. Over the objections of TMEE, the election of a new Board of Directors of
EPCIB was held. Since TMEE was not allowed to vote its shares, it was unable to elect any representative
to the Board of Directors despite the fact that it maintained enough shares to be entitled to at least one
board seat. Thus, in its Supplemental Petition attached to a Motion for Leave of Court to File
Supplemental Petition, TMEE prayed for the issuance of a resolution directing the maintenance of the
status quo prior to the disputed election of directors; restraining the new Board and the officers elected
by them from further performing their functions; and directing the Chairman and Corporate Secretary to
recognize and allow the old Board and officers to serve in a hold-over capacity until further orders from
this Court.13

In the course of deliberating the matter of provisional relief sought by TMEE, the self-evident nature of
the correct resolution on the points of law emerged, and a consensus developed within the Court that the
petition be resolved immediately. The challenged Resolution is ostensibly grounded on an earlier
decision of this Court, yet is ultimately oblivious to the full import of that decision and other juridical
precedents as well. The Sandiganbayan in its Resolution likewise sub silencio contradicts earlier rulings it
had previously rendered in connection with the same issues, yet takes refuge from its inconsistency on its
very own inaction on two still pending motions for reconsideration filed eight and three years ago,
respectively.

Considering that all the respondents have duly filed their respective comments, there is no impediment
to the immediate resolution of the case on the merits. We are compelled to act promptly in light of the
highly disturbing circumstances attending this case. This Court cannot countenance unabashed trifling
with the judicial process, turn a blind eye on a patent simulacrum of judicial adjudication and allow a
glaring travesty of justice to go unchecked in time.

The assailed Resolution in this case, promulgated by the Sandiganbayan on 22 May 2006, has been used
to maximum benefit by the respondents, all connected with EPCIB, in an obvious corporate squabble
which saw its apotheosis in the long scheduled annual stockholders meeting on 23 May 2006 wherein
TMEE was deprived of its right to vote its shares despite the fact that it would have been able to elect at
least one (1) seat on the Board of Directors. The Court is also impelled by the recognition that the
annulment of the Sandiganbayan resolution would have a pronounced consequent effect on the financial
community, if not the banking public at large. Hence, the need to resolve this matter promptly.

We now accordingly adjudicate.

The Court first dispenses with procedural issues raised that are ultimately minor. The petition is
denominated as one for certiorari with prayer preliminary injunction and/or temporary restraining
order, under the ambit of Rule 65 of the Rules of Court. Respondent Board of Directors of EPCIB argue
that the failure of TMEE to file a motion for reconsideration with the Sandiganbayan precluded the
immediate resort to the special civil action of certiorari. As a general rule, certiorari as a special civil
action does not lie unless a motion for reconsideration is first filed before the respondent court. However,
this rule does not apply when special circumstances warrant immediate or more direct action.14 It is well-
settled that the availability of appeal does not foreclose recourse to the extraordinary remedies of
certiorari or prohibition where appeal is not adequate, or equally beneficial,

speedy and sufficient.15 Where the exigencies of the case are such that the ordinary methods of appeal
may not prove adequate—either in point of promptness or completeness, so that a partial if not a total
failure of justice could result—a writ of certiorari may still be issued.16

It cannot evade notice that the assailed Sandiganbayan Resolution was promulgated one (1) day before
the scheduled stockholders meeting of EPCIB. Evidently, TMEE could no longer have relied on the
Sandiganbayan to reverse itself literally overnight, in time for the meeting. The filing of a motion for
reconsideration would not have been an adequate or speedy remedy for TMEE. Hence, resort to the
special civil action of certiorari without filing a motion for reconsideration is justified under the
circumstances.
The more consequential procedural objection lies in the failure of TMEE in its petition to pray for the
annulment of the 22 May 2006 Sandiganbayan Resolution despite the denomination of the petition as one
for certiorari, and the arguments therein that the Sandiganbayan acted with grave abuse of discretion in
rendering the Resolution. On this failure, the respondents in their respective comments argue that the
petition, which was accompanied by a prayer for writ of preliminary injunction and/or TRO, is effectively
an original action for injunction beyond the jurisdiction of this Court.

TMEE, in its Supplemental Petition filed seven (7) days after the filing of the petition, did subsequently
pray for the nullification of the Sandiganbayan resolution on the ground of grave abuse of discretion.
TMEE deserves some blame for failing to include such prayer in its original petition, yet given the
attendant circumstances, it would be an act of triviality to dismiss the petition on that ground alone. For
one, even assuming that the petition is indeed an original action for injunction, it was ruled in Del Mar v.
Pagcor17 that "this Court has the discretionary power to take cognizance of the petition at bar if
compelling reasons, or the nature and importance of the issues raised, warrant the immediate exercise of
its jurisdiction."18 Indeed, such compelling reasons, as adverted to before, are present in this case.

More fundamentally, it is evident from the allegations in the petition, replete with imputations of grave
abuse of discretion on the part of the Sandiganbayan when it promulgated its resolution, that the nature
of the petition is one for certiorari, with injunction sought only as an ancillary relief. The nature of an
action, as well as which court or body has jurisdiction over it, is determined based on the material
allegations contained in the petition.19 Any doubts as to whether TMEE seeks the annulment of the
Sandiganbayan resolution are cleared by the Supplemental Petition, which expressly seeks such relief.

The Court is also inclined to view this defect with liberality, considering that TMEE had only one (1)
calendar day to prepare the petition, which sought to vindicate the exercise of its voting rights in the
EPCIB stockholders meeting, which was enjoined by the Sandiganbayan resolution promulgated just the
day before such election. The forced haste under which the petition was prepared cannot be attributed to
the fault of TMEE, and any resulting errors in the petition that are of the non-fatal variety can be
overlooked.

Respondents, particularly the EPCIB Board of Directors, ascribe a few other procedural errors on the part
of the petitioner, but these are so minor that they do not merit the attention of the Court. Suffice it to say,
they do not adduce a compulsory rule that would mandate the dismissal of the petition contrary to the
discretion of the Court to do otherwise.

We now turn to the merits of the case.

The assailed Sandiganbayan resolution was occasioned by an "Urgent Ex-Parte Motion to Reinforce/Re-
issue TRO" filed by the PCGG, which prayed for the issuance of an order re-enforcing and/or re-issuing
the TRO issued by this Court in G.R. Nos. 105808 and 105809. The sort of relief sought is unconventional
to say the least. No such remedy is provided for under the rules of procedure, although it is not expressly
barred. The uniqueness of the relief sought should nonetheless be cause for skepticism on the part of the
court hearing the claim. Procedural rules exist to provide a methodical system that would facilitate the
judicious disposition of cases. A recourse that finds no authorization or support under the rules could in
fact be aimed to subvert orderly procedure, an end that runs contrary to the interest of justice.

The judicial duty, when confronted with such a pleading as the "motion for the
reinforcement/reissuance" of the PCGG, is to look beyond the verbiage and ascertain the real nature of
the action on which the prayer is founded. In this case, it is ineluctable that what the PCGG sought
through its motion was injunctive relief that would refrain TMEE from exercising its voting rights in the
2004 EPCIB stockholders’ meeting, or other meetings for that matter. While the legal basis for such
prayer is suggested on the continued recognition of a provisional remedy granted a long time ago, the
ultimate goal of the motion is to secure injunctive relief. As such, the rules on injunction must apply.

The relevant antecedent facts actually point to three successive recourses to injunctive relief which were
availed of in this case. The first was the 1986 order of sequestration, sequestration being in itself a form
of a provisional remedy, an extraordinary measure intended to prevent the destruction, concealment or
dissipation of sequestered properties and, thereby, to conserve and preserve them, pending the judicial
determination in the appropriate proceeding of whether the property was in truth ill-gotten.20

The second injunctive relief involved in this case came in the form of the TRO issued by this Court in 1992
in G.R. Nos. 105808 and 105809, restraining the implementation of the 1992 Sandiganbayan order
allowing TMEE to vote its shares. The right to the TRO is grounded on the subsistence of the
sequestration order.

The same TRO issued in G.R. Nos. 105808 and 105809 was reaffirmed in the 1995 Supreme Court
Decision in Republic v. Sandiganbayan, an unusual step in itself considering that normally, a provisional
injunctive order survives only as long as the case wherein it was issued. But since the said TRO related to
pending incidents in Civil Case No. 0035 before the Sandiganbayan, the Court ceded control over the TRO
to the anti-graft court, with a specific grant of authority on the latter to "to modify or terminate the same
in the exercise of its sound discretion in light of such evidence as may subsequently be adduced". The
Sandiganbayan did just that through its 1998 and 2003 Resolutions which respectively recognized
TMEE’s rights to vote the shares and nullified the writ of sequestration.

The third mode of injunctive relief involved herein was the PCGG’s motion for the "re-enforcement or
reissuance" of the earlier Supreme Court TRO. Palpably, this motion prayed for the reaffirmation of the
TRO granted by the Supreme Court in G.R. Nos. 105808 & 105809, cases which were closed and
terminated nearly 10 years ago; but at the same time effectively sought to enjoin the 1998 and 2003
Sandiganbayan Resolutions, praying as the PCGG did that TMEE be denied the right to vote its shares
notwithstanding the two Sandiganbayan resolutions.

For injunctive relief to avail to the PCGG, it must be able to demonstrate the existence of a clear legal right
to be entitled to such relief.21 In the absence of a clear legal right, the issuance of the injunctive relief
constitutes grave abuse of discretion.22 There could only be two putative sources of such legal right of the
PCGG — the 1986 sequestration order and the 1995 Decision of this Court which affirmed the 1992 TRO
issued by the Supreme Court. Yet closer scrutiny of either reveals no foundational recognition of a clear
legal right of the PCGG.

It is settled that as a general rule, the registered owner of the shares of a corporation, even if they are
sequestered by the government through the PCGG, exercises the right and the privilege of voting on
them.23 The PCGG as a mere conservator cannot, as a rule, exercise acts of dominion by voting these
shares.24 The registered owner of sequestered shares may only be deprived of these voting rights, and the
PCGG authorized to exercise the same, only if it is able to establish that (1) there is prima facie evidence
showing that the said shares are ill-gotten and thus belong to the State; and (2) there is an imminent
danger of dissipation, thus necessitating the continued sequestration of the shares and authority to vote
thereupon by the PCGG while the main issue is pending before the Sandiganbayan.25
Clearly, the existence of the writ of sequestration alone would not legally justify barring TMEE from
voting its shares. Such preclusion may only occur if there is prima facie evidence showing that the said
shares are ill-gotten and there is an imminent danger of dissipation. The Sandiganbayan or any other
court has yet to pronounce any findings to those effects. In fact, the Sandiganbayan, in its 1998
Resolution, instead declared that TMEE possessed "a prima facie right" as owner of the registered owner
of the sequestered shares, and that there appeared to be "no strong grounds for apprehension of
dissipation or loss of assets of TMEE."26 Concerns over dissipation have likewise been assuaged that the
shares have been deposited in escrow with the Land Bank of the Philippines on the initiative of TMEE
itself. In any event, the nullification in 2003 of the very writ of sequestration by the Sandiganbayan
further militates against any recognition that the sequestration order established a clear legal right that
entitled the PCGG to injunctive relief.

We now examine whether the legal consequences of the 1995 Decision of the Court provide a clear legal
right to injunctive relief to the PCGG.

An examination of the dispositive portion of the 1995 Decision insofar as it pertains to TMEE puts in
doubt whether its "execution" should have resulted in barring TMEE from voting its shares in the 2006
stockholders meeting. While the 1995 Decision maintained the earlier TRO barring TMEE from voting its
shares, it also authorized the Sandiganbayan "to modify or terminate the same in the exercise of its sound
discretion in light of such evidence as may subsequently be adduced."

In that sense, the 1995 Decision consisted of two (2) phases. The first phase consists of the affirmation of
the TRO, a stance that subsisted as a matter of default. The second phase, however, consists of either the
modification or termination of the TRO by the Sandiganbayan in light of the evidence subsequently
adduced. Should the condition set in the second phase – modification or termination by the
Sandiganbayan – then the first phase is ended, and the affirmation of the TRO can no longer be
acknowledged as the default action.

There is no question that the Sandiganbayan did modify the TRO by virtue of its 1998 and 2003
Resolutions. The 1998 Resolution "acknowledge[d] the right of intervenor Trans Middle East (Phil.)
Equities, Inc. (TMEE) to vote the shares of stocks registered in its name." The 2003 Resolution went
even further in declaring null and void the 1986 sequestration order. Both resolutions thoroughly
explained the reasons for granting favorable reliefs to TMEE.27 The 1998 Resolution even specifically
invoked the 1995 Decision of this Court that categorically declared that the Sandiganbayan had the
power to modify or terminate the restraining order in the exercise of its sound discretion in the light of
such evidence as may be subsequently adduced.28

Respondent Board of Directors contest the argument that the 1998 Resolution either lifted or terminated
the 1992 TRO, alleging that the dispositive portion therein29 merely allowed TMEE to votes it shares for
the stockholders meeting on 30 April 1998, and not at other stockholders’ meetings held in previous
years. This claim is belied by a close look at the dispositive portion of the 1998 Resolution, which
directed the then PCI Bank to "xxx acknowledge the right of [TMEE] to vote the shares of stocks
registered in its name and allow it to vote at the Stockholders’ Meeting scheduled on April 30, 1998".30

As evidenced by the use of the conjunctive "and", there were two directives contained in that order,
namely: that the right of TMEE to vote the shares of stocks registered in its name; and to allow TMEE to
vote at the 1998 stockholders’ meeting. The first directive, mandating the recognition of TMEE’s right to
vote its shares, is not subjected to any limitation as to time or particular circumstance. Neither did the
Sandiganbayan’s discussion in the body of the 1998 Resolution support the view that the right of TMEE to
vote the shares was limited to the 1998 stockholders meeting.

Respondents are generally silent as to the effect of the 2003 Resolution nullifying the writ of
sequestration. Yet the import of that ruling is equally important to this case.

The 2003 Resolution nullifying the sequestration order over TMEE’s shares was based on the fact, of
which there appears to be no serious contest, that the said order, dated 15 April 1986, was signed by only
one PCGG commissioner in violation of the PCGG Rules and Regulations promulgated on 11 April
1986.31 The 2003 Resolution particularly cited the Court’s 1998 Decision in Republic v.

Sandiganbayan,32 penned by Chief Justice Panganiban, which categorically ruled that "the writ [of
sequestration] must bear the signatures of two commissioners, because their signatures are the best
evidence of their approval thereof."33 The Court also noted that the PCGG Rules took effect on 11 April
1986, and that "the signing of sequestration orders by two commissioners had already been encouraged
after April 11, 1986."34

The binding effect of the same provision of the PCGG Rules on the PCGG after 11 April 1986 was also
affirmed in the 1996 ruling in Republic v. Sandiganbayan,35 also penned by Chief Justice Panganiban.
Quoting the same provision requiring that the writ of sequestration may be issued upon the authority of
at least two commissioners, the Court said that the provision was "couched in clear and simple language
[and] leaves no room for interpretation".

The finding of the Sandiganbayan that the writ of sequestration was null and void was material to the
determination whether the PCGG had the right to the injunctive relief it sought. This point is especially
relevant, since if the sequestration order against TMEE is declared null and void, the earlier TRO will
become functus officio. The TRO cannot continue to exist if the sequestration order is null and void from
the beginning. Based on the 2003 Sandiganbayan Resolution, the sequestration order against TMEE is
deemed void as of 15 April 1986, or more than 20 years ago. Not only the clarity, but the very existence of
the legal right on which the PCGG grounds its right to relief became controverted as a result of the 2003
Resolution.

These twin resolutions of the Sandiganbayan pose a critical impediment to a determination that the PCGG
had a clear legal right to protect that would justify injunctive relief in its favor. At the very least, these
resolutions, issued within the bounds of authority granted by this Court to the Sandiganbayan, becloud
the continued efficacy to this day of the 1992 TRO; at most, they confirm that the 1992 TRO no longer
subsists. The Court is inclined towards the latter view. Clearly, it would be proper to assert that the 1998
and 2003 Resolutions of the Sandiganbayan were issued not only in compliance with but in execution and
implementation of the 1995 Decision of the Court. Considering that the Sandiganbayan had already
modified or terminated the restraining order, pursuant to the authority granted it by this Court, it may be
very well be that there is nothing left in the 1995 Decision to execute. At bare minimum, considering the
accomplished modification and virtual termination of the restraining order as of 2003, execution of the
1995 Decision in 2006 cannot possibly contemplate the revival of the TRO.

Obviously, the Sandiganbayan failed to consider these points when it rendered the assailed Resolution. It
does not even appear that the Sandiganbayan evaluated the PCGG’s motion within the frame of mind that
a clear legal right must exist to entitle the PCGG’s prayer. Instead, it engaged in a mechanical application
of technicalities in a manner that failed to consider the more crucial issues at hand.
There is an admitted convenience in simply pronouncing, as the Sandiganbayan did, that since the
motions for reconsideration to the 1998 and 2003 Resolutions had not been resolved, the efficacy of
those resolutions cannot yet be recognized. It cannot be denied though that the two resolutions are
properly characterized as interlocutory orders, as they do not finally dispose of Civil Case No. 0035.
In Valarao v. Pascual,36 the Court contended with the question of whether respondents therein were
bound to respect the authority of a special administrator on the ground that the interlocutory order
appointing such administrator was not yet final and executory because of a pending motion for
reconsideration. The Court held:

[R]espondents cannot disobey the reasonable exercise of the authority of a special administrator on the
dubious ground that the order appointing petitioner Valarao as special administratrix had not in the
meantime become final and executory because of a pending motion for reconsideration filed by them.
The fallacy of this reasoning is apparent, for an interlocutory order is not instantly appealable and
therefore there is no period nor action to suspend or interrupt by a motion for reconsideration; it is even
well settled that a special civil action for certiorari does not suspend the immediate enforceability of an
interlocutory order absent a temporary restraining order or an injunction. In the same manner, the
appointment of a special administrator being an interlocutory order is not interrupted by a motion for
reconsideration and thus must be obeyed as the proceedings in the probate court progress.37

The same characteristics of the interlocutory order in Valarao apply in this case. Since the orders
recognizing TMEE to vote its shares and nullifying the writ of sequestration are both unappealable, they
can only be assailed through a special civil action for certiorari, the filing of which however does not ipso
facto inhibit the effectivity of the assailed order unless specifically enjoined. For this reason, it cannot be
said that the 1998 and 2003 Resolutions, interlocutory as they are in character, are not yet susceptible to
enforcement during the motions for reconsideration therefor.

It also bears notice that from the time the 1998 Resolution recognized the right of TMEE to vote its shares
until eight (8) years later, no serious challenges were posed against the right of TMEE to vote those
shares by reason of the pending motion for reconsideration. There is some dispute as to whether during
the last eight years of EPCIB stockholder meetings, TMEE was actually able to formally vote its
shares38 or merely consented to a common slate of nominees previously agreed upon to negate the need
to conduct an actual meeting.39 Yet whatever the fact may be, these stockholders meetings and election of
the Board of Directors were conducted to the satisfaction of TMEE, which was able to successfully elect at
least one nominee to the Board. Those circumstances do not bear the mark of TMEE being deprived of the
right to vote its shares in the stockholders meetings from 1998 to 2005, when the contrary should have
resulted if the position of the respondents were to be believed.

For all intents and purposes, the 1998 and 2003 Resolutions had been respected prior to the current year
by the Sandiganbayan and the parties. Given the pending motions for reconsideration, theoretically it is
still within the power of the Sandiganbayan to reverse or modify the 1998 and 2003 resolutions. Yet if
the Sandiganbayan were so minded to modify or reverse the two earlier resolutions, it should do so
directly and explicitly, not only tangentially or by implication as it actually did, and at that based on
premises which contradict the predicates on which its 1998 and 2003 Resolutions are anchored. In other
words, it may reverse its earlier rulings only on the evidentiary foundations prescribed by this Court in
its 1995 Decision which have to pertain to the existence of a valid basis for sequestration or the danger of
dissipation of the sequestered shares.
Until and unless it reconsiders the 1998 and 2003 Resolutions in that fashion and on that basis, the
Sandiganbayan is bound to respect them, moreso because they are its own rulings. It is thus precluded
from performing any act or promulgate any issuance inconsistent with the letter, tenor and disposition of
those previous rulings which remain extant. It cannot re-enforce the TRO against TMEE or recognizing
the continued legal effects of the nullified sequestration order, as it did through the challenged
resolutions. It can only do so by reconsidering the 1998 and 2003 resolutions.

Thus, it can be appreciated why the Sandiganbayan in the challenged Resolution merely opted to declare
the TRO confirmed in this Court’s 1995 Decision is "is still existing and in full force and effect," desisting
as it did from ordering the execution of the 1995 Decision. Such declaration, however, is not wholly
correct as it is incomplete. It did not include the fact that the TRO had already been modified by the 1998
and 2003 Resolutions of the Sandiganbayan. Moreover, it failed to consider the well-established doctrine
that the registered owner of sequestered shares is generally entitled to vote the shares.40

The Court thus rules, with considerable ease, that the 22 May 2006 Resolution of the Sandiganbayan was
issued with grave abuse of discretion, and must be annulled.

The Court finds the actions of the PCGG in this case distressing. Its actions and resort to unconventional
modes of relief towards the end of depriving TMEE the right to vote its shares, notwithstanding two
Sandiganbayan rulings recognizing such right are tantamount to abuse of the judicial process.

For one, concerning the Motion for Execution of Judgment it had filed on 2 May 2006, it appears highly
suspect that the PCGG would await more than ten years before it would move to execute or enforce the
1995 Decision of the Supreme Court. Entry of Judgment on that Decision was dated 2 April 1996. Under
Article 1144 of the Civil Code, an action based upon a judgment must be brought within ten years from
the time the right of action accrues, or within ten years counted from the time the judgment became
final.41 Under Section 2, Rule 37, the date of finality of the judgment or final order shall be deemed to be
the date of its entry.

Notably, nothing in the rules of procedure provides that the entry of judgment be served on the parties,
or reckons the date of finality of the judgment from the moment the entry of judgment is received by the
parties. Hence, the fact that PCGG allegedly was served the Entry of Judgment only on 2 March 2006 does
not detract from the fact that any action to execute or enforce the 1995 Decision of the Supreme Court
was barred by prescription after 2 April 2006. The filing of the two motions by the PCGG before the
Sandiganbayan was made only in May of 2006.

In its motion to reinforce/reissue TRO before the Sandiganbayan, the PCGG adverted to reports that the
sequestered shares were in danger of dissipation and diminution as the Romualdezes "were bent on
disposing their shares in Equitable-PCI Bank."42 The shares of EPCIB, including the interests earned
thereon, are deposited in escrow with the Land Bank of the Philippines, on order of the Sandiganbayan in
its 2003 Resolution, at the instance of no less than TMEE. Unless otherwise ordered by the
Sandiganbayan, these shares would remain in escrow until Civil Case No. 0035 is finally resolved by the
Sandiganbayan. As such, these shares have been apparently insulated from dissipation and diminution.
They cannot be simply be disposed of, conveyed or encumbered by TMEE, even if the sequestration order
were voided or the TRO lifted.

This being the situation, the only way by which these shares under escrow may be diminished or
dissipated would be through radical corporate changes within EPCIB, such as through the increase of
capital stock, or even through the dissolution or merger of the bank itself. However, it remains highly
dubious that TMEE could, by exercising its right to vote the shares, effect such changes that would
diminish or dissipate those stocks that it could not dispose of. The shares of TMEE comprise only 7.13%
of the outstanding capital stock of EPCIB,43 and would entitle TMEE to only one (1) seat in the 15-person
Board of Directors.44 TMEE is very much a minority stockholder in Equitable-PCI Bank, and on its own,
incapable of imposing its will on the bank.

It is not beyond the realm of possibility that these shares of TMEE in EPCIB, minimal as they may be,
could somehow accord TMEE a significant degree of influence in the policies and decisions of the bank. At
the same time, considering the limited number of shares TMEE holds, this prospect should be considered,
on its face, highly unlikely. Yet the PCGG staked its motion before the Sandiganbayan on the claim that the
allowance of TMEE to vote its shares could somehow diminish or dissipate those shares deposited in
escrow, a highly facile claim considering the circumstances. Still, the Sandiganbayan refused to subject
such claim to any scrutiny at all, and worse, granted the relief sought on the dubious premises.

Our attention is also called to the letter dated 22 May 2006, written by PCGG Commissioner William
Dichoso, and addressed to the Board of Directors of EPCIB.45 The letter, captioned "TRO Issued by the
Sandiganbayan in Civil Case No. 0035 (Republic of the Philippines v. Benjamin Romualdez)", bluntly
states that the Sandiganbayan "has issued a Temporary Restraining Order restraining xxx [TMEE] from
voting in the stockholders meeting of [EPCIB]," and advises that "Copy of the Temporary Restraining
Order will follow."46

No such temporary restraining order was issued by the Sandiganbayan. Certainly, the challenged
Resolution does not contain any directive for the issuance of a separate temporary restraining order. All
the challenged Resolution affirms is the supposed continuing force of the TRO as affirmed by 1995
Decision of the Court. But as earlier discussed, while the 1995 Decision affirmed the earlier TRO issued by
the Court, it also affirmed the right of the Sandiganbayan to modify or terminate such TRO if the evidence
so warranted. The Sandiganbayan has exercised such right and has chosen not to disavow such exercise.
Neither has the modification or termination of the TRO been reversed or set aside by a higher court.

The impression left by the PCGG letter to EPCIB was that the bank had no choice outside of violating a
judicial order but to disallow TMEE from voting its shares. Yet even with the assailed Resolution of the
Sandiganbayan, such a conclusion is not so evident. At the very least, the PCGG letter conveyed the
message that the Sandiganbayan had enjoined the voting of TMEE shares in the 23 May 2006
stockholders meeting when in fact the anti-graft court did not provide for an injunctive relief in such
manner.

Still, ultimate blame must be foisted on the Sandiganbayan. Wittingly or unwittingly, it became complicit
in the denial of justice to TMEE when it issued the assailed Resolution, despite the lack of ample basis to
support it. Had it ruled judiciously on the motion, the resultant farce would not have been staged. More to
the point, had it resolved the pending motions for reconsideration in a timely manner, this entire
controversy could have been avoided.

Finally, we consider the consequences of the annulment of the assailed Resolution on the subsequently
held stockholders’ meeting and election of the Board of Directors of EPCIB. It appears that there is no
serious dispute that TMEE would have been entitled to one seat on the Board had it been able to vote its
shares. TMEE asserts that it has 51,827,640 EPCIB shares,47 equivalent to 7.13% of the outstanding
capital stock of the bank. Respondent Board of Directors admits that the shares of TMEE constitute 7.13%
of the outstanding capital stock of the bank.48Since Section 24 of the Corporation Code allows a
stockholder such as TMEE to cumulate all of his shares in the voting for directors, a 7.13 % stock interest
in the outstanding capital stock is sufficient to elect one seat in the 15-seat EPCIB Board of
Directors.49 However, relying on the null and void Resolution of the Sandiganbayan, respondents Board of
Directors and Corporate Secretary prevented TMEE from voting its shares and electing its nominee or
representative to the Board of Directors.

Clearly, TMEE is entitled to one seat on the Board of Directors of EPCIB. There is the option of annulling
the entire election, but such step would be too drastic in light of the fact that only one of the 15 seats
should be necessarily affected upon the seating of TMEE’s nominee to the Board of Directors. The more
prudent step on the part of the Court is to declare that one nominee or representative of TMEE is entitled
to be seated immediately on the Board of Directors, and to direct the respondents EPCIB Board and
Board Corporate Secretary to admit and recognize said nominee or representative of TMEE to the Board
of Directors in place of the person who was elected to the Board at the 23 May 2006 annual stockholders’
meeting had TMEE not been disallowed to vote its shares.

The Court, as far back as 1998, already admonished the PCGG and the Sandiganbayan to speedily proceed
with the hearings and resolutions of the main cases for recovery and reconveyance of alleged ill-gotten
wealth.50 In ordinary times, what the Court should be resolving right now in the exercise of judicial
review should be the final decisions of the Sandiganbayan on the recovery of sequestered assets, and not
preliminary matters like those now before us. It is this unconscionable delay that has precisely allowed
this unwanted circus to march into this Court. The protracted delay serves no end except to foster
mockery of the judicial system.

WHEREFORE, the PETITION is GRANTED. The Resolution of the Sandiganbayan dated 22 May 2006 is
declared NULL and VOID.

The election at the 23 May 2006 annual stockholders’ meeting of the person to the seat in the Equitable-
PCI Bank Board of Directors to which petitioner Trans Middle East (Phils.), Inc. is entitled is likewise
declared NULL and VOID.

PENDING FINALITY OF THIS DECISION AND IMMEDIATELY UPON RECEIPT HEREOF, respondents Board
of Directors of Equitable-PCI Bank and Corporate Secretary Sabino E. Acut, Jr. are DIRECTED NOT TO
RECOGNIZE said person whose election to the Board of Directors is set aside and nullified herein and TO
RECOGNIZE the nominee or representative of TMEE as a duly elected member of the Board of Directors,
with all the rights and privileges appertaining to the position.

SO ORDERED.

THIRD DIVISION

G.R. No. 143972 August 31, 2007

PACIFIC BASIN SECURITIES CO., INC., Petitioner,


vs.
ORIENTAL PETROLEUM and MINERALS CORP. and EQUITABLE BANKING CORP., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 144056

ORIENTAL PETROLEUM and MINERALS CORP., EQUITABLE BANKING CORP. and ROBERT COYIUTO,
JR.,Petitioners,
vs.
PACIFIC BASIN SECURITIES CO., INC., Respondent.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 144631

PACIFIC BASIN SECURITIES CO., INC., Petitioner,


vs.
ORIENTAL PETROLEUM and MINERALS CORP., EQUITABLE BANKING CORP., ROBERTO COYIUTO
and ETHELWOLDO FERNANDEZ, Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

By Resolution dated February 21, 2001,1 the Court ordered the consolidation of the Petitions for Review
on Certiorari under Rule 45 of the Rules of Court docketed as G.R. No. 143972,2 G.R. No. 1440563 and G.R.
No. 144631.4

The facts of the case are undisputed:

On May 31, 1991, Pacific Basin Securities, Inc. (Pacific Basin), through the stock brokerage firm First
Resources Management and Securities Corporation (FRMSC), purchased 308,300,000 Class "A" shares of
Oriental Petroleum and Minerals Corporation (OPMC). Pacific Basin fully paid for the OPMC shares in the
total amount of ₱17,727,000.00 or ₱.05750 per share.5 The shares were listed and traded in the Makati
Stock Exchange.

The OPMC shares turned out to be owned by Piedras Petroleum Mining Corporation (Piedras Petroleum),
a sequestered company controlled by the nominees of the Presidential Commission on Good Government
(PCGG). PCGG sent a letter dated June 10, 1991 to Equitable Banking Corporation (EBC), OPMC’s stock
and transfer agent, confirming Piedras Petroleum’s sale of the OPMC shares in favor of Pacific Basin
through FRMSC. In the same letter, PCGG requested EBC to record the acquisition of said shares and to
issue the corresponding certificates of stock in favor of Pacific Basin.6

The requests were left unheeded. EBC informed FRMSC that it cannot effect the transfer of the OPMC s
hares to Pacific Basin on the following grounds: first, that the endorser of the stock certificate, a certain
Mr. Clemente Madarang, was not among the authorized signatories of Piedras Petroleum;
and second, there was no board resolution from Piedras Petroleum which authorized the sale of the
OPMC shares.7

FRMSC complied with the requirements imposed by EBC and consequently renewed its demand for the
transfer of the OPMC shares to Pacific Basin and the issuance of new certificates of stock.8 Again, these
requests proved futile.
Hence, on April 23, 1992, Pacific Basin filed a Petition for Mandamus with Prayer for a Writ of
Preliminary Mandatory Injunction and/or Restraining Order and Writ of Preliminary Prohibitory
Injunction docketed as SEC Case No. 04225.9 Pacific Basin alleged that: it had purchased 308,300,000
Class "A" shares of stock of OPMC; EBC refused to record its acquisition of the shares and to issue the
corresponding certificates of stock, which is in grave neglect of the performance of the ministerial duty
specifically enjoined by Section 63 of the Corporation Code; and there was a violation of Section 1, Article
1 of the Amended By-laws of OPMC which mandates the issuance of certificate of stock to each holder of
fully paid stock.10

In their Answer,11 OPMC and EBC claimed that the government’s title over the subject OPMC shares was
based on the cession made by Mr. Roberto S. Benedicto, an associate of former President Ferdinand
Marcos, in exchange for immunity from prosecution and suit by the government for allegedly amassing
ill-gotten wealth. According to OPMC and EBC, item no. 6 of the annex to the Compromise Agreement
executed between the government (through PCGG) and Mr. Benedicto shows that part of the assets to be
turned over by Mr. Benedicto to the government were all of the OPMC shares owned by Piedras
Petroleum. The Court, however, in G.R. Nos. 108368, 108548-49, and 108550 issued a Temporary
Restraining Order enjoining the enforcement of the Compromise Agreement. Thus, OPMC and EBC
maintained that the basis for PCGG’s claim of title over the OPMC shares disappeared as the effectivity of
the supposed cession made by Mr. Benedicto is suspended.

OPMC and EBC also argued that even on the assumption that the government has a valid and effective
title over the subject OPMC shares, the sale by Piedras Petroleum to Pacific Basin was void as there was
no showing that Piedras Petroleum complied with the legal requirements for the disposition of
government owned assets as embodied in Proclamation No. 50, as amended, and related rules and
regulations on the matter. The non-holding of a public bidding for the sale of the shares was allegedly a
blatant violation of the said law.

The Securities and Exchange Commission Hearing Officer12 ruled in

favor of Pacific Basin. In the Decision13 dated December 28, 1995, the Hearing Officer took judicial notice
of the Court’s January 10, 1993 and January 18, 1994 En Banc Resolutions which dismissed the petition
and denied the Motion for Reconsideration filed by PCGG in G.R. No. 108368. Thus, the issue of the
Temporary Restraining Order on the Compromise Agreement executed between PCGG and Mr. Benedicto
was rendered moot. The Decision further held that since the subject shares have been fully paid by Pacific
Basin, it is the obligation and a ministerial duty of OPMC and EBC to transfer the shares in the corporate
books and issue certificates of stock in favor of Pacific Basin under Section 63 of the Corporation Code
and Section I of Article I of the amended by-laws of OPMC. The corporate officers of OPMC were also
found to have acted in bad faith when they refused to transfer the shares to Pacific Basin. Hence, they
were ordered to jointly and severally pay Pacific Basin the following amounts: ₱20,000,000.00
representing actual damages; ₱300,000.00 representing exemplary damages; ₱300,000.00 representing
attorney’s fees; and ₱50,000.00 for the cost and expenses of the suit.

On December 28, 1995, OPMC and EBC filed their Motion for Reconsideration which was denied by the
Hearing Officer. Later, OPMC and EBC filed their appeal before the SEC en banc. On July 13, 1999, the
SEC en banc rendered its Decision14 which modified the December 28, 1995 Decision of the Hearing
Officer by deleting the awards of actual and exemplary damages in favor of Pacific Basin.
Petitioner Pacific Basin and respondents OPMC and EBC separately went to the Court of Appeals (CA) on
appeal, docketed as CA-G.R. SP No. 54456 and CA-G.R. SP No. 54442, respectively.

In CA-G.R. SP No. 54442, OPMC and EBC contend that the SEC erred in holding that the sale of publicly
listed shares of stock through the stock market is tantamount to a public bidding and that they are
ministerially bound to record said shares in their stock and transfer book.15

On January 26, 2000, the CA rendered a Decision16 which affirmed in toto the July 13, 1999 Decision of
the SEC en banc.17 The CA held that: public bidding signifies a letting of a contract that is open to all
notorious, a letting that furnishes fair and reasonable public notice and secures to the public equal
competition in bidding and becoming contractors; the sale of shares through public stock exchange offers
transparent and fair competition; and the pricing of shares of stock is a highly specialized field that is
better left to the experts. The dispositive portion of the Decision states:

WHEREFORE, the instant petition is hereby DENIED. Accordingly, the Decision dated 13 July 1999 of the
Securities and Exchange Commission is AFFIRMED in toto.

SO ORDERED.18

upon learning the January 26, 2000 Decision of the CA in CA-G.R. SP No. 54442, Pacific Basin filed with
the Court a petition, docketed as G.R. No. 143972, assailing said CA Decision claiming that:

I.

the court of appeals committed grave error when it sustained the SEC’s en banc decision which
deleted the award of actual and compensatory damages in favor of the petitioner. there is clear
and convincing evidence established through the unrebutted testimony of petitioner’s expert
witness that petitioner was deprived of actual profits in the amount of around twenty million
pesos (p20,000,000.00) x x x

II.

THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT FAILED TO AWARD THE
PETITIONER EXEMPLARY DAMAGES, AS FOUND BY THE SEC HEARING OFFICER WHO
CONDUCTED ADVERSARIAL PROCEEDINGS BELOW AND HAD OPPORTUNITY TO EXAMINE THE
PARTIES’ EVIDENCE AND THEIR WITNESSES. RESPONDENTS’ MANIFEST BAD FAITH AND
MALICIOUS REFUSAL TO REGISTER THE PURCHASE OF THE SHARES DESPITE LACK OF
REASONABLE OR JUSTIFIABLE GROUND ENTITLE THE PETITIONER TO EXEMPLARY DAMAGES. x
xx

OPMC and EBC are also before the Court in a petition, docketed as G.R. No. 144056, questioning the CA
Decision, thus:

I.

[g]overnment-owned property, even of [sic] shares of stock which are publicly listed in a stock
exchange, may be disposed of only through a public bidding, that the sale of such shares if made in
violation of the public bidding requirement is not valid and that the disposition of such shares
through the normal operation of the stock exchange does not satisfy the requirement of public
bidding. x x x

II.

x x x the GOOD FAITH OF THE PETITIONERS HAVING BEEN ESTABLISHED AS A MATTER OF FACT
THERE IS NO LEGAL BASIS TO ASSESS ATTORNEY’S FEES IN FAVOR OF THE RESPONDENT.

On the other hand, in CA-G.R. SP. No. 54456, Pacific Basin questioned SEC en banc’s deletion of the actual
and exemplary damages awarded to it by the SEC Hearing Officer.19

On August 18, 2000, the CA rendered its Decision20 which held that: the testimony given by Ms. Vicky
Chan, the Vice-President of Pacific Basin, is not sufficient to prove actual damages; no exemplary damages
should be awarded since the responsible officers of OPMC did not act in bad faith nor in a wanton,
fraudulent, reckless, oppressive or malevolent manner when they refused to transfer the subject shares
to Pacific Basin’s name; and the responsible officers of OPMC were only taking extra precautions in
verifying the validity of the transfer since it involved a substantial number of shares aside from the highly
controversial matters underlying the transfer which created doubt in their minds. The dispositive portion
of the Decision states:

WHEREFORE, foregoing premises considered, the appealed Decision dated July 13, 1999 of the Securities
and Exchange Commission (SEC) En Banc is hereby AFFIRMED in toto. Costs against the petitioner.

SO ORDERED.21

Pacific Basin is once again before the Court in a petition, docketed as G.R. No. 144631, assailing the CA
Decision claiming that:

I.

IT WAS GRAVE ERROR FOR THE COURT OF APPEALS TO RULE THAT PETITIONER HAS FAILED
TO PROVE ITS CLAIM FOR DAMAGES WITH A REASONABLE DEGREE OF CERTAINTY DESPITE
THE EVIDENCE ON RECORD. EFFECTIVELY, THE COURT OF APPEALS IS REQUIRING ABSOLUTE
CERTAINTY, WHICH IS EVEN BEYOND PROOF BEYOND REASONABLE DOUBT IN CRIMINAL
PROCEEDINGS OR PREPONDERANCE OF EVIDENCE IN CIVIL PROCEEDINGS. SINCE THIS CASE
WAS ORIGINALLY ADMINISTRATIVE IN NATURE, THE PROOF REQUIRED IS MERELY
SUBSTANTIAL EVIDENCE WHICH PETITIONER HAS MORE THAN SUFFICIENTLY ESTABLISHED.

II.

THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT RULED THAT THE TESTIMONY
OF MS. VICKY CHAN, PETITIONER’S VICE-PRESIDENT, IS NOT SUFFICIENT TO PROVE ACTUAL
DAMAGES SUSTAINED BY PETITIONER. THE TESTIMONY OF MS. CHAN WAS UNREBUTTED EVEN
IN THE PROCEEDINGS BEFORE THE SEC. HER EXPERTISE IN STOCK BROKERAGE WAS
ADMITTED AND NEVER QUESTIONED BY THE RESPONDENTS. x x x

III.
THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT RULED THAT RESPONDENTS
DID NOT ACT IN BAD FAITH, NOR IN WANTON, FRAUDULENT, RECKLESS OR OPPRESSIVE
MANNER. x x x MOREOVER, THIS CASE AFFECTS THE EXPECTATION OF THE INVESTING PUBLIC
ON THE MARKETABILITY OF THE SHARES LISTED AND TRADED IN THE STOCK EXCHANGE. AS
AN EXAMPLE TO THE PUBLIC GOOD, RESPONDENTS SHOULD BE ORDERED TO PAY EXEMPLARY
DAMAGES.

The petitions are without merit.

In G.R. No. 144056, OPMC and EBC argue that the OPMC shares are government-owned and, as
government property, these can be disposed of only through public bidding. Hence, the sale by Piedras
Petroleum of the OPMC shares to Pacific Basin through the stock market is not valid, since it does not
comply with the public bidding requirement.

The argument is baseless.

Prior to the 31 May 1991 sale to Pacific Basin, Piedras Petroleum was the owner of the subject OPMC
shares. Piedras Petroleum is a sequestered company controlled by the nominees of the PCGG. The fact
that Piedras Petroleum was placed under sequestration by the PCGG does not ipso facto make it a
government-owned corporation.

The Court elucidated on the power of the PCGG to issue sequestration orders in Bataan Shipyard &
Engineering Company, Inc. v. Presidential Commission on Good Government.22 The Court held:

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten"
means to place or cause to be placed under its possession or control said property, or any building or
office wherein any such property and records pertaining thereto may be found, including "business
enterprises and entities,"- for the purpose of preventing the destruction, concealment or dissipation
of, and otherwise conserving and preserving, the same- until it can be determined, through
appropriate judicial proceedings, whether the property was in truth "ill- gotten," i.e., acquired
through or as a result of improper or illegal use of or the conversion of funds belonging to the
Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of official position, authority, relationship, connection or influence, resulting in
unjust enrichment of the ostensible owner and grave damage and prejudice to the State. And this, too, is
the sense in which the term is commonly understood in other jurisdictions. (Emphasis supplied)23

The Court further held:

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of
preliminary attachment, or receivership. By attachment, a sheriff seizes property of a defendant in a civil
suit so that it may stand as security for the satisfaction of any judgment that may be obtained, and not
disposed of, or dissipated, or lost intentionally or otherwise, pending the action. By receivership,
property, real or personal, which is subject of litigation, is placed in the possession and control of a
receiver appointed by the Court, who shall conserve it pending final determination of the title or
right of possession over it. x x x (Emphasis supplied)24

A sequestration order is similar to the provisional remedy of Receivership under Rule 59 of the Rules of
Court. The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over so as to bring and defend actions in its own name; receive rents;
collect debts due; pay outstanding debts; and generally do such other acts and things as may be necessary
to fulfill its mission as conservator and administrator.25

The PCGG, as a mere conservator, does not automatically become the owner of a sequestered property in
behalf of the government. There must be a final determination by the courts if the property is in fact "ill-
gotten" and was acquired by using government funds. Thus, OPMC cannot conclusively claim that the
subject shares are government property by virtue of a sequestration order on Piedras Petroleum. Such
conclusion is non sequitur.

OPMC and EBC insist that Proclamation No. 5026 is the law which should govern the sale of the OPMC
shares to Pacific Basin. Under said law, the OPMC shares should be disposed of through public bidding.
We find such argument untenable.

Proclamation No. 50 seeks to "[p]romote privatization through an orderly, coordinated and efficient
programs for the prompt disposition of the large number of non-performing assets of the government
financial institutions, and certain government-owned or controlled corporations which have been found
unnecessary or inappropriate for the government sector to maintain."

The term "assets" is defined under Article I, Sec. 2, Par. 1, of Proclamation No. 50, as:

(i) receivables and other obligations due to government institutions under credit, lease, indemnity
and other agreements together with all collateral security and other rights (including but not
limited to rights in relation to shares of stock in corporations such as voting rights as well as rights
to appoint directors of corporations or otherwise engage in the management thereof) granted to
such institutions by contract or operation of law to secure or enforce the right of payment of such
obligations;

(ii) real and personal property of any kind owned or held by government institutions, including
shares of stock in corporations, obtained by such government institutions, whether directly or
indirectly, through foreclosure or other means, in settlement of such obligations;

(iii) shares of stock and other investments held by government institutions; and

(iv) the government institutions themselves, whether as parent or subsidiary corporations.

The subject OPMC shares do not fall within the ambit of "assets," as the term contemplates properties
which are government-owned. To repeat, the OPMC shares originally owned by Piedras Petroleum, a
sequestered corporation controlled by the nominees of PCGG, remain to be privately owned until such
time when the court declares that the subject shares were acquired through government funds.

Even on the assumption that the OPMC shares are government assets, the Court finds that the sale of the
subject shares through the stock exchange is valid and binding, as there is no law which mandates that
listed shares which are owned by the government be sold only through public bidding.

As conceded by both Pacific Basin and OPMC, the subject OPMC shares are listed and traded in the stock
exchange. OPMC is a listed corporation in the Philippine Stock Exchange (PSE).27 As a listed corporation,
it shall be bound by the provisions of the Revised Listing Rules of the PSE28 the objective of which is "to
provide a fair, orderly, efficient, and transparent market for the trading of securities x x x."

This Court held in Nicolas v. Court of Appeals29 that stock market trading is a technical and highly
specialized institution in the Philippines. Trading of listed shares should therefore be left to the stock
market where knowledge and expertise on securities mechanism can be expected.

Moreover, even if the law indeed requires that the sale of the subject shares undergo public bidding, the
Court finds that sale through the stock exchange is already a substantial compliance with the public
bidding requirement. As correctly held by the CA:

[T]o the mind of the Court, the sale of the sale of shares through public stock exchange offers transparent
and fair competition. Parenthetically, the pricing of shares of stock is a highly specialized field that is
better left to the experts. It involves an inquiry into the earning potential, dividend history, business
risks, capital structure, management, asset values of the company, prevailing business climate, political
and economic conditions, and myriad other factors that bear on the valuation of shares.

xxxx

The Commission on Audit does not require public bidding of publicly listed shares of stock as the stock
market determines the price of the share, hence, by analogy, the stock market itself can be considered as
public bidding. x x x30

It is beyond dispute that OPMC holds no unpaid claim against Pacific Basin for the value of the shares
acquired by the latter. The Court sees no reason why OPMC and EBC consistently and continuously
refused to record the transfer in the stock and transfer books of OPMC and issue new certificates in favor
of Pacific Basin.

Section 63 of the Corporation Code provides:

Sec. 63. x x x Shares of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid except as between the parties, until the transfer
is recorded in the books of the corporation x x x.

Clearly, the right of a transferee/ assignee to have stocks transferred to his name is an inherent right
flowing from his ownership of the stocks.31 The Court had ruled in Rural Bank of Salinas, Inc. v. Court of
Appeals32 that the corporation’s obligation to register is ministerial, citing Fletcher, to wit:

In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to
decide the question of ownership.33

The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction
without good cause, it may be compelled to do so by mandamus.34

The Court further held in Rural Bank of Salinas that the only limitation imposed by Section 63 of the
Corporation Code is when the corporation holds any unpaid claim against the shares intended to be
transferred.35
Pacific Basin satisfied the condition of full payment of the OPMC shares as evidenced by the FRMC Buy
Invoice No. 14200 dated May 31, 1991.36 This fact was never denied by both OPMC and EBC. Therefore,
upon Pacific Basin’s full payment of the OPMC shares, it became a ministerial duty on the part of OPMC to
record the transfer in the stock and transfer book of OPMC and issue new stock certificates in favor of
Pacific Basin. Thus, OPMC’s and EBC’s refusal to record the transfer is violative of Section 63 of the
Corporation Code and OPMC’s own amended by-laws which states:

Certificate of stock shall be issued to each holder of fully paid stock in numerical order from the
stock certificate book, and shall be signed by the President and countersigned by the Secretary and sealed
with the corporate seal. A record of each certificate issued shall be kept on the stub thereof and upon the
stock register of the company. (Emphasis supplied)

The Court agrees with and adopts the findings of the SEC Hearing Officer in his Decision:37

[t]he rights of an innocent purchaser of shares of stock cannot be prejudiced and has to be protected
especially when the purchase of the shares are coursed through the Stock Market (in this case the Makati
Stock Exchange). An investor when purchasing publicly listed shares of stock in the Stock Market has
every right to presume that the shares of a publicly listed corporation being traded in the Stock Market
are free from any defect, and that upon purchased [sic] of the said shares, it will be registered in his name
in the corporate books.

To rule otherwise would be froth with dangerous consequences. The investing public’s confidence in
purchasing and investing in shares of stocks thru the Stock Market will erode and become a tedious and
burdensome transaction for the buying or selling of shares of stock of publicly listed corporation. An
investor who invests good money in shares in the stock market necessarily expects that the said shares
will be registered in his name upon payment of the full value thereof.

Instead of building investor’s confidence and encourage investment in publicly listed shares in the Stock
Market, every investor will have second thoughts in investing as they will be purchasing shares in the
stock market subject to a caveat that there is no guaranty the shares they buy are good or transferable to
his name. Thus, every potential investor, prior to his purchase of shares of stock in the Stock Market will
have to investigate each and every share he intends to purchase to make sure that it is free from any
defect and that the said shares may be registered in his name after he purchases the same.

In G.R. No. 143972 and G.R. No. 144631, Pacific Basin alleges that the CA erred when it upheld the
Decision of the SEC En Banc which directed the deletion of the actual and exemplary damages awarded by
the SEC Hearing Officer.

As to the issue on actual damages, Pacific Basin contends that the CA erred in ruling that there was failure
to prove its claim for actual damages. Pacific Basin maintains that the testimony of its Vice-President, Ms.
Vicky Chan, is sufficient to establish the loss incurred as a result of OPMC’s refusal to transfer the shares
in their name.

In order that damages may be recovered, the best evidence obtainable by the injured party must be
presented. Actual or compensatory damages cannot be presumed, but must be duly proved, and so
proved with reasonable degree of certainty. A court cannot rely on speculation, conjecture or guesswork
as to the fact and amount of damages, but must depend upon competent proof that they have been
suffered and on evidence of the actual amount thereof. If the proof is flimsy and unsubstantial, no
damages will be awarded.38

The court cannot rely on uncorroborated testimony whose truth is suspect, but must depend upon
competent proof that actual damages have been actually suffered.39 The testimonies should be viewed in
light of claimant’s self-interest and, hence, should not be taken as gospel truth.40

Based on the records, the claim of Pacific Basin for actual damages, in the amount of ₱20,000,000.00 is
not supported by any documentary evidence. We find that the bare testimonial assertions of Ms. Vicky
Chan are not adequate and competent proof of the actual pecuniary loss allegedly suffered by Pacific
Basin.

OPMC and EBC, however, cannot escape liability. The Court awards Pacific Basin temperate damages. 41

Temperate damages are included within the context of compensatory damages. In arriving at a
reasonable level of temperate damages to be awarded, courts are guided by the ruling that there are
cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, although the
court is convinced that there has been such loss.42

The nature of stock market trading is speculative where the value of a specific share may vary from time
to time, depending on several factors which may affect the market. Pacific Basin is in the business which
involves marketing of securities; it would buy shares and re-sell them when their value appreciates to
gain profit from the transaction.

OPMC’s and EBC’s refusal to record the transfer in the stock and transfer book and issuance of new
certificates of stock in the name of Pacific Basin prevented Pacific from re-selling the subject shares in the
market. By this non-performance of a ministerial function, the Court is convinced that Pacific Basin
suffered pecuniary loss, the amount of which cannot be proved with certainty.

In lieu of actual damages, the Court finds OPMC and EBC, Mr. Roberto Coyiuto and Ethelwoldo Fernandez
(as president and corporate secretary of OPMC respectively) liable for temperate damages, jointly and
severally43 in the amount of ₱1,000,000.00.

The issue on exemplary damages deserves scant consideration. Well settled is the rule that although
exemplary damages are not recoverable as a matter of right, and although such damages may not be
proved, it must first be shown that the claimant is entitled to moral, temperate or compensatory damages
before a court can favorably consider an award of exemplary damages.44

The Court found earlier that Pacific Basin is not entitled to actual damages.lawph!l Exemplary damages,
as an accessory to actual damages, cannot also be awarded.

Moreover, the Court agrees with the findings of both the SEC en banc45 and the CA46 when it held that
OPMC and EBC did not act in bad faith nor in a wanton, fraudulent reckless, oppressive or malevolent
manner when they refused to transfer the subject shares under Pacific Basin’s name.

It is true that both OPMC and EBC refused to transfer the subject OPMC shares in the name of Pacific
Basin despite the fact that such transfer is ministerial in nature. However, the Court did not find any
proof that such refusal was tainted by bad faith. Pacific Basin alleges that the bad faith of both OPMC and
EBC is manifested by the propensity for shifting their defenses and the deliberate deprivation of the
rights so that OPMC can gain substantial shareholdings in the company and affect the balance of
power.47 All these are mere allegations.

It is axiomatic that good faith is always presumed unless convincing evidence to the contrary is adduced.
It is incumbent upon the party alleging bad faith to sufficiently prove such allegation. Absent enough
proof thereof, the presumption of good faith prevails.48 In the case at bar, the burden of proving alleged
bad faith therefore was on Pacific Basin, which failed to discharge its onus probandi. Without a clear and
persuasive evidence of bad faith, the presumption of good faith in favor of OPMC and EBC stands.

On the issue regarding the award of attorney’s fees, the Court finds

that it is justified. Attorney’s fees may be awarded inter alia when the defendant’s act or omission has
compelled the plaintiff to incur expenses to protect his interests or in any other case where the court
deems it just and equitable that the attorney’s fees and expenses of litigation be recovered.49

Here, Pacific Basin was forced to file a case for Mandamus when the OPMC officers refused to do the
ministerial act of recording the purchase of shares in the stock and transfer book and to issue new
certificates of stock for fully paid shares.

WHEREFORE, the petition in G.R. No. 144056 is DENIED. The petitions in G.R. Nos. 143972 and 144631
are PARTLY GRANTED. The assailed Decisions of the Court of Appeals dated January 26, 2000 and
August 18, 2000 are AFFIRMED with MODIFICATION to the effect that Oriental Petroleum and Minerals
Corporation and Equitable Banking Corporation, Mr. Roberto Coyiuto and Ethelwoldo Fernandez (as
president and corporate secretary of OPMC respectively) are ORDERED to pay Pacific Basin Securities
Co., Inc., jointly and severally, temperate damages in the amount of ₱1,000,000.00.

Costs against Oriental Petroleum and Minerals Corporation and Equitable Banking Corporation.

SO ORDERED.

G.R. No. 158805 April 16, 2009

VALLEY GOLF & COUNTRY CLUB, INC., Petitioner,


vs.
ROSA O. VDA. DE CARAM, Respondent.

DECISION

TINGA, J.:

May a non-stock corporation seize and dispose of the membership share of a fully-paid member on
account of its unpaid debts to the corporation when it is authorized to do so under the corporate by-laws
but not by the Articles of Incorporation? Such is the central issue raised in this petition, which arose after
petitioner Valley Golf & Country Club (Valley Golf) sold the membership share of a member who had been
delinquent in the payment of his monthly dues.

I.
The facts that preceded this petition are simple. Valley Golf & Country Club (Valley Golf) is a duly
constituted non-stock, non-profit corporation which operates a golf course. The members and their
guests are entitled to play golf on the said course and otherwise avail of the facilities and privileges
provided by Valley Golf.1 The shareholders are likewise assessed monthly membership dues.

In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram),2 the husband of the present respondent,
subscribed to purchased and paid for in full one share (Golf Share) in the capital stock of Valley Golf. He
was issued Stock Certificate No. 389 dated 26 January 1961 for the Golf Share.3 The Stock Certificate
likewise indicates a par value of ₱9,000.00.

Valley Golf would subsequently allege that beginning 25 January 1980, Caram stopped paying his
monthly dues, which were continually assessed until 31 June 1987. Valley Golf claims to have sent five (5)
letters to Caram concerning his delinquent account within the period from 27 January 1986 until 3 May
1987, all forwarded to

P.O. Box No. 1566, Makati Commercial Center Post Office, the mailing address which Caram allegedly
furnished Valley Golf.4 The first letter informed Caram that his account as of 31 December 1985 was
delinquent and that his club privileges were suspended pursuant to Section 3, Article VII of the by-laws of
Valley Golf.5 Despite such notice of delinquency, the second letter, dated 26 August 1986, stated that
should Caram’s account remain unpaid for 45 days, his name would be "included in the delinquent list to
be posted on the club’s bulletin board."6 The third letter, dated 25 January 1987, again informed Caram of
his delinquent account and the suspension of his club privileges.7The fourth letter, dated 7 March 1987,
informed Caram that should he fail to settle his delinquencies, then totaling ₱7,525.45, within ten (10)
days from receipt thereof Valley Golf would exercise its right to sell the Golf Share to satisfy the
outstanding amount, again pursuant to the provisions of the by-laws.8 The final letter, dated 3 May 1987,
issued a final deadline until 31 May 1987 for Caram to settle his account, or otherwise face the sale of the
Golf Share to satisfy the claims of Valley Golf.9

The Golf Share was sold at public auction on 11 June 1987 for ₱25,000.00 after the Board of Directors had
authorized the sale in a meeting on 11 April 1987, and the Notice of Auction Sale was published in the 6
June 1987 edition of the Philippine Daily Inquirer.10

As it turned out, Caram had died on 6 October 1986. Respondent initiated intestate proceedings before
the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle her husband’s estate.11 Unaware of the
pending controversy over the Golf Share, the Caram family and the RTC included the same as part of
Caram’s estate. The RTC approved a project of partition of Caram’s estate on 29 August 1989. The Golf
Share was adjudicated to respondent, who paid the corresponding estate tax due, including that on the
Golf Share.

It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the sale of the Golf
Share following their inquiry with Valley Golf about the share. After a series of correspondence, the
Caram heirs were subsequently informed, in a letter dated 15 October 1990, that they were entitled to
the refund of ₱11,066.52 out of the proceeds of the sale of the Golf Share, which amount had been in the
custody of Valley Golf since 11 June 1987.12

Respondent filed an action for reconveyance of the share with damages before the Securities and
Exchange Commission (SEC) against Valley Golf.13 On 15 November 1996, SEC Hearing Officer Elpidio S.
Salgado rendered a decision in favor of respondent, ordering Valley Golf to convey ownership of the Golf
Share or in the alternative to issue one fully paid share of stock of Valley Golf the same class as the Golf
Share to respondent. Damages totaling ₱90,000.00 were also awarded to respondent.14

The SEC hearing officer noted that under Section 67, paragraph 2 of the Corporation Code, a share stock
could only be deemed delinquent and sold in an extrajudicial sale at public auction only upon the failure
of the stockholder to pay the unpaid subscription or balance for the share. The section could not have
applied in Caram’s case since he had fully paid for the Golf Share and he had been assessed not for the
share itself but for his delinquent club dues. Proceeding from the foregoing premises, the SEC hearing
officer concluded that the auction sale had no basis in law and was thus a nullity.

The SEC hearing officer did entertain Valley Golf’s argument that the sale of the Golf Share was
authorized under the by-laws. However, it was ruled that pursuant to Section 6 of the Corporation Code,
"a provision creating a lien upon shares of stock for unpaid debts, liabilities, or assessments of
stockholders to the corporation, should be embodied in the Articles of Incorporation, and not merely in
the by-laws, because Section 6 (par.1) prescribes that the shares of stock of a corporation may have such
rights, privileges and restrictions as may be stated in the articles of incorporation."15 It was observed that
the Articles of Incorporation of Valley Golf did not impose any lien, liability or restriction on the Golf
Share or, for that matter, even any conditionality that the Golf Share would be subject to assessment of
monthly dues or a lien on the share for non-payment of such dues.16 In the same vein, it was opined that
since Section 98 of the Corporation Code provides that restrictions on transfer of shares should appear in
the articles of incorporation, by-laws and the certificate of stock to be valid and binding on any purchaser
in good faith, there was more reason to apply the said rule to club delinquencies to constitute a lien on
golf shares.17

The SEC hearing officer further held that the delinquency in monthly club dues was merely an ordinary
debt enforceable by judicial action in a civil case. The decision generally affirmed respondent’s assertion
that Caram was not properly notified of the delinquencies, citing Caram’s letter dated 7 July 1978 to
Valley Golf about the change in his mailing address. He also noted that Valley Golf had sent most of the
letters after Caram’s death. In all, the decision concluded that the sale of the Golf Share was effectively a
deprivation of property without due process of law.

On appeal to the SEC en banc,18 said body promulgated a decision19 on 9 May 2000, affirming the hearing
officer’s decision in toto. Again, the SEC found that Section 67 of the Corporation Code could not justify
the sale of the Golf Share since it applies only to unpaid subscriptions and not to delinquent membership
dues. The SEC also cited a general rule, formulated in American jurisprudence, that a corporation has no
right to dispose of shares of stock for delinquent assessments, dues, service fees and other unliquidated
charges unless there is an express grant to do so, either by the statute itself or by the charter of a
corporation.20 Said rule, taken in conjunction with Section 6 of the Corporation Code, militated against
the validity of the sale of the Golf Share, the SEC stressed. In view of these premises, which according to
the SEC entailed the nullity of the sale, the body found it unnecessary to rule on whether there was valid
notice of the sale at public auction.

Valley Golf elevated the SEC’s decision to the Court of Appeals by way of a petition for review.21 On 4
April 2003, the appellate court rendered a decision22 affirming the decisions of the SEC and the hearing
officer, with modification consisting of the deletion of the award of attorney’s fees. This time, Valley Golf’s
central argument was that its by-laws, rather than Section 67 of the Corporation Code, authorized the
auction sale of the Golf Share. Nonetheless, the Court of Appeals found that the by-law provisions cited by
Valley Golf are "of doubtful validity," as they purportedly conflict with Section 6 of the Code, which
mandates that "rights privileges or restrictions attached to a share of stock should be stated in the
articles of incorporation.23 It noted that what or who had become delinquent was "was Mr. Caram himself
and not his golf share," and such being the case, the unpaid account "should have been filed as a money
claim in the proceedings for the settlement of his estate, instead of the petitioner selling his golf share to
satisfy the account."24

The Court of Appeals also adopted the findings of the hearing officer that the notices had not been
properly served on Caram or his heirs, thus effectively depriving respondent of property without due
process of law. While it upheld the award of damages, the appellate court struck down the award of
attorney’s fees since there was no discussion on the basis of such award in the body of the decisions of
both the hearing officer and the SEC.25

There is one other fact of note, mentioned in passing by the SEC hearing officer26 but ignored by the SEC
en banc and the Court of Appeals. Valley Golf’s third and fourth demand letters dated 25 January 1987
and 7 March 1987, respectively, were both addressed to "Est. of Fermin Z. Caram, Jr." The abbreviation
"Est." can only be taken to refer to "Estate." Unlike the first two demand letters, the third and fourth
letters were sent after Caram had died on 6 October 1986. However, the fifth and final demand letter,
dated 3 May 1987 or twenty-eight (28) days before the sale, was again addressed to Fermin Caram
himself and not to his estate, as if he were still alive. The foregoing particular facts are especially
significant to our disposition of this case.

II.

In its petition before this Court, Valley Golf concedes that Section 67 of the Corporation Code, which
authorizes the auction sale of shares with delinquent subscriptions, is not applicable in this case.
Nonetheless, it argues that the by-laws of Valley Golf authorizes the sale of delinquent shares and that the
by-laws constitute a valid law or contractual agreement between the corporation and its stockholders or
their respective successors. Caram, by becoming a member of Valley Golf, bound himself to observe its
by-laws which constitutes "the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it."27 It also points
out that the by-laws itself had duly passed the SEC’s scrutiny and approval.

Valley Golf further argues that it was error on the part of the Court of Appeals to rely, as it did, upon
Section 6 of the Corporation Code "to nullify the subject provisions of the By-Laws."28 Section 6 referrs to
"restrictions" on the shares of stock which should be stated in the articles of incorporation, as
differentiated from "liens" which under the by-laws would serve as basis for the auction sale of the share.
Since Section 6 refers to restrictions and not to liens, Valley Golf submits that "liens" are excluded from
the ambit of the provision. It further proffers that assuming that liens and restrictions are synonymous,
Section 6 itself utilizes the permissive word "may," thus evincing the non-mandatory character of the
requirement that restrictions or liens be stated in the articles of incorporation.

Valley Golf also argues that the Court of Appeals erred in relying on the factual findings of the hearing
officer, which are allegedly replete with errors and contradictions. Finally, it assails the award of moral
and exemplary damages.

III.
As found by the SEC and the Court of Appeals, the Articles of Incorporation of Valley Golf does not contain
any provision authorizing the corporation to create any lien on a member’s Golf Share as a consequence
of the member’s unpaid assessments or dues to Valley Golf. Before this Court, Valley Golf asserts that
such a provision is contained in its by-laws. We required the parties to submit a certified copy of the by-
laws of Valley Golf in effect as of 11 June 1987.29 In compliance, Valley Golf submitted a copy of its by-
laws, originally adopted on 6 June 195830 and amended on 26 November 1986.31 The amendments bear
no relevance to the issue of delinquent membership dues. The relevant provisions, found in Article VIII
entitled "Club Accounts," are reproduced below:

Section 1. Lien.—The Club has the first lien on the share of the stockholder who has, in his/her/its name,
or in the name of an assignee, outstanding accounts and liabilities in favor of the Club to secure the
payment thereof.

xxx

Section 3. The account of any member shall be presented to such member every month. If any statement
of accounts remains unpaid for a period forty-five (45) days after cut-off date, said member maybe (sic)
posted as deliqnuent (sic). No delinquent member shall be entitled to enjoy the privileges of such
membership for the duration of the deliquency (sic). After the member shall have been posted as
delinquent, the Board may order his/her/its share sold to satisfy the claims of the club; after which the
member loses his/her/its rights and privileges permanently. No member can be indebted to the Club at
any time any amount in excess of the credit limit set by the Board of Directors from time to time. The
unpaid account referred to here includes non-payment of dues, charges and other assessments and non-
payment for subscriptions.32

To bolster its cause, Valley Golf proffers the proposition that by virtue of the by-law provisions a lien is
created on the shares of its members to ensure payment of dues, charges and other assessments on the
members. Both the SEC and the Court of Appeals debunked the tenability or applicability of the
proposition through two common thrusts.

Firstly, they correctly noted that the procedure under Section 67 of the Corporation Code for the stock
corporation’s recourse on unpaid subscriptions is inapt to a non-stock corporation vis-à-vis a member’s
outstanding dues. The basic factual backdrops in the two situations are disperate. In the latter, the
member has fully paid for his membership share, while in the former, the stockholder has not yet fully
paid for the share or shares of stock he subscribed to, thereby authorizing the stock corporation to call on
the unpaid subscription, declare the shares delinquent and subject the delinquent shares to a sale at
public auction.33

Secondly, the two bodies below concluded that following Section 6 of the Corporation Code, which
provides:

The shares of stock of stock corporation may be divided into classes or series of shares, or both, any of
which classes or series of shares may have such rights, privileges or restrictions as may be stated in the
articles of incorporation x x x 34

the lien on the Golf Share in favor of Valley Golf is not valid, as the power to constitute such a lien should
be provided in the articles of incorporation, and not merely in the by-laws.
However, there is a specific provision under the Title XI, on Non-Stock Corporations of the Corporation
Code dealing with termination of membership. Section 91 of the Corporation Code provides:

SEC. 91. Termination of membership.—Membership shall be terminated in the manner and for the causes
provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect
of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in
the articles of incorporation or the by-laws. (Emphasis supplied)

Clearly, the right of a non-stock corporation such as Valley Golf to expel a member through the forfeiture
of the Golf Share may be established in the by-laws alone, as is the situation in this case. Thus, both the
SEC and the appellate court are wrong in holding that the establishment of a lien and the loss of the Golf
Share consequent to the enforcement of the lien should have been provided for in the articles of
incorporation.

IV.

Given that the cause for termination of membership in a non-stock corporation may be established
through the by-laws alone and need not be set forth in the articles of incorporation, is there any cause to
invalidate the lien and the subsequent sale of the Golf Share by Valley Golf?

Former SEC Chairperson, Rosario Lopez, in her commentaries on the Corporation Code, explains the
import of Section 91 in a manner relevant to this case:

The prevailing rule is that the provisions of the articles of incorporation or by-laws of termination of
membership must be strictly complied with and applied to the letter. Thus, an association whose member
fails to pay his membership due and annual due as required in the by-laws, and which provides for the
termination or suspension of erring members as well as prohibits the latter from intervening in any
manner in the operational activities of the association, must be observed because by-laws are self-
imposed private laws binding on all members, directors and officers of the corporation.35

Examining closely the relevant by-law provisions of Valley Golf,36 it appears that termination of
membership may occur when the following successive conditions are met: (1) presentation of the
account of the member; (2) failure of the member to settle the account within forty-five days after the
cut-off date; (3) posting of the member as delinquent; and (4) issuance of an order by the board of
directors that the share of the delinquent member be sold to satisfy the claims of Valley Golf. These
conditions found in by-laws duly approved by the SEC warrant due respect and we are disinclined to rule
against the validity of the by-law provisions.

At the same time, two points warrant special attention.

A.

Valley Golf has sought to accomplish the termination of Caram’s membership through the sale of the Golf
Share, justifying the sale through the constitution of a lien on the Golf Share under Section 1, Article VIII
of its by-laws. Generally in theory, a non-stock corporation has the power to effect the termination of a
member without having to constitute a lien on the membership share or to undertake the elaborate
process of selling the same at public auction. The articles of incorporation or the by-laws can very well
simply provide that the failure of a member to pay the dues on time is cause for the board of directors to
terminate membership. Yet Valley Golf was organized in such a way that membership is adjunct to
ownership of a share in the club; hence the necessity to dispose of the share to terminate membership.

Share ownership introduces another dimension to the case—the reality that termination of membership
may also lead to the infringement of property rights. Even though Valley Golf is a non-stock corporation,
as evinced by the fact that it is not authorized to distribute to the holder of its shares dividends or
allotments of the surplus profits on the basis of shares held,37 the Golf Share has an assigned value
reflected on the certificate of membership itself.38 Termination of membership in Valley Golf does not
merely lead to the withdrawal of the rights and privileges of the member to club properties and facilities
but also to the loss of the Golf Share itself for which the member had fully paid.

The claim of Valley Golf is limited to the amount of unpaid dues plus incremental costs. On the other
hand, Caram’s loss may encompass not only the amount he had paid for the share but also the price it
would have fetched in the market at the time his membership was terminated.

There is an easy way to remedy what is obviously an unfair situation. Taking the same example, Valley
Golf seizes the share, sells it to itself or a third person for ₱100.000.00, then refunds ₱99,000.00 back to
the delinquent member. On its face, such a mechanism obviates the inequity of the first example, and
assures that the loss sustained by the delinquent member is commensurate to the actual debt owed to
Valley Golf. After all, applying civil law concepts, the pecuniary injury sustained by Valley Golf
attributable to the delinquent member is only to the extent of the unpaid debt, and it would be difficult to
foresee what right under law Valley Golf would have to the remainder of the sale’s proceeds.

A refund mechanism may disquiet concerns of undue loss of property rights corresponding to
termination of membership. Yet noticeably, the by-laws of Valley Golf does not require the Club to refund
to the discharged member the remainder of the proceeds of the sale after the outstanding obligation is
extinguished. After petitioner had filed her complaint though, Valley Golf did inform her that the heirs of
Caram are entitled to such refund.

B.

Let us now turn to the other significant concern.

The by-laws does not provide for a mode of notice to the member before the board of directors puts up
the Golf Share for sale, yet the sale marks the termination of membership. Whatever semblance of a
notice that is afforded is bare at best, ambiguous at most. The member is entitled to receive a statement
of account every month; however, the mode by which the member is to receive such notice is not
elaborated upon. If the member fails to pay within 45 days from the due date, Valley Golf is immediately
entitled to have the member "posted as delinquent." While the assignation of "delinquent status" is
evident enough, it is not as clear what the word "posted" entails. Connotatively, the word could imply the
physical posting of the notice of delinquency within the club premises, such as a bulletin board, which we
recognize is often the case. Still, the actual posting modality is uncertain from the language of the by-laws.

The moment the member is "posted as delinquent," Valley Golf is immediately enabled to seize the share
and sell the same, thereby terminating membership in the club. The by-laws does not require any notice
to the member from the time delinquency is posted to the day the sale of the share is actually held. The
setup is to the extreme detriment to the member, who upon being notified that the lien on his share is
due for execution would be duly motivated to settle his accounts to foreclose such possibility.
Does the Corporation Code permit the termination of membership without due notice to the member?
The Code itself is silent on that matter, and the argument can be made that if no notice is provided for in
the articles of incorporation or in the by-laws, then termination may be effected without any notice at all.
Support for such an argument can be drawn from our ruling in Long v. Basa,39 which pertains to a
religious corporation that is also a non-stock corporation.40 Therein, the Court upheld the expulsion of
church members despite the absence of any provision on prior notice in the by-laws, stating that the
members had "waived such notice by adhering to those by-laws[,] became members of the church
voluntarily[,] entered into its covenant and subscribed to its rules [and by] doing so, they are bound by
their consent."41

However, a distinction should be made between membership in a religious corporation, which ordinarily
does not involve the purchase of ownership shares, and membership in a non-stock corporation such as
Valley Golf, where the purchase of an ownership share is a condition sine qua non. Membership in Valley
Golf entails the acquisition of a property right. In turn, the loss of such property right could also involve
the application of aspects of civil law, in addition to the provisions of the Corporation Code. To put it
simply, when the loss of membership in a non-stock corporation also entails the loss of property rights,
the manner of deprivation of such property right should also be in accordance with the provisions of the
Civil Code.

It has been held that a by-law providing that if a member fails to pay dues for a year, he shall be deemed
to have relinquished his membership and may be excluded from the rooms of the association and his
certificate of membership shall be sold at auction, and any surplus of the proceeds be paid over him, does
not ipso facto terminate the membership of one whose dues are a year in arrears; the remedy given for
non-payment of dues is not exclusive because the corporation, so long as he remains a member, may sue
on his agreement and collect them.42

V.

With these foregoing concerns in mind, were the actions of Valley Golf concerning the Golf Share and
membership of Caram warranted? We believe not.

It may be conceded that the actions of Valley Golf were, technically speaking, in accord with the
provisions of its by-laws on termination of membership, vaguely defined as these are. Yet especially since
the termination of membership in Valley Golf is inextricably linked to the deprivation of property rights
over the Golf Share, the emergence of such adverse consequences make legal and equitable standards
come to fore.

The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987 which we can cite with
approval. Lopez cites:

[I]n order that the action of a corporation in expelling a member for cause may be valid, it is essential, in
the absence of a waiver, that there shall be a hearing or trial of the charge against him, with reasonable
notice to him and a fair opportunity to be heard in his defense. (Fletcher Cyc. Corp., supra) If the method
of trial is not regulated by the by-laws of the association, it should at least permit substantial justice. The
hearing must be conducted fairly and openly and the body of persons before whom it is heard or who are
to decide the case must be unprejudiced. (SEC opinion dated September 29, 1987, Bacalaran-Sucat
Drivers Association)1avvphi1
It is unmistakably wise public policy to require that the termination of membership in a non-stock
corporation be done in accordance with substantial justice. No matter how one may precisely define such
term, it is evident in this case that the termination of Caram’s membership betrayed the dictates of
substantial justice.

Valley Golf alleges in its present petition that it was notified of the death of Caram only in March of
1990,43 a claim which is reiterated in its Reply to respondent’s Comment.44 Yet this claim is belied by the
very demand letters sent by Valley Golf to Caram’s mailing address. The letters dated 25 January 1987
and 7 March 1987, both of which were sent within a few months after Caram’s death are both addressed
to "Est. of Fermin Z. Caram, Jr.;" and the abbreviation "[e]st." can only be taken to refer to "estate." This is
to be distinguished from the two earlier letters, both sent prior to Caram’s death on 6 October 1986,
which were addressed to Caram himself. Inexplicably, the final letter dated 3 May 1987 was again
addressed to Caram himself, although the fact that the two previous letters were directed at the estate of
Caram stands as incontrovertible proof that Valley Golf had known of Caram’s death even prior to the
auction sale.

Interestingly, Valley Golf did not claim before the Court of Appeals that they had learned of Caram’s death
only after the auction sale. It also appears that Valley Golf had conceded before the SEC that some of the
notices it had sent were addressed to the estate of Caram, and not the decedent himself.45

What do these facts reveal? Valley Golf acted in clear bad faith when it sent the final notice to Caram
under the pretense they believed him to be still alive, when in fact they had very well known that he had
already died. That it was in the final notice that Valley Golf had perpetrated the duplicity is especially
blameworthy, since it was that notice that carried the final threat that his Golf Share would be sold at
public auction should he fail to settle his account on or before 31 May 1987.

Valley Golf could have very well addressed that notice to the estate of Caram, as it had done with the third
and fourth notices. That it did not do so signifies that Valley Golf was bent on selling the Golf Share,
impervious to potential complications that would impede its intentions, such as the need to pursue the
claim before the estate proceedings of Caram. By pretending to assume that Caram was then still alive,
Valley Golf would have been able to capitalize on his previous unresponsiveness to their notices and
proceed in feigned good faith with the sale.lawphil.netWhatever the reason Caram was unable to respond
to the earlier notices, the fact remains that at the time of the final notice, Valley Golf knew that Caram,
having died and gone, would not be able to settle the obligation himself, yet they persisted in sending him
notice to provide a color of regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the Golf Share, is
sufficient to nullify the sale and sustain the rulings of the SEC and the Court of Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the final notice to
Caram on the deliberate pretense that he was still alive could bring into operation Articles Articles 19, 20
and 21 under the Chapter on Human Relations of the Civil Code.46 These provisions enunciate a general
obligation under law for every person to act fairly and in good faith towards one another. Non-stock
corporations and its officers are not exempt from that obligation.

VI.
Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to provide any formal
notice and hearing procedure before a member’s share may be seized and sold. The Court would have
been satisfied had the by-laws or the articles of incorporation established a procedure which assures that
the member would in reality be actually notified of the pending accounts and provide the opportunity for
such member to settle such accounts before the membership share could be seized then sold to answer
for the debt. As we have emphasized, membership in Valley Golf and many other like-situated non-stock
corporations actually involves the purchase of a membership share, which is a substantially expensive
property. As a result, termination of membership does not only lead to loss of bragging rights, but the
actual deprivation of property.

The Court has no intention to interfere with how non-stock corporations should run their daily affairs.
The Court also respects the fact that membership is non-stock corporations is a voluntary arrangement,
and that the member who signs up is bound to adhere to what the articles of incorporation or the by-laws
provide, even if provisions are detrimental to the interest of the member. At the same time, in the
absence of a satisfactory procedure under the articles of incorporation or the by-laws that affords a
member the opportunity to defend against the deprivation of significant property rights in accordance
with substantial justice, the terms of the by-laws or articles of incorporation will not suffice. There will be
need in such case to refer to substantive law. Such a flaw attends the articles of incorporation and by-
laws of Valley Golf. The Court deems it judicious to refer to the protections afforded by the Civil Code,
with respect to the preservation, maintenance, and defense from loss of property rights.

The arrangement provided for in the afore-quoted by-laws of Valley Golf whereby a lien is constituted on
the membership share to answer for subsequent obligations to th