Corpo

Business Organization Cases #2
G.R. No. 154366 November 17, 2010

CEBU BIONIC BUILDERS SUPPLY, INC. and LYDIA SIA, Petitioners,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, JOSE TO CHIP, PATRICIO YAP and ROGER
BALILA,Respondents.
DECISION
LEONARDO – DE CASTRO, J.:
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the Resolution2 dated February 5,
2002 and the Amended Decision3 dated July 5, 2002 of the Court of Appeals in CA-G.R. CV No. 57216. In the
Resolution dated February 5, 2002, the Court of Appeals admitted the Motion for Reconsideration 4 of herein
respondents Development Bank of the Philippines (DBP), Jose To Chip, Patricio Yap and Roger Balila, notwithstanding
the fact that the same was filed more than six months beyond the reglementary period. Said motion prayed for the
reversal of the Court of Appeals Decision5 dated February 14, 2001, which affirmed the Decision 6dated April 25, 1997
of the Regional Trial Court (RTC) of Cebu, Branch 8, in Civil Case No. CEB-10104 that ruled in favor of petitioners. In
the Amended Decision of July 5, 2002, the Court of Appeals reversed its previous Decision dated February 14, 2001
and dismissed the petitioners’ complaint for lack of merit.
The facts leading to the instant petition are as follows:
On June 2, 1981, the spouses Rudy R. Robles, Jr. and Elizabeth R. Robles entered into a mortgage contract7 with DBP
in order to secure a loan from the said bank in the amount of ₱500,000.00. The properties mortgaged were a parcel of
land situated in Tabunoc, Talisay, Cebu, which was then covered by Transfer Certificate of Title (TCT) No. T- 47783 of
the Register of Deeds of Cebu, together with all the existing improvements, and the commercial building to be
constructed thereon8 (subject properties). Upon completion, the commercial building was named the State Theatre
Building.
On October 28, 1981, Rudy Robles executed a contract of lease in favor of petitioner Cebu Bionic Builders Supply, Inc.
(Cebu Bionic), a domestic corporation engaged in the construction business, as well as the sale of hardware materials.
The contract pertinently provides:
CONTRACT OF LEASE
KNOW ALL MEN BY THESE PRESENTS:
This Lease Contract made and entered into, by and between:
RUDY ROBLES, JR., Filipino, of legal age, married and resident of 173 Maria Cristina Ext., Cebu City, hereinafter
referred to as the LESSOR,
- and -
CEBU BIONIC BUILDER SUPPLY, represented by LYDIA SIA, Filipino, of legal age, married and with address at 240
Magallanes St., Cebu City hereinafter known as the LESSEE;
WITNESSETH:
The LESSOR is the owner of a commercial building along Tabunok, Talisay, Cebu, known as the State Theatre
Building.
The LESSOR agrees to lease unto the LESSEE and the LESSEE accepts the lease from the LESSOR, a portion of the
ground floor thereof, consisting of one (1) unit/store space under the following terms and conditions:
1. The LESSEE shall pay a monthly rental of One Thousand (₱1,000.00) Pesos, Philippine Currency.
The rental is payable in advance within the first five (5) days of the month, without need of demand;
2. That the term of this agreement shall start on November 1, 1981 and shall terminate on the last
day of every month thereafter; provided however that this contract shall be automatically renewed on
a month to month basis if no notice, in writing, is sent to the other party to terminate this agreement
after fifteen (15) days from receipt of said notice;
xxxx
9. Should the LESSOR decide to sell the property during the term of this lease contract or immediately
after the expiration of the lease, the LESSEE shall have the first option to buy and shall match offers
from outside parties.9 (Emphases ours.)
The above contract was not registered by the parties thereto with the Registry of Deeds of Cebu.
Subsequently, the spouses Robles failed to settle their loan obligation with DBP. The latter was, thus, prompted to
effect extrajudicial foreclosure on the subject properties.10 On February 6, 1987, DBP was the lone bidder in the
foreclosure sale and thereby acquired ownership of the mortgaged subject properties. 11 On October 13, 1988, a final
Deed of Sale12 was issued in favor of DBP.
Meanwhile, on June 18, 1987, DBP sent a letter to Bonifacio Sia, the husband of petitioner Lydia Sia who was then
President of Cebu Bionic, notifying the latter of DBP’s acquisition of the State Theatre Building. Said letter reads:
June 18, 1987
1
Mr. Bonifacio Sia
Bionic Builders’ Inc.
State Theatre Bldg.
Tabunok, Talisay, Cebu
Sir:
This refers to the commercial space you are occupying in the acquired property of the Bank, formerly owned by Rudy
Robles, Jr.
Please be informed that said property has been acquired through foreclosure on February 6, 1987. Considering
thereat, we require you to remit the rental due for June 1987.
If you wish to continue on leasing the property, we request you to come to the Bank for the execution of a Contract of
Lease, the salient conditions of which are as follows:
1. The lease will be on month to month basis, for a maximum period of one (1) year;
2. Deposit equivalent to two (2) months rental and advance of one (1) month rental, and the
remaining amount for one year period (equivalent to 9 months rental) shall be secured by either
surety bond, cash bond or assigned time deposit;
3. That in case there is a better offer or if the property will be subject of a purchase offer, within the
term, the lessor is given an option of first refusal, otherwise he has to vacate the premises within
thirty (30) days from date of notice.
We consider, temporarily, the current monthly rental based on the six-month receipts, which we require you to submit,
until such time when we will fix the amount accordingly.
If the contract of lease is not executed within thirty (30) days from date hereof, it is construed that you are not
interested in leasing the premises and will vacate within the said period.
Please be guided accordingly.
Truly yours,
(SGD)LUCILO S. REVILLAS
Branch Head13 (Emphases ours.)
On July 7, 1987, the counsel of Bonifacio Sia replied to the above letter, to wit:
July 7, 1987
Mr. Lucilo S. Revillas
Branch Head
Development Bank of the Philippines
Dear Mr. Revillas,
This has reference to your letter of 18 June 1987 which you sent to my client, Mr. Bonifacio Sia of Cebu Bionic
Builders’ Supply – the lessee of a commercial space of the State Theatre Bldg., located at Tabunok, Talisay, Cebu.
My client is amenable to the terms contained in your letter except the following:
1. In lieu of item no. 2 thereof, my client will deposit with your bank the amount of P10,000.00, as
assigned time deposit;
2. The 30 days notice you mentioned in your letter, (3), is too short. My client is requesting for at
least 60 days notice.
I sincerely hope that you will give due course to this request.
Thank you.
Truly yours,
(SGD) ANASTACIO T. MUNTUERTO, JR.14
Thereafter, on November 14, 1989, a Certificate of Time Deposit 15 for ₱11,395.64 was issued in the name of Bonifacio
Sia and the same was allegedly remitted to DBP as advance rental deposit.
For reasons unclear, however, no written contract of lease was executed between DBP and Cebu Bionic.
In the meantime, subsequent to the acquisition of the subject properties, DBP offered the same for sale along with its
other assets. Pursuant thereto, DBP published a series of invitations to bid on such properties, which were scheduled
on January 19, 1989,16 February 23, 1989,17 April 13, 1989,18 and November 15, 1990.19 As no interested bidder came
forward, DBP publicized an Invitation on Negotiated Sale/Offer, the relevant terms and conditions of which stated:
INVITATION ON NEGOTIATED SALE/OFFER
The DEVELOPMENT BANK OF THE PHILIPPINES, Cebu Branch, will receive SEALED NEGOTIATED OFFERS/PURCHASE
PROPOSALS tendered at its Branch Office, DBP Building, Osmeña Boulevard, Cebu City for the sale of its acquired
assets mentioned hereinunder within the "15-Day-Acceptance-Period" starting from NOVEMBER 19, 1990
up to 12:00 o’clock noon of DECEMBER 3, 1990. Sealed offers submitted shall be opened by the Committee on
Negotiated Offers at exactly 2:00 o’clock in the afternoon of the last day of the acceptance period in order to
determine the highest and/or most advantageous offer.
2
Item Description/Location Starting Price
No.
xxxx
II Commercial land, Lot No. 3681-C-3, having an area of 396 ₱1,838,100.00
sq. m., situated in Tabunok, Talisay, Cebu and covered by
TCT No. T-65199 (DBP), including the commercial building
thereon.
xxxx
A pre-numbered Acknowledgment Receipt duly signed by at least two (2) of the Committee members
shall be issued to the offeror acknowledging receipt of such offer.
Negotiated offers may be made in CASH or TERMS, the former requiring a deposit of 10% and the latter
20% of the starting price, either in the form of cash or cashier’s/manager’s check to be enclosed in the
sealed offer.
xxxx
Interested negotiated offerors are requested to see Atty. Apolinar K. Panal, Jr., Acquired Asset in Charge (Tel. No. 9-
63-25), in order to secure copies of the Letter-Offer form and Negotiated Sale Rules and Procedures.
NOTE: If no offer is received during the above stated acceptance period, the properties described above
shall be sold to the first offeror who submits an acceptable proposal on a "First-Come-First-Served"
basis.
City of Cebu, Philippines, November 16, 1990.
(SGD.) TIMOTEO P. OLARTE
Branch Head20 (Emphases ours.)
In the morning of December 3, 1990, the last day for the acceptance of negotiated offers, petitioners submitted
through their representative, Judy Garces, a letter-offer form, offering to purchase the subject properties for
₱1,840,000.00. Attached to the letter-offer was a copy of the Negotiated Sale Rules and Procedures issued by DBP and
a manager’s check for the amount of ₱184,000.00, representing 10% of the offered purchase price. This offer of
petitioners was not accepted by DBP, however, as the corresponding deposit therefor was allegedly insufficient.
After the lapse of the above-mentioned 15-day acceptance period, petitioners did not submit any other offer/proposal
to purchase the subject properties.1avvphi1
On December 17, 1990, respondents To Chip, Yap and Balila presented their letter-offer21 to purchase the subject
properties on a cash basis for ₱1,838,100.00. Said offer was accompanied by a downpayment of 10% of the offered
purchase price, amounting to ₱183,810.00. On even date, DBP acknowledged the receipt of and accepted their offer.
On December 28, 1990, respondents To Chip, Yap and Balila paid the balance of the purchase price and DBP issued a
Deed of Sale22 over the subject properties in their favor.
On January 11, 1991, the counsel of respondents To Chip, Yap and Balila sent a letter 23 addressed to the proprietor of
Cebu Bionic, informing the latter of the transfer of ownership of the subject properties. Cebu Bionic was ordered to
vacate the premises within thirty (30) days from receipt of the letter and directed to pay the rentals from January 1,
1991 until the end of the said 30-day period.
The counsel of Cebu Bionic replied24 that his client received the above letter on January 11, 1991. He stated that he
has instructed Cebu Bionic to verify first the ownership of the subject properties since it had the preferential right to
purchase the same. He likewise requested that he be furnished a copy of the deed of sale executed by DBP in favor of
respondents To Chip, Yap and Balila.
On February 15, 1991, respondent To Chip wrote a letter25 to the counsel of Cebu Bionic, insisting that he and his co-
respondents Yap and Balila urgently needed the subject properties to pursue their business plans. He also reiterated
their demand for Cebu Bionic to vacate the premises.
Shortly thereafter, on February 27, 1991, the counsel of respondents To Chip, Yap and Balila sent its final demand
letter26 to Cebu Bionic, warning the latter to vacate the subject properties within seven (7) days from receipt of the
letter, otherwise, a case for ejectment with damages will be filed against it. 27
Despite the foregoing notice, Cebu Bionic still paid28 to DBP, on March 22, 1991, the amount of ₱5,000.00 as monthly
rentals on the unit of the State Theatre Building it was occupying for period of November 1990 to March 1991.
On April 10, 1991, petitioners filed against respondents DBP, To Chip, Yap and Balila a complaint29 for specific
performance, cancellation of deed of sale with damages, injunction with a prayer for the issuance of a writ of
preliminary injunction.30 The complaint was docketed as Civil Case No. CEB-10104 in the RTC.
Petitioners alleged, inter alia, that Cebu Bionic was the lessee and occupant of a commercial space in the State
Theatre Building from October 1981 up to the time of the filing of the complaint. During the latter part of 1990, DBP
advertised for sale the State Theatre Building and the commercial lot on which the same was situated. In the prior
3
invitation to bid, the bidding was scheduled on November 15, 1990; while in the next, under the 15-day acceptance
period, the submission of proposals was to be made from November 19, 1990 up to 12:00 noon of December 3, 1990.
Petitioners claimed that, at about 10:00 a.m. on December 3, 1990, they duly submitted to Atty. Apolinar Panal, Jr.,
Chief of the Acquired Assets of DBP, the following documents, namely:
6.1 Letter-offer form, offering to purchase the property advertised, for the price of
₱1,840,000, which was higher than the starting price of ₱1,838,100.00 on cash basis. x x x;
6.2 Negotiated Sale Rules and Procedures, duly signed by plaintiff, x x x;
6.3 Manager’s check for the amount of ₱184,000 representing 10% of the deposit dated December 3, 1990
and issued by Allied Banking Corp. in favor of the Development Bank of the Philippines. x x x. 31 (Emphasis
ours.)
Petitioners asserted that the above documents were initially accepted but later returned. DBP allegedly advised
petitioners that "there was no urgent need for the same x x x, considering that the property will necessarily be sold to
[Cebu Bionic] for the reasons that there was no other interested party and that [Cebu Bionic] was a preferred party
being the lessee and present occupant of the property subject of the lease[.]" 32 Petitioners then related that, without
their knowledge, DBP sold the subject properties to respondents To Chip, Yap and Balila. The sale was claimed to be
simulated and fictitious, as DBP still received rentals from petitioners until March 1991. By acquiring the subject
properties, petitioners contended that DBP was deemed to have assumed the contract of lease executed between
them and Rudy Robles. As such, DBP was bound by the provision of the lease contract, which stated that:
9. Should the Lessor decide to sell the property during the term of this lease contract or immediately after the
expiration of the lease, the Lessee shall have the first option to buy and shall match offers from outside parties. 33
Petitioners sought the rescission of the contract of sale between DBP and respondents To Chip, Yap and Balila.
Petitioners also prayed for the issuance of a writ of preliminary injunction, restraining respondents To Chip, Yap and
Balila from registering the Deed of Sale in the latter’s favor and from undertaking the ejectment of petitioners from the
subject properties. Likewise, petitioners entreated that DBP be ordered to execute a deed of sale covering the subject
properties in their name and to pay damages and attorney’s fees.
In its answer,34 DBP denied the existence of a contract of lease between itself and petitioners. DBP countered that the
letter-offer of petitioners was actually not accepted as their offer to purchase was on a term basis, which therefore
required a 20% deposit. The 10% deposit accompanying the petitioners’ letter-offer was declared insufficient. DBP
stated that the letter-offer form was not completely filled out as the "Term" and "Mode of Payment" fields were left
blank. DBP then informed petitioner Lydia Sia of the inadequacy of her offer. After ascertaining that there was no
other offeror as of that time, Lydia Sia allegedly summoned back her representative who did not leave a copy of the
letter-offer and the attached documents. DBP maintained that petitioners’ documents did not show that the same were
received and approved by any approving authority of the bank. The letter-offer attached to the complaint, which
indicated that the mode of payment was on a cash basis, was allegedly not the document shown to DBP. In addition,
DBP argued that there was no assumption of the lease contract between Rudy Robles and petitioners since it acquired
the subject properties through the involuntary mode of extrajudicial foreclosure and its request to petitioners to sign a
new lease contract was simply ignored. DBP, therefore, insisted that petitioners’ occupancy of the unit in the State
Theatre Building was merely upon its acquiescence. The petitioners’ payment of rentals on March 22, 1991 was
supposedly made in bad faith as they were made to a mere teller who had no knowledge of the sale of the subject
properties to respondents To Chip, Yap and Balila. DBP, thus, prayed for the dismissal of the complaint and, by way of
counterclaim, asked that petitioners be ordered to pay damages and attorney’s fees.
Respondents To Chip, Yap and Balila no longer filed a separate answer, adopting instead the answer of DBP. 35
In an Order36 dated July 31, 1991, the RTC granted the prayer of petitioners for the issuance of a writ of preliminary
injunction.37
On April 25, 1997, the RTC rendered judgment in Civil Case No. CEB-10104, finding meritorious the complaint of the
petitioners. Explained the trial court:
It is a fact on record that [petitioners] complied with the requirements of deposit and advance rental as conditions for
constitution of lease between the parties. [Petitioners] in complying with the requirements, issued a time deposit in
the amount of ₱11,395.64 and remitted faithfully its monthly rentals until April, 1991, which monthly rental was no
longer accepted by the DBP. Although there was no formal written contract executed between
[respondent] DBP and the [petitioners], it is very clear that DBP opted to continue the old and previous
contract including the terms thereon by accepting the requirements contained in paragraph 2 of its
letter dated June 18, 1987. It is also a fact on record that under the lease contract continued by the DBP on the
[petitioners], it is provided in paragraph 9 thereof that the lessee shall have the first option to buy and shall match
offers from outside parties. And yet, [respondent] DBP never gave [petitioners] the first option to buy or to
match offers from outside parties, more specifically [respondents] To Chip, Balila and Yap. It is also a fact
on record that [respondent] DBP in its letter dated June 18, 1987 to [petitioners] wrote in paragraph 3 thereof, "that
in case there is better offer or if a property will be subject of purchase offer, within the term, the lessee is given the
option of first refusal, otherwise, he has to vacate the premises within thirty (30) days". Yet, [respondent] DBP
4
never informed [petitioners] that there was an interested party to buy the property, meaning,
[respondents To Chip, Yap and Balila], thus depriving [petitioners] of the opportunity of first refusal
promised to them in its letter dated June 18, 1987. x x x.38 (Emphases ours.)
As regards the offer of petitioners to purchase the subject properties from DBP, the RTC gave more credence to the
petitioners’ version of the facts, to wit:
It is also a fact on record that when [respondent] DBP offered the property for negotiated sale under the 15-day
acceptance period[, which] ended at noon of December 3, 1991, [Cebu Bionic] submitted its offer, complete with [the
required documents.] x x x.
xxxx
These requirements, however, were unceremoniously returned by [respondent] bank with the assurance that since
there was no other bidder of the said property, there was no urgency for the same and that [Cebu Bionic] also, in all
events, is entitled to first option being the present lessee.
The declaration of Atty. Panal to the effect that Cebu Bionic wanted to buy the property on installment terms, such
that the deposit of ₱184,000.00 was insufficient being only 10% of the offer, could not be given much credence as it is
refuted by Exh. "H" which is the negotiated offer to purchase form under the 15-day acceptance period accomplished
by [petitioners] which shows clearly the written word "Cash" after the printed words "Term" and "Mode of Payment",
Exhibit "J", the Manager’s check issued by Allied Banking Corporation dated December 3, 1990 in the amount of
₱184,000.00 representing 10% of the offer showing the mode of payment is for cash; Exhibit "K" which is the
application for Manager’s check in the amount of ₱184,000.00 dated December 3, 1990 showing the beneficiary as
DBP. If it is true that the offer of [petitioners] was for installment payments, then in the ordinary course
of human behavior, it would not have wasted effort in securing a Manager’s check in the amount of
₱184,000.00 which was insufficient for 20% deposit as required for installment payments. More
credible is the explanation [given by] witness Judy Garces when she said that DBP through Atty. Panal
returned the documents submitted by her, saying that there was no urgency for the same as there was
no other bidder of [the said] property and that Cebu Bionic was entitled to a first option to buy being the
present lessee. In the letter also of [respondent] bank dated June 18, 1987, it is important to note that aside from
requiring Cebu Bionic to comply with certain requirements of time deposit and advance rental, as condition for
constitution of lease between the parties and which was complied by Cebu Bionic[,] said letter further states in
paragraph 3 thereof that "in case there is [a] better offer or if the property will be subject of a purchase offer, within
the term, the lessee is given the option of first refusal, otherwise, he has to vacate the premises within thirty days". In
answer to the Court’s question, however, Atty. Panal admitted that he did not tell [petitioners] that there was another
party who was willing to purchase the property, in violation of [petitioners]’ right of first refusal. 39 (Emphasis ours.)
Likewise, the RTC found that respondents To Chip, Yap and Balila were aware of the lease contract involving the
subject properties before they purchased the same from DBP. Thus:
[Respondent] Jose To Chip lamely pretends ignorance that [petitioners] are lessees of the property, subject matter of
this case. He states that he and his partners, the other [respondents], were given assurances by Atty. Panal of the
DBP that [Lydia Sia] is not a lessee, although he knew that [petitioners] were presently occupying the property and
that it was possessed by [petitioners] even before it was owned by the DBP. x x x.
xxxx
[Respondent] Roger Balila, in his testimony, likewise pretended ignorance that he knew that [Lydia Sia] was a lessee
of the property. x x x.
xxxx
Upon further questioning by the Court, he admitted that [Lydia Sia] was not possessing the building freely; that she
was a lessee of Rudy Robles, the former owner, but cleverly insisted in disowning knowledge that [Lydia Sia] was a
lessee, denying knowledge that [Lydia Sia] was paying rentals to [respondent] bank. His pretended ignorance x x x
was a way of evading [Cebu Bionic’s] right of first priority to buy the property under the contract of lease. x x x The
Court is convinced that [respondents To Chip, Yap and Balila] knew that [Cebu Bionic] was the present lessee of the
property before they bought the same from [respondent] bank. Common observation, knowledge and experience
dictates that as a prudent businessman, it was but natural that he ask Lydia Sia what her status was in occupying the
property when he went to talk to her, that he ask her if she was a lessee. But he said, all he asked her was whether
she was interested to buy the property. x x x.40
The trial court, therefore, concluded that:
From the foregoing facts on record, it is thus clear that [petitioner] Cebu Bionic is the present lessee of the property,
the lease contract having been continued by [respondent] DBP when it received rental payments up to March of 1991
as well as the advance rental for one year represented by the assigned time deposit which is still in [respondent]
bank’s possession. The provision, therefore, in the lease contract, on the right of first option to buy and the right of
first refusal contained in [respondent] bank’s letter dated June 18, 1987, are still subsisting and binding up to the
present, not only on [respondent] bank but also on [respondents To Chip, Yap and Balila]. x x x.
xxxx
5
WHEREFORE, THE FOREGOING PREMISES CONSIDERED, judgment is hereby rendered:
(1) Rescinding the Deed of Sale dated December 28, 1990 between [respondent] Development Bank of the
Philippines and [respondents] Roger Balila, Jose To Chip and Patricio Yap;
(2) Ordering the [respondent] Development Bank of the Philippines to execute a Deed of Sale over the
property, subject matter of this case upon payment by [petitioners] of the whole consideration involved and to
complete all acts or documents necessary to have the title over said property transferred to the name of
[petitioners];
(3) Costs against [respondents].41
DBP forthwith filed a Notice of Appeal.42 Respondents To Chip, Yap and Balila filed a Motion for Reconsideration43of the
above decision, but the RTC denied the same in an Order 44 dated July 4, 1997. Said respondents then filed their Notice
of Appeal.45
On February 14, 2001, the Court of Appeals promulgated its Decision, 46 pronouncing that:
We find nothing erroneous with the judgment rendered by the trial court. Perforce, We sustain it and dismiss the
[respondents’] submission.
The RTC determined, upon evidence on record after a careful evaluation of the witnesses and their testimonies during
the trial that indeed [petitioners’] right of first option was violated and thus, rescission of the sale made by DBP to
[respondents To Chip, Yap and Balila] are in order.
xxxx
Apparently, DBP accepted [the documents submitted by petitioners] and thereafter, through Atty. Panal (of DBP),
returned all of it to the [petitioners] "with the assurance that since there was no other bidder of the said property,
there was no urgency for the same and that [Cebu Bionic] also, in all events, is entitled to first option being the
present lessee.
[DBP] maintains that the return of the documents [submitted by petitioners] was in order since the [petitioners]
offered to buy the property in question on installment basis requiring a higher 20% deposit. This, however, was
correctly rejected by the trial court[.] x x x
The binding effect of the lease agreement upon the [respondents To Chip, Yap and Balila] must be sustained since
from existing jurisprudence cited by the lower court, it was determined during trial that:
"... [respondents To Chip, Yap and Balila] knew that [Cebu Bionic] was the present lessee of the property
before they bought the same from [respondent] bank. Common observation, knowledge and experience
dictates that as a prudent businessman, it was but natural that he ask Lydia Sia what her status was in
occupying the property when he went to talk to her, that he ask her if she was a lessee. But he said, all
he asked her was whether she was interested to buy the property. x x x.
Moreover, We find that the submissions presented by the [respondents] in their respective briefs argue against
questions of facts as found and determined by the lower court. The respondents’ contentions consist of crude attempts
to question the assessment and evaluation of testimonies and other evidence gathered by the trial court.
It must be remembered that findings of fact as determined by the trial court are entitled to great weight and respect
from appellate courts and should not be disturbed on appeal unless for [strong] and cogent reasons. These findings
generally, so long as supported by evidence on record, are not to be disturbed unless there are some facts or evidence
which the trial court has misappreciated or overlooked, and which if considered would have altered the results of the
entire case. Sad to say for the [respondents], We see no reason to depart from this well-settled legal principle.
WHEREFORE, in view of the foregoing, the judgment of the Regional Trial Court of Cebu City, Branch 8, in Civil
Case No. 10104 is hereby AFFIRMED in toto.47
On October 1, 2001, petitioners filed a Motion for Issuance of Entry of Judgment.48 Petitioners stressed that, based on
the records of the case, respondents were served a copy of the Court of Appeals Decision dated February 14, 2001
sometime on March 7, 2001. However, petitioners discovered that respondents have not filed any motion for
reconsideration of the said decision within the reglementary period therefor, nor was there any petition for certiorari or
appeal filed before the Supreme Court.
In response to the above motion, respondents To Chip, Yap and Balila filed on October 8, 2001 a Motion to Admit
Motion for Reconsideration.49 Atty. Francis M. Zosa, the counsel for respondents To Chip, Yap and Balila, explained
that he sent copies of the motion for reconsideration to petitioners and DBP via personal delivery. On the other hand,
the copies of the motion to be filed with the Court of Appeals were purportedly sent to Mr. Domingo Tan, a friend of
Atty. Zosa in Quezon City, who agreed to file the same personally with the appellate court in Manila. When Atty. Zosa
inquired if the motion for reconsideration was accordingly filed, Mr. Tan allegedly answered in the affirmative. To his
surprise, Atty. Zosa received a copy of petitioners’ Motion for Issuance of Entry of Judgment. Atty. Zosa, thus,
attributed the failure of his clients to file a motion for reconsideration on the mistake, excusable negligence and/or
fraud committed by Mr. Tan.
In the assailed Resolution dated February 5, 2002, the Court of Appeals granted the motion of respondents To Chip,
Yap and Balila and admitted the motion for reconsideration attached therewith "in the higher interest of substantial
justice."50
6
On July 5, 2002, the Court of Appeals reversed its original Decision dated February 14, 2001, reasoning thus:
After a judicious review and reevaluation of the evidence and facts on record, we are convinced that DBP had
terminated the Robles lease contract. From its letter of June 18, 1987, DBP had expressly notified [petitioners] that
"(I)f they wish to continue on leasing the property x x x" "to come to the Bank for the execution of a Contract of
‘1. The lease will be on a month to month basis for a maximum period of one (1) year;
‘2. Deposit equivalent to two (2) months rental and advance of one (1) month rental, and the
remaining amount for one year (equivalent to 9 months rental) shall be secured by either surety
bond, cash bond or assigned time deposit;
‘3. That in case there is a better offer or if the property will be subject of a purchase offer, within
the term, the lessor is given an option of first refusal, otherwise he has to vacate the premises
within thirty (30) days from date of notice.’
We consider, temporarily, the current monthly rental based on the six-month receipts, which we require you to submit,
until such time when we will fix the amount accordingly."
Evidently, except for the remittance of the monthly rentals up to March 1991, the conditions imposed by DBP have
never been complied with. [Petitioners] did not go to the Bank to sign any new written contract of lease with DBP.
[Petitioners] also did not put up a surety bond nor cash bond nor assign a time deposit to secure the payment of
rental for nine (9) months, although the [petitioners] opened a time deposit but did not assign it to DBP.
But even with the remittance and acceptance of the deposit made by [petitioners] equivalent to two (2) months rental
and advance of one (1) month rental it does not necessarily follow that DBP opted to continue with the Robles lease.
This is because the Robles contract provides:
"That the term of the agreement shall start on November 1, 1981 and shall terminate on the last day of
every month thereafter, provided however, that this contract shall be automatically renewed on a
month to month basis if no notice in writing is sent to the other party to determine to terminate this
agreement after fifteen (15) days from the receipt of said notice."
Here, a notice was sent to [petitioners] on June 18, 1987, informing them that if they "wish to continue on leasing the
property, we request you to come to the Bank for the execution of a Contract of Lease x x x."
[Petitioners] failed to enter into the contract of lease required by DBP for it to continue occupying the leased premises.
Because of [petitioners’] failure to comply with the conditions embodied in the 18 June 1987 letter, it cannot be said
that [petitioners] entered into a new contract with DBP where they were given the first option to buy the leased
property and to match offers from outside parties.
xxxx
Be that as it may, DBP continued to accept the monthly rentals based on the old Robles contract despite the fact that
the [petitioners] failed to enter into a written lease contract with it. Corollarily, the relations between the parties is now
governed by Article 1670 of the New Civil Code, thus:
"Art. 1670. If at the end of contract the lessee should continue enjoying the thing leased for fifteen days with the
acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, it is
understood that there is an implied new lease, not for the period of the original contract, but for the time established
in Articles 1682 and 1687. The other terms of the original contract shall be revived."
xxxx
x x x [T]he acceptance by DBP of the monthly rentals does not mean that the terms of the Robles contract were
revived. In the case of Dizon vs. Court of Appeals, the Supreme Court declared that:
"The other terms of the original contract of lease which are revived in the implied new lease under Article 1670 of the
New Civil Code are only those terms which are germane to the lessee’s right [of] continued enjoyment of the property
leased – an implied new lease does not ipso facto carry with it any implied revival of any option to purchase the leased
premises."
In view of the foregoing, it is clear that [petitioners] had no right to file a case for rescission of the deed of
saleexecuted by DBP in favor of [respondents To Chip, Yap and Balila] because said deed of sale did not violate their
alleged first option to buy or match offers from outside parties which is legally non-existent and which was not
impliedly renewed under Article 1670 of the Civil Code.
WHEREFORE, premises considered, the 14 February 2001 Decision is hereby RECONSIDERED and another one
is issued REVERSING the 25 April 1997 Decision of the Regional Trial Court, Branch 8, Cebu City in Civil Case No.
CEB-10104 and the complaint of [petitioners] is DISMISSED for lack of merit.51
Without seeking a reconsideration of the above decision, petitioners filed the instant petition. In their Comment,
respondents opposed the petition on both procedural and substantive grounds.
In petitioners’ Memorandum, they summarized the issues to be resolved in the present case as follows:
A) PRELIMINARY ISSUES:
I
7
WHETHER OR NOT THE VERIFICATION (AND CERTIFICATION OF NON-FORUM SHOPPING) IN THE
INSTANT PETITION WAS PROPER AND VALID DESPITE ITS BEING SIGNED BY ONLY ONE OF THE
TWO PETITIONERS.
II
WHETHER OR NOT ONLY QUESTIONS OF LAW AND NOT OF FACT CAN BE RAISED IN THE INSTANT
PETITION BEFORE THIS HON. SUPREME COURT.
B) MAIN AND PRINCIPAL ISSUES IN THE INSTANT PETITION:
I
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED IN ADMITTING RESPONDENTS’ MOTION
FOR RECONSIDERATION DESPITE ITS BEING FILED OUT OF TIME
II
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED IN DECLARING THAT PETITIONERS DID
NOT ENTER INTO CONTRACT WITH RESPONDENT DBP CONTINUING THE TERMS OF THE ROBLES
CONTRACT
III
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT DECLARED THAT THE
CONTINUATION BY RESPONDENT DBP OF THE LEASE CONTRACT DID NOT CONTAIN THE RIGHT OF
FIRST REFUSAL
IV
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT DECLARED THAT THE LEASE
CONTRACT IS GOVERNED BY ART. 1670 OF THE NEW CIVIL CODE
V
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT FAILED TO RECOGNIZE
PETITIONERS’ RIGHT OF FIRST REFUSAL TO WHICH RESPONDENTS WERE BOUND
VI
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED WHEN IT FAILED TO DECLARE THAT
RESPONDENT DBP HAD VIOLATED PETITIONERS’ RIGHTS
VII
WHETHER OR NOT THE HON. COURT OF APPEALS ERRED IN REVERSING ITS OWN JUDGMENT AND
DISMISSING PETITIONERS’ CLAIM FOR RESCISSION52
We shall first resolve the preliminary issues.
Respondents To Chip, Yap and Balila argue that the instant petition should be dismissed outright as the verification
and certification of non-forum shopping was executed only by petitioner Lydia Sia in her personal capacity, without the
participation of Cebu Bionic.
The Court is not persuaded.
Except for the powers which are expressly conferred on it by the Corporation Code and those that are implied by or
are incidental to its existence, a corporation has no powers. It exercises its powers through its board of directors
and/or its duly authorized officers and agents. Thus, its power to sue and be sued in any court is lodged with the
board of directors that exercises its corporate powers. 53 Physical acts, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of
directors.54
In this case, respondents To Chip, Yap and Balila obviously overlooked the Secretary’s Certificate 55 attached to the
instant petition, which was executed by the Corporate Secretary of Cebu Bionic. Unequivocally stated therein was the
fact that the Board of Directors of Cebu Bionic held a special meeting on July 26, 2002 and they thereby approved a
Resolution authorizing Lydia Sia to elevate the present case to this Court in behalf of Cebu Bionic, to wit:
Whereas, the board appointed LYDIA I. SIA to act and in behalf of the corporation to file the CERTIORARI with the
Supreme Court in relations to the decision of the Court of Appeals dated July 5, 2002 which reversed its own judgment
earlier promulgated on February 14, 2001 entitled CEBU BIONIC BUILDERS SUPPLY, INC. and LYDIA SIA, (Petitioners-
Appellants) –versus – THE DEVELOPMENT BANK OF THE PHILIPPINES, JOSE TO CHIP, PATRICIO YAP and ROGER
BALILA (Respondents- Appelles), docketed CA-G.R. NO. 57216.
Whereas, on mass unanimously motion of all members of directors present hereby approved the appointment of
LYDIA I. SIA to act and sign all papers in connection of CA-G.R. NO. 57216.
Resolved and it is hereby resolve to appoint and authorized LYDIA I. SIA to sign and file with the SUPREME COURT in
connection to decision of the Court of Appeals as above mention. 56
Respondents To Chip, Yap and Balila next argue that the instant petition raises questions of fact, which are not
allowed in a petition for review on certiorari. They, therefore, submit that the factual findings of the Court of Appeals
are binding on this Court.
Section 1, Rule 45 of the Rules of Court categorically states that the petition filed thereunder shall raise only questions
of law, which must be distinctly set forth. A question of law arises when there is doubt as to what the law is on a
8
certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the alleged
facts. For a question to be one of law, the same must not involve an examination of the probative value of the
evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law
provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented,
the question posed is one of fact.57
The above rule, however, admits of certain exceptions, 58 one of which is when the findings of the Court of Appeals are
contrary to those of the trial court. As will be discussed further, this exception is attendant in the case at bar.
We now determine the principal issues put forward by petitioners.
First off, petitioners fault the Court of Appeals for admitting the Motion for Reconsideration of its Decision dated
February 14, 2001, which was filed by respondents To Chip, Yap and Balila more than six months after receipt of the
said decision. The motion was eventually granted and the Court of Appeals issued its assailed Amended Decision,
ruling in favor of respondents.
Indeed, the appellate court’s Decision dated February 14, 2001 would have ordinarily attained finality for failure of
respondents to seasonably file their Motion for Reconsideration thereon. However, we agree with the Court of Appeals
that the higher interest of substantial justice will be better served if respondents’ procedural lapse will be excused.
Verily, we had occasion to apply this liberality in the application of procedural rules in Barnes v. Padilla59 where we
aptly declared that –
The failure of the petitioner to file his motion for reconsideration within the period fixed by law renders the decision
final and executory. Such failure carries with it the result that no court can exercise appellate jurisdiction to review the
case. Phrased elsewise, a final and executory judgment can no longer be attacked by any of the parties or be
modified, directly or indirectly, even by the highest court of the land.
However, this Court has relaxed this rule in order to serve substantial justice considering (a) matters of life, liberty,
honor or property, (b) the existence of special or compelling circumstances, (c) the merits of the case, (d) a cause not
entirely attributable to the fault or negligence of the party favored by the suspension of the rules, (e) a lack of any
showing that the review sought is merely frivolous and dilatory, and (f) the other party will not be unjustly prejudiced
thereby.60
In this case, what are involved are the property rights of the parties given that, ultimately, the fundamental issue to be
determined is who among the petitioners and respondents To Chip, Yap and Balila has the better right to purchase the
subject properties. More importantly, the merits of the case sufficiently called for the suspension of the rules in order
to settle conclusively the rights and obligations of the parties herein.
In essence, the questions that must be resolved are: 1) whether or not there was a contract of lease between
petitioners and DBP; 2) if in the affirmative, whether or not this contract contained a right of first refusal in favor of
petitioners; and 3) whether or not respondents To Chip, Yap and Balila are likewise bound by such right of first
refusal.
Petitioners contend that there was a contract of lease between them and DBP, considering that they had been allowed
to occupy the premises of the subject property from 1987 up to 1991 and DBP received their rental payments
corresponding to the said period. Petitioners claim that DBP were aware of their lease on the subject property when
the latter foreclosed the same and the acquisition of the subject properties through foreclosure did not terminate the
lease. Petitioners subscribe to the ruling of the RTC that even if there was no written contract of lease, DBP chose to
continue the existing contract of lease between petitioners and Rudy Robles by accepting the requirements set down
by DBP on the letter dated June 18, 1987. Petitioners likewise posit that the contract of lease between them and Rudy
Robles never expired, inasmuch as the contract did not have a definite term and none of the parties thereto
terminated the same. In view of the continuation of the lease contract between petitioners and Rudy Robles,
petitioners submit that Article 1670 of the Civil Code on implied lease is not applicable on the instant case.
We are not persuaded.
In Uy v. Land Bank of the Philippines,61 the Court held that "[i]n respect of the lease on the foreclosed property, the
buyer at the foreclosure sale merely succeeds to the rights and obligations of the pledgor-mortgagor subject to the
provisions of Article 1676 of the Civil Code on its possible termination. This article provides that ‘[t]he purchaser of a
piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save
when there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the
lease.’ In short, the buyer at the foreclosure sale, as a rule, may terminate an unregistered lease except when it knows
of the existence of the lease."
In the instant case, the lease contract between petitioners and Rudy Robles was not registered. 62 During trial, DBP
denied having any knowledge of the said lease contract.63 It asserted that the lease was merely presumed in view of
the existence of tenants in the subject property.64 Nevertheless, DBP recognized and acknowledged this lease contract
in its letter dated June 18, 1987, which was addressed to Bonifacio Sia, then President of Cebu Bionic. DBP even
required Sia to pay the monthly rental for the month of June 1987, thereby exercising the right of the previous lessor,
Rudy Robles, to collect the rental payments from the lessee. In the same letter, DBP extended an offer to Cebu Bionic
to continue the lease on the subject property, outlining the provisions of the proposed contract and specifically
9
instructing the latter to come to the bank for the execution of the same. DBP likewise gave Cebu Bionic a 30-day
period within which to act on the said contract execution. Should Cebu Bionic fail to do so, it would be deemed
uninterested in continuing with the lease. In that eventuality, the letter states that Cebu Bionic should vacate the
premises within the said period.
Instead of acceding to the terms of the aforementioned letter, the counsel of Cebu Bionic sent a counter-offer to DBP
dated July 7, 1987, suggesting a different mode of payment for the rentals and requesting for a 60-day period within
which time the parties will execute a new contract of lease.
The parties, however, failed to execute a written contract of lease. Petitioners put the blame on DBP, asserting that no
contract was signed because DBP did not prepare it for them. DBP, on the other hand, counters that it was petitioners
who did not positively act on the conditions for the execution of the lease contract. In view of the counter-offer of
petitioners, DBP and respondents To Chip, Yap and Balila argue that there was no meeting of minds between DBP and
petitioners, which would have given rise to a new contract of lease.
The Court rules that, indeed, no new contract of lease was ever perfected between petitioners and DBP.
In Metropolitan Manila Development Authority v. JANCOM Environmental Corporation ,65 we emphasized that:
Under Article 1305 of the Civil Code, "[a] contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service." A contract undergoes three distinct
stages — preparation or negotiation, its perfection, and finally, its consummation. Negotiation begins from the time
the prospective contracting parties manifest their interest in the contract and ends at the moment of agreement of the
parties. The perfection or birth of the contract takes place when the parties agree upon the essential elements of the
contract. The last stage is the consummation of the contract wherein the parties fulfill or perform the terms agreed
upon in the contract, culminating in the extinguishment thereof ( Bugatti vs. CA, 343 SCRA 335 [2000]). Article 1315 of
the Civil Code, provides that a contract is perfected by mere consent. Consent, on the other hand, is manifested by the
meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract (See Article
1319, Civil Code). x x x.66
In the case at bar, there was no concurrence of offer and acceptance vis-à-vis the terms of the proposed lease
agreement. In fact, after the reply of petitioners’ counsel dated July 7, 1987, there was no indication that the parties
undertook any other action to pursue the execution of the intended lease contract. Petitioners even admitted that they
merely waited for DBP to present the contract to them, despite being instructed to come to the bank for the execution
of the same.67
Contrary to the ruling of the RTC, the Court is also not convinced that DBP opted to continue the existing lease
contract between petitioners and Rudy Robles.
The findings of the RTC that DBP supposedly accepted the requirements the latter set forth in its letter dated June 18,
1987 is not well taken. To recapitulate, the third paragraph of the letter reads:
If you wish to continue on leasing the property, we request you to come to the Bank for the execution of a Contract of
1. The lease will be on month to month basis, for a maximum period of one (1) year;
2. Deposit equivalent to two (2) months rental and advance of one (1) month rental, and the remaining
amount for one year period (equivalent to 9 months rental) shall be secured by either surety bond, cash bond
or assigned time deposit;
3. That in case there is a better offer or if the property will be subject of a purchase offer, within the term, the
lessor is given an option of first refusal, otherwise he has to vacate the premises within thirty (30) days from
date of notice.68
The so-called "requirements" enumerated in the above paragraph are not really requirements to be complied with by
the petitioners for the execution of the proposed lease contract, as apparently considered by the RTC and the
petitioners. A close reading of the letter reveals that the items enumerated therein were in fact the salient terms and
conditions of the proposed contract of lease, which the DBP and the petitioners were to execute if the latter were so
willing. Also, the Certificate of Time Deposit in the amount of ₱11,395.64, which was allegedly paid to DBP as advance
rental deposit pursuant to the said requirements, was not even clearly established as such since it was neither secured
by a security bond or a cash bond, nor was it assigned to DBP.
The contention that the lease contract between petitioners and Rudy Robles did not expire, given that it did not have a
definite term and the parties thereto failed to terminate the same, deserves scant consideration. To recall, the second
paragraph of the terms and conditions of the contract of lease between petitioners and Rudy Robles reads:
2. That the term of this agreement shall start on November 1, 1981 and shall terminate on the last day of every month
thereafter; provided however that this contract shall be automatically renewed on a month to month basis if no notice,
in writing, is sent to the other party to terminate this agreement after fifteen (15) days from receipt of said
notice.69 (Emphases ours.)
Crystal clear from the above provision is that the lease is on a month-to-month basis. Relevantly, the well-entrenched
principle is that a lease from month-to-month is with a definite period and expires at the end of each month upon the
demand to vacate by the lessor.70 As held by the Court of Appeals in the assailed Amended Decision, the above-
10
mentioned lease contract was duly terminated by DBP by virtue of its letter dated June 18, 1987. We reiterate that the
letter explicitly directed the petitioners to come to the office of the DBP if they wished to enter into a new lease
agreement with the said bank. Otherwise, if no contract of lease was executed within 30 days from the date of the
letter, petitioners were to be considered uninterested in entering into a new contract and were thereby ordered to
vacate the property. As no new contract was in fact executed between petitioners and DBP within the 30-day period,
the directive to vacate, thus, took effect. DBP’s letter dated June 18, 1987, therefore, constituted the written notice
that was required to terminate the lease agreement between petitioners and Rudy Robles. From then on, the
petitioners’ continued possession of the subject property could be deemed to be without the consent of DBP.
Thusly, petitioners’ assertion that Article 1670 of the Civil Code is not applicable to the instant case is correct. The
reason, however, is not that the existing contract was continued by DBP, but because the lease was terminated by
DBP, which termination was accompanied by a demand to petitioners to vacate the premises of the subject property.
Article 1670 states that "[i]f at the end of the contract the lessee should continue enjoying the thing leased for fifteen
days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been
given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time
established in Articles 1682 and 1687. The other terms of the original contract shall be revived." In view of the order
to vacate embodied in the letter of DBP dated June 18, 1987 in the event that no new lease contract is entered into,
the petitioners’ continued possession of the subject properties was without the acquiescence of DBP, thereby negating
the constitution of an implied lease.
Contrary to the ruling of the RTC, DBP’s acceptance of petitioners’ rental payments of ₱5,000.00 for the period of
November 1990 to March 1991 did not likewise give rise to an implied lease between petitioners and DBP. In
Tagbilaran Integrated Settlers Association (TISA) Incorporated v. Court of Appeals, 71 we held that "the subsequent
acceptance by the lessor of rental payments does not, absent any circumstance that may dictate a contrary
conclusion, legitimize the unlawful character of their possession." In the present case, the petitioners’ rental payments
to DBP were made in lump sum on March 22, 1991. Significantly, said payments were remitted only after petitioners
were notified of the sale of the subject properties to respondents To Chip, Yap and Balila and after the petitioners
were given a final demand to vacate the properties. These facts substantially weaken, if not controvert, the finding of
the RTC and the argument of petitioners that the latter were faithfully remitting their rental payments to DBP until the
year 1991.
Thus, having determined that the petitioners and DBP neither executed a new lease agreement, nor entered into an
implied lease contract, it follows that petitioners’ claim of entitlement to a right of first refusal has no leg to stand on.
Furthermore, even if we were to grant, for the sake of argument, that an implied lease was constituted between
petitioners and the DBP, the right of first refusal that was contained in the prior lease contract with Rudy Robles was
not renewed therewith. This is in accordance with the ruling in Dizon v. Magsaysay,72 which involved the issue of
whether a provision regarding a preferential right to purchase is revived in an implied lease under Article 1670, to wit:
"[T]he other terms of the original contract" which are revived in the implied new lease under Article 1670 are only
those terms which are germane to the lessee’s right of continued enjoyment of the property leased. This is a
reasonable construction of the provision, which is based on the presumption that when the lessor allows the lessee to
continue enjoying possession of the property for fifteen days after the expiration of the contract he is willing that such
enjoyment shall be for the entire period corresponding to the rent which is customarily paid – in this case up to the
end of the month because the rent was paid monthly. Necessarily, if the presumed will of the parties refers to the
enjoyment of possession the presumption covers the other terms of the contract related to such possession, such as
the amount of rental, the date when it must be paid, the care of the property, the responsibility for repairs, etc. But no
such presumption may be indulged in with respect to special agreements which by nature are foreign to the right of
occupancy or enjoyment inherent in a contract of lease.73
DBP cannot, therefore, be accused of violating the rights of petitioners when it offered the subject properties for sale,
and eventually sold the same to respondents To Chip, Yap and Balila, without first notifying petitioners. Neither were
the said respondents bound by any right of first refusal in favor of petitioners. Consequently, the sale of the subject
properties to respondents was valid. Petitioners’ claim for rescission was properly dismissed.
WHEREFORE, the Petition for Review on Certiorari under Rule 45 of the Rules of Court is DENIED. The Resolution
dated February 5, 2002 and the Amended Decision dated July 5, 2002 of the Court of Appeals in CA-G.R. CV No.
57216 are hereby AFFIRMED. No costs.
SO ORDERED.
11
G.R. No. 125198 March 3, 1997
MSCI-NACUSIP Local Chapter, petitioner,
vs.
NATIONAL WAGES AND PRODUCTIVITY COMMISSION and MONOMER SUGAR CENTRAL,
INC., respondents.
HERMOSISIMA, JR., J.:

This is a petition for certiorari questioning the February 1, 1995 Decision of public respondent National Wages and
Productivity Commission (Commission, for brevity) in NWPC Case No. E-93-007 which reversed on appeal the August
17, 1993 Decision of the Regional Tripartite Wages and Productivity Board VI (Board, for brevity) denying the
application for exemption of private respondent Monomer Sugar Central, Inc. (MSCI, for brevity) from Wage Order No.
RO VI-01 issued by the Board.
The relevant antecedents are undisputed.
On January 11, 1990, Asturias Sugar Central, Inc. (ASCI, for brevity), executed a Memorandum of Agreement with
Monomer Trading Industries, Inc. (MTII, for brevity), whereby MTII shall acquire the assets of ASCI by way of a Deed
of Assignment provided that an entirely new organization in place of MTII shall be organized, which new corporation
shall be the assignee of the assets of ASCI.
By virtue of this Agreement, a new corporation was organized and incorporated on February 15, 1990 under the
corporate name Monomer Sugar Central, Inc. or MSCI, the private respondent herein.
On January 16, 1991, MSCI applied for exemption from the coverage of Wage Order No. RO VI-01 issued by the Board
on the ground that it is a distressed employer. In support thereto, MSCI submitted its audited financial statements and
income tax returns duly stamped "received" by the Bureau of Internal Revenue (BIR) and the Securities and Exchange
Commission (SEC) for the period beginning February 15, 1990 and ending August 31, 1990, including the quarterly
financial statements and income tax returns for the two quarters ending November 30, 1990 and February 28, 1991.
The petitioner herein MSCI-NACUSIP Local Chapter (Union, for brevity), in opposition, maintained that MSCI is not
distressed; that respondent applicant has not complied with the requirements for exemption; and that the financial
statements submitted by MSCI do not reflect the true and valid financial status of the company, and that the paid-up
capital would have been higher than P5 million and thus impairment would have been lower than 25% had the pre-
organization agreement between ASCI and MTII been complied with.
The Board conducted hearings on the application, during which the applicant was required to submit additional
documents such as its Articles of Incorporation, Memorandum of Agreement between ASCI and MTII, SEC registration,
including the schedules of its long-term liabilities, income and expenses, production reports and mill share, among
others.
On August 17, 1993, the Board denied MSCI's application for exemption based on the finding that the applicant's
losses of P3,400,738.00 for the period February 15, 1990 to August 31, 1990 constitute an impairment of only 5.25%
of its paid-up capital of P64,688,528.00, can not be said to be sufficient to meet the required 25% in order to qualify
for the exemption, as provided in NWPC Guidelines No. 01, Series of 1992 entitled "REVISED GUIDELINES ON
EXEMPTION FROM COMPLIANCE WITH THE PRESCRIBED WAGE/COST OF LIVING ALLOWANCE INCREASES GRANTED
BY THE REGIONAL TRIPARTITE WAGES AND PRODUCTIVITY BOARDS:"
Sec. 3. CRITERIA FOR EXEMPTION
The following criteria shall be used to determine whether the applicant establishment is qualified for
exemption:
xxx xxx xxx
3. For Distressed Establishments:
a. In the case of a stock corporation, partnership, single proprietorship, non-stock, non-profit
organization or cooperative engaged in a business activity or charging fees for its services —
a.1 When accumulated losses for the last 2 full accounting periods and interim period,
if any, immediately preceding the effectivity of the Order have impaired by at least 25
percent the:
— Paid-up capital at the end of the last full accounting period preceding the effectivity of the Order, in
the case of corporations:
— Total invested capital at the beginning of the last full accounting period preceding the effectivity of
the Order in the case of partnerships and single proprietorships.
xxx xxx xxx
The motion for reconsideration, filed by MSCI on September 20, 1993, was denied by the Board on October 12, 1993.
A timely appeal was brought before the public respondent Commission. In its decision dated February 1, 1995, the
Commission reversed and set aside the foregoing orders of the Board, and granted MSCI's application for exemption
from Wage Order No. RO VI-01, for a period of one (1) year from its effectivity or from November 27, 1990 to
November 26, 1991, in the following manner:
12
WHEREFORE, premises considered, the Orders of the Board appealed from are hereby REVERSED and
SET ASIDE. Monomer is hereby GRANTED full exemption from Wage Order No. RO VI-01, for a period
of one year from effectivity of the Wage Order, which is from 27 November 1990 to 26 November
1991.
SO DECIDED.1
Petitioner has come before us by way of a Petition for Certiorari under Rule 65.
The issue posed is whether or not respondent MSCI can qualify as a distressed employer from February 15, 1990 to
August 31, 1990 as well as during the interim period from September 1, 1990 to November 30, 1990 and thus be
entitled to exemption from compliance with Wage Order No. RO VI-01. To resolve this issue, however, a pivotal
determination must first be made: What is the correct paid-up capital of MSCI for the pertinent period covered by the
application for exemption — P5 million or P64,688,528.00?
The Board held that the paid-up capital of MSCI on the aforesaid dates was actually P64,688,528.00 and not P5 million
as claimed by MSCI in its application for exemption and, thus, the established losses amounting to P3,400,738.00
constitute an impairment of only 5.25% of the true paid-up capital of P64 million plus,2 which losses are not enough to
meet the required 25% impairment requirement. This conclusion is anchored on the belief of the Board that the value
of the assets of ASCI, party to the Memorandum of Agreement, transferred to MSCI on March 28, 1990 should be
taken into consideration in computing the paid-up capital of MSCI to reflect its true financial structure. Moreover, the
loans or advances extended by MTII, the other party to the Agreement, to MSCI should allegedly be treated as
additional investments to MSCI, 3 and must therefore be included in computing respondent's paid-up capital.
Public respondent Commission thought otherwise. In reversing the Board and granting the exemption, the Commission
held that the Board exceeded its authority in computing and giving new valuation to what should be the paid-up
capital of MSCI. It stressed that RA No. 6727, or the Wage Rationalization Act, and its implementing guidelines have
not conferred upon the Board the authority to change the paid-up capital of a corporation.4
The foregoing asseveration of the parties considered, we find no grave abuse of discretion on the part of the
Commission in setting aside the findings of the Board and granting full exemption to MSCI from Wage Order No. RO
VI-01.
NWPC Guidelines No. 01, Series of 1992 as well as the new NWPC Guidelines No. 01, Series of 1996, define Capital as
referring to paid-up capital at the end of the last full accounting period, in the case of corporations or total invested
capital at the beginning of the period under review, in the case of partnerships and single proprietorships. To have a
clear understanding of what paid-up capital is, however, a referral to Sections 12 and 13 of BP Blg. 68 or the
Corporation Code would be very helpful, viz:
Sec. 12. Minimum capital stock required of stock corporations. — Stock corporations incorporated
under this Code shall not be required to have any minimum authorized capital stock except as
otherwise specifically provided for by special law, and subject to the provisions of the following
section.
Sec. 13. Amount of capital stock to be subscribed and paid for purposes of incorporation. — At least
twenty-five (25%) percent of the authorized capital stock as stated in the articles of incorporation
must be subscribed at the time of incorporation, and at least twenty-five (25%) percent of the total
subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for
payment by the board of directors: Provided, however, That in no case shall the paid-up capital be
less than five thousand (P5,000.00) pesos. (n)
By express provision of Section 13, paid-up capital is that portion of the authorized capital stock which has been both
subscribed and paid. To illustrate, where the authorized capital stock of a corporation is worth P 1 million and the total
subscription amounts to P250,000.00, at least 25% of this amount, namely, P62,500.00 must be paid up per Section
13. The latter, P62,500.00, is the paid-up capital or what should more accurately be termed as "paid-up capital
stock." 5
In the case under consideration, there is no dispute, and the Board even mentioned in its August 17, 1993 Decision,
that MSCI was organized and incorporated on February 15, 1990 with an authorized capital stock of P60 million, P20
million of which was subscribed. Of the P20 million subscribed capital stock, P5 million was paid-up.6 This fact is only
too glaring for the Board to have been misled into believing that MSCI'S paid-up capital stock was P64 million plus and
not P5 million.
The submission of the Board that the value of the assets of Asturias Sugar Central, Inc. transferred to MSCI on March
28, 1990, as well as the loans or advances made by MTII to MSCI should have been taken into consideration in
computing the paid-up capital of MSCI is unmeritorious, at best, and betrays the Board's sheer lack of grasp of a basic
concept in Corporation Law, at worst. Not all funds or assets received by the corporation can be considered paid-up
capital, for this term has a technical signification in Corporation Law. Such must form part of the authorized capital
stock of the corporation, subscribed and then actually paid up.
13
Furthermore, the Commission aptly observed that the loans and advances of MTII to respondent MSCI cannot be
treated as investments, unless the corresponding shares of stocks are issued. But as it turned out, such loans and
advances were in fact treated as liabilities of MSCI to MTII as shown in its 1990 audited financial statements. 7 The
treatment by the Board of these loans as part of MSCI's capital stock without satisfying certain mandatory
requirements is proscribed under Section 38 of the Corporation Code which provides:
Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. No
corporation shall increase or decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and, at a stockholders'
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholders' meeting at which the proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each
stockholders at his place of residence as shown on the books of the corporation and deposited to de
addressee in the post office with postage prepaid, or served personally.
The above requirements, which are condition precedents before the capital stock of a corporation may be
increased, were unquestionably not observed in this case. Henceforth, the paid-up capital stock of MSCI for
the period covered by the application for exemption still stood at P5 million. The losses, therefore, amounting
to P3,400,738.00 for the period February 15, 1990 to August 31, 1990 impaired MSCI's paid-up capital of P5
million by as much as 68%. Likewise, the losses incurred by MSCI for the interim period from September 1,
1990 to November 30, 1990, as found by the Commission, per MSCI's quarterly income statements,
amounting to P13,554,337.33 impaired the company's paid-up capital of P5 million by a whopping
271.08%,8more than enough to qualify MSCI as a distressed employer. Respondent Commission thus acted
well within its jurisdiction in granting MSCI full exemption from Wage Order No. RO VI-01 as a distressed
employer.
WHEREFORE, the petition is DISMISSED. Costs against petitioner.
SO ORDERED.
14
GR. No. 174909
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO and RAUL A. MUYCO, Petitioners,
vs.
ROGELIO M. FLORETE, IMELDA C. FLORETE, DIAMEL CORPORATION, ROGELIO C. FLORETE JR., and
MARGARET RUTH C. FLORETE, Respondents.
x-----------------------x
G.R. No. 177275
ROGELIO M. FLORETE SR., Petitioner,
vs.
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO AND RAUL A. MUYCO, Respondents.
DECISION
LEONEN, J.:
A stockholder may suffer from a wrong done to or involving a corporation, but this does not vest in the aggrieved
stockholder a sweeping license to sue in his or her own capacity. The determination of the stockholder’s appropriate
remedy—whether it is an individual suit, a class suit, or a derivative suit—hinges on the object of the wrong done.
When the object of the wrong done is the corporation itself or "the whole body of its stock and property without any
severance or distribution among individual holders,"1 it is a derivative suit, not an individual suit or class/representative
suit, that a stockholder must resort to.
This resolves consolidated cases involving a Complaint for Declaration of Nullity of Issuances, Transfers and Sale of
Shares in People’s Broadcasting Service, Inc. and All Posterior Subscriptions and Increases thereto with Damages. 2The
Complaint did not implead as parties the concerned corporation, some of the transferees, transferors and other parties
involved in the assailed transactions. The Petition 3 docketed as G.R. No. 174909 assails the Court of Appeals Decision
affirming the dismissal of the Complaint and sustaining the award of ₱25,000,000.00 as moral damages and
₱5,000,000.00 as exemplary damages in favor of Rogelio Florete, Sr. The Petition 4 docketed as G.R. No. 177275
assails the Court of Appeals Decision that disallowed the immediate execution of the same award of damages.
Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4) children: Marcelino Florete, Jr.
(Marcelino, Jr.), Maria Elena Muyco (Ma. Elena), Rogelio Florete, Sr. (Rogelio, Sr.), and Teresita Menchavez (Teresita),
now deceased.5
People’s Broadcasting Service, Inc. (People’s Broadcasting) is a private corporation authorized to operate, own,
maintain, install, and construct radio and television stations in the Philippines. 6 In its incorporation on March 8,
1966,7 it had an authorized capital stock of ₱250,000.00 divided into 2,500 shares at ₱100.00 par value per
share.8Twenty-five percent (25%) of the corporation’s authorized capital stock were then subscribed to as follows:
Stockholder Number of Shares
Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares
Salome Florete (Salome) 100 shares
Ricardo Berlin (Berlin) 50 shares
Pacifico Sudario (Sudario) 50 shares
Atty. Santiago Divinagracia (Divinagracia), now deceased9 50 shares10

On November 17, 1967, Berlin and Sudario resigned from their positions as General Manager and Station Supervisor,
respectively.11 Berlin and Sudario each transferred 20 shares to Raul Muyco and Estrella Mirasol. 12
Salome died on November 22, 1980.13 Marcelino, Sr. suffered a stroke on July 12, 1982, which left him paralyzed and
bedridden until his death on October 3, 1990.14 After Marcelino, Sr.’s stroke, their son, Rogelio, Sr. started managing
the affairs of People’s Broadcasting.15
In October 1993, People’s Broadcasting sought the services of the accounting and auditing firm Sycip Gorres Velayo
and Co. in order to determine the ownership of equity in the corporation.16 On November 2, 1994, Sycip Gorres Velayo
and Co. submitted a report detailing the movements of the corporation’s shares from November 23, 1967 to December
8, 1989.17 The relevant portion of this report reads:
B. PEOPLE’S BROADCASTING SERVICE, INC. (PBS)
The movements in the capital stock accounts (by beneficial stockholders) are as follows:
1âwphi1
Shareholdings Transfer Transfer Transfer
Beneficial Additional Increase Shareholdings
Nov. 27, of of of
Stockholder Subscription (F) Oct. 31, 1993
1967 (A) Shares Shares Shares
15
Sept. 1, of Stock of Stock of Stock
1982 (B) March (D) June 5,
1, 1983 1987
(C) (E)
Marcelino M. 560 - 750 (680) - 62,344.19 62,974.19

Florete, Sr.
Salome M. 30 (30) - - -
Florete
Rogelio M. 20 5 1110 370 (5) 149,624.75 151,124.75

Florete
Ma. Elena F. 20 5 - - (25) 2,493.68 2,493.68

Muyco
Teresita F. - 5 - 20 (25) 2,493.69 2,493.69

Menchavez
Marcelino M. - 5 - 20 (20) 2,493.44 2,493.44

Florete, Jr.
Santiago C. 20 - - 270 75 29,925.25 30,290.25

Divinagracia
Newsound 610 - (610)

Broadcasting18
Consolidated - 1,250 (1,250)

Broadcasting
Total 1,260 1,250 249,375.00 251,875.00

(A) The People’s Broadcasting Service, Inc. was incorporated in 1965 with an authorized capital stock of P250,000
divided into 2,500 shares at P100 par value. As of November 23, 1967, the total subscribed shares of stock was [sic]
1,260. The 610 shares issued in the name of [Newsounds Broadcasting Network, Inc.] was [sic] authorized by the
Board of Directors in payment for the obligation of the Corporation to [Newsounds Broadcasting Network, Inc.].
....
(B) On August 5, 1982, the Board of Directors passed Resolution No. 4 which authorized Atty. Divinagracia to
negotiate the purchase of two stations of Consolidated Broadcasting System, Inc. (CBS), DYMF and DXMF in Cebu and
Davao, respectively. In consideration thereof, [People’s Broadcasting Service, Inc.] shall issue 1,250 shares of stock in
favor of [Consolidated Broadcasting System, Inc.]. In pursuance thereof, on September 1, 1982, the Corporation
issued the remaining 1,240 shares of unissued capital stock to [Consolidated Broadcasting System, Inc.]. To complete
the consideration of 1,250 shares, it was explained that [Salome] transferred her 10 shares to [Consolidated
Broadcasting System, Inc.] and distributed her remaining 20 shares to her children, at 5 shares each.
(C) On March 1, 1983, all the 610 shares of [Newsounds Broadcasting Network, Inc.] were transferred to [Rogelio,
Sr.]. We were not able to determine the person who endorsed the certificate in [sic] behalf [of] [Newsounds
Broadcasting Network, Inc.] as the certificate was not found on file. On the same day, the entire investment of
[Consolidated Broadcasting System, Inc.] were transferred to [Marcelino, Sr.] and [Rogelio, Sr.] at the proportion of
750 shares and 500 shares, respectively. The cancelled certificates of [Consolidated Broadcasting System, Inc.] were
endorsed by [Rogelio, Sr.] in [sic] its behalf.
(D) On February 28 and August 1, 1983, [Marcelino, Sr.] transferred 680 shares from his block to the following:
Transferee No. of Shares Date of Transfer
Rogelio M. Florete [Sr.] 370 February 28, 1983
Santiago C. Divinagracia 270 August 1, 1983
Marcelino M. Florete, Jr. 20 August 1, 1983

16
Teresita F. Menchavez 20 August 1, 1983
Total 680
(E) On June 3, 1987, the Corporation effected the transfer of 75 shares to [Divinagracia] by virtue of the deeds of sale
executed by the transferors concerned in his favor.
(F) On December 8, 1989, the [Securities and Exchange Commission] approved the application of the Corporation to
increase the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares at ₱100 par value. Of the
increase, 249,375 shares were subscribed for ₱24,937,500 and ₱6,234,375 thereof was paid-up. The subscribers to
the increase were as indicated in the foregoing.
There were no other transactions affecting the interest of the beneficial stockholders up to October 31, 1993 except
transfers to and from designated nominees[.] 19
Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to give a categorical statement on
equity ownership as People’s Broadcasting’s corporate records were incomplete. 20 The report contained the following
disclaimer on the findings regarding the corporation’s capital structure:
Because the procedures included certain assumptions as represented by the corporate secretaries mentioned in
Attachment I and we have not verified the documents supporting some of the transactions, we do not express an
opinion on the capital stock accounts of the respective companies [including People’s Broadcasting] as at October 31,
1993.21 (Emphasis supplied)
On February 1, 1997, the Board of Directors of People’s Broadcasting approved Sycip Gorres Velayo and Co.’s report. 22
In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the members of his immediate family,
namely: Imelda Florete, Rogelio Florete, Jr., and Margaret Ruth Florete, as well as to Diamel Corporation, a
corporation owned by Rogelio, Sr.’s family.23
As of April 27, 2002, the stockholders of record of People’s Broadcasting were the following:24
Stockholder No. of Shares
1. Diamel Corporation 30,000.00
2. Rogelio Florete [Sr.] 153,881.53
3. Marcelino Florete, Jr. 18,240.99
4. Ma. Elena Muyco 18,227.23
5. Santiago Divinagracia 30,289.25
6. Imelda Florete 1,000.00
7. Rogelio Florete, Jr. 100.00
8. Margaret Ruth Florete 100.00
9. Raul Muyco 10.00
10. Manuel Villa, Jr. 10.00
11. Gregorio Rubias 1.00
12. Cyril Regaldao 1.00
13. Jose Mari Treñas 1.00
14. Enrico Jacomille 1.00
15. Joseph Vincent Go 1.00
16. Jerry Treñas 1.00
17. Efrain Treñas 10.00

On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group) filed before the Regional Trial
Court a Complaint25 for Declaration of Nullity of Issuances, Transfers and Sale of Shares in People’s Broadcasting
Service, Inc. and All Posterior Subscriptions and Increases thereto with Damages 26 against Diamel Corporation,
Rogelio, Sr., Imelda Florete, Margaret Florete, and Rogelio Florete, Jr. (Rogelio, Sr. Group).
17
On July 25, 2003, the Rogelio, Sr. Group filed their Answer with compulsory counterclaim. 27
On August 2, 2005, the Regional Trial Court issued a Decision (which it called a "Placitum") dismissing the Marcelino,
Jr. Group’s Complaint. It ruled that the Marcelino, Jr. Group did not have a cause of action against the Rogelio, Sr.
Group and that the former is estopped from questioning the assailed movement of shares of People’s Broadcasting. It
also ruled that indispensible parties were not joined in their Complaint.
According to the trial court, the indispensable parties would include:
[Marcelino, Sr.] and/or his estate and/or his heirs, [Salome] and/or her estate and/or her heirs, [Divinagracia] and/or
his estate and/or his successors-in-interest, [Teresita] and/or her estate and/or her own successors-in-interest, the
other [People’s Broadcasting Service, Inc.] stockholders who may be actually beneficial owners and not purely
nominees, all the so called nominal stockholders. . . [and] the various [People’s Broadcasting Service, Inc.] Corporate
Secretaries[.]"28
The Regional Trial Court granted Rogelio, Sr.’s compulsory counterclaim for moral and exemplary damages amounting
to ₱25,000,000.00 and ₱5,000,000.00, respectively, reasoning that Rogelio, Sr. suffered from the besmirching of his
personal and commercial reputation.29
The dispositive portion of the Regional Trial Court Decision reads:
WHEREFORE, premises duly considered, the instant "Complaint" of the plaintiffs is hereby DISMISSED for lack of
merit.
The "Counterclaim" of defendant Rogelio Florete Sr. is hereby given DUE COURSE but only insofar as the claims for
moral and exemplary damages are concerned. Consequently, the plaintiffs herein are hereby ordered to pay, jointly
and severally, defendant Rogelio Florete Sr., the following sums, to wit:
1. TWENTY FIVE MILLION PESOS (P25,000,000.00) as and for MORAL DAMAGES; and,
2. FIVE MILLION PESOS (P5,000,000.00) as and for EXEMPLARY DAMAGES.
The "Counterclaim(s)" of the other defendants and the prayer for the recovery of attorney’s fees and litigation
expenses of defendant Rogelio Florete, Sr. are hereby DISMISSED likewise for lack of merit.
SO ORDERED.30
On August 15, 2005, Rogelio, Sr. filed a Motion for the immediate execution of the award of moral and exemplary
damages pursuant to Rule I, Section 431 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.32
On September 8, 2005, the Marcelino, Jr. Group filed before the Court of Appeals a Petition for Review 33 with a prayer
for the issuance of a temporary restraining order and/or writ of preliminary injunction to deter the immediate
execution of the trial court Decision awarding damages to Rogelio, Sr.34 The Court of Appeals issued a temporary
restraining order and, subsequently, a writ of preliminary injunction.35
In its Decision36 dated March 29, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Petition and affirmed
the trial court Decision.37 It also lifted the temporary restraining order and writ of preliminary injunction. 38
The Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of action against those whom they have
impleaded as defendants. It also noted that the principal obligors in or perpetrators of the assailed transactions were
persons other than those in the Rogelio, Sr. Group who have not been impleaded as parties. Thus, the Court of
Appeals emphasized that the following parties were indispensable to the case: People’s Broadcasting; Marcelino, Sr.;
Consolidated Broadcasting System, Inc.; Salome; Divinagracia; Teresita; and "other stockholders of [People’s
Broadcasting] to whom the shares were transferred or the nominees of the stockholders." 39
The Court of Appeals further emphasized that the estates of Marcelino, Sr. and Salome had long been settled, with
those in the Marcelino, Jr. Group participating (in their capacity as heirs). As the Marcelino, Jr. Group failed to act to
protect their supposed interests in shares originally accruing to Marcelino, Sr. and Salome, the group is estopped from
questioning the distribution of Marcelino, Sr.’s and Salome’s assets.40 Furthering the conclusion that the Marcelino, Jr.
Group was bound by estoppel, the Court of Appeals noted that the Marcelino, Jr. Group was well aware of the matters
stated in the report furnished by Sycip Gorres Velayo and Co. but failed to act on any supposed error in the report.
Instead, the Marcelino, Jr. Group waited ten (10) years before filing their Complaint. In the interim, they even
participated in the affairs of People’s Broadcasting, voting their shares and electing members of the Board of
Directors.41
On April 26, 2006, the Marcelino, Jr. Group filed a Motion for Reconsideration dated April 24, 2006. 42
Pending resolution of the Marcelino, Jr. Group’s Motion for Reconsideration, Rogelio, Sr. filed before the Regional Trial
Court a Motion to resolve his earlier motion for the immediate execution of the awards of moral and exemplary
damages, which was filed on August 15, 2005. 43 The Regional Trial Court granted the Motion in its Order dated May
18, 2006.44 On May 23, 2006, a Writ of Execution was issued to enforce the award of moral and exemplary damages. 45
The Marcelino, Jr. Group filed a Petition for Certiorari 46 before the Court of Appeals questioning the Regional Trial
Court Order to immediately execute its Decision. 47 On June 13, 2006, the Court of Appeals issued a temporary
restraining order and, subsequently, a writ of preliminary injunction.48 The Court of Appeals reversed the trial court
Order of immediate execution in the Decision promulgated on November 28, 2006. 49 It also annulled the writ of
execution issued pursuant to the Order of immediate execution. Rogelio, Sr. filed a Motion for Reconsideration, 50 but it
was denied on February 23, 2007.51
18
On September 15, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Motion for Reconsideration dated April
24, 2006.52
Hence, on November 17, 2006, the Marcelino, Jr. Group filed the Petition53 docketed as G.R. No. 174909.
Since the Court of Appeals Decision disallowed the immediate execution of the Regional Trial Court Decision, Rogelio,
Sr. filed on May 7, 2007 the Petition54 docketed as G.R. No. 177275.
On March 16, 2009, this court ordered the consolidation of the Petitions docketed as G.R. No. 174909 and G.R. No.
177275.
For resolution are the following issues:
First, whether it was proper for the Regional Trial Court to dismiss the Complaint filed by the Marcelino, Jr. Group;
Second, assuming that it was error for the Regional Trial Court to dismiss the Complaint and that the case may be
decided on the merits, whether the transfers of shares assailed by the Marcelino, Jr. Group should be nullified; and
Lastly, whether the Regional Trial Court’s award of moral and exemplary damages in favor of Rogelio, Sr. may be
executed at this juncture of the proceedings.
The Marcelino, Jr. Group insists that they have sufficiently established causes of action accruing to them and against
the Rogelio, Sr. Group.55 They add that they have impleaded all indispensable parties. 56 Thus, they claim that it was an
error for the Regional Trial Court to dismiss their Complaint. They assert that a resolution of the case on the merits
must ensue.
The Marcelino, Jr. Group seeks to nullify the following transactions on the shares of stock of People’s Broadcasting, as
noted in the report of Sycip Gorres Velayo and Co.:
(a) Issuance of 1,240 shares to Consolidated Broadcasting System, Inc. on September 1, 1982,
(b) Transfer of 10 shares from Salome to Consolidated Broadcasting System, Inc. on September 1, 1982,
(c) Issuance of 610 shares to Newsounds Broadcasting Network, Inc. on November 17, 1967,
(d) Transfer of 610 shares from Newsounds Broadcasting Network, Inc. to Rogelio, Sr. on March 1, 1983,
(e) Transfer of 750 shares from Consolidated Broadcasting System, Inc. to Marcelino, Sr. on March 1, 1983,
(f) Transfer of 500 shares from Consolidated Broadcasting System, Inc. to Rogelio, Sr.,
(g) Transfer of 680 shares from Marcelino, Sr. to the following: 370 shares to Rogelio, Sr., 270 shares to
Divinagracia, 20 shares to Marcelino, Jr., and 20 shares to Teresita, and
(h) Increase in the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares with a par value
of ₱100.00 per share on December 8, 1989, and the resulting subscriptions. 57
For the issuance of 1,250 shares to Consolidated Broadcasting System, Inc., the Marcelino, Jr. Group argues that
Board Resolution No. 4 dated August 5, 1982, the basis for the issuance of the 1,250 shares in favor of Consolidated
Broadcasting System, Inc., was a forgery: it was simulated, unauthorized, and issued without a quorum as required
under Section 25 of the Corporation Code.58 They add that Salome, who allegedly transferred her 10 shares to
complete the 1,250 share transfer, was already dead at the time of the alleged transfer on September 1, 1982. 59 The
Marcelino, Jr. Group claims that no member of the Board attended the meeting referred to in Board Resolution No.
4.60 They further allege that the signature of Marcelino, Sr. in Board Resolution No. 4 is a forgery. 61 They argue that
Marcelino, Sr. could not have attended the meeting on August 5, 1982 because from July 12, 1982 to August 26,
1982,62 he was confined in Gov. B. Lopez Memorial Hospital for quadriparesis and motor aphasia.63 They also supplied
the trial court with specimen signatures of Marcelino, Sr. to prove that the signature appearing on Board Resolution
No. 4 was forged.64
The Marcelino, Jr. Group alleges that from the time Marcelino, Sr. suffered a stroke on July 12, 1982 until his death on
October 3, 1990, he was no longer capable of giving consent because of his quadriparesis and motor aphasia. 65As they
emphasized, "[q]uadriparesis means weakness of the upper and lower extremities with spasticity and tremors. Motor
aphasia means that the patient could not communicate, unable to talk, nor responds [sic] to question or simple
commands."66 Thus, they conclude that all of the issuances of shares in favor of Marcelino, Sr. and all of the transfers
of shares to and from Marcelino, Sr. from July 12, 1982 are void for lack of consent.
With respect to the issuance of 610 shares to Newsounds Broadcasting Network, Inc. and the subsequent transfer of
610 shares to Rogelio, Sr., the Marcelino, Jr. Group argues that there is no deed of conveyance to support the transfer
and that the stock certificates representing the 610 shares are missing. They conclude that because of the absence of
the stock certificates, there is no valid delivery and endorsement as required by Section 63 of the Corporation
Code.67 Hence, the transfer is invalid.
Regarding the increase in the authorized capital stock of People’s Broadcasting, the Marcelino, Jr. Group argues that
the increase was procured by fraud because it was made "by the new Board of Directors who were elected by
stockholders who were transferees of the illegal, fraudulent and anomalous transfers, and therefore have no power
and authority to procure such increase."68 They also pray that the subscriptions to the increase be nullified.69
After a declaration that the issuances and transfers are void, the Marcelino, Jr. Group prays that the capital structure
of People’s Broadcasting System be corrected to reflect the following: 70
Beneficial Stockholder No. of Shares %
19
Marcelino Florete, Sr. 660 81.48
Salome Florete 100 12.35
Santiago Divinagracia 50 6.17
Total 810 100.00

The Marcelino, Jr. Group further claims that the award of moral and exemplary damages is erroneous. 71 They add that
the amounts of ₱25,000,000.00 as moral damages and ₱5,000,000.00 as exemplary damages are excessive. 72
The Rogelio, Sr. Group seeks the denial of the Petition filed by the Marcelino, Jr. Group, claiming that it raises factual
questions that may not be taken cognizance of in a petition for review on certiorari under Rule 45.73
They further argue that the Marcelino, Jr. Group has no cause of action against them. 74 They insist that indispensable
parties have not been impleaded75 and that the Marcelino Jr. Group’s claims should have been raised during the
settlement of the estates of deceased Spouses Marcelino, Sr. and Salome Florete. 76 They also argue that the
Marcelino, Jr. Group is already estopped from questioning Sycip Gorres Velayo and Co.’s report because they allowed
10 years to lapse before questioning the truthfulness of the report. They add that the Marcelino, Jr. Group’s members
have been voting their shares since 1963 without making any reservation.77
In G.R. No. 177275, Rogelio, Sr. argues that the Court of Appeals erred in disallowing the immediate execution of the
Regional Trial Court Decision. He argues that the Petition filed by the Marcelino, Jr. Group before the Court of Appeals
should not have been accepted because Rule 65 petitions require that there no longer be any appeal nor any plain,
speedy, and adequate remedy in the ordinary course of law.78 He alleges that when the Petition was filed by the
Marcelino, Jr. Group, there was still a pending appeal before the Court of Appeals to resolve the main case.79Rogelio,
Sr. adds that the filing of a new petition despite the pendency of the main case is a violation of the rule against forum
shopping.80
I
The sufficiency of the Marcelino, Jr. Group’s plea for relief, through their Complaint for Declaration of Nullity of
Issuances, Transfers and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior Subscriptions and
Increases thereto with Damages,81 hinges on a characterization of the suit or action they initiated. This
characterization requires a determination of the cause of action through which the Marcelino, Jr. Group came to court
for relief. It will, thus, clarify the parties who must be included in their action and the procedural and substantive
requirements they must satisfy if their action is to prosper.
A stockholder suing on account of wrongful or fraudulent corporate actions (undertaken through directors, associates,
officers, or other persons) may sue in any of three (3) capacities: as an individual; as part of a group or specific class
of stockholders; or as a representative of the corporation.
Villamor v. Umale82 distinguished individual suits from class or representative suits:
Individual suits are filed when the cause of action belongs to the individual stockholder personally, and not to the
stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may be filed to protect the stockholders in the group. 83
Villamor further explained that a derivative suit "is an action filed by stockholders to enforce a corporate action." 84 A
derivative suit, therefore, concerns "a wrong to the corporation itself."85 The real party in interest is the corporation,
not the stockholders filing the suit. The stockholders are technically nominal parties but are nonetheless the active
persons who pursue the action for and on behalf of the corporation.
Remedies through derivative suits are not expressly provided for in our statutes—more specifically, in the Corporation
Code and the Securities Regulation Code—but they are "impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary
duties."86 They are intended to afford reliefs to stockholders in instances where those responsible for running the
affairs of a corporation would not otherwise act:
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves,
a stockholder or member may find that he has no redress because the former are vested by law with the right to
decide whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation
would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law
gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as
a "derivative suit." It has been proven to be an effective remedy of the minority against the abuses of management.
Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the
ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest.87
20
The distinction between individual and class/representative suits on one hand and derivative suits on the other is
crucial. These are not discretionary alternatives. The fact that stockholders suffer from a wrong done to or involving a
corporation does not vest in them a sweeping license to sue in their own capacity . The recognition of derivative suits
as a vehicle for redress distinct from individual and representative suits is an acknowledgment that certain wrongs may
be addressed only through acts brought for the corporation:
Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of
his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since
the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer.88
In Asset Privatization Trust v. Court of Appeals ,89 the reasons for disallowing a direct individual suit were further
explained:
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable
to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders."
In other words, to allow shareholders to sue separately would conflict with the separate corporate entity
principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case
of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for themselves for that
would result in the appropriation by, and the distribution among them of part of the corporate assets before
the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be
legally done in view of Section 16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all
concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the damages
recoverable by the corporation for the same act. 90
The avenues for relief are, thus, mutually exclusive. The determination of the appropriate remedy hinges on the object
of the wrong done. When the object is a specific stockholder or a definite class of stockholders, an individual suit or
class/representative suit must be resorted to. When the object of the wrong done is the corporation itself or "the
whole body of its stock and property without any severance or distribution among individual holders," 91 it is a
derivative suit that a stockholder must resort to. In Cua, Jr. v. Tan:92
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and individual and
class suits, on the other, are mutually exclusive, viz.:
As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be
redressed because of failure of the corporation to act. Thus, ‘the action is derivative, i.e., in the corporate right, if the
gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any
severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the
dissipation of its assets.’" In contrast, "a direct action [is one] filed by the shareholder individually (or on behalf of a
class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder. . . . [T]he two
actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action)
or the corporation (derivative action)."
Thus, in Nelson v. Anderson, the minority shareholder alleged that the other shareholder of the corporation negligently
managed the business, resulting in its total failure. The appellate court concluded that the plaintiff could not maintain
the suit as a direct action: "Because the gravamen of the complaint is injury to the whole body of its stockholders, it
was for the corporation to institute and maintain a remedial action. A derivative action would have been appropriate if
its responsible officials had refused or failed to act." The court went on to note that the damages shown at trial were
the loss of corporate profits. Since "[s]hareholders own neither the property nor the earnings of the corporation," any
damages that the plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury to the
corporation."93 (Emphasis supplied, citations omitted)
Villamor recalls the requisites for filing derivative suits:
Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules) provides the five
(5) requisites for filing derivative suits:
SECTION 1. Derivative action.—A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
21
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of
Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be "in the name of
[the] corporation or association. . . ." This requirement has already been settled in jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the
corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on
behalf of the corporation and all other shareholders similarly situated who wish to join [him]." . . .
Moreover, it is important that the corporation be made a party to the case.94 (Citations omitted)
II
The greater number of cases that sustained stockholders’ recourse to derivative suits involved corporate acts
amounting to mismanagement by either the corporation’s directors or officers in relations to third persons. Several
cases serve as examples.
Hi-Yield Realty v. Court of Appeals95 affirmed the Regional Trial Court’s and Court of Appeals’ characterization of a
Petition for Annulment of Real Estate Mortgage and Foreclosure Sale 96 as a derivative suit. The Petition was initiated
by private respondent Roberto H. Torres, a stockholder, on behalf of the corporation Honorio Torres & Sons, Inc.
Petitioner Hi-Yield Realty, Inc. was among the defendants to the Petition, along with the related parties, Leonora, Ma.
Theresa, Glenn, and Stephanie, all surnamed Torres, as well as the Registers of Deeds of Marikina and of Quezon City.
Against Hi-Yield Realty, Inc.’s claims, this court sustained the respondent’s position that the Petition was "primarily a
derivative suit to redress the alleged unauthorized acts of its corporate officers and major stockholders in connection
with the lands."97
Cua, Jr. considered two corporate acts to be valid objects of a derivative suit. The first was a resolution of the Board of
Directors of the corporation Philippine Racing Club, Inc. to acquire up to 100% of the common shares of another
corporation, JTH Davies Holdings, Inc., as well as to appoint Santiago Cua, Jr. "to act as attorney-in-fact and proxy
who could vote all the shares of [Philippine Racing Club, Inc.] in [JTH Davies Holdings, Inc.], as well as nominate,
appoint, and vote into office directors and/or officers during regular and special stockholders meetings of [JTH Davies
Holdings, Inc.]."98 The second was another resolution of Philippine Racing Club, Inc.’s Board of Directors "approving
the property-for-shares exchange between P[hilippine] R[acing] C[lub], I[nc]. and [JTH Davies Holdings, Inc.]." 99
In Cua, Jr., the derivative suit grounded on the first was dismissed by this court for being moot and academic. 100 The
suit grounded on the second was similarly dismissed for failure to comply with one of the requisites for instituting a
derivative suit. The plaintiffs "made no mention at all of appraisal rights, which could or could not have been available
to them[,]" thereby violating Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies.101
As with Hi-Yield Realty and Cua, Go v. Distinction Properties Development and Construction, Inc.102 concerned a
corporate action taken in relation to a third person.
Petitioners Philip L. Go, Pacifico Q. Lim and Andrew Q. Lim filed before the Housing and Land Use Regulatory Board a
Complaint, which they claimed was one for specific performance intended to compel the developer of Phoenix Heights
Condominium, Distinction Properties Development and Construction, Inc. (Distinction Properties), to fulfill its
contractual obligations. The Complaint was filed in the wake of an agreement entered into by Distinction Properties
with the condominium corporation Phoenix Heights Condominium Corporation (PHCC). PHCC "approved a settlement
offer from [Distinction Properties] for the set-off of the latter’s association dues arrears with the assignment [from
Distinction Properties] of title over [two saleable commercial units/spaces originally held by Distinction Properties] and
their conversion into common areas."103
This court clarified that the true purpose of the petitioners’ action was not to compel Distinction Properties to fulfill its
contractual obligations. Instead, "petitioners [we]re actually seeking to nullify and invalidate the duly constituted acts
of PHCC - the April 29, 2005 Agreement entered into by PHCC with DPDCI and its Board Resolution which authorized
the acceptance of the proposed offsetting/settlement of DPDCI’s indebtedness and approval of the conversion of
certain units from saleable to common areas." This court thereby concluded that "the cause of action rightfully
pertains to PHCC [and that] [p]etitioners cannot exercise the same except through a derivative suit."104
The prevalence of derivative suits arising from corporate actions taken in relation to third persons is to be expected.
After all, it is easier to perceive the wrong done to a corporation when third persons unduly gain an advantage.
However, this does not mean that derivative suits cannot arise with respect to conflicts among a corporation’s
directors, officers, and stockholders.
Ching and Wellington v. Subic Bay Golf and Country Club105 sustained the Regional Trial Court’s and Court of Appeals’
characterization of the Complaint filed by stockholders against officers of the corporation as a derivative suit. Nestor
Ching and Andrew Wellington filed a Complaint in their own names and in their right as individual stockholders
assailing an amendment introduced into Subic Bay Golf and Country Club’s articles of incorporation, which supposedly
"takes away the right of the shareholders to participate in the pro-rata distribution of the assets of the corporation
22
after its dissolution."106 They anchored their action on Section 5(a) of Presidential Decree No. 902-A.107 They claimed
that this statutory provision "allows any stockholder to file a complaint against the Board of Directors for employing
devices or schemes amounting to fraud and misrepresentation which is detrimental to the interest of the public and/or
the stockholders."108
This court did not sustain Nestor Ching’s and Andrew Wellington’s claim of a right to sue in their own capacity.
Concluding that the petitioners’ action was a derivative suit, this court explained:
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board of Directors
of the corporation, the appointment of a receiver, and the prayer for damages in the amount of the decrease in the
value of the shares of stock, clearly show that the Complaint was filed to curb the alleged mismanagement of [Subic
Bay Gold and Country Club]. The causes of action pleaded by petitioners do not accrue to a single shareholder or a
class of shareholders but to the corporation itself.109 (Emphasis supplied)
We are mindful that in 1979, in Gamboa v. Victoriano,110 this court characterized an action to nullify the sale of 823
unissued shares on the ground of violating the plaintiffs’ pre-emptive rights and in violation of the voting requirement
for the Board of Directors as not a derivative suit. This court characterized the action as one in which "the plaintiffs are
alleging and vindicating their own individual interests or prejudice, and not that of the corporation."111
This pronouncement cannot be considered as a binding precedent for holding actions of the sort filed by the plaintiffs
therein to not be derivative suit. This point in Gamboa was mere obiter dictum. The main issue in Gamboa was the
validity of the trial court’s denial of the Motion to Dismiss filed by four of the seven defendants after the plaintiffs
entered into a compromise agreement with the three other defendants. The resolution of this issue was contingent on
the determination of whether the compromise amounted to the plaintiff’s waiver and estoppel for having conceded the
validity of the sale. Besides, this court itself acknowledged that the statement it made characterizing the action
brought by the plaintiffs was premature. Immediately after saying that "the plaintiffs are alleging and vindicating their
own individual interests or prejudice, and not that of the corporation[,]" 112 this court stated: "At any rate, it is yet too
early in the proceedings since the issues have not been joined." 113
III
In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and liabilities arising from the
Corporation Code, specifically: Section 23114 (on corporate decision-making being vested in the board of directors),
Section 25115 (quorum requirement for the transaction of corporate business), Sections 39116 and 102117 (both on
stockholders’ pre-emptive rights), Section 62118 (stipulating the consideration for which stocks must be issued), Section
63119 (stipulating that no transfer of shares "shall be valid, except as between the parties, until the transfer is recorded
in the books of the corporation"), and Section 65120 (on liabilities of directors and officers "to the corporation and its
creditors" for the issuance of watered stocks) in relation to provisions in People’s Broadcasting’s Articles of
Incorporation and By-Laws as regards conditions for issuances of and subscription to shares. The Marcelino, Jr. Group
ultimately prays that People’s Broadcasting’s entire capital structure be reconfigured to reflect a status quo ante. 121
As with Ching and Wellington, the actions being assailed by the Marcelino, Jr. Group pertain to parties that are not
extraneous to People’s Broadcasting. They assail and seek to nullify acts taken by various iterations of People’s
Broadcasting’s Board of Directors. All these acts and incidents concern the capital structure of People’s Broadcasting.
These acts reconfigured, through redistribution and enlargement, the structure of People’s Broadcasting’s equity
ownership. These acts also admitted into People’s Broadcasting new equity holders such as Consolidated Broadcasting
System, Inc. and Newsounds Broadcasting Network, Inc.
As Ching and Wellington exemplifies, the action should be a proper derivative suit even if the assailed acts do not
pertain to a corporation’s transactions with third persons. Cua, Jr. established that the pivotal consideration is whether
the wrong done as well as the cause of action arising from it accrues to the corporation itself or to the whole body of
its stockholders. Ching and Wellington states that if "[t]he causes of action pleaded . . . do not accrue to a single
shareholder or a class of shareholders but to the corporation itself,"122 the action should be deemed a derivative suit.
Also, in Go, an action "seeking to nullify and invalidate the duly constituted acts [of a corporation]" entails a cause of
action that "rightfully pertains to [the corporation itself and which stockholders] cannot exercise . . . except through a
derivative suit."123
These are the same conditions in this case. What the Marcelino, Jr. Group asks is the complete reversal of a number of
corporate acts undertaken by People’ Broadcasting’s different boards of directors. These boards supposedly engaged
in outright fraud or, at the very least, acted in such a manner that amounts to wanton mismanagement of People’s
Broadcasting’s affairs. The ultimate effect of the remedy they seek is the reconfiguration of People’s Broadcasting’s
capital structure.
The remedies that the Marcelino, Jr. Group seeks are for People’s Broadcasting itself to avail. Ordinarily, these reliefs
may be unavailing because objecting stockholders such as those in the Marcelino, Jr. Group do not hold the controlling
interest in People’s Broadcasting. This is precisely the situation that the rule permitting derivative suits contemplates:
minority shareholders having no other recourse "whenever the directors or officers of the corporation refuse to sue to
vindicate the rights of the corporation or are the ones to be sued and are in control of the corporation."124
23
The Marcelino, Jr. Group points to violations of specific provisions of the Corporation Code that supposedly attest to
how their rights as stockholders have been besmirched. However, this is not enough to sustain a claim that the
Marcelino, Jr. Group initiated a valid individual or class suit. To reiterate, whether stockholders suffer from a wrong
done to or involving a corporation does not readily vest in them a sweeping license to sue in their own capacity.
The specific provisions adverted to by the Marcelino, Jr. Group signify alleged wrongdoing committed against the
corporation itself and not uniquely to those stockholders who now comprise the Marcelino, Jr. Group. A violation of
Sections 23 and 25 of the Corporation Code—on how decision-making is vested in the board of directors and on the
board’s quorum requirement—implies that a decision was wrongly made for the entire corporation, not just with
respect to a handful of stockholders. Section 65 specifically mentions that a director’s or officer’s liability for the
issuance of watered stocks in violation of Section 62 is solidary "to the corporation and its creditors," not to any
specific stockholder. Transfers of shares made in violation of the registration requirement in Section 63 are invalid and,
thus, enable the corporation to impugn the transfer. Notably, those in the Marcelino, Jr. Group have not shown any
specific interest in, or unique entitlement or right to, the shares supposedly transferred in violation of Section 63.
Also, the damage inflicted upon People’s Broadcasting’s individual stockholders, if any, was indiscriminate. It was not
unique to those in the Marcelino, Jr. Group. It pertained to "the whole body of [People’s Broadcasting’s]
stock."125 Accordingly, it was upon People’s Broadcasting itself that the causes of action now claimed by the Marcelino
Jr. Group accrued. While stockholders in the Marcelino, Jr. Group were permitted to seek relief, they should have done
so not in their unique capacity as individuals or as a group of stockholders but in place of the corporation itself through
a derivative suit. As they, instead, sought relief in their individual capacity, they did so bereft of a cause of action.
Likewise, they did so without even the slightest averment that the requisites for the filing of a derivative suit, as
spelled out in Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies, have been
satisfied. Since the Complaint lacked a cause of action and failed to comply with the requirements of the Marcelino, Jr.
Group’s vehicle for relief, it was only proper for the Complaint to have been dismissed.
IV
Erroneously pursuing a derivative suit as a class suit not only meant that the Marcelino, Jr. Group lacked a cause of
action; it also meant that they failed to implead an indispensable party.
In derivative suits, the corporation concerned must be impleaded as a party. As explained in Asset Privatization Trust:
Not only is the corporation an indispensible party, but it is also the present rule that it must be served with process.
The reason given is that the judgment must be made binding upon the corporation in order that the corporation may
get the benefit of the suit and may not bring a subsequent suit against the same defendants for the same cause of
action. In other words the corporation must be joined as party because it is its cause of action that is being litigated
and because judgment must be a res ajudicata [sic] against it.126
We have already discussed Go where this court concluded that an action brought by three individual stockholders was,
in truth, a derivative suit. There, this court further explained that a case cannot prosper when the proper party is not
impleaded:
As it is clear that the acts being assailed are those of PHHC, this case cannot prosper for failure to implead the proper
party, PHCC.
An indispensable party is defined as one who has such an interest in the controversy or subject matter that a final
adjudication cannot be made, in his absence, without injuring or affecting that interest. In the recent case
of Nagkakaisang Lakas ng Manggagawa sa Keihin (NLMK-OLALIA-KMU) v. Keihin Philippines Corporation, the Court
had the occasion to state that:
Under Section 7, Rule 3 of the Rules of Court, "parties in interest without whom no final determination can be had of
an action shall be joined as plaintiffs or defendants." If there is a failure to implead an indispensable party, any
judgment rendered would have no effectiveness. It is "precisely ‘when an indispensable party is not before the court
(that) an action should be dismissed.’ The absence of an indispensable party renders all subsequent actions of the
court null and void for want of authority to act, not only as to the absent parties but even to those present." The
purpose of the rules on joinder of indispensable parties is a complete determination of all issues not only between the
parties themselves, but also as regards other persons who may be affected by the judgment. A decision valid on its
face cannot attain real finality where there is want of indispensable parties.
Similarly, in the case of Plasabas v. Court of Appeals, the Court held that a final decree would necessarily affect the
rights of indispensable parties so that the Court could not proceed without their presence. In support thereof, the
Court in Plasabas cited the following authorities, thus:
The general rule with reference to the making of parties in a civil action requires the joinder of all indispensable parties
under any and all conditions, their presence being a sine qua non of the exercise of judicial power. For this reason, our
Supreme Court has held that when it appears of record that there are other persons interested in the subject matter of
the litigation, who are not made parties to the action, it is the duty of the court to suspend the trial until such parties
are made either plaintiffs or defendants. x x x Where the petition failed to join as party defendant the person
interested in sustaining the proceeding in the court, the same should be dismissed. x x x When an indispensable party
is not before the court, the action should be dismissed.
24
Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or
defendants. The burden of procuring the presence of all indispensable parties is on the plaintiff. The evident purpose
of the rule is to prevent the multiplicity of suits by requiring the person arresting a right against the defendant to
include with him, either as co-plaintiffs or as co-defendants, all persons standing in the same position, so that the
whole matter in dispute may be determined once and for all in one litigation.
From all indications, PHCC is an indispensable party and should have been impleaded, either as a plaintiff or as a
defendant, in the complaint filed before the HLURB as it would be directly and adversely affected by any determination
therein. To belabor the point, the causes of action, or the acts complained of, were the acts of PHCC as a corporate
body[.]127 (Citations omitted)
V
There are two consequences of a finding on appeal that indispensable parties have not been joined. First, all
subsequent actions of the lower courts are null and void for lack of jurisdiction. 128 Second, the case should be
remanded to the trial court for the inclusion of indispensable parties. It is only upon the plaintiff’s refusal to comply
with an order to join indispensable parties that the case may be dismissed. 129
All subsequent actions of lower courts are void as to both the absent and present parties. 130 To reiterate, the inclusion
of an indispensable party is a jurisdictional requirement:
While the failure to implead an indispensable party is not per se a ground for the dismissal of an action, considering
that said party may still be added by order of the court, on motion of the party or on its own initiative at any stage of
the action and/or such times as are just, it remains essential — as it is jurisdictional — that any indispensable party be
impleaded in the proceedings before the court renders judgment . This is because the absence of such indispensable
party renders all subsequent actions of the court null and void for want of authority to act, not only as to the absent
parties but even as to those present.131 (Emphasis supplied, citation omitted)
In Metropolitan Bank and Trust Co. v. Alejo132 and Arcelona v. Court of Appeals,133 this court clarified that the courts
must first acquire jurisdiction over the person of an indispensable party. Any decision rendered by a court without first
obtaining the required jurisdiction over indispensable parties is null and void for want of jurisdiction: "the presence of
indispensable parties is necessary to vest the court with jurisdiction, which is ‘the authority to hear and determine a
cause, the right to act in a case.’"134
In Divinagracia v. Parilla,135 Macawadib v. Philippine National Police Directorate for Personnel and Records
Management,136 People v. Go,137 and Valdez-Tallorin v. Heirs of Tarona,138 among others, this court annulled
judgments rendered by lower courts in the absence of indispensible parties.
The second consequence is unavailing in this case. While "[n]either misjoinder nor non-joinder of parties is ground for
dismissal of an action"139 and is, thus, not fatal to the Marcelino, Jr. Group’s action, we have shown that they lack a
cause of action. This warrants the dismissal of their Complaint.
The first consequence, however, is crucial. It determines the validity of the Regional Trial Court’s award of damages to
Rogelio, Sr.
Since the Regional Trial Court did not have jurisdiction, the decision awarding damages in favor of Rogelio, Sr. is
void.1âwphi1
Apart from this, there is no basis in jurisprudence for awarding moral and exemplary damages in cases where
individual suits that were erroneously filed were dismissed. In the analogous cases that we previously discussed—Hi-
Yield Realty, Cua, Jr., Go, and Ching and Wellington—the dismissal alone of the erroneously filed complaints sufficed.
This court never saw the need to award moral and exemplary damages. This is in keeping with the Civil Code
provisions that stipulate when the award of such damages is proper. We find no reason to conclude that the Marcelino,
Jr. Group acted in so malevolent, oppressive, or reckless a manner that moral and exemplary damages must be
awarded in such huge amounts as the Regional Trial Court did.
From the conclusion that the Decision awarding damages is void and unwarranted, it necessarily follows that the Order
of the Regional Trial Court to immediately execute its Decision is likewise null and void. In Arcelona, the Decision
sought to be annulled was already being executed. However, this court found that the assailed Decision was
promulgated without indispensable parties being impleaded. Hence, the Decision was ruled to have been made
without jurisdiction. This court nullified the judgment and declared:
A void judgment for want of jurisdiction is no judgment at all . It cannot be the source of any right nor the
creator of any obligation. All acts performed pursuant to it and all claims emanating from it have no legal
effect. Hence, it can never become final and any writ of execution based on it is void: x x x it may be said to be a
lawless thing which can be treated as an outlaw and slain at sight, or ignored wherever and whenever it exhibits its
head.140(Emphasis supplied)
Accordingly, the subsequent Order of the Decision’s immediate execution is also void for lack of jurisdiction. Contrary
to Rogelio Sr.’s claim in its Petition, execution cannot ensue. For this reason, the Petition docketed as G.R. No. 177275
must be denied.
WHEREFORE, the Petition docketed as G.R. No. 174909 is PARTLY GRANTED and the Petition docketed as G.R. No.
177275 is DENIED.
25
The Complaint filed by Marcelino M. Florete, Jr., Maria Elena F. Muyco, and Raul A. Muyco for Declaration of Nullity of
Issuances, Transfers and Sale of Shares in People's Broadcasting Service, Inc. and All Posterior Subscriptions and
Increases thereto with Damages is dismissed as the complainants have no cause of action. The award of
P25,000,000.00 as moral damages and PS,000,000.00 as exemplary damages in favor of Rogelio Florete, Sr. is
deleted. The Regional Trial Court Order dated May 18, 2006 ordering the immediate execution of its Decision dated
August 2, 2005 is set aside.
SO ORDERED.
26
G.R. No. 224307, August 06, 2018

THE MISSIONARY SISTERS OF OUR LADY OF FATIMA (PEACH SISTERS OF LAGUNA), REPRESENTED BY
REV. MOTHER MA. CONCEPCION R. REALON, ET AL., Petitioners, v. AMANDO V. ALZONA, ET
AL., Respondents.
DECISION
REYES, JR., J.:
Before this Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court seeking to annul and set
aside the Decision2 dated January 7, 2016 of the Court of Appeals (CA) in CA-G.R. CV No. 101944, and its
Resolution3 dated April 19, 2016, denying the motion for reconsideration thereof. The assailed decision partly granted
the respondents' appeal and set aside the Decision 4 dated August 14, 2013 of the Regional Trial Court (RTC) of
Calamba City, Branch 92 in Civil Case No. 3250-02-C.
The Antecedent Facts
The Missionary Sisters of Our Lady of Fatima (petitioner), otherwise known as the Peach Sisters of Laguna, is a
religious and charitable group established under the patronage of the Roman Catholic Bishop of San Pablo on May 30,
1989. Its primary mission is to take care of the abandoned and neglected elderly persons. The petitioner came into
being as a corporation by virtue of a Certificate issued by the Securities and Exchange Commission (SEC) on August
31, 2001.5 Mother Ma. Concepcion R. Realon (Mother Concepcion) is the petitioner's Superior General.
The respondents, on the other hand, are the legal heirs of the late Purificacion Y. Alzona (Purificacion).
The facts giving rise to the instant controversy follow:
Purificacion, a spinster, is the registered owner of parcels of land covered by Transfer Certificate of Title (TCT) Nos. T-
57820* and T-162375; and a co-owner of another property covered by TCT No. T-162380, all of which are located in
Calamba City, Laguna.6
In 1996, Purificacion, impelled by her unmaterialized desire to be nun, decided to devote the rest of her life in helping
others. In the same year, she then became a benefactor of the petitioner by giving support to the community and its
works.7
In 1997, during a doctor's appointment, Purificacion then accompanied by Mother Concepcion, discovered that she has
been suffering from lung cancer. Considering the restrictions in her movement, Purificacion requested Mother
Concepcion to take care of her in her house, to which the latter agreed.8
In October 1999, Purificacion called Mother Concepcion and handed her a handwritten letter dated October 1999.
Therein, Purificacion stated that she is donating her house and lot at F. Mercado Street and Riceland at Banlic, both at
Calamba, Laguna, to the petitioner through Mother Concepcion. On the same occasion, Purificacion introduced Mother
Concepcion to her nephew, Francisco Del Mundo (Francisco), and niece, Ma. Lourdes Alzona Aguto-Africa (Lourdes).
Purificacion, instructed Francisco to give a share of the harvest to Mother Concepcion, and informed Lourdes that she
had given her house to Mother Concepcion.9
Sometime in August 2001, at the request of Purificacion, Mother Concepcion went to see Atty. Nonato Arcillas (Atty.
Arcillas) in Los Baños, Laguna. During their meeting, Atty. Arcillas asked Mother Concepcion whether their group is
registered with the SEC, to which the latter replied in the negative. Acting on the advice given by Atty. Arcillas, Mother
Concepcion went to SEC and filed the corresponding registration application on August 28, 2001. 10
On August 29, 2001, Purificacion executed a Deed of Donation Inter Vivos (Deed) in favor of the petitioner, conveying
her properties covered by TCT Nos. T-67820 and T-162375, and her undivided share in the property covered by TCT
No. T-162380. The Deed was notarized by Atty. Arcillas and witnessed by Purificacion's nephews Francisco and
Diosdado Alzona, and grandnephew, Atty. Fernando M. Alonzo. The donation was accepted on even date by Mother
Concepcion for and in behalf of the petitioner.11
Thereafter, Mother Concepcion filed an application before the Bureau of Internal Revenue (BIR) that the petitioner be
exempted from donor's tax as a religious organization. The application was granted by the BIR through a letter dated
January 14, 2002 of Acting Assistant Commissioner, Legal Service, Milagros Regalado. 12
27
Subsequently, the Deed, together with the owner's duplicate copies of TCT Nos. T-57820, T-162375, and T-162380,
and the exemption letter from the BIR was presented for registration. The Register of Deeds, however, denied the
registration on account of the Affidavit of Adverse Claim dated September 26, 2001 filed by the brother of Purificacion,
respondent Amando Y. Alzona (Amando).13
On October 30, 2001, Purificacion died without any issue, and survived only by her brother of full blood, Amando, who
nonetheless died during the pendency of this case and is now represented and substituted by his legal heirs, joined as
herein respondents.14
On April 9, 2002, Amando filed a Complaint before the RTC, seeking to annul the Deed executed between Purificacion
and the petitioner, on the ground that at the time the donation was made, the latter was not registered with the SEC
and therefore has no juridical personality and cannot legally accept the donation. 15
After trial, on August 14, 2013, the RTC rendered its Decision16 finding no merit in the complaint, thus ruling:
WHEREFORE, the instant case is hereby DISMISSED with costs against the [respondents]. The Compulsory
counterclaim of the [petitioner] is likewise dismissed for lack of evidence.
SO ORDERED.17
In its decision, the RTC held that all the essential elements of a donation are present. The RTC set aside the allegation
by the respondents relating to the incapacity of the parties to enter into a donation. 18
In the case of Purificacion, the RTC held that apart from the self-serving allegations by the respondents, the records
are bereft of evidence to prove that she did not possess the proper mental faculty in making the donation; as such the
presumption that every person is of sound mind stands.19
On the capacity of the donee, the RTC held that at the time of the execution of the Deed, the petitioner was a de
facto corporation and as such has the personality to be a beneficiary and has the power to acquire and possess
property. Further then, the petitioner's incapacity cannot be questioned or assailed in the instant case as it constitutes
a collateral attack which is prohibited by the Corporation Code of the Philippines.20 In this regard, the RTC found that
the recognition by the petitioner of Mother Concepcion's authority is sufficient to vest the latter of the capacity to
accept the donation.21
Acting on the appeal filed by the respondents, the CA rendered the herein assailed Decision 22 on January 7, 2016, the
dispositive portion of which reads:
WHEREFORE, the appeal is PARTLY GRANTED. The assailed August 14, 2013 Decision of the RTC, Branch 92, Calamba
City in Civil Case No. 3250-02 is SET ASIDE by declaring as VOID the deed of Donation dated August 14, 2013. [The
respondents'] prayer for the award of moral and exemplary damages as well as attorney's fees is nevertheless
DENIED.
SO ORDERED.23
In so ruling, the CA, citing the case of Seventh Day Adventist Conference Church of Southern Phils., Inc. v.
Northeastern Mindanao Mission of Seventh Day Adventist, Inc.,24 held that the petitioner cannot be considered as a de
facto corporation considering that at the time of the donation, there was no bona fide attempt on its part to
incorporate.25 As an unregistered corporation, the CA concluded that the petitioner cannot exercise the powers, rights,
and privileges expressly granted by the Corporation Code. Ultimately, bereft of juridical personality, the CA ruled that
the petitioner cannot enter into a contract of Donation with Purificacion. 26
Finally, the CA denied the respondents' claim for actual damages and attorney's fees for failure to substantiate the
same.27
The petitioner sought a reconsideration of the Decision dated January 7, 2016, but the CA denied it in its
Resolution28 dated April 19, 2016.
In the instant petition, the petitioner submits the following arguments in support of its position:
28
a. The Donation Inter Vivos is valid and binding against the parties therein [Purificacion] and the [petitioner] and
their respective successors in interest:
1.) The [petitioner] has the requisite legal personality to accept donations as a religious institution under the
Roman Catholic Bishop of San Pablo authorized to receive donations;
2.) The [petitioner] has the requisite legal capacity to accept the donation as it may be considered a de
facto corporation.
3.) Regardless of the absence of the Certificate of Registration of [petitioner] at the time of the execution of the
Deed of Donation, the same is still valid and binding having been accepted by a representative of the
[petitioner] while the latter was still waiting for the issuance of the Certificate of Registration and which
acceptance of the donation was duly ratified by the corporation.
4.) The intestate estate of Purificacion is estopped from questioning the legal personality of [the petitioner].
b.
c. The Respondents lack the requisite legal capacity to question the legality of the deed of donation.29
In sum, the issue to be resolved by this Court in the instant case is whether or not the Deed executed by Purificacion
in favor of the petitioner is valid and binding. In relation to this, the Court is called upon to determine the legal
capacity of the petitioner, as donee, to accept the donation, and the authority Mother Concepcion to act on behalf of
the petitioner in accepting the donation.
Ruling of the Court
The petition is meritorious.
The petitioner argues that it has the requisite legal personality to accept the donation as a religious institution
organized under the Roman Catholic Bishop of San Pablo, a corporation sole.30
Regardless, the petitioner contends that it is a de facto corporation and therefore possessed of the requisite
personality to enter into a contract of donation.
Assuming further that it cannot be considered as a de facto corporation, the petitioner submits that the acceptance by
Mother Concepcion while the religious organization is still in the process of incorporation is valid as it then takes the
form of a pre-incorporation contract governed by the rules on agency. The petitioner argues that their subsequent
incorporation and acceptance perfected the subject contract of donation. 31
Ultimately, the petitioner argues that the intestate estate of Purificacion is estopped from questioning its legal
personality considering the record is replete of evidence to prove that Purificacion at the time of the donation is fully
aware of its status and yet was still resolved into giving her property.32
In response, the respondents submit that juridical personality to enter into a contract of donation is vested only upon
the issuance of a Certificate of Incorporation from SEC. 33 Further, the respondents posit that the petitioner cannot
even be considered as a de facto corporation considering that for more than 20 years, there was never any attempt on
its part to incorporate, which decision came only after Atty. Arcillas, suggestion. 34
In order that a donation of an immovable property be valid, the following elements must be present: (a) the essential
reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; (c) the intent to do an act of
liberality or animus donandi; (d) the donation must be contained in a public document; and e) that the acceptance
thereof be made in the same deed or in a separate public instrument; if acceptance is made in a separate instrument,
the donor must be notified thereof in an authentic form, to be noted in both instruments.35
There is no question that the true intent of Purificacion, the donor and the owner of the properties in question, was to
give, out of liberality the subject house and lot, which she owned, to the petitioner. This act, was then contained in a
public document, the deed having been acknowledged before Atty. Arcillas, a Notary Public. 36 The acceptance of the
donation is made on the same date that the donation was made and contained in the same instrument as manifested
by Mother Concepcion's signature.37 In fine, the remaining issue to be resolved is the capacity of the petitioner as
29
donee to accept the donation, and the authority of Mother Concepcion to act on its behalf for this purpose.
Under Article 737 of the Civil Code, "[t]he donor's capacity shall be determined as of the time of the making of the
donation." By analogy, the legal capacity or the personality of the donee, or the authority of the latter's representative,
in certain cases, is determined at the time of acceptance of the donation.
Article 738, in relation to Article 745, of the Civil Code provides that all those who are not specifically disqualified by
law may accept donations either personally or through an authorized representative with a special power of attorney
for the purpose or with a general and sufficient power.
The Court finds that for the purpose of accepting the donation, the petitioner is deemed vested with personality to
accept, and Mother Concepcion is clothed with authority to act on the latter's behalf.
At the outset, it must be stated that as correctly pointed out by the CA, the RTC erred in holding that the petitioner is
a de facto corporation.
Jurisprudence settled that "[t]he filing of articles of incorporation and the issuance of the certificate of incorporation
are essential for the existence of a de facto corporation."38 In fine, it is the act of registration with SEC through the
issuance of a certificate of incorporation that marks the beginning of an entity's corporate existence. 39
Petitioner filed its Articles of Incorporation and by-laws on August 28, 2001. However, the SEC issued the
corresponding Certificate of Incorporation only on August 31, 2001, two (2) days after Purificacion executed a Deed of
Donation on August 29, 2001. Clearly, at the time the donation was made, the Petitioner cannot be considered a
corporation de facto. 40
Rather, a review of the attendant circumstances reveals that it calls for the application of the doctrine of corporation
by estoppel as provided for under Section 21 of the Corporation Code, viz.:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority
to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.(Emphasis Ours)
The doctrine of corporation by estoppel is founded on principles of equity and is designed to prevent injustice and
unfairness. It applies when a non-existent corporation enters into contracts or dealings with third persons. 41 In which
case, the person who has contracted or otherwise dealt with the non-existent corporation is estopped to deny the
latter's legal existence in any action leading out of or involving such contract or dealing. While the doctrine is generally
applied to protect the sanctity of dealings with the public,42 nothing prevents its application in the reverse, in fact the
very wording of the law which sets forth the doctrine of corporation by estoppel permits such interpretation. Such that
a person who has assumed an obligation in favor of a non-existent corporation, having transacted with the latter as if
it was duly incorporated, is prevented from denying the existence of the latter to avoid the enforcement of the
contract.
Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long as there is no fraud and when
the existence of the association is attacked for causes attendant at the time the contract or dealing sought to be
enforced was entered into, and not thereafter. 43
In this controversy, Purificacion dealt with the petitioner as if it were a corporation. This is evident from the fact that
Purificacion executed two (2) documents conveying her properties in favor of the petitioner – first, on October 11,
1999 via handwritten letter, and second, on August 29, 2001 through a Deed; the latter having been executed the day
after the petitioner filed its application for registration with the SEC. 44
The doctrine of corporation by estoppel rests on the idea that if the Court were to disregard the existence of an entity
which entered into a transaction with a third party, unjust enrichment would result as some form of benefit have
already accrued on the part of one of the parties. Thus, in that instance, the Court affords upon the unorganized entity
30
corporate fiction and juridical personality for the sole purpose of upholding the contract or transaction.
In this case, while the underlying contract which is sought to be enforced is that of a donation, and thus rooted on
liberality, it cannot be said that Purificacion, as the donor failed to acquire any benefit therefrom so as to prevent the
application of the doctrine of corporation by estoppel. 45 To recall, the subject properties were given by Purificacion, as
a token of appreciation for the services rendered to her during her illness.46 In fine, the subject deed partakes of the
nature of a remuneratory or compensatory donation, having been made "for the purpose of rewarding the donee for
past services, which services do not amount to a demandable debt."47
As elucidated by the Court in Pirovano, et al. v. De La Rama Steamship Co.:48

In donations made to a person for services rendered to the donor, the donor's will is moved by acts which directly
benefit him. The motivating cause is gratitude, acknowledgment of a favor, a desire to compensate. A donation made
to one who saved the donor's life, or a lawyer who renounced his fees for services rendered to the donor, would fall
under this class of donations.49
Therefore, under the premises, past services constitutes consideration, which in tum can be regarded as "benefit" on
the part of the donor, consequently, there exists no obstacle to the application of the doctrine of corporation by
estoppel; although strictly speaking, the petitioner did not perform these services on the expectation of something in
return.
Precisely, the existence of the petitioner as a corporate entity is upheld in this case for the purpose of validating the
Deed to ensure that the primary objective for which the donation was intended is achieved, that is, to convey the
property for the purpose of aiding the petitioner in the pursuit of its charitable objectives.
Further, apart from the foregoing, the subsequent act by Purificacion of re-conveying the property in favor of the
petitioner is a ratification by conduct of the otherwise defective donation.50
Express or implied ratification is recognized by law as a means to validate a defective contract. 51Ratification cleanses
or purges the contract from its defects from constitution or establishment, retroactive to the day of its creation. By
ratification, the infirmity of the act is obliterated thereby making it perfectly valid and enforceable. 52
The principle and essence of implied ratification require that the principal has full knowledge at the time of ratification
of all the material facts and circumstances relating to the act sought to be ratified or validated.53 Also, it is important
that the act constituting the ratification is unequivocal in that it is performed without the slightest hint of objection or
protest from the donor or the donee, thus producing the inevitable conclusion that the donation and its acceptance
were in fact confirmed and ratified by the donor and the donee.54
In this controversy, while the initial conveyance is defective, the genuine intent of Purificacion to donate the subject
properties in favor of the petitioner is indubitable. Also, while the petitioner is yet to be incorporated, it cannot be said
that the initial conveyance was tainted with fraud or misrepresentation. Contrarily, Purificacion acted with full
knowledge of circumstances of the Petitioner. This is evident from Purificacion's act of referring Mother Concepcion to
Atty. Arcillas, who, in turn, advised the petitioner to apply for registration. Further, with the execution of two (2)
documents of conveyance in favor of the petitioner, it is clear that what Purificacion intended was for the sisters
comprising the petitioner to have ownership of her properties to aid them in the pursuit of their charitable activities, as
a token of appreciation for the services they rendered to her during her illness.55 To put it differently, the reference to
the petitioner was merely a descriptive term used to refer to the sisters comprising the congregation collectively.
Accordingly, the acceptance of Mother Concepcion for the sisters comprising the congregation is sufficient to perfect
the donation and transfer title to the property to the petitioner. Ultimately, the subsequent incorporation of the
petitioner and its affirmation of Mother Concepcion's authority to accept on its behalf cured whatever defect that may
have attended the acceptance of the donation.
The Deed sought to be enforced having been validly entered into by Purificacion, the respondents' predecessor-in-
interest, binds the respondents who succeed the latter as heirs. 56 Simply, as they claim interest in their capacity as
Purificacion's heirs, the respondents are considered as "privies" to the subject Deed; or are "those between whom an
action is binding although they are not literally parties to the said action." 57 As discussed in Constantino, et al. v. Heirs
of Pedro Constantino, Jr.:58
[p]rivity in estate denotes the privity between assignor and assignee, donor and donee, grantor and grantee, joint
tenant for life and remainderman or reversioner and their respective assignees, vendor by deed of warranty and a
31
remote vendee or assignee. A privy in estate is one, it has been said, who derives his title to the property in question
by purchase; one who takes by conveyance. In fine, respondents, as successors-in-interest, derive their right from and
are in the same position as their predecessor in whose shoes they now stand. 59 (Citation omitted)
Anent the authority of Mother Concepcion to act as representative for and in behalf of the petitioner, the Court
similarly upholds the same. Foremost, the authority of Mother Concepcion was never questioned by the petitioner. In
fact, the latter affirms and supports the authority of Mother Concepcion to accept the donation on their behalf; as she
is, after all the congregation's Superior General. 60 Furthermore, the petitioner's avowal of Mother Concepcion's
authority after their SEC registration is a ratification of the latter's authority to accept the subject donation as the
petitioner's representative.61
In closing, it must be emphasized that the Court is both of law and of justice. Thus, the Court's mission and purpose is
to apply the law with justice.62
Donation is an expression of our social conscience, an act rooted purely on the goodness of one's heart and intent to
contribute.
Purificacion, the donor is worthy of praise for her works of charity. Likewise, the petitioner is worthy of admiration for
with or without the promise of reward or consideration, the Court is certain that it is impelled by sincere desire to help
the petitioner in overcoming her illness.
It is unfortunate that the will of a person moved by the desire to reciprocate the goodness shown to her during the
lowest and culminating points of her life is questioned and herein sought to be nullified on strict legality, when the
intent of the donor to give is beyond question.
The promotion of charitable works is a laudable objective. While not mentioned in the Constitution, the Court
recognizes benevolent giving as an important social fabric that eliminates inequality. As such, charitable giving must be
encouraged through support from society and the Court.
WHEREFORE, in consideration of the foregoing disquisitions, the instant petition for review
on certiorari is GRANTED. Accordingly, the Decision dated January 7, 2016 and Resolution dated April 19, 2016 of the
Court of Appeals in CA-G.R. CV No. 101944, are hereby REVERSED and SET ASIDE.
SO ORDERED.
32
G.R. No. 166751 June 8, 2006
RIDGEWOOD ESTATE, INC. (Erroneously sued as Camella Homes), Petitioner,
vs.
EXPEDITO BELAOS, Respondent.
DECISION
PUNO, J.:
This is a petition for review of the decision of the Court of Appeals dated July 28, 2004 and its resolution dated
January 19, 2005 in CA-G.R. SP No. 77836. The Court of Appeals affirmed the order of the Regional Trial Court of
Manila in Civil Case No. 02-103764 denying the motion to dismiss filed by herein petitioner Ridgewood Estate, Inc.
Petitioner is a subdivision developer that sells properties under the trade name "Camella Homes." Respondent Expedito
Belaos entered into a contract to sell with petitioner for the purchase of a house and lot at Tierra Nevada, Gen. Trias,
Cavite. Pursuant thereto, respondent issued several postdated checks in favor of petitioner as amortization for the
property. Petitioner, however, failed to construct the house. Thus, respondent, in a letter dated April 16, 2000,
rescinded the contract to sell and demanded the return of the amounts he had paid to petitioner, as well as the
postdated checks. Petitioner remitted to respondent the sum of P299,908.00, equivalent to the down payment and six
monthly amortizations previously paid by respondent, but it nonetheless continued to encash the other postdated
checks, to the prejudice of respondent.
Respondent filed before the Regional Trial Court of Manila a complaint for damages against Camella Homes for
encashing the postdated checks despite repeated demands to return them and refrain from encashing them in view of
the recission of the contract to sell.
Petitioner filed a motion to dismiss. It argued that Camella Homes is not a real party-in-interest and the complaint
states no cause of action as the contract to sell was entered into by and between Expedito L. Belaos and Ridgewood
Estate, Inc. It further argued that the complaint was defective since Camella Homes is not a natural or juridical
person, hence, it is not an entity authorized by law to be a party to a civil suit.
The trial court denied the motion to dismiss. It applied the doctrine on corporation by estoppel under Section 21 of the
Corporation Code which states:
Section 21. Corporation by estoppel.—All persons who assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground
that there was in fact no corporation.
Petitioner filed a petition for certiorari before the Court of Appeals. In addition to its contention that Camella Homes
was not a real party-in-interest, petitioner also raised the argument that the trial court had no jurisdiction over the
suit, as the subject matter of the complaint was within the exclusive jurisdiction of the Housing and Land Use
Regulatory Board (HLURB).
In its decision dated July 28, 2004, the Court of Appeals dismissed the petition. It held:
Private respondent’s complaint contains allegations that Ridgewood Estate’s (sic) deliberately and intentionally
encashed the postdated checks despite knowledge of the contract’s recission. Respondent prayed for the award of
actual, moral and exemplary damages due to his humiliation and loss of credibility with the banking community and
among his colleagues caused by petitioner’s alleged malicious acts.
Respondent Belaos is not claiming refund or any other claim from a subdivision developer. He does not demand for
specific performance of contractual and statutory obligations of delivering the property to him. In the cases that
reached the Supreme Court, the ruling has consistently been that the NHA or the HLURB has jurisdiction over
complaints arising from contracts between the subdivision developer and the lot buyer or those aimed at compelling
the subdivision developer to comply with its contractual and statutory obligations to make the subdivision a better
place to live in. It has already been admitted by both parties that the contract has already been rescinded and that
Ridgewood returned the downpayment [sic] and some of the postdated checks. Hence, the Court a quo has
jurisdiction over the action for damages.1
Petitioner filed a motion for reconsideration which was denied by the Court of Appeals in its resolution dated January
19, 2005.
Petitioner raises the following arguments in the case at bar:
1. That the honorable court failed to consider that the lower court acted with grave abuse of discretion when
the latter assumed jurisdiction over a matter which the law already vests with the Housing and Land Use
Regulatory Board.
2. That a perusal of the order of the lower court reveals that it committed grave abuse of discretion when it
anchored itself on an erroneous finding that Camella Homes allegedly is a corporation by estoppel.
33
3. That the Honorable Court of Appeals failed to consider that the lower court committed grave abuse of
discretion when it failed to consider that the complaint filed by private respondent has no cause of action for
failure to implead the real party in interest.
4. That the Honorable Court of Appeals failed to consider that the lower court committed grave abuse of
discretion when it ordered Camella Homes, which has no legal capacity to be sued[,] to submit an answer.2
We affirm the decision of the Court of Appeals.
First, the trial court correctly assumed jurisdiction over the complaint filed by respondent against petitioner.
Section 1 of Presidential Decree No. 1344 provides for the jurisdiction of HLURB (then National Housing Authority),
thus:
Sec. 1. In the exercise of its function to regulate the real estate trade and business and in addition to its powers
provided for in Presidential Decree No. 957, the National Housing Authority shall have exclusive jurisdiction to hear
and decide the cases of the following nature:
a. Unsound real estate business practices;
b. Claims involving refund and any other claims filed by subdivision lot or condominium unit buyer against the
project owner, developer, dealer, broker or salesman; and
c. Cases involving specific performance of contractual and statutory obligations filed by buyers of subdivision
lot or condominium unit against the owner, developer, dealer, broker or salesman.
The Court held in Roxas v. Court of Appeals3 that the mere relationship between the parties, i.e., that of being
subdivision owner/developer and subdivision lot buyer, does not automatically vest jurisdiction in the HLURB. For an
action to fall within the exclusive jurisdiction of the HLURB, the decisive element is the nature of the action as
enumerated in Section 1 of P.D. No. 1344. The HLURB has jurisdiction over complaints aimed at compelling the
subdivision developer to comply with its contractual and statutory obligations.
The complaint filed by respondent against petitioner was one for damages. It prayed for the payment of moral, actual
and exemplary damages by reason of petitioner’s malicious encashment of the checks even after the rescission of the
contract to sell between them. Respondent claimed that because of petitioner’s malicious and fraudulent acts, he
suffered humiliation and embarrassment in several banks, causing him to lose his credibility and good standing among
his colleagues.4 Such action falls within the jurisdiction of regular courts, not the HLURB.
Second, we observe that respondent’s complaint was actually directed against herein petitioner, Ridgewood Estate,
Inc., although it named Camella Homes as respondent therein. The complaint itself referred to Ridgewood Estate, Inc.
as the authorized representative of Camella Homes. Petitioner cannot use the lack of juridical personality by Camella
Homes as reason to evade its liability, if any, to petitioner. Petitioner admittedly uses the name "Camella Homes" as its
business name. Hence, to the buyers, Camella Homes and Ridgewood Estate, Inc. are one and the same. A reading of
the complaint would show that respondent was essentially suing petitioner, it being the seller of the house and lot he
intended to purchase. We agree with the Court of Appeals’ ruling that the remedy in this case is not the dismissal of
the case but the joinder of the proper party. 5 The appellate court correctly explained:
Dismissal of the complaint is not the remedy since the Court a quo properly acquired jurisdiction [over] the action for
damages. In its pleadings before the trial court, defendant Camella Homes alleges that it is not a juridical entity, not
the real party in interest and pointed to Ridgewood Estates [ sic], Inc. as the party liable to Belaos. In its petition
before [u]s, "Ridgewood Estates [sic], Inc. erroneously sued as Camella Homes" presented itself as one of the
developers of Camella Homes, specifically that of Tierra Nevada Subdivision of which respondent Belaos is a buyer,
then it claims to be the real party in interest in the controversy by admitting it entered into a Contract to Sell with
Belaos, [then] tries to exculpate Camella Homes by alleging that the latter is not a juridical entity and alleges that it is
the HLURB which has jurisdiction over the controversy. lavvphil.net
The Regional Trial Court did not commit grave abuse of discretion in denying the motion to dismiss and ordering
defendant Camella Homes to file an answer. Assuming arguendo that petitioner Ridgewood is a separate entity from
Camella Homes, defendant Camella Homes may implead the former. Private respondent Belaos may file a motion to
amend his complaint so as to implead the real party in interest. Parties may be dropped or added by order of the court
on motion of any party or on its own initiative at any stage of the action and on such terms as are just. (Sec. 11, Rule
3 of the 1997 Rules of Civil Procedure)6
We, therefore, find that the trial court did not err in denying petitioner’s motion to dismiss.
IN VIEW WHEREOF, the petition is DENIED.
SO ORDERED.
34
G.R. No. 177549 June 18, 2009
ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,
vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L.
YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY,
INC.,Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which seeks to reverse and set
aside the Resolutions dated 18 July 20062 and 19 April 20073 of the Court of Appeals in CA-G.R. SP No. 00185. Upon
herein respondents’ motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering
its Decision4 dated 15 February 2006; and remanding the case to the Regional Trial Court (RTC) of Cebu City, Branch
11, for necessary proceedings, in effect, reversing the Decision5 dated 10 November 2004 of the RTC which dismissed
respondents’ Complaint in SRC Case No. 022-CEB. Herein petitioners’ Motion for Reconsideration of the Resolution
dated 18 July 2006 was denied by the appellate court in the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita G.
Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife,
Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a
domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business.
On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate
Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts 6before the RTC of
Cebu. The said Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of
Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in
the attached Affidavit executed by respondent Joseph.
According to respondents,7 Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner
Anthony as one of the incorporators, holding 1,000 shares of stock worth ₱100,000.00. 8 Petitioner Anthony paid for
the said shares of stock with respondent Joseph’s money, thus, making the former a mere trustee of the shares for the
latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to
respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony remained as trustee
for respondent Joseph of the 200 shares of stock in Winchester, Inc., still in petitioner Anthony’s name.
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding petitioner
Anthony, their accumulated 8,500 shares in the corporation.11 Subsequently, on 7 November 1995, Winchester, Inc.
sold the same 8,500 shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners Rosita
and Jason.12
Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer in the
corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it were their
own family business. Petitioner Rosita handled the money market placements of the corporation to the exclusion of
respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds and
properties of Winchester, Inc. by understating the sales, charging their personal and family expenses to the said
corporation, and withdrawing stocks for their personal use without paying for the same. Respondents attached to the
Complaint various receipts13 to prove the personal and family expenses charged by petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock in petitioner
Anthony’s name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records
of Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents’ inspection; (2) render an accounting of
all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family expenses
which petitioners charged to Winchester, Inc., as well as the properties of the corporation which petitioners withheld
without payment; and (4) pay respondents’ attorney’s fees and litigation expenses. In the meantime, respondents
sought the appointment of a Management Committee and the freezing of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim, 14 attached to which was petitioner
Anthony’s Affidavit.15 Petitioners vehemently denied the allegation that petitioner Anthony was a mere trustee for
respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner Anthony’s name. For the incorporation
of Winchester, Inc., petitioner Anthony contributed ₱25,000.00 paid-up capital, representing 25% of the total par
value of the 1,000 shares he subscribed to, the said amount being paid out of petitioner Anthony’s personal savings
and petitioners Anthony and Rosita’s conjugal funds. Winchester, Inc. was being co-managed by petitioners and
respondents, and the attached receipts, allegedly evidencing petitioners’ use of corporate funds for personal and
family expenses, were in fact signed and approved by respondent Joseph.
35
By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory Counterclaim that
respondents had no cause of action against them. Respondents’ Complaint was purely intended for harassment. It
should be dismissed under Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions precedent
before its filing. First, there was no allegation in respondents’ Complaint that earnest efforts were exerted to settle the
dispute between the parties. Second, since respondents’ Complaint purportedly constituted a derivative suit, it
noticeably failed to allege that respondents exerted effort to exhaust all available remedies in the Articles of
Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents’
Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous
demand upon petitioners to inspect the corporate books but petitioners refused. Prayed for by petitioners, in addition
to the dismissal of respondents’ Complaint, was payment of moral and exemplary damages, attorney’s fees, litigation
expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a Management Committee was
commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he executed, which
was attached to the respondents’ Complaint. On 4 November 2002, respondent Joseph was cross-examined by the
counsel for petitioners. Thereafter, the continuation of the hearing was set for 29 November 2002, in order for
petitioners to adduce evidence in support of their opposition to the application for the appointment of a Management
Committee.17
During the hearing on 29 November 2002, the parties manifested before the RTC that there was an ongoing mediation
between them, and so the hearing on the appointment of a Management Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks in
trade,18the real properties, and the other assets of Winchester, Inc. In partial implementation of the afore-mentioned
amicable settlement, the stocks in trade and real properties in the name of Winchester, Inc. were equally distributed
among petitioners and respondents. As a result, the stockholders and members of the Board of Directors of
Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution 19 dissolving the corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.20
On 25 June 2004, petitioners filed a Manifestation 21 informing the RTC of the existence of their amicable settlement
with respondents. Respondents, however, made their own manifestation before the RTC that they were repudiating
said settlement, in view of the failure of the parties thereto to divide the remaining assets of Winchester, Inc.
Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.22
On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the application for
the appointment of a Management Committee, petitioners and respondents agreed that the RTC may already render a
judgment based on the pleadings. In accordance with the agreement of the parties, the RTC issued, on even date, an
Order23 which stated:
ORDER
During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and suggested
that a judgment may be rendered by the Court in this case based on the pleadings, affidavits, and other evidences on
record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate
Controversies. The suggestion of counsels was approved by the Court.
Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective memoranda
within a non-extendible period of twenty (20) days from notice hereof. Thereafter, the instant case will be deemed
submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge
Petitioners and respondents duly filed their respective Memoranda, 24 discussing the arguments already set forth in the
pleadings they had previously submitted to the RTC. Respondents, though, attached to their Memorandum a
Supplemental Affidavit25 of respondent Joseph, containing assertions that refuted the allegations in petitioner
Anthony’s Affidavit, which was earlier submitted with petitioners’ Answer with Compulsory Counterclaim. Respondents
also appended to their Memorandum additional documentary evidence,26 consisting of original and duplicate cash
invoices and cash disbursement receipts issued by Winchester, Inc., to further substantiate their claim that petitioners
were understating sales and charging their personal expenses to the corporate funds.
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB. The
dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders judgment in this case
DISMISSING the complaint filed by the [herein respondents].
36
The Court also hereby dismisses the [herein petitioners’] counterclaim because it has not been indubitably shown that
the filing by the [respondents] of the latter’s complaint was done in bad faith and with malice. 27
The RTC declared that respondents failed to show that they had complied with the essential requisites for filing a
derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at
the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
As to respondents’ prayer for the inspection of corporate books and records, the RTC adjudged that they had likewise
failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies requires that the complaint for inspection of corporate books or records must
state that:
(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be
furnished with financial statements under Sections 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be furnished with financial
statements made by the plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if
any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal,
stating the law and jurisprudence in support thereof.
The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was
supposed to be the custodian of the corporate books and records; therefore, a court order for respondents’ inspection
of the same was no longer necessary. The RTC similarly denied respondents’ demand for accounting as it was clear
that Winchester, Inc. had been engaging the services of an audit firm. Respondent Joseph himself described the audit
firm as competent and independent, and believed that the audited financial statements the said audit firm prepared
were true, faithful, and correct.
Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the
same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review under Rule
43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004 Decision of the
RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case, together with the applicable laws and
jurisprudence, WE see no reason or justification for granting the present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings and evidence
of the parties except the supplemental affidavit of [herein respondent] Joseph and its corresponding annexes
appended in [respondents’] memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed the
complaint for its failure to comply with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate
Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7, Section 2 thereof, which reads as
follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. – The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
xxxx
RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action. – x x x
xxxx
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain
the relief he desires.
xxxx
37
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint – In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the
following:
(1) The case is set (sic) for the enforcement of plaintiff’s right of inspection of corporate orders or records
and/or to be furnished with financial statements under Section 74 and 75 of the Corporation Code of the
Philippines;
(2) A demand for inspection and copying of books [and/or] to be furnished with financial statements made by
the plaintiffs upon defendant;
(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for such refusal, if
any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal,
stating the law and jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents] have not complied with the above quoted provisions.
[Respondents] should be mindful that in filing their complaint which, as admitted by them, is a derivative suit, should
have first exhausted all available remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules
governing the corporation. The contention of [respondent Joseph] that he had indeed made several talks to (sic) his
brother [herein petitioner Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the
law requires is to bring the grievance to the Board of Directors or Stockholders for the latter to take the opportunity to
settle whatever problem in its regular meeting or special meeting called for that purpose which [respondents] failed to
do. x x x The requirements laid down by the Interim Rules of Procedure for Intra-Corporate Controversies are
mandatory which cannot be dispensed with by any stockholder of a corporation before filing a derivative
suit.28 (Emphasis ours.)
The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Joseph’s Supplemental Affidavit
and other additional evidence, which respondents belatedly submitted with their Memorandum to the said trial court.
The appellate court ratiocinated that:
With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph and its
annexes appended to their memorandum should have been taken into consideration by the Court a quo to support the
reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic)
inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial conference conducted on August 26,
2004, the parties through their respective counsels had come up with an agreement that the lower court would render
judgment based on the pleadings and evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the
Interim Rules of Procedure for Intra-Corporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. – If, after submission of the pre-trial briefs, the court determines that, upon
consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be
rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or
otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents which were submitted only upon the filing of the
memorandum for the [respondents] were not submitted in the pre-trial briefs for the stipulation of the parties during
the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:
SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set forth
such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on
the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading;
Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence,
except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he
fails or refuses to execute an affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its
introduction in evidence.
38
There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within one of the
exceptions of the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, "the party making an allegation in a civil case has
the burden of proving it by preponderance of evidence." Differently stated, upon the plaintiff in [a] civil case, the
burden of proof never parts. That is, appellants must adduce evidence that has greater weight or is more convincing
that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal of the complaint
but the [respondents] themselves for their lackadaisical attitude in setting forth and appending their defences
belatedly. To admit them would be a denial of due process for the opposite party which this Court cannot allow. 29
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed Decision of the Regional
Trial Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC Case No. 022-CEB is
AFFIRMED in toto. Cost against the [herein respondents].30
Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for Reconsideration and
Motion to Set for Oral Arguments the Motion for Reconsideration,31 invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present action; and
(2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic) inadmissible
because the rules and the lower court expressly allowed the submission of the same in its order dated August
26, 2004 x x x.32
In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents’ Motion to Set for Oral Arguments the
Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that transpired during the oral
arguments, which took place on 30 March 2006. Counsels for the parties manifested before the appellate court that
they were submitting respondents’ Motion for Reconsideration for resolution. Justice Magpale, however, still called on
the parties to talk about the possible settlement of the case considering their familial relationship. Independent of the
resolution of respondents’ Motion for Reconsideration, the parties were agreeable to pursue a settlement for the
dissolution of the corporation, which they had actually already started.
In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from notice,
their intended amicable settlement, since the same would undeniably affect the resolution of respondents’ pending
Motion for Reconsideration. If the said period should lapse without the parties submitting an amicable settlement, then
they were directed by the appellate court to file within 10 days thereafter their position papers instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,36 stating that the parties did not
reach an amicable settlement. Respondents informed the appellate court that prior to the filing with the Securities and
Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already divided the stocks in
trade and the real assets of the corporation among themselves. Respondents posited, though, that the afore-
mentioned distribution of the assets of Winchester, Inc. among the parties was null and void, as it violated the last
paragraph of Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of capital stock and as
otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities." At the same time, however, respondents brought to
the attention of the Court of Appeals that the parties did eventually file with the SEC a petition for dissolution of
Winchester, Inc., which the SEC approved.37
Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for
Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10
November 2004. They instead argued that the RTC Decision in question was null and void as it did not clearly state the
facts and the law on which it was based. Respondents sought the remand of the case to the RTC for further
proceedings on their derivative suit and completion of the dissolution of Winchester, Inc., including the legalization of
the prior partial distribution among the parties of the assets of said corporation.
Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents of attempting to incorporate
extraneous matters into the latter’s Motion for Reconsideration. Petitioners pointed out that the issue before the Court
of Appeals was not the dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the RTC
was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents’ Motion for
Reconsideration. The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis-à-vis the issues raised by the [herein respondents’]
motion for reconsideration and in view of the formal dissolution of the corporation which leaves unresolved up to the
present the settlement of the properties and assets which are now in danger of dissipation due to the unending
litigation, this Court finds the need to remand the instant case to the lower court (commercial court) as the proper
forum for the adjudication, disposition, conveyance and distribution of said properties and assets between and
amongst its stockholders as final settlement pursuant to Sec. 122 of the Corporation Code after payment of all its
39
debts and liabilities as provided for under the same proviso. This is in accord with the pronouncement of the Supreme
Court in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and which WE quote, viz:
"the corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting
and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may
act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity x x x nor those of its owners and creditors. If the three-year
extended life has expired without a trustee or receiver having been expressly designated by the corporation within that
period, the board of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and
in its behalf, might make proper representation with the Securities and Exchange Commission, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns."
In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the lower court
under Republic Act No. [8799] (otherwise known as the Securities and Exchange Commission) as implemented by A.M.
No. 00-8-10-SC (Transfer of Cases from the Securities and Exchange Commission to the Regional Trial Courts) which
took effect on October 1, 2001, is the proper forum for working out the final settlement of the corporate concern. 39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated February 15, 2006 is
hereby SET ASIDE and the instant case is REMANDED to the lower court to take the necessary proceedings in
resolving with deliberate dispatch any and all corporate concerns towards final settlement. 40
Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was denied by the Court of Appeals
in its other assailed Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE PHILIPPINES,
JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS CASE TO THE
LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE
GROUNDS FOR THE [RESPONDENTS’] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED
WAS A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE SUMMARY PROCEDURE
FOR INTRA-CORPORATE CASES.42
The crux of petitioners’ contention is that the Court of Appeals committed grievous error in reconsidering its Decision
dated 15 February 2006 on the basis of extraneous matters, which had not been previously raised in respondents’
Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration before the appellate court;
i.e., the adjudication, disposition, conveyance, and distribution of the properties and assets of Winchester, Inc. among
its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact that the parties were able to
agree before the Court of Appeals to submit for resolution respondents’ Motion for Reconsideration of the 15 February
2006 Decision of the same court, independently of any intended settlement between the parties as regards the
dissolution of the corporation and distribution of its assets, only proves the distinction and independence of these
matters from one another. Petitioners also contend that the assailed Resolution dated 18 July 2006 of the Court of
Appeals, granting respondents’ Motion for Reconsideration, failed to clearly and distinctly state the facts and the law
on which it was based. Remanding the case to the RTC, petitioners maintain, will violate the very essence of the
summary nature of the Interim Rules of Procedure Governing Intra-Corporate Controversies, as this will just entail
delay, protract litigation, and revert the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf
and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said
corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. During
the pendency of the proceedings before the court a quo, the parties were able to reach an amicable settlement
wherein they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already
partially implemented by the parties, when respondents repudiated the same, for which reason the RTC proceeded
with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents’
Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under
40
the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of
respondents’ allegations in said Complaint after consideration of the pleadings and evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC that
respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case by a
preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate court,
insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of respondents’
Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable settlement of
their dispute, but the parties were unable to do so. The parties were not able to submit to the appellate court, within
the given period, any amicable settlement; and filed, instead, their Position Papers. This effectively meant that the
parties opted to submit respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of
Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on the merits.
It was at this point that the case took an unexpected turn.
In accordance with respondents’ allegation in their Position Paper that the parties subsequently filed with the SEC, and
the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to
the RTC so that all the corporate concerns between the parties regarding Winchester, Inc. could be resolved towards
final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the
derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder
is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a
shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief
which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a
defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the
corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over
intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court
pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.
In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically governed by
Section 122 of the Corporation Code, which reads:
SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others
in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its
assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of
said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation,
the settlement and adjustment of claims against it and the payment of its just debts. 44 More particularly, it entails the
following:
Winding up the affairs of the corporation means the collection of all assets, the payment of all its creditors, and the
distribution of the remaining assets, if any among the stockholders thereof in accordance with their contracts, or if
there be no special contract, on the basis of their respective interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail unless it is inconsistent with law.45
It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate
assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the
corporation.46lawphil.net
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither
part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals
41
to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of
Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute
the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents
themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented;
and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties
before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final settlement of corporate
concerns" was solely grounded on respondents’ allegation in its Position Paper that the parties had already filed before
the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes, however, that there is
absolute lack of evidence on record to prove said allegation. Respondents failed to submit copies of such petition for
dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule in evidence that each
party must prove his affirmative allegation. Since it was respondents who alleged the voluntary dissolution of
Winchester, Inc., respondents must, therefore, prove it.47 This respondents failed to do.
Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and the same
was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final settlement by the RTC of
the remaining corporate concerns. It must be remembered that the Complaint filed by respondents before the RTC
essentially prayed for the accounting and reimbursement by petitioners of the corporate funds and assets which they
purportedly misappropriated for their personal use; surrender by the petitioners of the corporate books for the
inspection of respondents; and payment by petitioners to respondents of damages. There was nothing in respondents’
Complaint which sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of
Winchester, Inc. could not have resulted in the conversion of respondents’ derivative suit to a proceeding for the
liquidation of said corporation, but only in the dismissal of the derivative suit based on either compromise agreement
or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already went
beyond the issues raised in respondents’ Motion for Reconsideration. Instead of focusing on whether it erred in
affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents’ Complaint due to respondents’
failure to comply with the requirements for a derivative suit and submit evidence to support their allegations, the Court
of Appeals unduly concentrated on respondents’ unsubstantiated allegation that Winchester, Inc. was already
dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different from that
originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents’ Motion for
Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of finally putting an end to the
case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all remedies
before filing the derivative suit; and (2) respondent Joseph’s Supplemental Affidavit and its annexes should have been
taken into consideration, since the submission thereof was allowed by the rules of procedure, as well as by the RTC in
its Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a derivative suit, the
Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16 February 2006. 1avvphi1
The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision
of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make
corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their
fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because
of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific
performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures
for its protection. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution.48
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following
requirements which a stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or association,
as the case may be, provided, that:
42
A perusal of respondents’ Complaint before the RTC would reveal that the same did not allege with particularity that
respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-
laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in respondent Joseph’s Affidavit, which
was attached to respondents’ Complaint. Respondent Joseph averred in his Affidavit that he tried for a number of
times to talk to petitioner Anthony to settle their differences, but the latter would not listen. Respondents additionally
claimed that taking further remedies within the corporation would have been idle ceremony, considering that
Winchester, Inc. was a family corporation and it was impossible to expect petitioners to take action against themselves
who were the ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are
simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder
filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to
allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the
final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding
their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available." Respondents did not refer to
or mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for
dispute resolution among stockholders, which respondents unsuccessfully availed themselves of. And the Court is not
prepared to conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for
such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the
second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies. They are flimsy and insufficient, compared to the seriousness of respondents’ accusations of fraud,
misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a
family corporation should not in any way exempt respondents from complying with the clear requirements and
formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the
distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of
corporations, in the institution by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies, the respondents’ Complaint failed to allege, explicitly or
otherwise, the fact that there were no appraisal rights available for the acts of petitioners complained of, as well as a
categorical statement that the suit was not a nuisance or a harassment suit.
As to respondents’ second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of
Appeals, in its 15 February 2006 Decision, that respondent Joseph’s Supplemental Affidavit and additional evidence
were inadmissible since they were only appended by respondents to their Memorandum before the RTC. Section 8,
Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear that:
Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set forth
such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on
the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading,
Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence,
except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he
fails or refuses to execute an affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its
introduction in evidence. (Emphasis ours.)
According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other documentary
evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for
the respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-
trial briefs of the parties. That the parties should have already identified and submitted to the trial court the affidavits
of their witnesses and documentary evidence by the time of pre-trial is strengthened by the fact that Section 1, Rule 4
43
of the Interim Rules of Procedure Governing Intra-Corporate Controversies require that the following matters should
already be set forth in the parties’ pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after the period for availment of, and
compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and
serve an order immediately setting the case for pre-trial conference, and directing the parties to submit their
respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-trial
brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set
for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the following:
xxxx
(4) Documents not specifically denied under oath by either or both parties;
xxxx
(7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting
their positions on each of the issues;
(8) All other pieces of evidence, whether documentary or otherwise and their respective purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,49 it is
the duty of the court to ensure during the pre-trial conference that the parties consider in detail, among other things,
objections to the admissibility of testimonial, documentary, and other evidence, as well as objections to the form or
substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a party’s pre-trial
brief, at the very last instance, so that the opposite party is given the opportunity to object to the form and substance,
or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue
advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in
accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:
Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs, the court determines that, upon
consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be
rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or
otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.
Even then, the afore-quoted provision still requires, before the court makes a determination that it can render
judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took into consideration the
pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court can render
judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses
and documentary evidence should be submitted, at the latest, with the parties’ pre-trial briefs. Taking further into
account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies
parties are required to file their memoranda simultaneously, the same would mean that a party would no longer have
any opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its memorandum. To
violate the above-quoted provision would, thus, irrefragably run afoul the former party’s constitutional right to due
process.
In the instant case, therefore, respondent Joseph’s Supplemental Affidavit and the additional documentary evidence,
appended by respondents only to their Memorandum submitted to the RTC, were correctly adjudged as inadmissible
by the Court of Appeals in its 15 February 2006 Decision for having been belatedly submitted. Respondents neither
alleged nor proved that the documents in question fall under any of the three exceptions to the requirement that
affidavits and documentary evidence should be attached to the appropriate pleading or pre-trial brief of the party,
which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby GRANTED.
The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 00185 are
hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby
AFFIRMED. No costs.
SO ORDERED.
44
G.R. No. 174353 September 10, 2014
NESTOR CHING and ANDREW WELLINGTON, Petitioners,
vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias
JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of the Decision 1dated
October 27, 2005 of the Court of Appeals in CA-G.R. CV No. 81441, which affirmed the Order2 dated July 8, 2003 of
the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No. 03-001 dismissing the Complaint filed by
herein petitioners.
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint 3 with the RTC of Olongapo
City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its
Board of Directors and officers under the provisions of Presidential Decree No. 902-A in relation to Section 5.2 of the
Securities Regulation Code. The Subic Bay Golfers and Shareholders Incorporated (SBGSI), a corporation composed of
shareholders of the defendant corporation, was also named as plaintiff. The officers impleaded as defendants were the
following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu; (2) its treasurer, Hu Tsung Chieh alias Jack Hu; (3)
corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu Tsung Tzu. The case was docketed as
Civil Case No. 03-001. The complaint alleged that the defendant corporation sold shares to plaintiffs at US$22,000.00
per share, presenting to them the Articles of Incorporation which contained the following provision:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in their
favor. Shareholders shall be entitled only to a pro-rata share of the assets of the Club at the time of its dissolution or
liquidation.4
However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the Securities and
Exchange Commission (SEC), wherein the above provision was changed as follows:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in their
favor. In accordance with the Lease and Development Agreement by and between Subic Bay Metropolitan Authority
and The Universal International Group of Taiwan, where the golf courseand clubhouse component thereof was
assigned to the Club, the shareholders shall not have proprietary rights or interests over the properties of the Club. 5x x
x. (Emphasis supplied.)
Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above amendment which
allegedly makes the shares non-proprietary, as it takes away the rightof the shareholders to participate in the pro-rata
distribution of the assets of the corporation after its dissolution. According to petitioners, this is in fraud of the
stockholders who only discovered the amendment when they filed a case for injunction to restrain the corporation
from suspending their rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of
Directors and officers of the corporation did not call any stockholders’ meeting from the time of the incorporation, in
violation of Section 50 of the Corporation Code and the By-Laws of the corporation. Neither did the defendant directors
and officers furnish the stockholders with the financial statements of the corporation nor the financial report of the
operation of the corporation in violation of Section 75 of the Corporation Code. Petitioners also claim that on August
15, 1997, SBGCCI presented to the SEC an amendment to the By-Laws of the corporation suspending the voting rights
of the shareholders except for the five founders’ shares. Said amendment was allegedly passed without any
stockholders’ meeting or notices to the stockholders in violation of Section 48 of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the management of the corporation allegedly
committed by the Board of Directors and officers of the corporation, particularly:
a. The Board of Directors and the officers of the corporation did not indicate in its financial report for the year
1999 the amount of ₱235,584,000.00 collected from the subscription of 409 shareholders who paid
U.S.$22,000.00 for one (1) share of stock at the then prevailing rate of ₱26.18 to a dollar. The stockholders
were not informed how these funds were spent or its whereabouts.
b. The Corporation has been collecting green fees from the patrons of the golf course at an average sum of
₱1,600.00 per eighteen (18) holes but the income is not reported in their yearly report. The yearly report for
the year 1999 contains the report of the Independent Public Accountant who stated that the company was
incorporated on April 1, 1996 but has not yet started its regular business operation. The golf course has been
in operation since 1997 and as such has collected green fees from non-members and foreigners who played
golf in the club. There is no financial report as to the income derived from these sources.
c. There is reliable information that the Defendant Corporation has not paid its rentals to the Subic Bay
Metropolitan Authority which up to the present is estimated to be not less than one (1) million U.S. Dollars.
Furthermore, the electric billings of the corporation [have] not been paid which amounts also to several
millions of pesos.
45
d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and presently the club
is operating without any valid contract with SBMA. The defendant was ordered by the Supreme Court to yield
the possession, the operation and the management of the golf course to SBMA. Up to now the defendants
[have] defied this Order.
e. That the value of the shares of stock of the corporation has drastically declined from its issued value of
U.S.$22,000.00 to only Two Hundred Thousand Pesos, (₱200,000.00) Philippine Currency. The shareholders
[have] lost in terms ofinvestment the sum estimated to be more than two hundred thousand pesos.This loss is
due to the fact that the Club is mismanaged and the golf course is poorly maintained. Other amenities of the
Club has (sic) not yet been constructed and are not existing despite the lapse of morethan five (5) years from
the time the stocks were offered for sale to the public. The cause of the decrease in value of the sharesof
stocks is the fraudulent mismanagement of the club. 6
Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the corporation,
petitioners prayed in their Complaint for the following:
WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining order be issued
enjoining the defendants from acting as Officers and Board of Directors of the Corporation. After hearing[,] a writ of
preliminary injunction be issued enjoining defendants to act as Board of Directors and Officers of the Corporation. In
the meantime a Receiver be appointed by the Court to act as such until a duly constituted Board of Directors and
Officers of the Corporation be elected and qualified.
That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand Pesos each
representing the decrease in value of their shares of stocks plus the sum of ₱100,000.00 as legal expense and
attorney’s fees, as well as appearance fee of ₱4,000.00 per hearing.7
In their Answer, respondents specifically denied the allegations of the Complaint and essentially averred that:
(a) The subscriptions of the 409 shareholders were paid to Universal International Group Development
Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs and other shareholders
bought their shares;8
(b) Contrary to the allegations in the Complaint, said subscriptions were reflected inSBGCCI’s balance sheets
for the fiscal years 1998 and 1999;9
(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their shares were
purchased after the amendment of the Articles of Incorporation and such amendment was publicly known to
all members prior and subsequent to the said amendment;10
(d) Shareholders’ meetingshad been held and the corporate acts complained of were approved at
shareholders’ meetings;11
(e) Financial statements of SBGCCI had always been presented to shareholders justifiably requesting copies; 12
(f) Green fees collected were reported in SBGCCI’s audited financial statements; 13
(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to operate under a valid
contract with the SBMA;14 and
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of members’
shares have increased.15
Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was authorized by SBGSI to
file the Complaint on the said corporation’s behalf; (b) to comply with the requisites for filing a derivative suit and an
action for receivership; and (c) to justify their prayer for injunctive relief since the Complaint may be considered a
nuisance or harassment suit under Section 1(b), Rule1 of the Interim Rules of Procedure for Intra-Corporate
Controversies.16 Thus, they prayed for the dismissal of the Complaint.
On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is a derivative suit,
explaining thus:
The Court finds that this case is intended not only for the benefit of the two petitioners. This is apparentfrom the
caption of the case which reads Nestor Ching, Andrew Wellington and the Subic Bay Golfers and Shareholders, Inc.,
for and in behalf of all its members as petitioners. This is also shown in the allegations of the petition[.] x x x.
On the bases of these allegations of the petition, the Court finds that the case is a derivative suit. Being a derivative
suit in accordance with Rule 8 of the Interim Rules, the stockholders and members may bring an action in the name of
the corporation or association provided that he (the minority stockholder) exerted all reasonable efforts and allege[d]
the same with particularity in the complaint to exhaust of (sic) all remedies available under the articles of
incorporation, by-laws or rules governing the corporation or partnership to obtain the reliefs he desires. An
examination of the petition does not show any allegation that the petitioners applied for redress to the Board of
Directors of respondent corporation there being no demand, oralor written on the respondents to address their
complaints. Neither did the petitioners appl[y] for redress to the stockholders of the respondent corporation and
ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should have asked the Board of Directors
of the respondent corporation and/or its stockholders to hold a meeting for the taking up of the petitioners’ rights in
this petition.17
46
The RTC held that petitioners failed to exhaust their remedies within the respondent corporation itself. The RTC
further observed that petitioners Ching and Wellington were not authorized by their co-petitioner Subic Bay Golfers
and Shareholders Inc. to filethe Complaint, and therefore had no personality to file the same on behalf ofthe said
shareholders’ corporation. According to the RTC, the shareholdings of petitioners comprised of two shares out of the
409 alleged outstanding shares or 0.24% is an indication that the action is a nuisance or harassment suit which may
be dismissed either motu proprio or upon motion in accordance with Section 1(b) of the Interim Rules of Procedure for
Intra-Corporate Controversies.18
Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed as CA-G.R. CV No.
81441. On October 27, 2005, the Court of Appeals rendered the assailed Decision affirming that of the RTC.
Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint they filed with the
RTC was not a derivative suit. They claim that they filed the suit in their own right as stockholders against the officers
and Board of Directors of the corporation under Section 5(a) of Presidential DecreeNo. 902-A, which provides:
Sec. 5. In addition tothe 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.
According to petitioners, the above provision (which should be read in relation to Section 5.2 of the Securities
Regulation Code which transfers jurisdiction over such cases to the RTC) allows any stockholder to file a complaint
against the Board of Directors for employing devices or schemes amounting to fraud and misrepresentation which is
detrimental to the interest of the public and/or the stockholders.
In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it should
nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies within the corporation.
Petitioners cite Republic Bank v. Cuaderno19 wherein the Court allowed the derivative suit even without the exhaustion
of said remedies as it was futile to do so since the Board ofDirectors were all members of the same family. Petitioners
also point out that in Cuadernothis Court held that the fact that therein petitioners had only one share of stock does
not justify the denial of the relief prayed for.
To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies on petitioners’ part,
they claim that they filed in Court a case for Injunction docketed as Civil Case No. 103-0-01, to restrain the corporation
from suspending their rights to use all the facilities of the club, on the ground that the club cannot collect membership
fees until they have completed the amenities as advertised when the shares of stock were sold to them. They allegedly
asked the Club to produce the minutes of the meeting of the Board of Directors allowing the amendments of the
Articles of Incorporation and By-Laws. Petitioners likewise assail the dismissal of the Complaint for being a harassment
ornuisance suit before the presentation of evidence. They claim that the evidence they were supposed to present will
show that the members of the Board of Directors are not qualified managers of a golf course.
We find the petition unmeritorious.
At the outset, it should be noted thatthe Complaint in question appears to have been filed only by the two petitioners,
namely Nestor Ching and Andrew Wellington, who each own one stock in the respondent corporation SBGCCI. While
the caption of the Complaint also names the "Subic Bay Golfers and Shareholders Inc. for and in behalf of all its
members," petitioners did not attach any authorization from said alleged corporation or its members to file the
Complaint. Thus, the Complaint is deemed filed only by petitioners and not by SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine that the nature of an
action, as well as which court or body has jurisdiction over it, isdetermined based on the allegations contained in the
complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the
claims asserted therein.20
We have also held that the body rather than the title of the complaint determines the nature of an action. 21
In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit, anindividual suit, and
a representative or class suit:
A derivative suit must be differentiated from individual and representative or class suits, thus:
"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons
may be classified intoindividual suits, class suits, and derivative suits. Where a stockholder or member is denied the
right of inspection, his suit would be individual because the wrong is done to him personally and not to the other
stockholders or the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders’
rights are violated, a class or representative suitwill be proper for the protection of all stockholders belonging to the
same group. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs
to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the
corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this
47
fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and
separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate
entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors.
Furthermore,there is the difficulty of determining the amount of damages that should be paid to each individual
stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves,
a stockholder or member may find that he has no redress because the former are vested by law with the right to
decide whether or notthe corporation should sue, and they will never be willing to sue themselves. The corporation
would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law
gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as
a "derivative suit." It has been proven to be an effective remedy of the minority against the abuses of management.
Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue orare the
ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest."
xxxx
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and individual and
class suits, on the other, are mutually exclusive, viz.:
"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be
redressed because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in the corporate right, if the
gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any
severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the
dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed by the shareholder individually (or on behalf of
a classof shareholders to which he or she belongs) for injury to his or her interestas a shareholder. x x x. [T]he two
actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action)
*651 or the corporation(derivative action)." x x x.
Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other shareholder of the
corporation negligently managed the business, resulting in its total failure. x x x. The appellate court concluded that
the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is injury to the
whole body of its stockholders, it was for the corporation to institute and maintain a remedial action. x x x. A
derivative action would have been appropriate if its responsible officials had refused or failed to act." x x x. The court
wenton to note that the damages shown at trial were the loss of corporate profits. x x x. Since "[s]hareholders own
neither the property nor the earnings of the corporation," any damages that the plaintiff alleged that resulted from
such loss of corporate profits "were incidental to the injury to the corporation." (Citations omitted.)
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board of Directors
of the corporation, the appointment of a receiver, and the prayer for damages in the amount of the decrease in the
value of the sharesof stock, clearly show that the Complaint was filed to curb the alleged mismanagement of SBGCCI.
The causes of action pleaded by petitioners do not accrue to a single shareholder or a class of shareholders but to the
corporation itself.
However, as minority stockholders, petitioners do not have any statutory right to override the business judgments of
SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lackof qualification to manage a golf
course. Contraryto the arguments of petitioners, Presidential Decree No. 902-A, which is entitled REORGANIZATION
OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID AGENCY
UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT, does not grant minority
stockholders a cause of action against waste and diversion by the Board of Directors, but merely identifies the
jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It is settled that a stockholder’s right to
institute a derivative suit is not based on any express provisionof the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for violation of their fiduciary duties. 23
At this point, we should take note that while there were allegations in the Complaint of fraud in their subscription
agreements, such as the misrepresentation of the Articles of Incorporation, petitioners do not pray for the rescission of
their subscription or seekto avail of their appraisal rights. Instead, they ask that defendants be enjoined from
managing the corporation and to pay damages for their mismanagement. Petitioners’ only possible cause of action as
minority stockholders against the actions of the Board of Directors is the common law right to file a derivative suit. The
legal standing of minority stockholders to bring derivative suits is not a statutory right, there being no provision in the
Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity.
However, a derivative suit cannot prosper without first complying with the legal requisites for its institution. 24
48
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies imposes the following
requirements for derivative suits:
The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same should not have been dismissed on the
ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners are indeed only two out of
the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a minority of
stockholders file a derivative suit for and in behalf of a corporation.25
With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the
Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they desire. The Complaint
contained no allegation whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if petitioners
thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint and
specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in
accordance with the Interim Rules. The requirement of this allegation in the Complaint is not a useless formality which
may be disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan26:
The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are
simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder
filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies availableunder the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to
allege such fact with particularityin the complaint. The obvious intent behind the rule is to make the derivative suit the
final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 81441
which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City dismissing the Complaint filed thereon by
herein petitioners is AFFIRMED.
SO ORDERED.
49
G.R. No. 157479 November 24, 2010
PHILIP TURNER and ELNORA TURNER, Petitioners,
vs.
LORENZO SHIPPING CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment of the value of their shareholdings.
In the stockholders’ suit to recover the value of their shareholdings from the corporation, the Regional Trial Court
(RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation, herein respondent, to pay.
Execution was partially carried out against the respondent. On the respondent’s petition for certiorari, however, the
Court of Appeals (CA) corrected the RTC and dismissed the petitioners’ suit on the ground that their cause of action for
collection had not yet accrued due to the lack of unrestricted retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on March 4, 2003 in C.A.-
G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge
of Branch 46 of the Regional Trial Court of Manila, et al.1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged primarily in cargo
shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove the
stockholders’ pre-emptive rights to newly issued shares of stock. Feeling that the corporate move would be prejudicial
to their interest as stockholders, the petitioners voted against the amendment and demanded payment of their shares
at the rate of ₱2.276/share based on the book value of the shares, or a total of ₱2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted that the
market value on the date before the action to remove the pre-emptive right was taken should be the value, or
₱0.41/share (or a total of ₱414,100.00), considering that its shares were listed in the Philippine Stock Exchange, and
that the payment could be made only if the respondent had unrestricted retained earnings in its books to cover the
value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal committee pursuant to
Section 82 of the Corporation Code, each of them nominating a representative, who together then nominated the third
member who would be chairman of the appraisal committee. Thus, the appraisal committee came to be made up of
Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio Acyatan, the respondent’s nominee; and Leo Anoche of the
Asian Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an aggregate value of
₱2,565,400.00 for the petitioners. 2
Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus 2%/month
penalty from the date of their original demand for payment, as well as the reimbursement of the amounts advanced as
professional fees to the appraisers.3
In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’ demand, explaining that
pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only when
the corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained
earnings at the time of the petitioners’ demand, as borne out by its Financial Statements for Fiscal Year 1999 showing
a deficit of ₱72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and damages in the RTC in
Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially assigned to Branch 132. 5
On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION NINE HUNDRED
SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS, Philippine Currency, evidenced
by its Financial Statement as of the Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final, that the same
cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a matter of right,
to a summary judgment. xxx 6
The respondent opposed the motion for partial summary judgment, stating that the determination of the unrestricted
retained earnings should be made at the end of the fiscal year of the respondent, and that the petitioners did not have
a cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the Presiding Judge of Branch 133
transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s special commercial courts in Makati City
due to the case being an intra-corporate dispute. Hence, Civil Case No. 01-086 was re-raffled to Branch 142.
Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was ultimately
transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon, 7 pursuant to the Interim Rules of
50
Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-corporate cases to be brought in the RTC
exercising jurisdiction over the place where the principal office of the corporation was found.
After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’ counsel did not attend,
Judge Tipon issued an order,8 granting the petitioners’ motion for partial summary judgment, stating:
As to the motion for partial summary judgment, there is no question that the 3-man committee mandated to appraise
the shareholdings of plaintiff submitted its recommendation on October 27, 2000 fixing the fair value of the shares of
stocks of the plaintiff at P2.54 per share. Under Section 82 of the Corporation Code:
"The findings of the majority of the appraisers shall be final, and the award shall be paid by the corporation within
thirty (30) days after the award is made."
"The only restriction imposed by the Corporation Code is–"
"That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained
earning in its books to cover such payment."
The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the Securities and
Exchange Commission, the defendant has retained earnings of P11,975,490 as of March 21, 2002. This is not disputed
by the defendant. Its only argument against paying is that there must be unrestricted retained earning at the time the
demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say that the
unrestricted retained earnings must exist at the time of the demand. Even if there are no retained earnings at the time
the demand is made if there are retained earnings later, the fair value of such stocks must be paid. The only
restriction is that there must be sufficient funds to cover the creditors after the dissenting stockholder is paid. No such
allegations have been made by the defendant. 9
On November 12, 2002, the respondent filed a motion for reconsideration.
On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners filed a motion for
immediate execution and a motion to strike out motion for reconsideration. In the latter motion, they pointed out that
the motion for reconsideration was prohibited by Section 8 of the Interim Rules. Thus, also on November 22, 2002,
Judge Tipon denied the motion for reconsideration and granted the petitioners’ motion for immediate execution. 10
Subsequently, on November 28, 2002, the RTC issued a writ of execution. 11
Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two aforecited
orders of Judge Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE SPOUSES
TURNER, BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC HAD NO RETAINED EARNINGS, AND
THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE SPOUSES TURNER,
WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY RETAINED EARNINGS MADE A
YEAR AFTER THE "COMPLAINT" WAS FILED ARE IRRELEVANT TO THE SPOUSES TURNER’S RIGHT TO
RECOVER UNDER THE "COMPLAINT", BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO
JUDGE TIPON’S ATTENTION, IS "IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE
SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS DISCRETION, WHEN
HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF EXECUTION" DIRECTING THE EXECUTION OF HIS
PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT IS NOT A
FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT AND THEREFORE CANNOT BE
SUBJECT OF EXECUTION UNDER THE SUPREME COURT’S CATEGORICAL HOLDING IN PROVINCE OF
PANGASINAN VS. COURT OF APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining the petitioners, and
their agents and representatives from enforcing the writ of execution. By then, however, the writ of execution had
been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution. Thereupon, the
sheriff resumed the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:
However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal condition that no
payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its
books to cover such payment. Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means
that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of
corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution
of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Creditors of a
51
corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors
will not use the assets of the corporation to purchase its own stock.
In the instant case, it was established that there were no unrestricted retained earnings when the Turners filed their
Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that payment of their shares could only
be made if it had unrestricted earnings in its books to cover the same. Petitioner reiterated this in a letter dated 2
January 2001 which further informed the Turners that its Financial Statement for fiscal year 1999 shows that its
retained earnings ending December 31, 1999 was at a deficit in the amount of ₱72,973,114.00, a matter which has
not been disputed by private respondents. Hence, in accordance with the second paragraph of sec. 82, BP 68 supra,
the Turners’ right to payment had not yet accrued when they filed their Complaint on January 22, 2001, albeit their
appraisal right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared that:
Now, before an action can properly be commenced all the essential elements of the cause of action must be in
existence, that is, the cause of action must be complete. All valid conditions precedent to the institution of the
particular action, whether prescribed by statute, fixed by agreement of the parties or implied by law must be
performed or complied with before commencing the action, unless the conduct of the adverse party has been such as
to prevent or waive performance or excuse non-performance of the condition.
It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of action
consists of the operative facts which give rise to such right of action. The right of action does not arise until the
performance of all conditions precedent to the action and may be taken away by the running of the statute of
limitations, through estoppel, or by other circumstances which do not affect the cause of action. Performance or
fulfillment of all conditions precedent upon which a right of action depends must be sufficiently alleged, considering
that the burden of proof to show that a party has a right of action is upon the person initiating the suit.
The Turners’ right of action arose only when petitioner had already retained earnings in the amount of ₱11,975,490.00
on March 21, 2002; such right of action was inexistent on January 22, 2001 when they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by law, an action commenced before the cause of
action has accrued is prematurely brought and should be dismissed. The fact that the cause of action accrues after the
action is commenced and while it is pending is of no moment. It is a rule of law to which there is, perhaps, no
exception, either at law or in equity, that to recover at all there must be some cause of action at the commencement
of the suit. There are reasons of public policy why there should be no needless haste in bringing up litigation, and why
people who are in no default and against whom there is as yet no cause of action should not be summoned before the
public tribunals to answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless
the plaintiff has a valid and subsisting cause of action at the time his action iscommenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an
amendment setting up such after-accrued cause of action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals.
The Turners’ apprehension that their claim for payment may prescribe if they wait for the petitioner to have
unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that determines the starting
point for the computation of the period of prescription. Stated otherwise, the prescriptive period is to be reckoned
from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein Complaint and
issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside the limits of jurisdiction, and
as distinguished from the entire absence of jurisdiction, means that the act although within the general power of the
judge, is not authorized and therefore void, with respect to the particular case, because the conditions which authorize
the exercise of his general power in that particular case are wanting, and hence, the judicial power is not in fact
lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding Writs of
Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED without prejudice to refiling by
the private respondents of the action for enforcement of their right to payment as withdrawing stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION FOR
CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS JURISDICTION
AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN
GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;
II.
52
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE DISMISSAL OF THE CASE,
WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE ORDER GRANTING THE MOTION
FOR PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE DETERMINED BY
THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners’ complaint in Civil
Case No. 01-086, and in rendering the summary judgment and issuing writ of execution.
A.
Stockholder’s Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or
her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code,
to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of
any stockholder or class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of
incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate
action is taken.13 It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to
retire from the corporation.141avvphil
Under the common law, there were originally conflicting views on whether a corporation had the power to acquire or
purchase its own stocks. In England, it was held invalid for a corporation to purchase its issued stocks because such
purchase was an indirect method of reducing capital (which was statutorily restricted), aside from being inconsistent
with the privilege of limited liability to creditors.15 Only a few American jurisdictions adopted by decision or statute the
strict English rule forbidding a corporation from purchasing its own shares. In some American states where the English
rule used to be adopted, statutes granting authority to purchase out of surplus funds were enacted, while in others,
shares might be purchased even out of capital provided the rights of creditors were not prejudiced.16 The reason
underlying the limitation of share purchases sprang from the necessity of imposing safeguards against the depletion by
a corporation of its assets and against the impairment of its capital needed for the protection of creditors. 17
Now, however, a corporation can purchase its own shares, provided payment is made out of surplus profits and the
acquisition is for a legitimate corporate purpose.18 In the Philippines, this new rule is embodied in Section 41 of the
Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That
the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of
this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the right of
appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate action by making
a written demand on the corporation within 30 days after the date on which the vote was taken for the payment of the
fair value of his shares. The failure to make the demand within the period is deemed a waiver of the appraisal right. 19
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a period of
60 days from the date the stockholders approved the corporate action, the fair value shall be determined and
appraised by three disinterested persons, one of whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings and award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is made. Upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the corporation.20
53
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall be suspended
from the time of demand for the payment of the fair value of the shares until either the abandonment of the corporate
action involved or the purchase of the shares by the corporation, except the right of such stockholder to receive
payment of the fair value of the shares.21
4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to the
corporation the certificates of stock representing his shares for notation thereon that such shares are dissenting
shares. A failure to do so shall, at the option of the corporation, terminate his rights under this Title X of the
Corporation Code. If shares represented by the certificates bearing such notation are transferred, and the certificates
are consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the
transferee shall have all the rights of a regular stockholder; and all dividend distributions that would have accrued on
such shares shall be paid to the transferee.22
5. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon the
surrender of the certificates of stock representing his shares, the fair value thereof as of the day prior to the date on
which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.23
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted
retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be
restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares
of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution
of corporate assets.24 The creditors of a corporation have the right to assume that the board of directors will not use
the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the stockholders without first paying corporate debts. Thus,
any disposition of corporate funds and assets to the prejudice of creditors is null and void.26
B.
Petitioners’ cause of action was premature
That the respondent had indisputably no unrestricted retained earnings in its books at the time the petitioners
commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s legal obligation to pay the value
of the petitioners’ shares did not yet arise. Thus, the CA did not err in holding that the petitioners had no cause of
action, and in ruling that the RTC did not validly render the partial summary judgment.
A cause of action is the act or omission by which a party violates a right of another. 27 The essential elements of a
cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative legal duty of the
defendant to respect such right; and (c) an act or omission by such defendant in violation of the right of the plaintiff
with a resulting injury or damage to the plaintiff for which the latter may maintain an action for the recovery of relief
from the defendant.28 Although the first two elements may exist, a cause of action arises only upon the occurrence of
the last element, giving the plaintiff the right to maintain an action in court for recovery of damages or other
appropriate relief.29
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a cause of action.
Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any cause of action.
The RTC concluded that the respondent’s obligation to pay had accrued by its having the unrestricted retained
earnings after the making of the demand by the petitioners. It based its conclusion on the fact that the Corporation
Code did not provide that the unrestricted retained earnings must already exist at the time of the demand.
The RTC’s construal of the Corporation Code was unsustainable, because it did not take into account the petitioners’
lack of a cause of action against the respondent. In order to give rise to any obligation to pay on the part of the
respondent, the petitioners should first make a valid demand that the respondent refused to pay despite having
unrestricted retained earnings. Otherwise, the respondent could not be said to be guilty of any actionable omission
that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint cure the lack of
cause of action in Civil Case No. 01-086. The petitioners’ right of action could only spring from an existing cause of
action. Thus, a complaint whose cause of action has not yet accrued cannot be cured by an amended or supplemental
pleading alleging the existence or accrual of a cause of action during the pendency of the action. 30For, only when
there is an invasion of primary rights, not before, does the adjective or remedial law become operative.31 Verily, a
premature invocation of the court’s intervention renders the complaint without a cause of action and dismissible on
such ground.32 In short, Civil Case No. 01-086, being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more than sufficient to cover the
petitioners’ claims on June 26, 2002 (when they filed their motion for partial summary judgment) did not rectify the
absence of the cause of action at the time of the commencement of Civil Case No. 01-086. The motion for partial
54
summary judgment, being a mere application for relief other than by a pleading, 33 was not the same as the complaint
in Civil Case No. 01-086. Thereby, the petitioners did not meet the requirement of the Rules of Court that a cause of
action must exist at the commencement of an action, which is "commenced by the filing of the original complaint in
court."34
The petitioners claim that the respondent’s petition for certiorari sought only the annulment of the assailed orders of
the RTC (i.e., granting the motion for partial summary judgment and the motion for immediate execution); hence, the
CA had no right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the motion for partial
summary judgment and the motion for immediate execution, the CA’s directive for the dismissal of Civil Case No. 01-
086 was not an abuse of discretion, least of all grave, because such dismissal was the only proper thing to be done
under the circumstances. According to Surigao Mine Exploration Co., Inc. v. Harris:35
Subject to certain qualification, and except as otherwise provided by law, an action commenced before the cause
of action has accrued is prematurely brought and should be dismissed. The fact that the cause of action
accrues after the action is commenced and while the case is pending is of no moment. It is a rule of law to which
there is, perhaps no exception, either in law or in equity, that to recover at all there must be some cause of action at
the commencement of the suit. There are reasons of public policy why there should be no needless haste in bringing
up litigation, and why people who are in no default and against whom there is as yet no cause of action should not be
summoned before the public tribunals to answer complaints which are groundless. An action prematurely brought is a
groundless suit. Unless the plaintiff has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the
action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is
not permissible.
Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was the wrong remedy, in
view of the fact that the granting of the motion for partial summary judgment constituted only an error of law
correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it exceeded its
jurisdiction by taking cognizance of the complaint that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation
v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.
55
G.R. No. 152685 December 4, 2007

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,
vs.
NATIONAL TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity as NTC
Commissioner, and EDGARDO CABARRIOS, in his capacity as Chief, CCAD, respondents.
RESOLUTION
VELASCO, JR., J.:
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court. It assails the February 12, 2001
Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 61033, which dismissed petitioner’s special civil action for
certiorari and prohibition, and the March 21, 2002 Resolution3 of the CA denying petitioner’s motion for
reconsideration. The petition raises the sole issue on whether the appellate court erred in holding that the
assessments of the National Telecommunications Commission (NTC) were contrary to our Decision in G.R. No. 127937
entitled NTC v. Honorable Court of Appeals. 4
This case pertains to Section 40 (e)5 of the Public Service Act6 (PSA), as amended on March 15, 1984, pursuant to
Batas Pambansa Blg. 325, which authorized the NTC to collect from public telecommunications companies Supervision
and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock subscribed or paid for
of a stock corporation, partnership or single proprietorship of the capital invested, or of the property and equipment,
whichever is higher.
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long Distance Telephone
Company (PLDT) starting sometime in 1988. The SRF assessments were based on the market value of the outstanding
capital stock, including stock dividends, of PLDT. PLDT protested the assessments contending that the SRF ought to be
based on the par value of its outstanding capital stock. Its protest was denied by the NTC and likewise, its motion for
reconsideration.
PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the SRF should be assessed
at par value of the outstanding capital stock of PLDT, excluding stock dividends.
With the denial of the NTC’s partial reconsideration of the CA Decision, the issue of the basis for the assessment of the
SRF was brought before this Court under G.R. No. 127937 wherein we ruled that the SRF should be based neither on
the par value nor the market value of the outstanding capital stock but on the value of the stocks subscribed or paid
including the premiums paid therefor, that is, the amount that the corporation receives, inclusive of the premiums if
any, in consideration of the original issuance of the shares. We added that in the case of stock dividends, it is the
amount that the corporation transfers from its surplus profit account to its capital account, that is, the amount the
stock dividends represent is equivalent to the value paid for its original issuance.
PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF should be based on the
par value in consonance with our holding in Philippine Long Distance Telephone Company v. Public Service
Commission,7 and that the premiums on issued shares should not be included in the valuation of the outstanding
capital stock. Through our November 15, 1999 Resolution in G.R. No. 127937, we elucidated that our July 28, 1999
decision was not in conflict with our ruling in Philippine Long Distance Telephone Company since we never enunciated
in the said case that the phrase "capital stock subscribed or paid" must be determined at par value. We reiterated that
the term "capital stock subscribed or paid" is the amount that the corporation receives, inclusive of the premiums, if
any, in consideration of the original issuance of the shares.
Thereafter, to comply with our disposition in G.R. No. 127937, for the reassessment of the SRF based on the value of
the stocks subscribed or paid including the premiums paid for the stocks, if any, the NTC sent the assailed
assessments of February 10, 20008 and September 5, 20009 to PLDT which included the value of stock dividends
issued by PLDT. The assailed assessments were based on the schedule of capital stock submitted by PLDT.
PLDT now contends that our disposition in G.R. No. 127937 excluded stock dividends from the SRF coverage, while the
NTC asserts the contrary. Also, PLDT questions the assessments for violating our disposition in G.R. No. 127937 since
these assessments were identical to the previous assessments from 1988 which were questioned by PLDT in G.R. No.
127937 for being based on the market value of its outstanding capital stock.
PLDT wrote a letter protesting the assailed February 10, 2000 assessment which was not acted upon by the NTC.
Instead, the NTC sent a second assailed assessment on September 5, 2000. Thus, in an attempt to clarify and resolve
this issue, PLDT filed a Motion for Clarification of Enforcement of the Decision dated 28 July 1999 in G.R. No. 127937
which this Court simply noted for the case had already become final and executory.
Thus, on October 2, 2000, PLDT instituted the special civil action for certiorari and prohibition docketed as CA-G.R. SP
No. 6103310 before the CA. To maintain the status quo and to defer the enforcement of the assailed assessments and
subsequent assessments, on October 3, 2000, the CA issued a Temporary Restraining Order. On December 4, 2000, a
writ of preliminary injunction was granted.
Subsequently, on February 12, 2001, the CA rendered the assailed Decision dismissing the petition. The dispositive
portion reads:
56
WHEREFORE, the petition is DISMISSED for lack of merit, and the writ of preliminary injunction heretofore
issued is DISSOLVED.11
PLDT’s motion for reconsideration was denied by the CA’s Special Division of Five on March 21, 2002.
Hence, the instant petition for review, raising the core issue:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED NTC ASSESSMENTS WERE NOT
CONTRARY TO THE PURISIMA DECISION.12
The petition is bereft of merit.
PLDT argues that in our Decision in G.R. No. 127937 we have excluded from the coverage of the SRF the capital
stocks issued as stock dividends. Petitioner argues that G.R. No. 127937 clearly delineates between capital subscribed
and stock dividends to the effect that the latter are not included in the concept of capital stock subscribed because
subscribers or shareholders do not pay for their subscriptions as no amount is received by the corporation in
consideration of such issuances since these are effected as mere book entries, that is, the transfer from the retained
earnings account to the capital or stock account. To bolster its position, PLDT repeatedly used the phrase "actual
payments" received by a corporation as a consideration for issuances of shares which do not apply to stock dividends.
We are not persuaded.
Crucial in point is our disquisition in G.R. No. 127937 entitled National Telecommunications Commission v. Honorable
Court of Appeals, which we quote:
The term "capital" and other terms used to describe the capital structure of a corporation are of universal
acceptance and their usages have long been established in jurisprudence. Briefly, capital refers to the value of
the property or assets of a corporation. The capital subscribed is the total amount of the capital that
persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily
by, and can be more than, the par value of the shares. In fine, it is the amount that the corporation
receives, inclusive of the premiums if any, in consideration of the original issuance of the
shares. In the case of stock dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account. It is the same amount that can be loosely termed as the
"trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for
the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder
(except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never
impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the considerations therefor. 13 (Emphasis
supplied.)
Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject to the SRF. Second,
such capital stock is equated to the "trust fund" of a corporation held in trust as security for satisfaction to creditors in
case of corporate liquidation.
The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar as it is subject to the
SRF. They are. The first issue we have to tackle is, are all the stock dividends that are part of the outstanding capital
stock of PLDT subject to the SRF? Yes, they are.
PLDT’s contention, that stock dividends are not similarly situated as the subscribed capital stock because the
subscribers or shareholders do not pay for their issuances as no amount was received by the corporation in
consideration of such issuances since these are effected as a mere book entry, is erroneous.
Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the
declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the declaration in
the case of a stock dividend is the actual value of the original issuance of said stocks. In G.R. No. 127937 we said that
"in the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its
capital account" or "it is the amount that the corporation receives in consideration of the original issuance of the
shares." It is "the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based
on the number of shares owned."14 Such distribution in whatever form is valued at the declared amount or monetary
equivalent.
Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the declaration of
stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a
portion or its entire unrestricted retained earnings either to its working capital or for capital asset acquisition or
investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the
dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted retained
earnings is distributed pro rata to corporate shareholders.
When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed
among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the
amount of the declared dividend while the stockholders’ equity is increased. Furthermore, the actual payment is the
cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which
57
he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the
availability and conditioned on a certain level of retained earnings. 15 Elsewise put, where the unrestricted retained
earnings of a corporation are more than 100% of the paid-in capital stock, the corporate Board of Directors is
mandated to declare dividends which the shareholders will receive in cash unless otherwise declared as property or
stock dividends, which in the latter case the stockholders are forced to forego cash in lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of
their dividend for capital stock, and the monetary value they forego is considered the actual payment for the original
issuance of the stocks given as dividends. Therefore, stock dividends acquired by shareholders for the monetary value
they forego are under the coverage of the SRF and the basis for the latter is such monetary value as declared by the
board of directors.
On the second issue, do the assailed NTC assessments violate the ruling in G.R. No. 127937? PLDT contends that
these did since the assessments are identical to the previous assessments from 1988 which were questioned by PLDT
in the seminal G.R. No. 127937 for being based on the market value of its outstanding capital stock.
A cursory review of the assessments made by the NTC prior to our July 28, 1999 Decision in G.R. No. 127937 and the
assailed assessments of February 10, 2000 and September 5, 2000 does show that the assessments are substantially
identical. In our July 28, 1999 Decision in G.R. No. 127937, we noted, and similarly true in the petition before us, that,
"The actual capital paid or the amount of capital stock paid and for which PLDT received actual payments were not
disclosed or extant in the records before the Court."16
Hence, as before, we cannot factually determine whether the assailed assessments substantially followed our Decision
in G.R. No. 127937. It is apparent that the assessments are identical and that the NTC in the earlier case asserted that
the SRF be based on the market value of the capital stock, yet it assessed it to PLDT. However, a closer look at the
assailed assessments of February 13, 2000 and September 5, 2000 would show that the NTC based its assessment on
the schedule of capital stock submitted by PLDT. PLDT did not dispute this; it only disputed the level of assessment
which was the same as before.
Now, where should the NTC base its assessment? It is incumbent upon PLDT to furnish the NTC the actual payment
made on the subscription of its capital stock in order for the NTC to assess the proper SRF. Logically, the NTC would
base its SRF assessment of PLDT from PLDT data.
PLDT should not bewail that the assailed assessments are substantially the same assessments it protested in G.R. No.
127937. After all, it had not shown the actual figures of the amount of premiums and subscriptions it had received for
the original issuances of its capital stock. While indeed it submitted a table of the comparative assessments made by
the NTC to this Court, PLDT has not furnished the NTC nor this Court the correct figures of the actual payments made
for its capital stock.
We are not unaware that in accounting practice, the journal entries for transactions are recorded in historical value or
cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities and
equity transactions where the actual loan and the amount paid for the subscription are recorded at the actual
payment, including the premiums paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not increased
or decreased due to market forces. In the case of properties, the appreciation in values is generally not recorded as
income nor the increase in the corresponding asset because the increase or decrease is not yet realized until the
property is actually sold. The same is true with the capital account. The market value may be much higher than the
actual payment of the par value and premium of capital stock. Still, the books of account will not reflect such increase;
and vice-versa, any decrease of the value of stocks is likewise not reflected in the books of account. Thus, given the
general practice that book entries of the premiums and subscriptions for capital stock are the actual value for the
original issuance of stocks, then the NTC was correct to follow the schedule of capital stocks submitted by PLDT.
Moreover, the "Trust Fund" doctrine, the second concept this Court elucidated in G.R. No. 127937 and quoted above,
bolsters the correctness of the assessments made by the NTC. As a fund in trust for creditors in case of liquidation, the
actual value of the subscriptions and the value of stock dividends distributed may not be decreased or increased by
the fluctuating market value of the stocks. Thus, absent any showing by PLDT of the actual payment it received for the
original issuance of its capital stock, the assessments made by the NTC, based on the schedule of outstanding capital
stock of PLDT recorded at historical value payments made, is deemed correct.
Anent stock dividends, the value transferred from the unrestricted retained earnings of PLDT to the capital stock
account pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF, which the NTC
correctly assessed.
WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the February 12, 2001 Decision and March 21,
2002 Resolution in CA-G.R. SP No. 61033. Costs against petitioner.
SO ORDERED.
58
G.R. No. 127937 July 28, 1999
NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner,
vs.
HONORABLE COURT OF APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, respondents.
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to modify the October
30, 1996 Decision 1 and the January 27, 1997 Resolution 2 of the Court of Appeals 3 in CA-G.R. SP No.
34063.1âwphi1.nêt
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine Long Distance
Telephone Company (PLDT) the following assessment notices and demands for payment:
1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40
(e) of the PSA for the said year, 1988, computed at P0.50 per P100.00 of the
Protestant's (PLDT) outstanding capital stock as at December 31, 1987 which then
consisted of Serial Preferred Stock amounting to P1,277,934,390.00 (Billion) and
Common Stock of P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).
2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the
approval of the protestant's increase of its authorized capital stock from P2.7 Billion to
P4.5 Billion; and
3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section
40 (g) of the PSA in connection with the Commission's decisions in NTC Cases Nos.
86-13 and 87-008 respectively, approving the Protestant's equity participation in the
Fiber Optic Interpacific Cable systems and X-5 Service Improvement and Expansion
Program. 4
In its two letter-protests dated February 23, 1988 and July 14, 1988, and position papers 6 dated November 8, 1990
5
and March 12, 1991, respectively, the PLDT challenged the aforesaid assessments, theorizing inter alia that:
(a) The assessments were being made to raise revenues and not as mere reimbursements for actual
regulatory expenses in violation of the doctrine in PLDT vs. PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par values of
private respondent's outstanding capital stock;
(c) Petitioner has no authority to compel private respondents payment of the assessed fees under
Section 40 (f) for the increase of its authorized capital stock since petitioner did not render any
supervisory or regulatory activity and incurred no expenses in relation thereto.
xxx xxx xxx 7
8
On September 29, 1993, the NTC rendered a Decision in NTC Case No. 90-223, denying the protest of PLDT and
disposing thus:
FOR ALL THE FOREGOING, finding PLDT's protest to be without merit, the Commission has no
alternative but to uphold the law and DENIES the protest of PLDT. Unless otherwise restrained by a
competent court of law, the Common Carrier Authorization Department (CCAD) is hereby directed to
update its assessments and collections on PLDT and all public telecommunications carriers for the
payment of the fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised NTC
Schedule of Fees and Charges.
This decision takes effect immediately.
SO ORDERED.
On October 22, 1993, PLDT interposed a Motion for Reconsideration, 9 which was denied by NTC in an Order 10issued
on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which came out with its questioned
Decision of October 30, 1996, modifying the disposition of NTC as follows:
WHEREFORE, the assailed decision and order of the respondent Commission dated September 29,
1993 and May 03, 1994, respectively, in NTC Case No. 90-223 are hereby MODIFIED. The Commission
is ordered to recompute its assessments and demands for payment from petitioner PLDT as follows.
A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the Public Service Act, as
amended, they should be computed at fifty centavos for each one hundred pesos or fraction thereof of
the par value of the capital stock subscribed or paid excluding stock dividends, premiums or capital in
excess of par.
B. For permit fees for the approval of petitioner's increase of authorized capital stock under Section 40
(f) of the same Act, they should be computed at fifty for each one hundred pesos or fraction thereof,
regardless of any regulatory service or expense incurred by respondent.
59
On November 20, 1996, NTC moved for partial reconsideration of the abovementioned Decision, with respect to the
basis of the assessment under Section 40 (e), i.e., par value of the subscribed capital stock. It also sought a partial
reconsideration of the fee of fifty (P0.50) centavos for the issuance or increasing of the capital stock under Section 40
(f). 11
With the denial of its motions for reconsideration by the Resolution of the Court of Appeals dated January 27, 1997,
petitioner found its way to this Court via the present Petition; posing as sole issue:
WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPUTATION OF
SUPERVISION AND REGULATION FEES UNDER SECTION 40 (F) OF THE PUBLIC SERVICE ACT
SHOULD BE BASED ON THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK.
Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on the market value of PLDT's
outstanding capital stock inclusive of stock dividends and premium, and not on the par value of PLDT's capital stock
excluding stock dividends and premium, as contended by PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone Company vs . Public
Service Commission, 66 SCRA 341, that the basis for computation of the fee to be charged by NTC on PLDT, is " the
capital stock subscribed or paid and not, alternatively, the property and equipment."
The law in point is clear and categorical. There is no room for construction. It simply calls for application. To repeat,
the fee in question is based on the capital stock subscribed or paid, nothing less nothing more.
It bears stressing that it is not the NTC that imposed such a fee. It is the legislature itself. Since Congress has the
power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation, the distinction between
police power and the power to tax, which could be significant if the exercising authority were mere political
subdivisions (since delegation by it to such political subdivisions of one power does not necessarily include the other),
would not be of any moment when, as in the case under consideration, Congress itself exercises the power. All that is
to be done would be to apply and enforce the law when sufficiently definitive and not constitutional infirm.
The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance,
and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or
assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of
the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of
the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from
its surplus profit account to its capital account. It is the same amount that can loosely be termed as the "trust fund" of
the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the
debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no
part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital
as the consideration therefor. 12
In the same way that the Court in PLDT vs. PSC has rejected the "value of the property and equipment" as being the
proper basis for the fee imposed by Section 40(e) of the Public Service Act, as amended by Republic Act No. 3792, so
also must the Court disallow the idea of computing the fee on "the par value of [PLDT's] capital stock subscribed or
paid excluding stock dividends, premiums, or capital in excess of par." Neither, however, is the assessment made by
the National Telecommunications Commission on the basis of the market value of the subscribed or paid-in capital
stock acceptable since it is itself a deviation from the explicit language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision and regulation fee under Section
40(e) made by NTC for 1988, computed at P0.50 per 100 of PLDT's outstanding capital stock as of December 31,
1987, amounted to P7,495,161.00. The same was based on the amount of P1,277,934,390.00 of serial preferred
stocks and P221,097,785.00 of common stocks or a total of P1,499,032,175.00. The assessment was reported to
include stock dividends, premium on issued common shares and premium on preferred shares converted into common
stock. 13 The actual capital paid or the amount of capital stock paid and for which PLDT received actual payments were
not disclosed or extant in the records before the Court. The only other item available is the amount assessed by
petitioner from PLDT, which had been based on market value of the outstanding capital stock on given dates. 14
All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case of Philippine Long Distance
Telephone Company vs. Public Service Commission, it should be reiterated that the proper basis for the computation of
subject fee under Section 40(e) of the Public Service Act, as amended by Republic Act No. 3792, is "the capital stock
subscribed or paid and not, alternatively, the property and equipment. 1âwphi1.nêt
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its Resolution, dated January 27,
1997, in CA G.R. SP No. 34063, as well as the decision of the National Telecommunication Commission, dated
September 29, 1993, and Order, dated May 3, 1994, in NTC case No. 90-223, are hereby SET ASIDE and the National
Telecommunication Commission is hereby ordered to make a re-computation of the fee to be imposed on Philippine
60
Long Distance Telephone Company on the basis of the latter's capital stock subscribed or paid and strictly in
accordance with the foregoing disquisition and conclusion.
No pronouncement as to costs.
SO ORDERED.
61
G.R. No. 194964-65
UNIVERSITY OF MINDANAO, INC., Petitioner,
vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.
DECISION
LEONEN, J.:
Acts of an officer that are not authorized by the board of directors/trustees do not bind the corporation unless the
corporation ratifies the acts or holds the officer out as a person with authority to transact on its behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals' December 17, 2009 Decision 2 and December 20,
2010 Resolution.3 The Court of Appeals reversed the Cagayan De Oro City trial court’s and the Iligan City trial court’s
Decisions to nullify mortgage contracts involving University of Mindanao’s properties. 4
University of Mindanao is an educational institution. For the year 1982, its Board of Trustees was chaired by Guillermo
B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao’s Assistant Treasurer. 5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift banks: (1) First Iligan
Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI). Guillermo B.
Torres chaired both thrift banks. He acted as FISLAI’s President, while his wife, Dolores P. Torres, acted as DSLAI’s
President and FISLAI’s Treasurer.6
Upon Guillermo B. Torres’ request, Bangko Sentral ng Pilipinas issued a P1.9 million standby emergency credit to
FISLAI. The release of standby emergency credit was evidenced by three (3) promissory notes dated February 8,
1982, April 7, 1982, and May 4, 1982 in the amounts of P500,000.00, P600,000.00, and P800,000.00, respectively. All
these promissory notes were signed by Guillermo B. Torres, and were co-signed by either his wife, Dolores P. Torres,
or FISLAI’s Special Assistant to the President, Edmundo G. Ramos, Jr.7
On May 25, 1982, University of Mindanao’s Vice President for Finance, Saturnino Petalcorin, executed a deed of real
estate mortgage over University of Mindanao’s property in Cagayan de Oro City (covered by Transfer Certificate of
Title No. T-14345) in favor of Bangko Sentral ng Pilipinas.8 "The mortgage served as security for FISLAI’s P1.9 Million
loan[.]"9 It was allegedly executed on University of Mindanao’s behalf. 10
As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino Petalcorin showed a
Secretary’s Certificate signed on April 13, 1982 by University of Mindanao’s Corporate Secretary, Aurora de Leon.11 The
Secretary’s Certificate stated:
That at the regular meeting of the Board of Trustees of the aforesaid corporation [University of Mindanao] duly
convened on March 30, 1982, at which a quorum was present, the following resolution was unanimously adopted:
"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage real estate
properties with the Central Bank of the Philippines to serve as security for the credit facility of First
Iligan Savings and Loan Association, hereby authorizing the President and/or Vice-president for
Finance, Saturnino R. Petalcorin of the University of Mindanao, Inc. to sign, execute and deliver the
covering mortgage document or any other documents which may be proper[l]y required." 12
The Secretary’s Certificate was supported by an excerpt from the minutes of the January 19, 1982 alleged meeting of
University of Mindanao’s Board of Trustees. The excerpt was certified by Aurora de Leon on March 13, 1982 to be a
true copy of University of Mindanao’s records on file.13 The excerpt reads:
3 – Other Matters:
(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to represent the University of
Mindanao to transact, transfer, convey, lease, mortgage, or otherwise hypothecate any or all of the following
properties situated at Cagayan de Oro and Iligan City and authorizing further Mr. Petalcorin to sign any or all
documents relative thereto:
1. A parcel of land situated at Cagayan de Oro City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of Cagayan de Oro City;
2. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15696 (a.t.) of the Registry of Deeds of Iligan City; and
3. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of Iligan City. 14
The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas was annotated on the
certificate of title of the Cagayan de Oro City property (Transfer Certificate of Title No. 14345) on June 25, 1982.
Aurora de Leon’s certification was also annotated on the Cagayan de Oro City property’s certificate of title (Transfer
Certificate of Title No. 14345).15
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of P620,700.00. Guillermo B.
Torres and Edmundo Ramos executed a promissory note on October 21, 1982 to cover that amount. 16
On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage, allegedly on behalf of
University of Mindanao, over its two properties in Iligan City.1âwphi1 This mortgage served as additional security for
62
FISLAI’s loans. The two Iligan City properties were covered by Transfer Certificates of Title Nos. T-15696 and T-
15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City properties and Aurora de Leon’s
certification were annotated on Transfer Certificates of Title Nos. T-15696 and T-15697.18 On January 18, 1983,
Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City properties was also annotated on the tax declarations
covering the Iligan City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983 and on August 20, 1984 in
the amounts of P1,633,900.00 and P6,489,000.00, respectively. 20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum of Agreement
intended to rehabilitate the thrift banks, which had been suffering from their depositors’ heavy withdrawals. Among
the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later
became known as Mindanao Savings and Loan Association, Inc. (MSLAI). 21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May 24, 1991. 23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao, informing it that the bank would
foreclose its properties if MSLAI’s total outstanding obligation of P12,534,907.73 remained unpaid. 24
In its reply to Bangko Sentral ng Pilipinas’ June 18, 1999 letter, University of Mindanao, through its Vice President for
Accounting, Gloria E. Detoya, denied that University of Mindanao’s properties were mortgaged. It also denied having
received any loan proceeds from Bangko Sentral ng Pilipinas.25
On July 16, 1999, University of Mindanao filed two Complaints for nullification and cancellation of mortgage. One
Complaint was filed before the Regional Trial Court of Cagayan de Oro City, and the other Complaint was filed before
the Regional Trial Court of Iligan City.26
University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko Sentral ng Pilipinas. It also
did not receive any loan proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon’s certification was anomalous. It never authorized Saturnino
Petalcorin to execute real estate mortgage contracts involving its properties to secure FISLAI’s debts. It never ratified
the execution of the mortgage contracts. Moreover, as an educational institution, it cannot mortgage its properties to
secure another person’s debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision in favor of University of
Mindanao,29 thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and against defendants:
1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of BANGKO
SENTRAL NG PILIPINAS involving Lot 421-A located in Cagayan de Oro City with an area of 482
square meters covered by TCT No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951 and Entry No.
9952 annotated at the back of said TCT No. T-14345, Registry of Deeds of Cagayan de Oro City;
Prayer for attorney’s fee [sic] is hereby denied there being no proof that in demanding payment of the emergency
loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated by evident bad faith,
SO ORDERED.30 (Citation omitted)
The Regional Trial Court of Cagayan de Oro City found that there was no board resolution giving Saturnino Petalcorin
authority to execute mortgage contracts on behalf of University of Mindanao. The Cagayan de Oro City trial court gave
weight to Aurora de Leon’s testimony that University of Mindanao’s Board of Trustees did not issue a board resolution
that would support the Secretary’s Certificate she issued. She testified that she signed the Secretary’s Certificate only
upon Guillermo B. Torres’ orders.31
Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on University of Mindanao’s
behalf. He merely executed the contract because of Guillermo B. Torres’ request. 32
Bangko Sentral ng Pilipinas’ witness Daciano Pagui, Jr. also admitted that there was no board resolution giving
Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of Mindanao. 33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not authorized to execute
mortgage contracts for University of Mindanao. Hence, the mortgage of University of Mindanao’s Cagayan de Oro City
property was unenforceable. Saturnino Petalcorin’s unauthorized acts should be annulled. 34
Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in favor of University of
Mindanao.35 The dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendants,
as follows:
1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated November 5, 1982 for being
unenforceable or void contract;
63
2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on TCT No. T-15696 and
TCT No. T-15697 with respect to the aforesaid Deed of Real Estate Mortgage dated November 5, 1982 and all
other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owner’s duplicate copies of TCT No. T-
15696 and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [f]oreclosure [p]roceedings and the [a]uction [s]ale conducted by defendant Atty.
Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent thereto and ordering the Register of
Deeds of Iligan City not to register any Certificate of Sale pursuant to the said auction sale nor make any
transfer of the corresponding titles, and if already registered and transferred, to cancel all the said entries in
TCT No. T-15696 and TCT No. T-15697 and/or cancel the corresponding new TCTs in the name of defendant
Bangko Sentral ng Pilipinas;
5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000 permanent.
No pronouncement as to costs.36 (Citation omitted)
The Iligan City trial court found that the Secretary’s Certificate issued by Aurora de Leon was fictitious37 and irregular
for being unnumbered.38 It also did not specify the identity, description, or location of the mortgaged properties.39
The Iligan City trial court gave credence to Aurora de Leon’s testimony that the University of Mindanao’s Board of
Trustees did not take up the documents in its meetings. Saturnino Petalcorin corroborated her testimony. 40
The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino Petalcorin to execute
documents of mortgage on behalf of University of Mindanao made the real estate mortgage contract unenforceable
under Article 140341 of the Civil Code.42 The mortgage contract and the subsequent acts of foreclosure and auction
sale were void because the mortgage contract was executed without University of Mindanao’s authority. 43
The Iligan City trial court also ruled that the annotations on the titles of University of Mindanao’s properties do not
operate as notice to the University because annotations only bind third parties and not owners. 44 Further, Bangko
Sentral ng Pilipinas’ right to foreclose the University of Mindanao’s properties had already prescribed. 45
Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro City and the Iligan City trial
courts.46
After consolidating both cases, the Court of Appeals issued a Decision on December 17, 2009 in favor of Bangko
Sentral ng Pilipinas, thus:
FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court of Cagayan de Oro
City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7 December 2001 of the Regional Trial Court of Iligan
City, Branch 1 in Civil Case No. 4790 are REVERSED and SET ASIDE. The Complaints in both cases before the trial
courts are DISMISSED. The Writ of Preliminary Injunction issued by the Regional Trial Court of Iligan City, Branch 1
in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.47
The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM Board of Trustees actually passed a Board
Resolution authorizing Petalcorin to mortgage the subject real properties," 48 Aurora de Leon’s Secretary’s Certificate
"clothed Petalcorin with apparent and ostensible authority to execute the mortgage deed on its behalf[.]" 49Bangko
Sentral ng Pilipinas merely relied in good faith on the Secretary’s Certificate.50 University of Mindanao is estopped from
denying Saturnino Petalcorin’s authority.51
Moreover, the Secretary’s Certificate was notarized. This meant that it enjoyed the presumption of regularity as to the
truth of its statements and authenticity of the signatures. 52 Thus, "BSP cannot be faulted for relying on the [Secretary’s
Certificate.]"53
The Court of Appeals also ruled that since University of Mindanao’s officers, Guillermo B. Torres and his wife, Dolores
P. Torres, signed the promissory notes, University of Mindanao was presumed to have knowledge of the
transaction.54 Knowledge of an officer in relation to matters within the scope of his or her authority is notice to the
corporation.55
The annotations on University of Mindanao’s certificates of title also operate as constructive notice to it that its
properties were mortgaged.56 Its failure to disown the mortgages for more than a decade was implied ratification. 57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas’ action for foreclosure had not yet prescribed because
the due date extensions that Bangko Sentral ng Pilipinas granted to FISLAI extended the due date of payment to five
(5) years from February 8, 1985.58 The bank’s demand letter to Dolores P. Torres on June 18, 1999 also interrupted
the prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for Reconsideration60 and Motion for Partial
Reconsideration respectively of the Court of Appeals’ Decision. On December 20, 2010, the Court of Appeals issued a
Resolution, thus:
Acting on the foregoing incidents, the Court RESOLVES to:
1. GRANT the appellant’s twin motions for extension of time to file comment/opposition
and NOTE the Comment on the appellee’s Motion for Reconsideration it subsequently filed on June
23, 2010;
64
2. GRANT the appellee’s three (3) motions for extension of time to file comment/opposition
and NOTE the Comment on the appellant’s Motion for Partial Reconsideration it filed on July 26, 2010;
3. NOTE the appellant’s "Motion for Leave to File Attached Reply Dated August 11, 2010" filed on
August 13, 2010 and DENY the attached "Reply to Comment Dated July 26, 2010";
4. DENY the appellee’s Motion for Reconsideration as it does not offer any arguments sufficiently
meritorious to warrant modification or reversal of the Court’s 17 December 2009 Decision. The Court
finds that there is no compelling reason to reconsider its ruling; and
5. GRANT the appellant’s Motion for Partial Reconsideration, as the Court finds it meritorious,
considering that it ruled in its Decision that "BSP can still foreclose on the UM’s real property in
Cagayan de Oro City covered by TCT No. T-14345." It then follows that the injunctive writ issued by
the RTC of Cagayan de Oro City, Branch 24 must be lifted. The Court’s 17 December 2009 Decision is
accordingly MODIFIED and AMENDED to read as follows:
"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7
December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790
are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writs of Preliminary Injunction issued by the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 and in the Regional Trial Court of Cagayan de Oro
City, Branch 24 in Civil Case No. 99-414 are LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)
Hence, University of Mindanao filed this Petition for Review.
The issues for resolution are:
First, whether respondent Bangko Sentral ng Pilipinas’ action to foreclose the mortgaged properties had already
prescribed; and
Second, whether petitioner University of Mindanao is bound by the real estate mortgage contracts executed by
Saturnino Petalcorin.
We grant the Petition.
I
Petitioner argues that respondent’s action to foreclose its mortgaged properties had already prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the lapse of time. 62 Its purpose is "to protect the diligent
and vigilant, not those who sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years from the day they may be brought. 64 Actions on
mortgages may be brought not upon the execution of the mortgage contract but upon default in payment of the
obligation secured by the mortgage.65
A debtor is considered in default when he or she fails to pay the obligation on due date and, subject to exceptions,
after demands for payment were made by the creditor. Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive for
the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
Article 1193 of the Civil Code provides that an obligation is demandable only upon due date. It provides:
ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day
comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily come, although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated
by the rules of the preceding Section.
In other words, as a general rule, a person defaults and prescriptive period for action runs when (1) the obligation
becomes due and demandable; and (2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive period
necessarily run on the date when the loan becomes due and demandable. 66 Prescriptive period runs from the date of
demand,67 subject to certain exceptions.
65
In other words, ten (10) years may lapse from the date of the execution of contract, without barring a cause of action
on the mortgage when there is a gap between the period of execution of the contract and the due date or between
the due date and the demand date in cases when demand is necessary. 68
The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The maturity dates of FISLAI’s
loans were repeatedly extended until the loans became due and demandable only in 1990. 69 Respondent informed
petitioner of its decision to foreclose its properties and demanded payment in 1999.
The running of the prescriptive period of respondent’s action on the mortgages did not start when it executed the
mortgage contracts with Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from 1990 when the loan became due, if the obligation
was covered by the exceptions under Article 1169 of the Civil Code; (2) or from 1999 when respondent demanded
payment, if the obligation was not covered by the exceptions under Article 1169 of the Civil Code.
In either case, respondent’s Complaint with cause of action based on the mortgage contract was filed well within the
prescriptive period.
Given the termination of all traces of FISLAI’s existence,70 demand may have been rendered unnecessary under Article
1169(3)71 of the Civil Code. Granting that this is the case, respondent would have had ten (10) years from due date in
1990 or until 2000 to institute an action on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of actions may be interrupted by (1) the filing of a court
action; (2) a written extrajudicial demand; and (3) the written acknowledgment of the debt by the debtor.
Therefore, the running of the prescriptive period was interrupted when respondent sent its demand letter to petitioner
on June 18, 1999. This eventually led to petitioner’s filing of its annulment of mortgage complaints before the Regional
Trial Courts of Iligan City and Cagayan De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent’s action was within the ten (10)-year prescriptive period.
Respondent demanded payment of the loans in 1999 and filed an action in the same year.
II
Petitioner argues that the execution of the mortgage contract was ultra vires. As an educational institution, it may not
secure the loans of third persons.73 Securing loans of third persons is not among the purposes for which petitioner was
established.74
Petitioner is correct.
Corporations are artificial entities granted legal personalities upon their creation by their incorporators in accordance
with law. Unlike natural persons, they have no inherent powers. Third persons dealing with corporations cannot
assume that corporations have powers. It is up to those persons dealing with corporations to determine their
competence as expressly defined by the law and their articles of incorporation. 75
A corporation may exercise its powers only within those definitions. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those "committed outside the object for which a corporation is
created"76 are ultra vires.
The only exception to this rule is when acts are necessary and incidental to carry out a corporation’s purposes, and to
the exercise of powers conferred by the Corporation Code and under a corporation’s articles of incorporation. 77This
exception is specifically included in the general powers of a corporation under Section 36 of the Corporation Code:
SEC. 36. Corporate powers and capacity.—Every corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities and bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed
by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
66
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as
stated in its articles of incorporation. (Emphasis supplied)
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to determine if a corporate act is in accordance
with its purposes:
It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the
charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and
fanciful, sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question
is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.79 (Emphasis
supplied)
As an educational institution, petitioner serves:
a. To establish, conduct and operate a college or colleges, and/or university;
b. To acquire properties, real and/or personal, in connection with the establishment and operation of such
college or colleges;
c. To do and perform the various and sundry acts and things permitted by the laws of the Philippines unto
corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational program of the
corporation and to acquire all properties, real and personal[,] necessary for the purposes[;]
e. To establish, operate, and/or acquire broadcasting and television stations also in line with the educational
program of the corporation and for such other purposes as the Board of Trustees may determine from time to
time;
f. To undertake housing projects of faculty members and employees, and to acquire real estates for this
purpose;
g. To establish, conduct and operate and/or invest in educational foundations; [As amended on December 15,
1965][;]
h. To establish, conduct and operate housing and dental schools, medical facilities and other related
undertakings;
i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of Incorporation of
the University of Mindanao, Inc. – the Petitioner].80
Petitioner does not have the power to mortgage its properties in order to secure loans of other persons. As an
educational institution, it is limited to developing human capital through formal instruction. It is not a corporation
engaged in the business of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment and real estate; establishing housing facilities for
personnel and students; hiring a concessionaire; and other activities that can be directly connected to the operations
and conduct of the education business may constitute the necessary and incidental acts of an educational institution.
Securing FISLAI’s loans by mortgaging petitioner’s properties does not appear to have even the remotest connection
to the operations of petitioner as an educational institution. Securing loans is not an adjunct of the educational
institution’s conduct of business.81 It does not appear that securing third-party loans was necessary to maintain
petitioner’s business of providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were shown to be clearly within the corporation’s
powers or were connected to the corporation’s purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given to the children of a
deceased person who contributed to the growth of the corporation.83 This court found that this donation was within
the broad scope of powers and purposes of the corporation to "aid in any other manner any person . . . in which any
interest is held by this corporation or in the affairs or prosperity of which this corporation has a lawful interest." 84
In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared valid a rule by Twin Towers
Condominium denying delinquent members the right to use condominium facilities. 86 This court ruled that the
condominium’s power to promulgate rules on the use of facilities and to enforce provisions of the Master Deed was
clear in the Condominium Act, Master Deed, and By-laws of the condominium.87 Moreover, the promulgation of such
rule was "reasonably necessary" to attain the purposes of the condominium project. 88
This court has, in effect, created a presumption that corporate acts are valid if, on their face, the acts were within the
corporation’s powers or purposes. This presumption was explained as early as in 1915 in Coleman v. Hotel De
France89 where this court ruled that contracts entered into by corporations in the exercise of their incidental powers
are not ultra vires.90
Coleman involved a hotel’s cancellation of an employment contract it executed with a gymnast. One of the hotel’s
contentions was the supposed ultra vires nature of the contract. It was executed outside its express and implied
powers under the articles of incorporation.91
67
In ruling in favor of the contract’s validity, this court considered the incidental powers of the hotel to include the
execution of employment contracts with entertainers for the purpose of providing its guests entertainment and
increasing patronage.92
This court ruled that a contract executed by a corporation shall be presumed valid if on its face its execution was not
beyond the powers of the corporation to do.93 Thus:
When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made,
it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within
their powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail
where it would defeat the ends of justice or work a legal wrong. 94
However, this should not be interpreted to mean that such presumption applies to all cases, even when the act in
question is on its face beyond the corporation’s power to do or when the evidence contradicts the presumption.
Presumptions are "inference[s] as to the existence of a fact not actually known, arising from its usual connection with
another which is known, or a conjecture based on past experience as to what course human affairs ordinarily
take."95 Presumptions embody values and revealed behavioral expectations under a given set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be overturned by evidence, however strong the evidence
is.98 They are made conclusive not because there is an established uniformity in behavior whenever identified
circumstances arise. They are conclusive because they are declared as such under the law or the rules. Rule 131,
Section 2 of the Rules of Court identifies two (2) conclusive presumptions:
SEC. 2. Conclusive presumptions.— The following are instances of conclusive presumptions:
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another
to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission, be permitted to falsify it;
(b) The tenant is not permitted to deny the title of his landlord at the time of the commencement of the
relation of landlord and tenant between them.
On the other hand, disputable presumptions are presumptions that may be overcome by contrary evidence. 99 They are
disputable in recognition of the variability of human behavior. Presumptions are not always true. They may be wrong
under certain circumstances, and courts are expected to apply them, keeping in mind the nuances of every experience
that may render the expectations wrong.
Thus, the application of disputable presumptions on a given circumstance must be based on the existence of certain
facts on which they are meant to operate. "[P]resumptions are not allegations, nor do they supply their
absence[.]"100Presumptions are conclusions. They do not apply when there are no facts or allegations to support them.
If the facts exist to set in motion the operation of a disputable presumption, courts may accept the presumption.
However, contrary evidence may be presented to rebut the presumption.
Courts cannot disregard contrary evidence offered to rebut disputable presumptions. Disputable presumptions apply
only in the absence of contrary evidence or explanations. This court explained in Philippine Agila Satellite Inc. v. Usec.
Trinidad-Lichauco:101
We do not doubt the existence of the presumptions of "good faith" or "regular performance of official duty," yet these
presumptions are disputable and may be contradicted and overcome by other evidence . Many civil actions are oriented
towards overcoming any number of these presumptions, and a cause of action can certainly be geared towards such
effect. The very purpose of trial is to allow a party to present evidence to overcome the disputable presumptions
involved. Otherwise, if trial is deemed irrelevant or unnecessary, owing to the perceived indisputability of the
presumptions, the judicial exercise would be relegated to a mere ascertainment of what presumptions apply in a given
case, nothing more. Consequently, the entire Rules of Court is rendered as excess verbiage, save perhaps for the
provisions laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no public officer could ever be
sued for acts executed beyond their official functions or authority, or for tortious conduct or behavior, since such acts
would "enjoy the presumption of good faith and in the regular performance of official duty." Indeed, few civil actions
of any nature would ever reach the trial stage, if a case can be adjudicated by a mere determination from the
complaint or answer as to which legal presumptions are applicable. For example, the presumption that a person is
innocent of a wrong is a disputable presumption on the same level as that of the regular performance of official duty.
A civil complaint for damages necessarily alleges that the defendant committed a wrongful act or omission that would
serve as basis for the award of damages. With the rationale of the Court of Appeals, such complaint can be dismissed
upon a motion to dismiss solely on the ground that the presumption is that a person is innocent of a
wrong.102 (Emphasis supplied, citations omitted)
In this case, the presumption that the execution of mortgage contracts was within petitioner’s corporate powers does
not apply. Securing third-party loans is not connected to petitioner’s purposes as an educational institution.
III
68
Respondent argues that petitioner’s act of mortgaging its properties to guarantee FISLAI’s loans was consistent with
petitioner’s business interests, since petitioner was presumably a FISLAI shareholder whose officers and shareholders
interlock with FISLAI. Respondent points out that petitioner and its key officers held substantial shares in MSLAI when
DSLAI and FISLAI merged. Therefore, it was safe to assume that when the mortgages were executed in 1982,
petitioner held substantial shares in FISLAI.103
Parties dealing with corporations cannot simply assume that their transaction is within the corporate powers. The acts
of a corporation are still limited by its powers and purposes as provided in the law and its articles of incorporation.
Acquiring shares in another corporation is not a means to create new powers for the acquiring corporation. Being a
shareholder of another corporation does not automatically change the nature and purpose of a corporation’s business.
Appropriate amendments must be made either to the law or the articles of incorporation before a corporation can
validly exercise powers outside those provided in law or the articles of incorporation. In other words, without an
amendment, what is ultra vires before a corporation acquires shares in other corporations is still ultra vires after such
acquisition.
Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI, securing loans of third
persons is still beyond petitioner’s power to do. It is still inconsistent with its purposes under the law 104 and its articles
of incorporation.105
In attempting to show petitioner’s interest in securing FISLAI’s loans by adverting to their interlocking directors and
shareholders, respondent disregards petitioner’s separate personality from its officers, shareholders, and other juridical
persons.
The separate personality of corporations means that they are "vest[ed] [with] rights, powers, and attributes [of their
own] as if they were natural persons[.]"106 Their assets and liabilities are their own and not their officers’,
shareholders’, or another corporation’s. In the same vein, the assets and liabilities of their officers and shareholders
are not the corporations’. Obligations incurred by corporations are not obligations of their officers and shareholders.
Obligations of officers and shareholders are not obligations of corporations.107 In other words, corporate interests are
separate from the personal interests of the natural persons that comprise corporations.
Corporations are given separate personalities to allow natural persons to balance the risks of business as they
accumulate capital. They are, however, given limited competence as a means to protect the public from fraudulent
acts that may be committed using the separate juridical personality given to corporations.
Petitioner’s key officers, as shareholders of FISLAI, may have an interest in ensuring the viability of FISLAI by
obtaining a loan from respondent and securing it by whatever means. However, having interlocking officers and
stockholders with FISLAI does not mean that petitioner, as an educational institution, is or must necessarily be
interested in the affairs of FISLAI.
Since petitioner is an entity distinct and separate not only from its own officers and shareholders but also from FISLAI,
its interests as an educational institution may not be consistent with FISLAI’s.
Petitioner and FISLAI have different constituencies. Petitioner’s constituents comprise persons who have committed to
developing skills and acquiring knowledge in their chosen fields by availing the formal instruction provided by
petitioner. On the other hand, FISLAI is a thrift bank, which constituencies comprise investors.
While petitioner and FISLAI exist ultimately to benefit their stockholders, their constituencies affect the means by
which they can maintain their existence. Their interests are congruent with sustaining their constituents’ needs
because their existence depends on that. Petitioner can exist only if it continues to provide for the kind and quality of
instruction that is needed by its constituents. Its operations and existence are placed at risk when resources are used
on activities that are not geared toward the attainment of its purpose. Petitioner has no business in securing FISLAI,
DSLAI, or MSLAI’s loans. This activity is not compatible with its business of providing quality instruction to its
constituents.
Indeed, there are instances when we disregard the separate corporate personalities of the corporation and its
stockholders, directors, or officers. This is called piercing of the corporate veil.
Corporate veil is pierced when the separate personality of the corporation is being used to perpetrate fraud, illegalities,
and injustices.108 In Lanuza, Jr. v. BF Corporation:109
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues." It is also warranted in alter ego cases "where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation."110
These instances have not been shown in this case. There is no evidence pointing to the possibility that petitioner used
its separate personality to defraud third persons or commit illegal acts. Neither is there evidence to show that
petitioner was merely a farce of a corporation. What has been shown instead was that petitioner, too, had been
victimized by fraudulent and unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate fraud if we accept respondent’s contentions.
69
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its behalf. There was no
board resolution to that effect. Thus, the mortgages executed by Saturnino Petalcorin were unenforceable.111
The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed without authority
from petitioner.
Petitioner must exercise its powers and conduct its business through its Board of Trustees. Section 23 of the
Corporation Code provides:
SEC. 23. The board of directors or trustees.—Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.
Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any manner without action
from its Board of Trustees. The Board of Trustees must act as a body in order to exercise corporate powers. Individual
trustees are not clothed with corporate powers just by being a trustee. Hence, the individual trustee cannot bind the
corporation by himself or herself.
The corporation may, however, delegate through a board resolution its corporate powers or functions to a
representative, subject to limitations under the law and the corporation’s articles of incorporation. 112
The relationship between a corporation and its representatives is governed by the general principles of
agency.113Article 1317 of the Civil Code provides that there must be authority from the principal before anyone can act
in his or her name:
ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by
law a right to represent him.
Hence, without delegation by the board of directors or trustees, acts of a person—including those of the corporation’s
directors, trustees, shareholders, or officers—executed on behalf of the corporation are generally not binding on the
corporation.114
Contracts entered into in another’s name without authority or valid legal representation are generally unenforceable.
The Civil Code provides:
ART. 1317. . . .
A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf
it has been executed, before it is revoked by the other contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or legal representation,
or who has acted beyond his powers[.]
The unenforceable status of contracts entered into by an unauthorized person on behalf of another is based on the
basic principle that contracts must be consented to by both parties.115 There is no contract without meeting of the
minds as to the subject matter and cause of the obligations created under the contract. 116
Consent of a person cannot be presumed from representations of another, especially if obligations will be incurred as a
result. Thus, authority is required to make actions made on his or her behalf binding on a person. Contracts entered
into by persons without authority from the corporation shall generally be considered ultra vires and
unenforceable117 against the corporation.
Two trial courts118 found that the Secretary’s Certificate and the board resolution were either non-existent or fictitious.
The trial courts based their findings on the testimony of the Corporate Secretary, Aurora de Leon herself. She signed
the Secretary’s Certificate and the excerpt of the minutes of the alleged board meeting purporting to authorize
Saturnino Petalcorin to mortgage petitioner’s properties. There was no board meeting to that effect. Guillermo B.
Torres ordered the issuance of the Secretary’s Certificate. Aurora de Leon’s testimony was corroborated by Saturnino
Petalcorin.
Even the Court of Appeals, which reversed the trial courts’ decisions, recognized that "BSP failed to prove that the UM
Board of Trustees actually passed a Board Resolution authorizing Petalcorin to mortgage the subject real
properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings of fact of the trial courts
and the Court of Appeals when such findings are supported by evidence on record.120 Hence, not having the proper
board resolution to authorize Saturnino Petalcorin to execute the mortgage contracts for petitioner, the contracts he
executed are unenforceable against petitioner. They cannot bind petitioner.
However, personal liabilities may be incurred by directors who assented to such unauthorized act 121 and by the person
who contracted in excess of the limits of his or her authority without the corporation’s knowledge. 122
V
70
Unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation are not void
ab initio.
In Pirovano, et al., this court explained that corporate acts may be ultra vires but not void. 123 Corporate acts may be
capable of ratification:124
[A] distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra
vires. The former contemplates the doing of an act which is contrary to law, morals, or public order, or contravene
some rules of public policy or public duty, and are, like similar transactions between individuals, void. They cannot
serve as basis of a court action, nor acquire validity by performance, ratification, or estoppel. Mere ultra vires acts, on
the other hand, or those which are not illegal and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. 125
Thus, even though a person did not give another person authority to act on his or her behalf, the action may be
enforced against him or her if it is shown that he or she ratified it or allowed the other person to act as if he or she
had full authority to do so. The Civil Code provides:
ART. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope
of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it
expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the
former allowed the latter to act as though he had full powers . (Emphasis supplied)
Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized act. 126 It converts the
unauthorized act of an agent into an act of the principal.127 It cures the lack of consent at the time of the execution of
the contract entered into by the representative, making the contract valid and enforceable. 128 It is, in essence, consent
belatedly given through express or implied acts that are deemed a confirmation or waiver of the right to impugn the
unauthorized act.129 Ratification has the effect of placing the principal in a position as if he or she signed the original
contract. In Board of Liquidators v. Heirs of M. Kalaw, et al.:130
Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract
by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;"
and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the act or
contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of a
contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a
grant of prior authority."131 (Citations omitted)
Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act, or acceptance
or retention of benefits.132 However, silence, acquiescence, retention of benefits, and acts that may be interpreted as
approval of the act do not by themselves constitute implied ratification. For an act to constitute an implied ratification,
there must be no acceptable explanation for the act other than that there is an intention to adopt the act as his or her
own.133 "[It] cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of
the agent."134
No act by petitioner can be interpreted as anything close to ratification. It was not shown that it issued a resolution
ratifying the execution of the mortgage contracts. It was not shown that it received proceeds of the loans secured by
the mortgage contracts. There was also no showing that it received any consideration for the execution of the
mortgage contracts. It even appears that petitioner was unaware of the mortgage contracts until respondent notified it
of its desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done.135 Petitioner’s lack of knowledge about the mortgage executed in
its name precludes an interpretation that there was any ratification on its part.
Respondent further argues that petitioner is presumed to have knowledge of its transactions with respondent because
its officers, the Spouses Guillermo and Dolores Torres, participated in obtaining the loan. 136
Indeed, a corporation, being a person created by mere fiction of law, can act only through natural persons such as its
directors, officers, agents, and representatives. Hence, the general rule is that knowledge of an officer is considered
knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres were officers of both the thrift banks and petitioner,
their knowledge of the mortgage contracts cannot be considered as knowledge of the corporation.
The rule that knowledge of an officer is considered knowledge of the corporation applies only when the officer is
acting within the authority given to him or her by the corporation. In Francisco v. Government Service Insurance
System:137
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and
in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such
knowledge or not.138
71
The public should be able to rely on and be protected from the representations of a corporate representative acting
within the scope of his or her authority. This is why an authorized officer’s knowledge is considered knowledge of
corporation. However, just as the public should be able to rely on and be protected from corporate representations,
corporations should also be able to expect that they will not be bound by unauthorized actions made on their account.
Thus, knowledge should be actually communicated to the corporation through its authorized representatives. A
corporation cannot be expected to act or not act on a knowledge that had not been communicated to it through an
authorized representative. There can be no implied ratification without actual communication. Knowledge of the
existence of contract must be brought to the corporation’s representative who has authority to ratify it. Further, "the
circumstances must be shown from which such knowledge may be presumed."139
The Spouses Guillermo and Dolores Torres’ knowledge cannot be interpreted as knowledge of petitioner. Their
knowledge was not obtained as petitioner’s representatives. It was not shown that they were acting for and within the
authority given by petitioner when they acquired knowledge of the loan transactions and the mortgages. The
knowledge was obtained in the interest of and as representatives of the thrift banks.
VI
Respondent argues that Saturnino Petalcorin was clothed with the authority to transact on behalf of petitioner, based
on the board resolution dated March 30, 1982 and Aurora de Leon’s notarized Secretary’s Certificate. 140 According to
respondent, petitioner is bound by the mortgage contracts executed by Saturnino Petalcorin. 141
This court has recognized presumed or apparent authority or capacity to bind corporate representatives in instances
when the corporation, through its silence or other acts of recognition, allowed others to believe that persons, through
their usual exercise of corporate powers, were conferred with authority to deal on the corporation’s behalf. 142
The doctrine of apparent authority does not go into the question of the corporation’s competence or power to do a
particular act. It involves the question of whether the officer has the power or is clothed with the appearance of
having the power to act for the corporation. A finding that there is apparent authority is not the same as a finding that
the corporate act in question is within the corporation’s limited powers.
The rule on apparent authority is based on the principle of estoppel. The Civil Code provides:
ART. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon.
....
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his
failure to repudiate the agency, knowing that another person is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition because we recognize that there is information
asymmetry between third persons who have little to no information as to what happens during corporate meetings,
and the corporate officers, directors, and representatives who are insiders to corporate affairs.143
In People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the contract entered into by
the corporation’s officer without a board resolution was binding upon the corporation because it previously allowed the
officer to contract on its behalf despite the lack of board resolution.145
In Francisco, this court ruled that Francisco’s proposal for redemption of property was accepted by and binding upon
the Government Service Insurance System. This court did not appreciate the Government Service Insurance System’s
defense that since it was the Board Secretary and not the General Manager who sent Francisco the acceptance
telegram, it could not be made binding upon the Government Service Insurance System. It did not authorize the Board
Secretary to sign for the General Manager. This court appreciated the Government Service Insurance System’s failure
to disown the telegram sent by the Board Secretary and its silence while it accepted all payments made by Francisco
for the redemption of property.146
There can be no apparent authority and the corporation cannot be estopped from denying the binding affect of an act
when there is no evidence pointing to similar acts and other circumstances that can be interpreted as the corporation
holding out a representative as having authority to contract on its behalf. In Advance Paper Corporation v. Arma
Traders Corporation,147 this court had the occasion to say:
The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct which a third
party knew and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s
acts or conduct must have produced a change of position to the third party’s detriment. 148 (Citation omitted)
Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot be presumed based on a Secretary’s
Certificate and excerpt from the minutes of the alleged board meeting that were found to have been simulated. These
documents cannot be considered as the corporate acts that held out Saturnino Petalcorin as petitioner’s authorized
representative for mortgage transactions. They were not supported by an actual board meeting. 149
VII
Respondent argues that it may rely on the Secretary’s Certificate issued by Aurora de Leon because it was notarized.
The Secretary’s Certificate was void whether or not it was notarized.
72
Notarization creates a presumption of regularity and authenticity on the document. This presumption may be rebutted
by "strong, complete and conclusive proof"150 to the contrary. While notarial acknowledgment "attaches full faith and
credit to the document concerned[,]"151 it does not give the document its validity or binding effect. When there is
evidence showing that the document is invalid, the presumption of regularity or authenticity is not applicable.
In Basilio v. Court of Appeals,152 this court was convinced that the purported signatory on a deed of sale was not as
represented, despite testimony from the notary public that the signatory appeared before him and signed the
instrument.153 Apart from finding that there was forgery,154 this court noted:
The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the document and that Dionisio
Z. Basilio appeared personally before him and signed the instrument himself. However, he admitted that he did not
know Dionisio Z. Basilio personally to ascertain if the person who signed the document was actually Dionisio Z. Basilio
himself, or another person who stood in his place. He could not even recall whether the document had been executed
in his office or not.
Thus, considering the testimonies of various witnesses and a comparison of the signature in question with admittedly
genuine signatures, the Court is convinced that Dionisio Z. Basilio did not execute the questioned deed of
sale. Although the questioned deed of sale was a public document having in its favor the presumption of regularity,
such presumption was adequately refuted by competent witnesses showing its forgery and the Court’s own visual
analysis of the document.155 (Emphasis supplied, citations omitted)
In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale was void because it was a mere
sham.157 It was not intended to have any effect between the parties. 158 This court said:
[I]t is not the intention nor the function of the notary public to validate and make binding an instrument never, in the
first place, intended to have any binding legal effect upon the parties thereto. 159
Since the notarized Secretary’s Certificate was found to have been issued without a supporting board resolution, it
produced no effect. It is not binding upon petitioner. It should not have been relied on by respondent especially given
its status as a bank.
VIII
The banking institution is "impressed with public interest"160 such that the public’s faith is "of paramount
importance."161 Thus, banks are required to exercise the highest degree of diligence in their transactions. 162 In China
Banking Corporation v. Lagon,163 this court found that the bank was not a mortgagee in good faith for its failure to
question the due execution of a Special Power of Attorney that was presented to it in relation to a mortgage
contract.164 This court said:
Though petitioner is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, it
cannot be excused from the duty of exercising the due diligence required of a banking institution. Banks are expected
to exercise more care and prudence than private individuals in their dealings, even those that involve registered lands,
for their business is affected with public interest. 165 (Citations omitted)
For its failure to exercise the degree of diligence required of banks, respondent cannot claim good faith in the
execution of the mortgage contracts with Saturnino Petalcorin. Respondent’s witness, Daciano Paguio, Jr., testified
that there was no board resolution authorizing Saturnino Petalcorin to act on behalf of petitioner. 166 Respondent did
not inquire further as to Saturnino Petalcorin’s authority.
Banks cannot rely on assumptions. This will be contrary to the high standard of diligence required of them.
VI
According to respondent, the annotations of respondent’s mortgage interests on the certificates of titles of petitioner’s
properties operated as constructive notice to petitioner of the existence of such interests. 167 Hence, petitioners are
now estopped from claiming that they did not know about the mortgage.
Annotations of adverse claims on certificates of title to properties operate as constructive notice only to third parties—
not to the court or the registered owner.1âwphi1 In Sajonas v. Court of Appeals:168
[A]nnotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real
property where the registration of such interest or right is not otherwise provided for by the Land Registration Act or
Act 496 (now [Presidential Decree No.] 1529 or the Property Registration Decree), and serves a warning to third
parties dealing with said property that someone is claiming an interest on the same or a better right than that of the
registered owner thereof.169 (Emphasis supplied)
Annotations are merely claims of interest or claims of the legal nature and incidents of relationship between the person
whose name appears on the document and the person who caused the annotation. It does not say anything about the
validity of the claim or convert a defective claim or document into a valid one. 170 These claims may be proved or
disproved during trial.
Thus, annotations are not conclusive upon courts or upon owners who may not have reason to doubt the security of
their claim as their properties' title holders.
WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 17, 2009
is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November 23, 2001 and December 7, 2001
are REINSTATED.
73
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 decision 2 of the
Court of Appeals, dated October 5, 1999, which in turn upheld, likewise with modification, the decision of the SEC en
banc, dated September 11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y.
Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002
Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by
the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB)
for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the
Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo
(the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the
Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a
par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in
addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were
entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to
nominate the President, the Secretary and six directors (including the chairman) to the board of directors of
FLADC. Moreover, the Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius
committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for
200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional
549,800 stock subscription therein. The Ongs paid in another P70 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
74
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 commenced 4 by the Tius on February 27, 1996 at the
Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-Subscription
Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and
consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC;
(c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of
incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325
and 134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the
annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and representatives, to desist from
exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any
manner intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of
P8,866,669.00 and all interest payments as well as any payments on principal received from the
P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from
said defendants plus legal interest from the date of receipt of such amount.
SO ORDERED.5
On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs' P70 million was
declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that the imposition of
interest on it was correct.6
Both parties 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;
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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
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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.
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On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective positions of the
parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their respective memoranda. On
February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine Consumers
Foundation, Inc. vs. National Telecommunications Commission,13 this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study of the facts and the law, illuminated
by a mutual exchange of views.14 After a thorough re-examination of the case, we find that our Decision of February 1,
2002 overlooked certain aspects which, if not corrected, will cause extreme and irreparable damage and prejudice to
the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious motions
for reconsideration. As long as the same adequately raises a valid ground 15 (i.e., the decision or final order is contrary
to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining finality.
In Security Bank and Trust Company vs. Cuenca,16 we ruled that a motion for reconsideration is not pro-forma for the
reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court. We explained
there that a movant may raise the same arguments, if only to convince this Court that its ruling was erroneous.
Moreover, the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not 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-
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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
79
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?
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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.
81

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Business Organization Cases #2

G.R. No. 154366 November 17, 2010

HERMOSISIMA, JR., J.:

Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares

Salome Florete (Salome) 100 shares

Ricardo Berlin (Berlin) 50 shares

Pacifico Sudario (Sudario) 50 shares

Atty. Santiago Divinagracia (Divinagracia), now deceased9 50 shares10

Marcelino M. 560 - 750 (680) - 62,344.19 62,974.19

Rogelio M. 20 5 1110 370 (5) 149,624.75 151,124.75

Ma. Elena F. 20 5 - - (25) 2,493.68 2,493.68

Teresita F. - 5 - 20 (25) 2,493.69 2,493.69

Marcelino M. - 5 - 20 (20) 2,493.44 2,493.44

Santiago C. 20 - - 270 75 29,925.25 30,290.25

Newsound 610 - (610)

Consolidated - 1,250 (1,250)

Total 1,260 1,250 249,375.00 251,875.00

Rogelio M. Florete [Sr.] 370 February 28, 1983

Santiago C. Divinagracia 270 August 1, 1983

Marcelino M. Florete, Jr. 20 August 1, 1983

1. Diamel Corporation 30,000.00

2. Rogelio Florete [Sr.] 153,881.53

3. Marcelino Florete, Jr. 18,240.99

4. Ma. Elena Muyco 18,227.23

5. Santiago Divinagracia 30,289.25

6. Imelda Florete 1,000.00

7. Rogelio Florete, Jr. 100.00

8. Margaret Ruth Florete 100.00

9. Raul Muyco 10.00

10. Manuel Villa, Jr. 10.00

11. Gregorio Rubias 1.00

12. Cyril Regaldao 1.00

13. Jose Mari Treñas 1.00

14. Enrico Jacomille 1.00

15. Joseph Vincent Go 1.00

16. Jerry Treñas 1.00

17. Efrain Treñas 10.00

Salome Florete 100 12.35

Santiago Divinagracia 50 6.17

Total 810 100.00

G.R. No. 224307, August 06, 2018

The facts giving rise to the instant controversy follow:

The petition is meritorious.

As elucidated by the Court in Pirovano, et al. v. De La Rama Steamship Co.:48

G.R. No. 152685 December 4, 2007

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