Corpo ESCRA cases

No. L-19550. June 19, 1967.HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners, vs. HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his capacity as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR., and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City Branch and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents.

Constitutional Law; Search warrants; Corporations; Only party affected may contest legality of seizure effected by search warrants.—Officers of certain corporations, from which documents, papers and things were seized by means of search warrants, have no cause of action to assail the legality of the seizures because said corporations have personalities distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby. The objection to an unlawful search is purely personal and cannot be availed of by third parties.

Same; Evidence: When illegally seized evidence is admissible.—Officers of certain corporations cannot validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations since the right to object to their admission in evidence belongs exclusively to the corporations, to which the seized effectsbelong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity.

Same; Requisites for issuing search warrants.—The Constitution provides that no warrant shall issue but upon probable cause, to be determined by the judge, and that the warrant shall particularly describe the things to be seized.

Same; General search warrants.—Search warrants, issued upon applications stating that the natural and juridical persons therein named had committed a violation of Central Bank laws, tariff and customs laws, Tax Code and Revised Penal Code do not satisfy the constitutional requirements because no specific offense had been alleged in said applications. It was impossible for the judges, who issued the warrants, to have found the existence of probable cause, which presupposes the introduction of competent proof that the party against whom it is sought has performed particular acts or committed specific omissions in violation of a specific penal provision.

Same; Why general warrants are outlawed.—General search warrants are outlawed because they place the sanctity of the domicile and the privacy of communication and correspondence at the mercy of the whims, caprice or passion of peace officers.

Same; Provision of Revised Rules of Court.—To prevent the issuance of general warrants, the Supreme Court amended the Old Rules of Court by providing in the Revised Rules of Court that "no search warrant shall issue for more than one specific offense".

Same; Warrants not describing particularly the things to be seized.—Search warrants authorizing the seizure of books of accounts and records "showing all the business transactions" of certain persons, regardless of whether the transactions were legal or illegal, contravene the explicit command of the Bill of Rights that the things to be seized should be particularly described and defeat its major objective of eliminating general warrants.

Same; Evidence; Abandonment of Moncado ruling; Illegally seized documents are not admissible in evidence.—The Moncado ruling, that illegally seized documents, papers and things are admissible in evidence, must be abandoned. The exclusion of such evidence is the only practical means of enforcing the constitutional injunction against unreasonable searches and seizures. The non-exclusionary rule is contrary to the letter and spirit of the prohibition against unreasonable searches and seizures. If there is competent evidence to establish probable cause of the commission of a given crime by the party against whom the warrant is intended, then there is no reason why the applicant should not comply with the constitutional requirements If he has no such evidence, then it is not possible for the judge to find that there is a probable cause, and, hence, no justifica-tion for the issuance of the warrant. The only possible explanation for the issuance in that case is the necessity of fishing for evidence of the commission of a crime. Such a fishing expedition is indicative of the absence of evidence to establish a probable cause.

CASTRO, J., concurring and dissenting:

Constitutional Law; Search and Seizure; Lack of standard of petitioners cannot affect illegality of search and seizure.— That the petitioners have no legal standing to ask for the suppression of the papers, things, and effects seized from places other than their residences, cannot in any manner affect, alter, or otherwise modify the intrinsic nullity of the search warrants and the intrinsic illegality of the searches and seizures made thereunder. Whether or not petitioners possess legal standing, the said warrants are void and remain void, and the searches and seizures were illegal and remain illegal. No inference can be drawn from the words of the Constitution that "legal standing", or the lack of it, is a determinant of the nullity or validity of a Search warrant or of the lawfulness or illegality of a search or seizure.

Same; Provision on search and seizure is derived from Federal Constitution.—Our constitutional provision on searches and seizures was derived almost verbatim from the Fourth Amendment to the United States Constitution. In the many years of judicial construction and interpretation of the said constitutional provision, our courts have invariably regarded

as doctrinal the pronouncements made on the Fourth Amendment by federal courts, especially the Federal Supreme Court and the Federal Circuit Courts of Appeals. The U.S. doctrines and pertinent cases on standing to move for the suppression or return of documents, papers and effects, which are the fruits of an unlawful search and seizure, may be summarized as follows: (a) ownership of documents, papers, and effects gives "standing"; (b) ownership and/or control or possession—actual or constructive—of premises searched gives "standing"; and (c) the "aggrieved person" doctrine where the search warrant and the sworn application for search warrant are "primarily" directed solely and exclusively 'against the "aggrieved person", gives "standing". An examination of the search warrants in this case will readily show that, excepting three, all were directed against the petitioners personally. In some of them, the petitioners were named personally, followed by the designation, "The President and/or General Manager" of the particular corporation. The three warrants excepted named three corporate defendants. But the "office/house/warehouse/premises" mentioned in the said three warrants were also the same "office/house/warehouse/premises" declared to be owned by or under the control of the petitioners in all the other search

warrants directed against the petitioners and/or "the President and/or General Manager" of the particular corporation. The searches and seizures were to be made, and were actually made, in the "office/house/warehouse/premises" owned by or under the control of the petitioners.

Same; Ownership of properties seized entitles petitioners to bring motion to return and suppress and gives them standing as persons aggrieved by unlawful search and seizure.— Ownership of the properties seized alone entitles the petitioners to bring a motion to return and suppress, and gives them standing as persons aggrieved by an unlawful search and seizure regardless of their location at the time of seizure. Under the constitutional provision against unlawful searches and seizures, a person places himself or his property within a constitutionally protected area, be it his home or his office, his hotel room or his automobile.

Same; Control of premises searched gives "standing".— Independent of ownership or other personal interest in the records and documents seized, the petitioners have standing to move for return and suppression by virtue of their proprietary or leasehold interest in many of the premises searched. These proprietary and leasehold interests have been sufficiently set forth in their motion for reconsideration and need not be recounted here. It has never been held that a person with requisite interest in the premises searched must own the property seized in order to have standing in a motion to return and suppress.

ORIGINAL ACTION in the Supreme Court. Certiorari, prohibition. mandamus and injunction.

The facts are stated in the opinion of the Court.

Paredes, Poblador, Cruz & Nazareno and Meer, Meer & Meer and Juan T. David for petitioners.

Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro, Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D, Quiason and Solicitor C. Padua for respondents.

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin1—hereinafter referred to as Respondents-

_______________

1 Hon. Jose W. Diokno, in his capacity as Secretary of Justice, Jose Lukban, in his capacity as Acting Director, National Bureau of Investigation, Special Prosecutors Pedro D. Cenzon, Efren I. Plana and Manuel Villareal, Jr., and Assistant Fiscal Maneses G. Reyes. City of Manila.

Prosecutors—several judges2—hereinafter referred to as Respondents-Judges—issued, on different dates,3 a total of 42 search warrants against petitioners herein4 and/or the corporations of which they were officers,5 directed to any peace officer, to search the persons above-named and/ or the premises of their offices, warehouses and/or residences, and to seize and take possession of the following personal property to wit:

"Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursements receipts, balance sheets and profit and loss statements and Bobbins (cigarette wrappers)."

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended to be used as the means of committing the offense," which is described in the applications adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal Code." Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the Rules of Court—because, inter alia: (1) they do not describe with particularity the documents, books and things

________________

2 Hon. Amado Roan, Judge of the Municipal (now City) Court of Manila, Hon. Roman Cansino, Judge of the Municipal (now City) Court of Manila, Hon. Hermogenes Caluag, Judge of the Court of First Instance of Rizal, Quezon City Branch, Hon. Eulogio Mencias, Judge of the Court of First Instance of Rizal,

Pasig Branch, and Hon, Damian Jimenez, Judge of the Municipal (now City) Court of Quezon City.

3 Covering the period from March 3 to March 9, 1962.

4 Harry S, Stonehill, Robert P. Brooks, John J. Brooks and Karl Beck.

5 U.S. Tobacco Corporation, Atlas Cement Corporation, Atlas Development Corporation, Far East Publishing Corporation (Evening News), Investment Inc., Industrial Business Management Corporation, General Agricultural Corporation, American Asiatic Oil Corporation, Investment Management Corporation, Holiday Hills, Inc., Republic Glass Corporation, Industrial and Business Management Corporation, United Housing Corporation, The Philippine Tobacco-Flue-Curing and Redrying Corporation, Republic Real Estate Corporation and Merconsel Corporation.

to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants were issued to fish evidence against the aforementioned petitioners in deportation cases filed against them; (4) the searches and seizures were made in an illegal manner; and (5) the documents, papers and cash money seized were not delivered to the courts that issued the warrants, to be disposed of in accordance with law—on March 20, 1962, said petitioners filed with the Supreme Court this original action for certiorari, prohibition, mandamus and injunction, and prayed that, pending final disposition of the present case, a writ of preliminary injunction be issued restraining RespondentsProsecutors, their agents and/or representatives from using the effects seized as aforementioned, or any copies thereof, in the deportation cases already adverted to, and that, in due course, thereafter, decision be rendered quashing the contested search warrants and declaring the same null and void, and commanding the respondents, their agents or representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash moneys seized or confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged6 (1) that the contested search warrants are valid and have been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners' consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners, regardless of the alleged illegality of the aforementioned searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by resolution dated June 29, 1962. the writ was partially lifted or dissolved, insofar as the papers, documents and things seized from the offices of the corporations above mentioned are concerned; but, the injunction was maintained as regards the papers, documents and things found and seized in the residences of petitioners herein.7

_______________

6 Inter alia,.

7 "Without prejudice to explaining the reasons for this order in the decision to be rendered in the case, the writ of

389

VOL. 20, JUNE 19, 1967

389

Stonehill vs. Diokno

Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may be split into two (2) major groups, namely: (a) those found and seized in the off ices of the aforementioned corporations, and (b) those found and seized in the residences of petitioners herein.

As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have

________________

preliminary injunction issued by us in this case against the use of the papers, documents and things from the following premises: (1) The office of the U.S. Tobacco Corp. at the Ledesma Bldg., Arzobispo St., Manila; (2) 932 Gonzales, Ermita, Manila; (3) office at Atlanta St. bounded by Chicago, 15th & 14th Sts., Port Area, Manila; (4) 527 Rosario St, Mla.; (5) Atlas Cement Corp. and/or Atlas Development Corp., Magsaysay Bldg., San Luis, Ermita, Mla.; (6) 205 13th St., Port Area, Mla.; (7) No. 224 San Vicente St, Mla.; (8) Warehouse No. 2 at Chicago & 23rd Sts., Mla.; (9) Warehouse at 23rd St., between Muelle de San Francisco & Boston, Port Area, Mla.; (10) Investment Inc., 24th St. & Boston; (11) IBMC, Magsaysay Bldg., San Luis, Mla.; (12) General Agricultural Corp., Magsaysay Bldg., San Luis, Manila; (13) American Asiatic Oil Corp., Magsaysay Bldg., San Luis, Manila; (14) Room 91, Carmen Apts., Dewey Blvd., Manila; (15) Warehouse Railroad St. between 17 & 12 Sts., Port Area, Manila; (16) Rm. 304, Army & Navy Club, Manila, South Blvd.; (17) Warehouse Annex Bldg., 18th St., Port Area, Manila; (18) Rm. 81 Carmen Apts., Dewey Blvd., Manila; (19) Holiday Hills, Inc., Trinity Bldg,, San Luis, Manila; (20) No. 2008 Dewey Blvd.; (21) Premises of 24th St. & Boston, Port Area, Manila; (22) Republic Glass Corp., Trinity Bldg., San Luis. Manila; (23) IBMC, 2nd Floor, Trinity Bldg., San Luis, Manila; (24) IBMC, 2nd Flr., Gochangco Blg., 610 San Luis, Manila; (25) United Housing Corp., Trinity Bldg., San Luis, Manila; (26) Republic Real Estate Corp., Trinity Bldg., San Luis, Manila; (27) 1437 Colorado St., Malate, Manila; (28) Phil. Tobacco Flue-Curing,

Magsaysay Bldg., San Luis, Manila and (29) 14 Baldwin St., Sta. Cruz, Manila, in the hearing of Deportation Cases Nos. R-953 and 955 against petitioners, before the Deportation Board, is hereby lifted. The preliminary injunction shall continue as to the papers, documents and things found in the other premises namely: in those of the residences of petitioners, as follows: (1) 13 Narra Road, Forbes Park, Makati, Rizal; (2) 15 Narra Road, Forbes Park, Makati, Rizal; and (3) 8 Urdaneta Avenue, Urdaneta Village, Makati, Rizal."

SUPREME COURT REPORTS ANNOTATED


their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or of the interest of each of them in said corporations, and whatever the offices they hold therein may be.8 Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby,9 and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties.10 Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity.11 Indeed, it has been held:

"x x x that the Government's action in gaining possession of papers belonging to the corporation did not relate to nor did it affect the personal defendants. If these papers were unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the rights of the corporation and not the rights of the other defendants, Next, it is clear that a question of the lawfulness of a seizure can be raised only by one whose rights have been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had not been seized or the privacy of whose homes had not been disturbed; nor could they claim for them-selves the benefits of the Fourth Amendment, when its violation, if any, was with reference to the rights of another. Remus vs. United States (C.C.A.) 291 F. 501, 511. It follows, therefore, that the question of the admissibility of the evidence based on an alleged unlawful search and seizure does not extend to the personal defendants but embraces only the corporation whose property was taken. x x x." (A. Guckenheimer & Bros. Co. vs United. States, [1925] 3 F. 2d. 786, 789, Italics supplied.)

________________Stonehill vs. Diokno

With respect to the documents, papers and things seized in the residences of petitioners herein, the aforementioned

resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by this Court,12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence against petitioners herein.

In connection with said documents, papers and things, two (2) important questions need be settled, namely: (1) whether the search warrants in question, and the searches and seizures made under the authority thereof, are valid or not, and (2) if the answer to the preceding question is in the negative, whether said documents, papers and things may be used in evidence against petitioners herein.

Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and that, accordingly, the seizures effected upon the authority thereof are null and void. In this connection, the Constitution13 provides:

"The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized."

Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall issue but upon probable cause, to be determined by the judge in the manner set forth in said provision; and (2) that the warrant shall particularly describe the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed, the same were issued upon applications stating that the natural and juridical persons therein named had committed a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other words, no specific offense had been alleged in said applications. The averments thereof with respect to the offense committed were abstract. As a consequence, it was impossible for the

________________

12 On March 22, 1962.

13 Section 1, paragraph 3, of Article III thereof.

judges who issued the warrants to have found the existence of probable cause, for the same presupposes the introduction of competent proof that the party against whom it is sought has performed particular acts, or committed specific omissions, violating a given provision of our criminal laws. As a matter of fact, the applications involved in this case do not allege any specific acts performed by herein petitioners. It would be a legal heresy, of the highest order, to convict

anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code,"—as alleged in the aforementioned applications—without reference to any determinate provision of said laws or codes.

To uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of communication and correspondence at the mercy of the whims, caprice or passion of peace officers. This is precisely the evil sought to be remedied by the constitutional provision above quoted—to outlaw the so-called general warrants. It is not difficult to imagine ,what would happen, in times of keen political strife, when the party in power feels that the minority is likely to wrest it, even though by legal means,

Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court14 by providing in its counterpart, under the Revised Rules of Court15 that "a search warrant

________________

14 Reading: x x x A search warrant shall not issue but upon probable cause to be determined by the judge or justice of the peace after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized.

15 x x x A search warrant shall not issue but upon probable cause in connection with one specific offense to be determined by the judge or justice of the peace after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched and persons or things to be seized.

shall not issue but upon probable cause in connection with one specific offense." Not satisfied with this qualification, the Court added thereto a paragraph, directing that "no search warrant shall issue for more than one specific offense."

The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized to wit:

"Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements."

Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights—that the things to be seized be particularly described—as well as tending to defeat its major objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the searches and seizures under consideration were unconstitutional, the documents, papers and things thus seized are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are unanimously of the opinion that the position taken in the Moncado case must be abandoned. Said position was in line with the American common law rule, that the criminal should not be allowed to go free merely "because the constable has blundered,"16 upon the theory that the constitutional prohibition against unreasonable searches and seizures is protected by means other than the exclusion of evidence unlawfully obtained,17 such as the

_______________

No search warrant shall issue for more than one specific offense. (Sec. 3, Rule 126.)



common-law action for damages against the searching officer, against the party who procured the issuance of the search warrant and against those assisting in the execution of an illegal search, their criminal punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as may be provided by other laws.

However, most common law jurisdictions have already given up this approach and eventually adopted the exclusionary rule, realizing that this is the only practical means of enforcing the constitutional injunction against unreasonable searches and seizures. In the language of Judge Learned Hand:

"As we understand it, the reason for the exclusion of evidence competent as such, which has been unlawfully acquired, is that exclusion is the only practical way of enforcing the constitutional privilege. In earlier times the action of trespass against the offending official may have been protection enough; but that is true no longer. Only in case the prosecution which itself controls the seizing officials,

knows that it cannot profit by their wrong, will that wrong be repressed."18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

"If letters and private documents can thus be seized and held and used in evidence against a citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be secure against such searches and seizures, is of no value, and, so far as those thus placed are concerned, might as well be stricken from the Constitution. The efforts of the courts and their officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the sacrifice of those great principles established by years of endeavor and suffering which have resulted in their embodiment in the fundamental law of the land."19

This view was, not only reiterated, but. also, broadened in subsequent decisions of the same Federal Court.20 After

_______________

reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.) :

"x x x Today we once again examine the Wolf's constitutional documentation of the right of privacy free from unreasonable state intrusion, and after its dozen years on our books, are led by it to close the only courtroom door remaining open to evidence secured by official lawlessness in flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that very same unlawful conduct. We hold that all evidence obtained by searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a State court.

"Since the Fourth Amendment's right of privacy has been declared enforceable against the States through the Due Process Clause of the Fourteenth, it is enforceable against them by the same sanction of exclusion as it used against the Federal Government. Were it otherwise, then just as without the Weeks rule the assurance against unreasonable federal searches and seizures would be 'a form of words,' valueless and underserving of mention in a perpetual charter of inestimable human liberties, so too, without that rule the freedom from state invasions of privacy would be so ephemeral and so neatly severed from its conceptual nexus with the freedom from all brutish means of coercing evidence as not to permit this Court's high regard as a freedom 'implicit in the concept of ordered liberty.' At the time that the Court held in Wolf that the amendment was applicable to the States through the Due Process Clause, the cases of this Court as we have seen, had steadfastly held that as to federal officers the Fourth Amendment included the exclusion of the evidence seized in violation of its provisions. Even Wolf 'stoutly adhered' to that proposition. The right to privacy, when conceded operatively enforceable against the States, was not

susceptible of destruction by avulsion of the sanction upon which its protection and enjoyment had always been deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the substantive protections of due process to all constitutionally unreasonable searches—state or federal—it was logically and constitutionally necessary that the exclusion doctrine—an essential part of the right to privacy—be also insisted upon as an essential ingredient of the right newly recognized by the Wolf Case. In short, the admission of the new constitutional right by Wolf could not consistently tolerate denial of its most important constitutional privilege, namely, the exclusion of the evidence which an accused had been forced to give by reason of the unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its privilege and enjoyment. Only last year the Court itself recognized that the purpose of the exclusionary rule 'is to deter—to compel respect for the constitutional guaranty



in the only effectively available way—by removing the incen-tive to disregard it' x x x.

"The ignoble shortcut to conviction left open to the State tends to destroy the entire system of constitutional restraints on which the liberties of the people rest. Having once recognized that the right to privacy embodied in the Fourth Amendment is enforceable against the States, and that the right to be secure against rude invasions of privacy by state officers is, therefore constitutional in origin. we can no longer permit that right to remain an empty promise. Because it is enforceable in the same manner and to like effect as other basic rights secured by its Due Process Clause', we can no longer permit it to be revocable at the whim of any police officer who, in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision, founded on reason and truth, gives to the individual no more than that which the Constitution guarantees him, to the police officer no less than that to which honest law enforce-ment is entitled, and, to the courts, that judicial integrity so necessary in the true administration of justice." (italics ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the constitutional injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has com-petent 'evidence to establish probable cause of the commission of a given crime by the party against 'whom the warrant is intended, then there is no reason why the applicant should not comply with the requirements of the fundamental law. Upon the other hand, if he has no such competent evidence, then it is not possible for the Judge to find that there is probable cause, and, hence, no justification for the issuance of the warrant. The only possible explanation (not 'justification) for its issuance is the necessity of fishing evidence of the

commission of a crime. But, then, this fishing expedition is indicative of the absence of evidence to establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration, overlooks the fact that violations thereof are, in general, committed by agents of the party in power, for, certainly, those belonging to the minority could not possibly abuse a power they do not have. Regardless of the handicap under which the minority usually—but, understandably—finds itself

in prosecuting agents of the majority, one must not lose sight of the fact that the psychological and moral effect of the possibility21 of securing their conviction, is watered down by the pardoning power of the party for whose benefit the illegality had been committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects seized in the offices of the corporations above referred to include personal belongings of said petitioners and other effects under their exclusive possession and control, for the exclusion of which they have a standing under the latest rulings of the federal courts of the United States.22

We note, however, that petitioners' theory, regarding their alleged possession of and control over the aforementioned records, papers and effects, and the alleged "personal" nature thereof, has been advanced, not in their petition or amended petition herein, but in the Motion for Reconsideration and Amendment of the Resolution of June 29, 1962. In other words. said theory would appear to be a readjustment of that followed in said petitions, to suit the approach intimated in the Resolution sought to be reconsidered and amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said motion for reconsideration, or submitted in support thereof, contain either inconsistent allegations, or allegations inconsistent with the theory now advanced by petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions and motion for reconsideration, and

________________

the contents of the aforementioned affidavits and other papers submitted in support of said motion, have sufficiently

established the facts or conditions contemplated in the cases relied upon by the petitioners; to warrant application of the views therein expressed, should we agree thereto. At any rate, we do not deem it necessary to express our opinion thereon, it being best to leave the matter open for determination in appropriate cases in the future.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that the warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the documents, papers and other effects so seized in the aforementioned residences are concerned; that the aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other effects seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution, without special pronouncement as to costs.

It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

Castro, .J., concurring and dissenting:

From my analysis of the opinion written by Chief Justice Roberto Concepcion and from the import of the deliberations of the Court on this case, I gather the following distinct conclusions:

1. All the search warrants served by the National Bureau of Investigation in this case are general warrants and are therefore proscribed by, and in violation of, paragraph 3 of section 1 of Article III (Bill of Rights) of the Constitution;

2. All the searches and seizures conducted under the authority of the said search warrants were consequently illegal;

3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1, should be, and is declared, abandoned;

4. The search warrants served at the three residences of the petitioners are expressly declared null and void: the searches and seizures therein made are expressly declared illegal; and the writ of preliminary injunction heretofore issued against the use of the documents, papers and effects seized in the said residences is made permanent; and

5. Reasoning that the petitioners have not in their pleadings satisfactorily demonstrated that they have legal standing to move for the suppression of the documents, papers and effects seized in the places other than the three residences adverted to above, the opinion written by the Chief Justice refrains from expressly declaring as null and void the such warrants- served at such other places and as illegal the searches and seizures made therein, and leaves "the matter open for determination in appropriate cases in the future."

It is precisely the position taken by the Chief Justice summarized in the immediately preceding paragraph (numbered 5) with which I am not in accord.

I do not share his reluctance or unwillingness to expressly declare, at this time, the nullity of the search warrants served at places other than the three residences, and the illegality of the searches and seizures conducted under the authority thereof. In my view even the exacerbating passions and prejudices inordinately generated by the environmental political and moral developments of this case should not deter this Court from forthrightly laying down the law not only for this case but as well for future cases and future generations. All the search warrants, without exception, in this case are admittedly general, blanket and roving warrants and are therefore admittedly and indisputably outlawed by the Constitution; and the searches and seizures made were therefore unlawful. That the peti-

tioners, let us assume in gratia argumente, have no legal standing to ask for the suppression of the papers, things and effects seized from places other than their residences, to my mind, cannot in any manner affect, alter or otherwise modify the intrinsic nullity of the search warrants and the intrinsic illegality of the searches and seizures made thereunder. Whether or not the petitioners possess legal standing the said warrants are void and remain void, and the searches and seizures were illegal and remain illegal. No inference can be drawn from the words of the Constitution that "legal standing" or the lack of it is a determinant of the nullity or validity of a search warrant or of the lawfulness or illegality of a search or seizure.

On the question of legal standing, I am of the conviction that, upon the pleadings submitted to this Court the petitioners have the requisite legal standing to move for the suppression and return of the documents, papers and effects that were seized from places other than their family residences.

Our constitutional provision on searches and seizures was derived almost verbatim from the Fourth Amendment to the United States Constitution. In the many years of judicial construction and interpretation of the said constitutional provision, our courts have invariably regarded as doctrinal the pronouncement made on the Fourth Amendment by federal courts, especially the Federal Supreme Court and the Federal Circuit Courts of Appeals.

The U.S. doctrines and pertinent cases on standing to move for the suppression or return of documents, papers and effects which are the fruits of an unlawful search and seizure, may be summarized as follows; (a) ownership of documents, papers and effects gives "standing;" (b) ownership and/or control or possession—actual or constructive—of premises searched gives "standing"; and (c) the "aggrieved person" doctrine where the search warrant and the sworn application for search warrant are "primarily" directed solely and exclusively against the "aggrieved person," gives "standing."

An examination of the search warrants in this case will readily show that, excepting three, all were directed against the petitioners personally. In some of them, the petitioners were named personally, followed by the designation, "the President and/or General Manager" of the particular corporation. The three warrants excepted named three corporate defendants. But the "office/house/ warehouse/premises" mentioned in the said three warrants were also the same "office/house/warehouse/premises" declared to be owned by or under the control of the petitioners in all the other search warrants directed against the petitioners and/or "the President and/or General Manager" of the particular corporation. (see pages 5-24 of Petitioners' Reply of April 2, 1962). The searches and seizures were to be made, and were actually made, in the "office/house/warehouse/premises" owned by or under the control of the petitioners.

Ownership of matters seized gives "standing"

Ownership of the properties seized alone entitles the petitioners to bring a motion to return and suppress, and gives them standing as persons aggrieved by an unlawful search and seizure regardless of their location at the time of seizure. Jones vs. United States, 362 U.S. 257, 261 (1960) (narcotics stored In the apartment of a friend of the defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal and corporate papers of corporation of which the defendant was president), United States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not belonging to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th Cir. 1925) (books seized from the defendant's sister but belonging to the defendant); Cf. Villano vs. United States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized in desk neither owned by nor in exclusive possession of the def endant).

In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it was held that under the constitutional provision against unlawful searches and seizures. a person places himself or his property within a



constitutionally protected area, be it his home or his office, his hotel room or his automobile:

"Where the argument falls is in its misapprehension of the fundamental nature and scope of Fourth Amendment protection. What the Fourth Amendment protects is the security a man relies upon when he places himself or his property with-in a constitutionally protected area, be it his home or his office, his hotel room or his automobile. There he is protected from unwarranted governmental intrusion. And when he puts something in his filing cabinet, in his desk drawer, or in his pocket, he has the right to know it will be secure from an unreasonable search or an unreasonable seizure. So it was that the Fourth Amendment could not tolerate the warrantless search of the hotel room in Jeffers, the purloining of the petitioner's private papers in Gouled, or the surreptitious electronic surveilance in Silverman. Countless other cases which have come to this Court over the years have involved a myriad of differing factual contexts in which the protections of the Fourth Amendment have been appropriately invoked. No doubt, the future will bring countless others. By nothing we say here do we either foresee or foreclose factual situations to which the Fourth Amendment may be applicable." (Hoffa vs. U.S., 87 S. Ct. 408 (December 12, 1966). See also U.S, vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951). (Italics supplied).

Control of premises searched gives "standing."

Independent of ownership or other personal interest in the records and documents seized, the petitioners have standing to move for return and suppression by virtue of their proprietary or leasehold interest in many of the premises searched. These proprietary and leasehold interests have been sufficiently set forth in their motion for reconsideration and need not be recounted here, except to emphasize that the petitioners paid rent, directly or in-directly, for practically all the premises searched (Room 91, 84 Carmen Apts.; Room 304, Army & Navy Club; Premises 2008, Dewey Boulevard; 1436 Colorado Street); maintained personal offices within the corporate offices (IBMC, USTC); had made improvements or furnished such offices; or had paid for the filing cabinets in which the papers were stored (Room 204, Army & Navy Club) ; and individually, or through their respective spouses, owned the controlling stock of the corporations involved. The petitioners' proprietary interest in most, if not all, of the premises searched therefore independently gives


them standing to move for the return and suppression of the books, papers and effects seized therefrom.

In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and extent of the interest in the searched premises necessary to maintain a motion to

suppress. After reviewing what it considered to be the unduly technical standard of the then prevailing circuit court decisions, the Supreme Court said (362 U.S. 266) :

"We do not lightly depart from this course of decisions by the lower courts. We are persuaded, however, that it is unnecessary and ill-advised to import into the law surrounding the constitutional right to be free from unreasonable searches and seizures subtle distinctions, developed and refined by the common law in evolving the body of private property law which, more than almost any other branch of law, has been shaped by distinctions whose validity is largely historical. Even in the area from which they derive, due consideration has led to the discarding of those distinctions in the homeland of the common law. See Occupiers' Liability Act, 1957, 5 and 6 Eliz. 2, c, 31, carrying out Law Reform Committee, Third Report, Cmd. 9305. Distinctions such as those between 'lessee,' 'licensee,' 'invitee,' 'guest,' often only of gossamer strength, ought not be determinative in fashioning procedures ultimately referable to constitutional safeguards. See also Chapman vs. United States, 354 U.S. 610, 616-17 (1961).

It has never been held that a person with requisite interest in the premises searched must own the property seized in order to have standing in a motion to return and suppress, In Alioto vs. United States, 216 F. Supp. 48 (1963), a bookkeeper for several corporations from whose apartment the corporate records were seized successfully moved for their return. In United States vs. Antonelli, Fireworks Co., 53 F. Supp. 870, 873 (W. D. N. Y. 1943), the corporation's president successfully moved for the return and suppression as to him of both personal and corporate documents seized from his home during the course of an illegal search:

"The lawful possession by Antonelli of documents and property," either his own or the corporation's was entitled to protection against unreasonable search and seizure. Under the circumstances in the case at bar, the search and seizure were unreasonable and unlawful. The motion for the return of seized articles and the suppression of the evidence so obtained should be granted." (Italics supplied).

Time was when only a person who had property interest in either the place searched or the articles seized had the necessary standing to invoke the protection of the exclusionary rule. But in MacDonald vs. United States, 335 U.S. 461 (1948), Justice Robert Jackson, joined by Justice Felix Frankfurter, advanced the view that "even a guest may expect the shelter of the rooftree he is under against criminal intrusion." This view finally became the official view of the U.S. Supreme Court and was articulated in United States vs. Jeffers, 432 U.S. 48 (1951). Nine years later, in 1960, in Jones vs. United States, 362 U.S. 257, 267, the U.S. Supreme Court went a step further. Jones was a mere guest in the apartment unlawfully searched, but the Court nonetheless declared that the exclusionary rule protected him as well. The concept of "person aggrieved by an unlawful search and' seizure" was

enlarged to include "anyone legitimately on premises where the search occurs."

Shortly after the U.S. Supreme Court's Jones decision, the U.S. Court of Appeals for the Fifth Circuit held that the defendant organizer, sole stockholder and president of a corporation had standing in a mail fraud prosecution against him to demand the return and suppression of corporate property. Henzel vs. United States, 296 F. 2d 650, 652 (5th Cir. 1961), supra. The court concluded that the defendant had standing on two independent grounds: First—he had a suff icient interest in the property seized, and second—he had an adequate interest in the premises searched (just like in the case at bar). A postal inspector had unlawfully searched the corporation's premises and had seized most of the corporation's books and records. Looking to Jones, the court observed:

"Jones clearly tells us, therefore, what is not required to qualify one as a 'person aggrieved by an unlawful search and seizure.' It tells us that appellant should not have been precluded from objecting to the Postal Inspector's search and seizure of the corporation's books and records merely because the appellant did not show ownership or possession of the books and records or a substantial possessory interest in the invaded premises xxx." (Henzel vs. United States, 296 F. 2d at 651).

Henzel was soon followed by Villano vs. United States, 310 F. 2d 680. 683, (10th Cir. 1962). In Villano,

police officers seized two notebooks from a desk in the defendant's place of employment; the defendant did not claim ownership of either; he asserted that several employees (including himself) used the notebooks. The Court held that the employee had a protected interest and that there also was an invasion of privacy. Both Henzel and Villano considered also the fact that the search and seizure were "directed at" the moving defendant. Henzel vs. United States, 296 F. 2d at 682; Villano vs. United States, 310 F. 2d at 683.

In a case in which an attorney closed his law office, placed his files in storage and went to Puerto Rico, the Court of Appeals for the Eighth Circuit recognized his standing to move to quash as unreasonable search and seizure under the Fourth Amendment of the U.S. Constitution a grand jury subpoena duces tecum directed to the custodian of his files. The Government contended that the petitioner had no standing because the books and papers were physically in the possession of the custodian, and because the subpoena was directed against the custodian. The court rejected the contention, holding that

"Schwimmer legally had such possession, control and unrelinquished personal rights in the books and papers as not to enable the question of unreasonable search and seizure to be escaped through the mere procedural device of compelling a third-party naked possessor to produce and

deliver them." Schwimmer vs. United States, 232 F. 2d 855, 861 (8th Cir. 1956).

Aggrieved person doctrine where the search warrant is primarily directed against said person gives "standing."

The latest United States decision squarely in point is United States vs. Birrell, 242 F. Supp. 191 (1965, U.S.D.C., S.D.N.Y.). The defendant had stored with an attorney certain files and papers,' which attorney, by the name of Dunn, was not, at the time of the seizing of the records, Birrell's attorney.* Dunn,, in turn, had stored most of the records at his home in the country and on a farm which, according to Dunn's affidavit, was under his (Dunn's) "control and management." The papers

________________

* Attorney-client relationship played no part in the decision of the case.

turned out to be private, personal and business papers together with corporate books and records of certain unnamed corporations in which Birrell did not even claim ownership. (All of these type records were seized in the case at bar), Nevertheless, the search in Birrell was held invalid by the court which held that even though Birrell did not own the premises where the records were stored, he had "standing" to move for the return of all the papers and properties seized. The court, relying on Jones vs. U. S., supra; U.S. vs. Antonelli Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S. supra; and Schwimmer vs. U.S., supra, pointed out that

"It is overwhelmingly established that the searches here in question were directed solely and exclusively against Birrell. The only person suggested in the papers as having violated the law was Birrell. The first search warrant described the records as having been used 'in committing a violation of Title 18, United States Code, Section 1341, by the use of the mails by one Lowell M. Birrell, x x x.' The second search warrant was captioned: 'United States of America vs. Lowell M, Birrell." (p. 198)

"Possession (actual or constructive), no less than ownership, gives standing to move to suppress. Such was the rule even before Jones." (p, 199)

"If, as thus indicated, Birrell had at least constructive possession of the records stored with Dunn, it matters not whether he had any interest in the premises searched." See also Jeffers v, United States, 88 U.S. Appl. D.C. 58, 187 F. 2d 498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).

The ruling in the Birrell case was reaffirmed on motion for reargument; the United States did not appeal from this decision. The factual situation in Birrell is strikingly similar to the case of the present petitioners; as in Birrell, many

personal and corporate papers were seized from premises not petitioners' family residences; as in Birrell, the searches were "PRIMARILY DIRECTED SOLELY AND EXCLUSIVELY" against the petitioners. Still both types of documents were suppressed in Birrell because of the illegal search. In the case at bar, the petitioners connection with the premises raided is much closer than in Birrell.

Thus, the petitioners have full standing to move for the quashing of all the warrants regardless whether these

were directed against residences in the narrow sense of the word, as long as the documents were personal papers of the petitioners or (to the extent that they were corporate papers) were held by them in a personal capacity or under their personal control.

Prescinding from the foregoing, this Court, at all events, should order the return to the petitioners all personal and private papers and effects seized, no matter where these were seized, whether from their residences or corporate offices or any other place or places. The uncontradicted sworn statements of the petitioners in their various pleadings submitted to this Court indisputably show that amongst the things seized from the corporate offices and other places were personal and private papers and effects belonging to the petitioners.

If there should be any categorization of the documents, "papers and things which where the objects of the unlawful searches and seizures, I submit that the grouping should be: (a) personal or private papers of the petitioners wherever they were unlawfully seized, be it their family residences, offices, warehouses and/or premises owned and/or controlled and/or possessed (actually or constructively) by them as shown in all the search warrants and in the sworn applications filed in securing the void search warrants, and (b) purely corporate papers belonging to corporations. Under such categorization or grouping, the determination of which unlawfully seized papers, documents and things are personal/private of the petitioners or purely corporate papers will have to be left to the lower courts which issued the void search warrants in ultimately effecting the suppression and/or return of the said documents.

'And as unequivocally indicated by the authorities above cited, the petitioners likewise have clear legal standing to move for the suppression of purely corporate papers as "President and/or General Manager" of the corporations involved as specifically mentioned in the void search warrants.

Finally, I must articulate my persuasion that although the cases cited in my disquisition were criminal prosecutions, the great clauses of the constitutional proscription

on illegal searches and seizures do not withhold the mantle of their protection from cases not criminal in origin or nature.

Writs granted in part and denied in part; motion for reconsideration denied. [Stonehill vs. Diokno, 20 SCRA 383(1967)]

G.R. No. 108670. September 21, 1994.*LBC EXPRESS, INC., petitioner, vs. THE COURT OF APPEALS, ADOLFO M. CARLOTO, and RURAL BANK OF LABASON, INC., respondents.

Damages; Moral damages cannot be awarded to a corporation, an artificial person which has no feelings, emotions or senses, and which cannot experience physical suffering and mental anguish.—The respondent court erred in awarding moral damages to the Rural Bank of Labason, Inc., an artificial person. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by respondent bank as an artificial person.

Same; Equity; The right to recover moral damages is based on equity and he who comes to court to demand equity must come with clean hands.—We can neither sustain the award of moral damages in favor of the private respondents. The right to recover moral damages is based on equity. Moral damages are recoverable only if the case falls under Article 2219 of the Civil Code in relation to Article 21. Part of conventional wisdom is that he who comes to court to demand equity, must come with clean hands. In the case at bench, respondent Carloto

_______________

* SECOND DIVISION.

603

VOL. 236, SEPTEMBER 21, 1994

603

LBC Express, Inc. vs. Court of Appeals

is not without fault. He was fully aware that his rural bank’s obligation would mature on November 21, 1984 and his bank has set aside cash for these bills payable. He was all set to go to Manila to settle this obligation. He has received the documents necessary for the approval of their rediscounting application with the Central Bank. He has also received the plane ticket to go to Manila. Nevertheless, he did not immediately proceed to Manila but instead tarried for days allegedly claiming his ONE THOUSAND PESOS (P1,000.00) pocket money. Due to his delayed trip, he failed to submit the rediscounting papers to the Central Bank on time and his bank was penalized THIRTY-TWO THOUSAND PESOS

(P32,000.00) for failure to pay its obligation on its due date. The undue importance given by respondent Carloto to his ONE THOUSAND PESOS (P1,000.00) pocket money is inexplicable for it was not indispensable for him to follow up his bank’s rediscounting application with Central Bank.

Same; Same; The attitude of a party in needing the money to “invite people for snack or dinner” in the course of following-up official business with the Central Bank speaks ill of his business dealings.—According to said respondent, he needed the money to “invite people for a snack or dinner.” The attitude of said respondent speaks ill of his ways of business dealings and cannot be countenanced by this Court. Verily, it will be revolting to our sense of ethics to use it as basis for awarding damages in favor of private respondent Carloto and the Rural Bank of Labason, Inc.

Same; Same; Bad faith under the law cannot be presumed and it must be established by clear and convincing evidence.—We also hold that respondents failed to show that petitioner LBC’s late delivery of the cashpack was motivated by personal malice or bad faith, whether intentional or thru gross negligence. In fact, it was proved during the trial that the cashpack was consigned on November 16, 1984, a Friday. It was sent to Cebu on November 19, 1984, the next business day. Considering this circumstance, petitioner cannot be charged with gross neglect of duty. Bad faith under the law can not be presumed; it must be established by clear and convincing evidence.

Same; Same; Contracts; In breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could reasonably have foreseen.—Again, the unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the

604

604



the parties had foreseen or could reasonably have foreseen. The damages, however, will not include liability for moral damages.

Same; Same; Same; In a contractual or quasi-contractual relationship, exemplary damages may be awarded only if the defendant had acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.—Prescinding from these premises, the award of exemplary damages made by the

respondent court would have no legal leg to support itself. Under Article 2232 of the Civil Code, in a contractual or quasicontractual relationship, exemplary damages may be awarded only if the defendant had acted in “a wanton, fraudulent, reckless, oppressive, or malevolent manner.” The established facts do not so warrant the characterization of the action of petitioner LBC.

PETITION for review on certiorari of a decision of the Court of Appeals.


Emmanuel D. Agustin for petitioner.

Bernardo P. Concha for private respondents.

PUNO, J.:

In this Petition for Review on Certiorari, petitioner LBC questions the decision1 of respondent Court of Appeals affirming the judgment of the Regional Trial Court of Dipolog City, Branch 8, awarding moral and exemplary damages, reimbursement of P32,000.00, and costs of suit; but deleting the amount of attorney’s fees.

Private respondent Adolfo Carloto, incumbent President-Man-ager of private respondent Rural Bank of Labason, alleged that on November 12, 1984, he was in Cebu City transacting business with the Central Bank Regional Office. He was instructed to proceed to Manila on or before November 21, 1984 to follow-up the Rural Bank’s plan of payment of rediscounting obligations with Central Bank’s main office in Manila.2 He then purchased a

_______________

1 Herrera, Manuel, J., Ponente; Torres, Justo, and Gutierrez, Angelina, JJ., concurring.

2 Rollo, Court of Appeals Decision, p. 78.

605


605


Carloto-Concha to send him ONE THOUSAND PESOS (P1,000.00) for his pocket money in going to Manila and some rediscounting papers thru petitioner’s LBC Office at Dipolog City.3

On November 16, 1984, Mrs. Concha thru her clerk, Adelina Antigo consigned thru LBC Dipolog Branch the pertinent

documents and the sum of ONE THOUSAND PESOS (P1,000.00) to respondent Carloto at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. This was evidenced by LBC Air Cargo, Inc., Cashpack Delivery Receipt No. 34805.

On November 17, 1984, the documents arrived without the cashpack. Respondent Carloto made personal follow-ups on that same day, and also on November 19 and 20, 1984 at LBC’s office in Cebu but petitioner failed to deliver to him the cashpack.

Consequently, respondent Carloto said he was compelled to go to Dipolog City on November 24, 1984 to claim the money at LBC’s office. His effort was once more in vain. On November 27, 1984, he went back to Cebu City at LBC’s office. He was, however, advised that the money has been returned to LBC’s office in Dipolog City upon shipper’s request. Again, he demanded for the ONE THOUSAND PESOS (P1,000.00) and refund of FORTY-NINE PESOS (P49.00) LBC revenue charges. He received the money only on December 15, 1984 less the revenue charges.

Respondent Carloto claimed that because of the delay in the transmittal of the cashpack, he failed to submit the rediscounting documents to Central Bank on time. As a consequence, his rural bank was made to pay the Central Bank THIRTY-TWO THOUSAND PESOS (P32,000.00) as penalty interest.4 He allegedly suffered embarrassment and humiliation.

Petitioner LBC, on the other hand, alleged that the cashpack was forwarded via PAL to LBC Cebu City branch on November 22, 1984.5 On the same day, it was delivered at respondent Carloto’s residence at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. However, he was not around to receive it. The delivery man served instead a claim notice to insure he would

______________

3 Ibid.

4 Ibid., p. 79.

5 Ibid.

606

606



Delivery Receipt No. 342805. Notwithstanding the said notice, respondent Carloto did not claim the cashpack at LBC

Cebu. On November 23, 1984, it was returned to the shipper, Elsie CarlotoConcha at Dipolog City.

Claiming that petitioner LBC wantonly and recklessly disregarded its obligation, respondent Carloto instituted an action for Damages Arising from Non-performance of Obligation docketed as Civil Case No. 3679 before the Regional Trial Court of Dipolog City on January 4, 1985. On June 25, 1988, an amended complaint was filed where respondent rural bank joined as one of the plain-tiffs and prayed for the reimbursement of THIRTY-TWO THOUSAND PESOS (P32,000.00).

After hearing, the trial court rendered its decision, the dispositive portion of which reads:

“WHEREFORE, judgment is hereby rendered:

1. Ordering the defendant LBC Air Cargo, Inc. to pay unto plaintiff Adolfo M. Carloto and Rural Bank of Labason, Inc., moral damages in the amount of P10,000.00; exemplary damages in the amount of P5,000.00; attorney’s fees in the amount of P3,000.00 and litigation expenses of P1,000.00; 2. Sentencing defendant LBC Air Cargo, Inc., to reimburse plaintiff Rural Bank of Labason, Inc. the sum of P32,000.00 which the latter paid as penalty interest to the Central Bank of the Philippines as penalty interest for failure to rediscount its due bills on time arising from the defendant’s failure to deliver the cashpack, with legal interest computed from the date of filing of this case; and 3. Ordering defendant to pay the costs of these proceedings.

SO ORDERED.”6

On appeal, respondent court modified the judgment by deleting the award of attorney’s fees. Petitioner’s Motion for Reconsideration was denied in a Resolution dated January 11, 1993.

Hence, this petition raising the following questions, to wit:

1. Whether or not respondent Rural Bank of Labason, Inc., being an artificial person should be awarded moral damages.

________________

6 Rollo, pp. 127-128, penned by Regional Trial Court Judge Pelagio R. Lachica.

607


607


2. Whether or not the award of THIRTY-TWO THOUSAND PESOS (P32,000.00) was made with grave abuse of discretion. 3. Whether or not the respondent Court of Appeals gravely abused its discretion in affirming the trial court’s decision ordering petitioner LBC to pay moral and exemplary damages despite performance of its obligation.

We find merit in the petition.

The respondent court erred in awarding moral damages to the Rural Bank of Labason, Inc., an artificial person.

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.7 A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish.8 Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life9—all of which cannot be suffered by respondent bank as an artificial person.

We can neither sustain the award of moral damages in favor of the private respondents. The right to recover moral damages is based on equity. Moral damages are recoverable only if the case falls under Article 2219 of the Civil Code in relation to Article 21.10 Part of conventional wisdom is that he who comes to court to demand equity, must come with clean hands.

In the case at bench, respondent Carloto is not without fault. He was fully aware that his rural bank’s obligation would mature on November 21, 1984 and his bank has set aside cash for these bills payable.11 He was all set to go to Manila to settle this obligation. He has received the documents necessary for the approval of their rediscounting application with the Central Bank. He has also received the plane ticket to go to Manila. Nevertheless, he

________________

7 Civil Code, Article 2217.

8 Tamayo vs. University of Negros Occidental, 58 OG No. 37, p. 6023, September 10, 1962.

9 Supra., at p. 6032.

10 Garciano vs. Court of Appeals, G.R. No. 96126, August 10, 1992, 212 SCRA 436.

11 Rollo, p. 214.

608

608



did not immediately proceed to Manila but instead tarried for days allegedly claiming his ONE THOUSAND PESOS (P1,000.00) pocket money. Due to his delayed trip, he failed to submit the rediscounting papers to the Central Bank on time and his bank was penalized THIRTY-TWO THOUSAND PESOS (P32,000.00) for failure to pay its obligation on its due date. The undue importance given by respondent Carloto to his ONE THOUSAND PESOS (P1,000.00) pocket money is inexplicable for it was not indispensable for him to follow up his bank’s rediscounting application with Central Bank. According to said respondent, he needed the money to “invite people for a snack or dinner.”12 The attitude of said respondent speaks ill of his ways of business dealings and cannot be countenanced by this Court. Verily, it will be revolting to our sense of ethics to use it as basis for awarding damages in favor of private respondent Carloto and the Rural Bank of Labason, Inc.

We also hold that respondents failed to show that petitioner LBC’s late delivery of the cashpack was motivated by personal malice or bad faith, whether intentional or thru gross negligence. In fact, it was proved during the trial that the cashpack was consigned on November 16, 1984, a Friday. It was sent to Cebu on November 19, 1984, the next business day. Considering this circumstance, petitioner cannot be charged with gross neglect of duty. Bad faith under the law can not be presumed; it must be established by clear and convincing evidence.13 Again, the unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could reasonably have foreseen. The damages, however, will not include liability for moral damages.14

Prescinding from these premises, the award of exemplary damages made by the respondent court would have no legal leg to support itself. Under Article 2232 of the Civil Code, in a

______________

12 Id., p. 216.

13 See People’s Bank and Trust Co. vs. Syvel’s Inc., No. L-29280, August 11, 1988, 164 SCRA 247.

14 See China Airlines Limited vs. Court of Appeals, G.R. No. 94590, July 29, 1992, 211 SCRA 897.

609


609


contractual or quasi-contractual relationship, exemplary damages may be awarded only if the defendant had acted in “a wanton, fraudulent, reckless, oppressive, or malevolent manner.” The established facts do not so warrant the characterization of the action of petitioner LBC.

IN VIEW WHEREOF, the Decision of the respondent court dated September 30, 1992 is REVERSED and SET ASIDE; and the Complaint in Civil Case No. 3679 is ordered DISMISSED. No costs.

SO ORDERED.

Narvasa (C.J., Chairman), Padilla, Regalado and Mendoza, JJ., concur.

Judgment reversed and set aside.

Notes.—The National Telecommunications Commission has no jurisdiction to impose a fine. (Radio Communications of the Philippines, Inc. vs. National Telecommunications Commission, 215 SCRA 455 [1992])

The award of attorney’s fees must be disallowed where the award of exemplary damages is eliminated. (Albenson Enterprises Corporation vs. Court of Appeals, 217 SCRA 16 [1993]) [LBC Express, Inc. vs. Court of Appeals, 236 SCRA 602(1994)]

G.R. No. L-13203 January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner, vs.COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates for petitioner.Office of the Solicitor General for respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public.

On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952 countermanded his demand for sales tax deficiency on the ground that "after several investigations conducted into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject, however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954, redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demand was in the total sum of P2,215,809.27 detailed as follows:

Deficiency Sales Tax

Assessment (First) of November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr 1947 to 4th Qrtr 1949 inclusive P1,031,296.60

Additional Assessment for period from 1st to 4th Qrtr 1950, inclusive 234,880.13

Total amount demanded per letter of December P1,266,176.73

16, 1954

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo and sustaining the respondent Collector's theory that there was no legitimate or bona fide purpose in the organization of SM — the apparent objective of its organization being to evade the payment of taxes — and that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded its separate corporate existence and on April 27, 1957, rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the modification of the computation of the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration of this decision having been denied, Yutivo brought the case to this Court thru the present petition for review.

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or SM

was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was preparing to leave the Philippines and terminate its business of importing vehicles," the court below speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This observation, which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of cars in the Philippines even before the war and had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning the assembly plant project but also totally ceasing to do business as an importer. Moreover, the newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a rumored plan that GM would abandon the assembly plant project in the Philippines. There was no mention of the cessation of business by GM which must not be confused with the abandonment of the assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost a year after SM was organized.

At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes.

The transactions between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued the method of distribution that it had initiated long before GM withdrew from the Philippines.

On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax by the importer based on the landed cost of the imported article, increased by mark-ups of 25%, 50%, and 100%, depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many years past in the promotion and pursuit of the business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." The use of the word "original" and the express provision that the tax was collectible "once only" evidently has made the provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained without the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for therein were less than what were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after some two years of investigation and

duty of investigation and study concluded in 1952 that Yutivo's sales tax returns were correct — only to reverse himself after another two years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could have been easily passed off to the consumer, especially since the period covered by the assessment was a "seller's market" due to the post-war scarcity up to late 1948, and the imposition of controls in the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent

transfers thereof were paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the subscription of shares, employing the persons named or "charged" with corresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that they were the principal officers and constituted the majority of the Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's Moreover, these persons were related to death other as brothers or first cousins. There was every reason for them to agree in order to protect their common interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions made by various person's but except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts of said stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party which really undertook to pay or underwrite payment thereof.

The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary of the former.

True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controlling stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations, the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In addition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business, financial and management policies of both corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo's books. The payments for and charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's corporate officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations and existence became dependent upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head Office" or "Home

Office" as shown by their letters of remittances or other correspondences. These correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or stationery of Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM, it plainly appears that Yutivo had sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or department of the former.

Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two organizations are separate juridical entities, the corresponding receipts or receivables should have been treated as income on the part of Yutivo. But such management fees were recorded as "Reserve for Bonus" and were therefore a liability reserve and not an income account. This reserve for bonus were subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the management fees were paid directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.

Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment by reason of prescription. The contention, in our opinion, cannot be

sustained. It will be noted that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering the said period was made at the earliest on October 1, as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due to insufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950 was forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be considered to have been finally withdrawn. That the assessment was subsequently reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16, 1954, the same was assessed well within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is expressly granted such authority under section 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has "direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, any provision of existing law to the contrary not withstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in public interest."

It should here also be stated that the assessment in question was consistently protested by petitioner, making several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have waived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of limitations against the

government in certain instances in which the taxpayer has taken some affirmative action to prevent the collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government relied. The cases frequently involve dissolved corporations. If no waiver has been given, the cases usually show come conduct directed to a postponement of collection, such, for example, as some variety of request to apply an overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. A definite representation of implied authority may be involved, and in many cases the taxpayer has received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues, but generally speaking, the cases present a strong combination of equities against the taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — es involving an original assessment of more than P5,000 — refers only to compromises and refunds of taxes, but not to total withdrawal of the assessment. The contention is without merit. A careful examination of the provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation consisting of

only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of third husband and wife corporation consisted of an apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband, who directed the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment. The sale of this property for the price mentioned would have netted the corporation a handsome profit on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got together for the execution of the document of sale, the Millers announced that their attorney had called their attention to the large corporate tax which would have to be paid if the sale was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding corporate stock." The building, which as above stated was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously agreed upon between the corporation and the Fines.

The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term capital gain on the exchange of their corporate stock with the corporate property. The Commissioner of Internal Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was in substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a settled principle that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure; and that

in taking a position with respect to a question of law, the substance of which was disclosed by the statement indorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply denying fraud and averring that the loss reported on its return was correct to the best of its knowledge and belief. We think the respondent has not sustained the burden of proving a fraudulent intent. We have concluded that the sale of the petitioner's property was in substance a sale by the petitioner, and that the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is a settled principle that a taxpayer may diminish his liability by any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon it, its adoption of that method is not subject to censure. Petitioner took a position with respect to a question of law, the substance of which was disclosed by the statement endorsed on its return. We can not say, under the record before us, that that position was taken fraudulently. The determination of the fraud penalties is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the government of its revenues which will justify the imposition of the surcharge penalty.

We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. — On sales made after he third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the, invoices in order that the reduction thereof from the gross ailing price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have been complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision complained of —

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of the procedure would in certain cases elevate the bracket under which the tax is based. The late payment is already penalized, thru the imposition of surcharges, by adopting the theory of the Collector, we will be creating an additional penalty not contemplated by law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would amount only to P820,549.91 as shown in the following computation:

Rates of Gross Sales of Sales Taxes Due and Total Gross Selling

Sales TaxVehicles Exclusive of Sales Tax

Computed under Gen. Cir Nos. 431 & 400

Price Charged to the Public

5 % P11,912,219.57 P595,610.98 P12,507,83055

7% 909,559.50 63,669.16 973,228.66

10% 2,618,695.28 261,869.53 2,880,564.81

15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97 251,114.09 1,088,291.06

50% 74,244.30 37,122.16 111,366.46

75% 8,000.00 6,000.00

TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76

Deficiency Tax still due P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is merely an expression of his general or "private sentiment" on the particular issue, for he concurred the dispositive part of the decision. At any rate, assuming that there is no valid decision for lack of concurrence of two judges, the case was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before said court hall be decided within 30 days after submission thereof. "If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to the Supreme Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section." The case having been brought before us on appeal, the question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment.

So ordered without costs.

No. L-18216. October 30, 1962.STOCKHOLDERS OF F. GUANZON AND SONS,INC., petitioners-appellants, vs. REGISTER OF DEEDS OF MANILA, respondent-appellee.

Corporations; Liquidation and distribution of assets for transfer to stockholders; Certificate of liquidation in the nature of transfer or conveyance.—Where the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in

374

374


Stockholders of F. Guanzon and Sons, Inc. vs. Register of Deeds of Manila

proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders, and the certificate should be considered as one in the nature of a transfer or conveyance.

APPEAL from a decision of the Land Registration Commission.


Ramon C. Fernandez for petitioners-appellants.

Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the corporation reciting, among other things, that by virtue of a resolution of the stockholders adopted on September 17, 1960, dissolving the corporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration on seven grounds, of which the following were disputed by the stockholders:

“3. The number of parcels not certified to in the acknowledgment ; “5. P430.50 Reg. fees need be paid; “6. P940.45 documentary stamps need be attached to the document;

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

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

The stockholders interposed the present appeal. As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three grounds on which the denial of the registration of the certificate of liquidation was predicated hinges on whether or not that certificate merely involves a distribution of the cor-

375

VOL. 6 OCTOBER 30, 1962

375

Stockholders of F. Guanzon and Sons, Inc. vs. Register of Deeds of Manila

poration’s assets or should be considered a transfer or conveyance.

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

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

We agree with the opinion of these two officials. A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75;

Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56 So., 235), but its holder is not the owner of any part of the capital of the corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio

376

376


Philippine Land-Air-Sea Labor Union (PLASLU) vs. Kin San Rice and Corn Mill Co.

St., 474). The stockholder is not a co-owner or tenant in common of the corporate property (Harton v. Hohnston, 166 Ala., 317, 51 So., 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter’s assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings,—and this is in effect the purpose which they seek to obtain from the Register of Deeds of Manila,—that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.

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

Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur.

Barrera, J., took no part.

Resolution affirmed. [Stockholders of F. Guanzon and Sons, Inc. vs. Register of Deeds of Manila, 6 SCRA 373(1962)]

No. L-45911. April 11, 1979.*JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUÑAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.

Supreme Court; Judgments; Securities and Exchange Commission; Corporation Law; Supreme Court always strives to settle a legal controversy in a single proceeding.—xxx In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong, was made

________________

* EN BANC.

337

VOL. 89, APRIL 11, 1979

337

Gokongwei, Jr. vs. Securities and Exchange Commission

by the San Miguel Corporation in 1948; and that in the stockholders’ annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders.

Corporation Law; While reasonableness of a by-law is a legal question, where reasonableness of a by-law provision is one in which reasonable minds may differ a court will not be justified in subsisting its judgment for those authorized to make the by-laws.—The validity or reasonableness of a by-law of a corporation is purely a question of law. Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority.

Same; Under the Corporation Law a corporation is authorized to prescribe the qualification of its directors.—In this

jurisdiction, under Section 21 of the Corporation Law, a corporation may prescribed in its by-laws “the qualifications, duties and compensation of directors, officers and employees ***.” This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that “every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director * * *.”

Same; Stockholder has no vested right to be elected as stockholder.—Any person “who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he implied contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law.” To this extent, therefore, the stockholder may be considered to have “parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation and surrendered it to the will of the majority or his fellow incorporators. **** It can not therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed *** by any act of the former which is authorized by a majority, ***.”

338

338



Same; A director stands in a fiduciary relation to the competition and its stockholders. The disqualification of a competition from being elected to the board of directors is a reasonable exercise of corporate authority. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation for the collective benefit of the stockholders, “they occupy a fiduciary relation, and in these sense the relation is one of trust.”

Same; Same.—It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporate duties above his personal concerns.

Same; Same.—Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may well require that he disclose this information to a competitive rival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director.

Same; Another reason for upholding a by-law provision that forbids a competitor to be elected as corporate director are the laws prohibiting cartels.—There is another important consideration in determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, Section 2 of Article XIV of the Constitution provides: “That State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.”

339

VOL. 89, APRIL 11, 1979

339


Same; Same.—Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers’ effectiveness as the final arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule of trade. “It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the highest quality ***.” They operate to forestall concentration of economic power. The law against monopolies and combinations in restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade.

Same; Election of petitioner as San Miguel Corporation Director may run counter to the prohibition contained in Section 13(5) of Corporation Law on investments in corporations engaged in agriculture.—Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in Section 13(5) of the Corporation Law. Said section provides in part that “any stockholder of more than one corporation

organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of such corporations. ***.”

Same; The by-law amendment of SMC applies equally to all and does not discriminate against petitioner only.—However, the by-law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-laws operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competitor from election to the Board of Directors of another corporation is valid and reasonable.

Same; Petitioner is not ipso facto disqualified to run on SMC director. He must be given full opportunity by the SEC to show that he is not covered by the disqualification.—While We here sustain the

340

340



validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders. Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities and Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari.

Same; Every stockholder has the right to inspect corporate books and records.—The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of selfprotection. It is generally held by majority of the courts

that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to germane to the petitioner’s interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation.

Same; The right of stockholder to inspect corporate books extends to a wholly-owned subsidiary.—In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in respondent corporation’s possession and control.

Same; Purely ultra vires corporate acts of corporate officers to invest corporate funds in another business or corporation, i.e., acts not contrary to law, morals, public order as public policy, may be ratified

341

VOL. 89, APRIL 11, 1979

341


by the stockholders holding 2/3 of the voting power.—Assuming arguendo that the Board of Directors of San Miguel Corporation had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding twothirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. “Mere ultra vires acts”, said this Court in Pirovano, “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.”

Corporation Law; Judgment; The doctrine of the law of the case.—We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has no applicability for the following reasons: a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a final and conclusive determination of an issue in the first case later invoked as the law of the case.

Same; Same; When doctrine of the law of the case not applicable.—The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as the question of the validity or invalidity of the amended by-laws is concerned. The Court’s judgment of April 11, 1979 clearly shows that the voting on this question inconclusive with six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect likewise expressly reserved his vote thereon. No final aad conclusive determination could be reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil action originally commenced in this Court, the action was simply dismissed with the result that no law of the case was laid down insofar as the issue of the validity or invalidity of the questioned by-laws is con-

342

342



cerned, and the relief sought herein by petitioner that this Court bypass the SEC which has yet to hear and determine the same issue pending before it below and that this Court itself directly resolve the said issue stands denied.

Same; Same; Constitutional Law; Due Process; When procedural due process was not observed.—The entire Court, therefore, recognized that petitioner had not been given procedural due process by the SMC board on the matter of his disqualification and that he was entitled to a “new and proper hearing”. It stands to reason that in such hearing, petitioner could raise not only questions of fact but questions of law, particularly questions of law affecting the investing public and their right to representation on the board as provided by law—not to mention that as borne out by the fact that no restriction whatsoever appears in the Court’s decision, it was never contemplated that petitioner was to be limited questions of fact and could not raise the fundamental question of law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC board. Furthermore, it was expressly provided unanimously in the Court’s decision that the SMC board’s decision on the disqualification of petitioner (“assuming the board of directors of San Miguel Corporation should, after the proper

hearing, disqualify him” as qualified in Mr. Justice Barredo’s own separate opinion, at page 2) shall be appealable to respondent Securities and Exchange Commission “deliberating and acting en banc” and “ultimately to this Court.”

Same; Same; Reservation of the vote of the Chief Justice.—As expressly stated in the Chief Justice’s reservation of his vote, the matter of the question of the applicability of the said section 13(5) to petitioner would be heard by this Court at the appropriate time after the proceedings below (and necessarily the question of the validity of the amended by-laws would be taken up anew and the Court would at that time be able to reach a final and conclusive vote).

Same; Same; Validity of the amended by-laws.—The six votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, De Castro and this writer in favor of validity of the amended by-laws in question, with only four members of this Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and Justice Fernando reserving their votes thereon and Justice Aquino and Melencio Herrera not

343

VOL. 89, APRIL 11, 1979

343


voting, thereby resulting in the dismissal of the petition “insofar as it assails the validity of the amended by-laws . . . . for lack of necessary votes”, has no other legal consequence than that it is the law of the case far as the parties herein are concerned, albeit the majority opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This means that petitioner Gokongwei and the respondents, including the Securities and Exchange Commission, are bound by the foregoing result, namely, that the Court en banc has not found merit in the claim that the amended by-laws in question are invalid. Indeed, it is one thing to say that dismissal of the case is not doctrinal and entirely another thing to maintain that such dismissal leaves the issue unsettled.

Same; Same; Where petitioner can no longer revive the issue validity of the amended by-laws.—I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged bylaws is already settled. From which it follows that the same are already enforceable insofar as they are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of validity whether in the Securities Exchange Commission, in this Court or in any other forum, unless he proceeds on the basis of a

factual milieu different from the setting of this case. Not even the Securities and Exchange Commission may pass on such question anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf. The vote of four justices to remand the case thereto cannot alter the situation.

Same; Same; Where Court has not found merit in the claim that the amended by-laws in question are valid.—I concur in Justice Barredo’s statement that the dismissal (for lack of necessary votes) of the petition to the extent that “it assails the validity of the amended by-laws,” is the law of the case at bar, which means in effect that as far and only in so far as the parties and the Securities and Exchange Commission are concerned, the Court has not found merit in the claim that the amended by-laws in question are valid.

Same; Same; Term and meaning of “farming.”—This is my view, even as I am for a restrictive interpretation of Section 13(5) of the Philippine Corporation Law, under which I would limit the scope of the provision to corporations engaged in agriculture, but only as the word “agriculture” refers to its more limited meaning as distinguish-

344

344



ed from its general and broad connotation. The term would then mean “farming” or raising the natural products of the soil, such as by cultivation, in the acquisition of agricultural land such as by homestead, before the patent may be issued.

Same; Same; Poultry raising or piggery is included in the term “agriculture.”—It is my opinion that under the public land statute, the development of a certain portion of the land applied for a specified in the law as a condition precedent before the applicant may obtain a patent, is cultivation, not let us say, poultry raising or piggery, which may be included in the term “Agriculture” in its broad sense. For under Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it should because the provision is in derogation of property rights, the petitioner in this case would be disqualified from becoming an officer of either the San Miguel Corporation or his own supposedly agricultural corporations.

ORIGINAL ACTION in the Supreme Court. Certiorari, mandamus and injunction.


De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos.

Sequion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T. Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:SEC CASE NO. 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for “declaration of nullity

345

VOL. 89, APRIL 11, 1979

345


of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction” against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled “John Gokongwie, Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation”, was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation was only P70,139,740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043 with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on

the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications to

346

346



be a director of respondent corporation, being a substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner’s disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void.1

________________

1 The pertinent amendment reads as follows: “RESOLVED, That Section 2, Article III of the By-laws of San Miguel Corporation, which reads as follows:

‘SECTION 2. Any stockholder having at least five thousand shares registered in his name may be elected director, but he shall not be qualified to hold office unless he pledges said five thousand shares to the Corporation to answer for his conduct.’ be, and the same hereby is, amended, to read as follows;

‘SECTION 2. Any stockholder having at least five thousand shares registered in his name may be elected Director, provided, however, that no person shall qualify or be eligible for nomination or election to the Board of Directors if he is engaged in any business which competes with or is antagonistic to that of the Corporation. Without limiting the generality of the foregoing, a person shall be deemed to be so engaged:

(a) if he is an officer, manager or controlling person of, or the owner (either of record or beneficially) of 10% or more of any

outstanding class of shares of, any corporation (other than one in which the corporation owns at least 30% of the capital stock) engaged in a business which the Board, by at least three-fourths vote, determines to be competitive or antagonistic to that of the Corporation; or

(b) If he is an officer, manager or controlling person of, or the owner (either of record or beneficially) of 10% or more of any outstanding class of shares of, any other corporation or entity engaged in any line of business of the Corporation, when in the judgment of the Board, by at least three-fourths vote, the laws against combinations in restraint of trade shall be violated by such person’s membership in the Board of Directors.

(c) If the Board, in the exercise of its judgment in good faith, determines by at least three-fourths vote that he is the nominee of any person set forth in (a) or (b).

347

VOL. 89, APRIL 11, 1979

347


As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr., and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with respondent corporation, which was allowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that “all nominations for election of directors * * * shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting” is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission an “Urgent Motion for Production and Inspection of Documents”, alleging that the Secretary of respondent

corportion refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request, and that respondent corporation

________________

In determining whether or not a person is a controlling person, beneficial owner, or the nominee of another, the Board may take into account such factors as business and family relationship. For the proper implementation of this provision, all nominations for election of Directors by the stockholders shall be submitted in writing to the Board of Directors at least five working days before the date of the Annual Meeting.’ ” (Rollo, pp. 402-463.)

348

348



had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents requested to be copied were (a) minutes of che stockholder’s meeting held on March 13, 1961; (b) copy of the management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.

The “Urgent Motion for Production and Inspection of Documents” was opposed by respondents, alleging, among others, that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature since the materiality or relevance of the evidence sought cannot be determined until the issues are joined; that it fails to show good cause and constitutes continued harrasment; and that some of the information sought are not part of the records of the corporation and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition denying the substantial allegations therein and stating, by way of affirmative defenses that “the action taken by the Board of Directors on September 18, 1976 resulting in the * * * amendments is valid and legal because the power to ‘amend, modify, repeal or adopt new By-laws’ delegated to said Board on March 13, 1961 and long prior thereto has

never been revoked, withdrawn or otherwise nullified by the stockholders of SMC”; that contrary to petitioner’s claim, “the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time the delegtion of said power is made, not when the Board opts to exercise said delegated power”; that petitioner has not availed of his intracorporate remedy for the nullification of the amendment,

349

VOL. 89, APRIL 11, 1970

349


which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section 1 of the by-laws and section 22 of the Corporation Law, hence the petition is premature; that petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board, since he failed to object to other amendments made on the bais of the same 1961 authorization; that the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be inconsistent with any existing law; that respondent corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its directors might be tempted to put their personal interests over that of the corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the board should not be interfered with; that the by-laws, as amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney’s fees to respondents. The application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began acquiring shares therein, until September 1976 when its total holding amounted to 622,987 shares; that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent corporation, until its total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of Robina and CFC (both closed

corporations) purchased 5,000 shares of stock of respondent corporation, and thereafter, in

350

350



behalf of himself, CFC and Robina, “conducted malevolent and malicious publicity campaign against SMC” to generate support from the stockholder “in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the Board of Directors of SMC”, that in the stockholders’ meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages; that “petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting”; that thereafter the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and attorney’s fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-inintervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

“Considering the evidence submitted before the Commission by the petitioner and respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders’ meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the possession, custody and control of the said corporation, it appearing that the same is material and relevant to the issues involved in the main case. Accordingly, the respondents should allow petitionr-movant entry in the principal office of the respondent Cor

351

VOL. 89, APRIL 11, 1979

351


poration, San Miguel Corporation on January 14, 1977, at 9:30 o’clock in the morning for purposes of enforcing the rights herein granted; it being understood that the inspection, copying and photographing of the said documents shall be undertaken under the direct and strict supervision of this Commission. Provided, however, that other documents and/or papers not heretofore included are not covered by this Order and any inspection thereof shall require the prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances, bonuses, compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-in-interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent, right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his request to copy and inspect the management contract between San Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof for the reason that he had already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production and inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent corporation in San Miguel International, Inc., until after the hearing on the merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval.”2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued a notice of special stockholders’ meeting for the purpose of “ratification and confirmation of the amendment to the By-laws”, setting such meeting for February 10, 1977. This prompted petitioner to ask respondent Commission for a summary judgment in-

________________

2 Annex “H”, Petition, pp. 168-169, Rollo.

352

352



sofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders’ meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary judgment was opposed by private respondents. Pending action on the motion, petitioner filed an “Urgent Motion for the Issuance of a Temporary Restraining Order”, praying that pending the determination of petitioner’s application for the issuance of a preliminary injunction and/or petitioner’s motion for summary judgment, a temporary restraining order be issued, restraining respondents from holding the special stockholders’ meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, respondents conducted the special stockholders’ meeting wherein the amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification the special stockholders’ meeting.

A motion for reconsideration of the order denying petitioner’s man for summary judgment was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner’s motion for production of records had not yet been resolved.

In view of the die fact that the annual stockholders’ meeting of respondent corporation had been scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications specified in

353

VOL. 89, APRIL 11, 1979

353


the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner’s irreparable damage and prejudice. Allegedly despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders’ meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act, hence petitioner came to this Court.SEC CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with respondent Commission, on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated motion to strike and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4, 1977, the Commission acted thereon only on April 25, 1977, when it denied respondents’ motions to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders’ meeting, including in the Agenda thereof, the following:

354

354



“6. Reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on March 20, 1972 to invest corporate funds in other companies or

businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto.”

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual stockholders’ meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders’ meeting. For the purpose of urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner’s contention before this Court that respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner’s rights to property and due process. He prayed that this Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of the annual stockholders’ meeting on May 10, 1977, or from making effective the amended by-laws of respondent corporation, until further orders from this Court or until the Securities and Ex-

355

VOL. 89, APRIL 11, 1979

355


change Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner’s motion for reconsideration, with its supplement, of the order of the Commission denying in part petitioner’s motion for production of documents, petitioner’s motion for reconsideration of the order denying the issuance of a temporary restraining order denying the issuance of a temporary restraining order, and petitioner’s consolidated motion to declare respondents in contempt and to nullify the stockholders’ meeting; (2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the validity of the by-laws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders’ meeting; and (3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner’s motion for reconsideration of the order of respondent Commission denying petitioner’s motion for summary judgment;

It is petitioner’s assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and without circumspection in issuing the aforesaid orders to petitioner’s irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner’s right to due process when it decided en banc an issue not raised before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner’s request to have the same calendared for hearing; and (3) that the respondents acted oppressively against the petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

356

356



It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel International, Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the petition is without merit for the following reasons:

(1) that the petitioner and the interests he represents are engaged in businesses competitive and antagonistic to that of respondent San Miguel Corporation, it appearing that he owns and controls a greater portion of his SMC stock thru the

Universal Robina Corporation and the Consolidated Foods Corporation, which corporations are engaged in businesses directly and substantially competing with the allied businesses of respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to SMC’s business and trade secrets and plans; (2) that the amended by-laws were adopted to preserve and protect respondent SMC from the clear and present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize their direct access to its business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a competitor in the Board of Directors is a blatant disregard of no less than the Constitution and pertinent laws against combinations in restraint of trade; (3) that by-laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself by excluding competitors and antagonistic parties, under the law of self-preservation, and it should be allowed a wide latitude in the selection of means to preserve itself;

357

VOL. 89, APRIL 11, 1979

357


(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner’s own acts or omissions, since he failed to have the petition to suspend, pendente lite, the amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not given a chance to act “with deliberate dispatch”, and (5) that even assuming that the petition was meritorious, it has become moot and academic because respondent Commission has acted on the pending incidents complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G. Tanjuatco, Sr. filed his comment, alleging that the petition has become moot and academic for the reason, among others, that the acts of private respondents sought to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on May 10, 1977; that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be voted for

as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further, it was averred that the questions and issues raised by petitioner are pending in the Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders’ meeting of May 10, 1977

358

358



did not render the case moot; that the amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6 of the Agenda of the annual stockholders’ meeting of respondent corporation, took into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that “such action is within the authority of the corporation as well as falling within the sphere of stockholders’ right to know, deliberate upon and/or to express their wishes regarding disposition of corporate funds considering that their investments are the ones directly affected.” It was alleged that the main petition has, therefore, become moot and academic.

On September 29, 1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging that the actuations of respondent SEC tended to

deprive him of his right to due process, and “that all possible questions on the facts now pending before the respondent Commission are now before this Honorable Court which has the authority and the competence to act on them as it may see fit.” (Rollo, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner’s request for an examination

359

VOL. 89, APRIL 11, 1979

359


of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda of the Annual Stockholders’ Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law.I

Whether or not amended by-laws are valid is purely a legal question, which public interest requires to be resolved—

It is the position of the petitioner that “it is not necessary to remand the case to respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative remedies”, considering that: first: “whether or not the provisions of the amended by-laws are intrinsically valid * * * is purely a legal question. There is no factual dispute as to what the provisions are and evidence is not necessary to determine whether such amended by-laws are valid as framed and approved * * *”; second: “it is for the interest and guidance of the public that an immediate and final ruling on the question be made * * *”; third: “petitioner was denied due process by SEC” when “Commissioner de Guzman had openly shown prejudice against petitioner * * *”, and “Commissioner Sulit * * * approved the amended by-laws ex-parte and obviously found the same intrinsically valid”; and finally: “to remand the case to SEC would only entail delay rather than serve the ends of justice.”

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal issues raised by the parties in keeping with the “cherished rules of procedure” that “a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation”, citing Gayos v. Gayos.3 To

________________

3 L-27812, September 26, 1975, 67 SCRA 146.

360

360



the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of its amended bylaws and the rights and obligations of the parties thereunder, otherwise “the time spent and effort exerted by the parties concerned and, more importantly, by this Honorable Court, would have been for naught because the main question will come back to this Honorable Court for final resolution.” Respondent Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of the issues involved, invoking the latter’s primary jurisdiction to hear and decide cases involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding, leaving no root or branch to bear the seeds of future litigation.4 Thus, in Francisco v. City of Davao,5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et al.,6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits “because public interest demands an early disposition of the case”, and in Republic v. Central Surety and Insurance Company,7 this Court denied remand of the third-party complaint to the trial court for further proceedings, citing precedents where this Court, in similar situations, resolved to decide the cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b) where public interest demands an early disposition of the case; or (c) where the trial court had already received

________________

4 Gayos v. Gayos, ibid., citing Marquez v. Marquez, No. 47792, July 24, 1941, 73 Phil. 74, 78; Keramik Industries, Inc. v. Guerrero, L-38866, November 29, 1974, 61 SCRA 265.

5 L-20654, December 24, 1964, 12 SCRA 628.

6 L-20583, January 23, 1967, 19 SCRA 58.

7 L-27802, October 26, 1968, 25 SCRA 641.

361

VOL. 89, APRIL 11, 1979

361


all the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits.8 It is settled that the doctrine of primary jurisdiction has no application where only a question of law is involved.8a Because uniformity may be secured through review by a single Supreme Court, questions of law may appropriately be determined in the first instance by courts.8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more tna 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders’ annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders.II

Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable—

The validity or reasonableness of a by-law of a corporation is purely a question of law.9 Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law.10 This rule is subject, however, to the limita-

________________

8 Samal v. Court of Appeals, L-8579, May 25, 1956, 99 Phil. 230.

8a 2 Am. Jur. 2d 696, 697.

8b Pan American P. Corp. v. Supreme Court of Delaware, 330 US 656, 6 L. ed. 2d 584.

9 Fleischer v. Botica Nolasco Co., Inc., No. 23241, March 14, 1925, 47 Phil. 583, 590.

10 18 C.J.S. Corporations, Sec. 189, p. 603.

362

362



tion that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority.11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board”, at the same time depriving petitioner of his “vested right” to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that exclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protection from the unrestrained self-interest of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the

following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr.—6,325 shares; (b) Universal Robina Corporation—788,647 shares; (c) CFC Corporation—658,313 shares, or a total of 1,403,285

_________________

11 People ex rel. Wildi v. Ittner, 165 Ill. App. 360, 367 (1911), cited in Fletcher, Cyclopedia Corporations, Sec. 4191.

363

VOL. 89, APRIL 11, 1979

363


shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the allied businesses of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER’S CORPORATIONS AND SAN MIGUEL COR PORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line

Estimated1977 SMC

Market ShareRobina-CFC

Total

Table Eggs

0.6%

10.0%

10.6%

Layer Pullets

33.0%

24.0%

57.0%

Dressed Chicken

35.0%

14.0%

49.0%

Poultry & Hog Feeds

40.0%

12.0%

52.0%

Ice Cream

70.0%

13.0%

83.0%

Instant Coffee

45.0%

40.0%

85.0%

Woven Fabrics

17.5%

9.1%

26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer pullets, dressed chicken, poultry and hog

364

364



feeds, ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than P478 million. In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders’ Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC, rejected petitioner’s candidacy for the Board of Directors because they “realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC.” On

September 18, 1978, the Board of Directors of SMC, by “virtue of powers delegated to it by the stockholders,” approved the amendment to the by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders’ Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner’s candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders’ Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares, voted against petitioner.

365

VOL. 89, APRIL 11, 1979

365


AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CON FERRED BY LAW

Private respondents contend that the disputed amended bylaws were adopted by the Board of Directors of San Miguel Corporation as a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders “irreparable prejudice.” Submitted for resolution, therefore, is the issue—whether or not respondent San Miguel Corporation could, as a measure of self-protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by all authorities that ‘every corporation has the inherent power to adopt by-laws ‘for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.’ ”12 At common law, the rule was “that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation.”13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws “the qualifications, duties and compensation of directors, officers and

________________

12 McKee & Company v. First National Bank of San Diego, 265 F. Supp. 1 (1967), citing Olincy v. Merle Norman Cosmetics, Inc., 200 Cal. App. 20, 260, 19 Cal. Reptr. 387 (1962).

13 Fletcher, Cyclopedia Corporations, Sec. 4171, cited in McKee & Company, supra.

366

366



employees * * *.” This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that “every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director * * *.” In Government v. El Hogar,14 the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and is “highly prudent and in conformity with good practice.”

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person “who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law.”15 To this extent, therefore, the stockholder may be considered to have “parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. * * * It can not therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed * * * by any act of the former which is authorized by a majority * * *.”16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least

two-thirds of the subscribed capital stock of the corporation. If the amend-

_________________

14 No. 26649, July 13, 1927, 50 Phil. 399, 441.

15 6 Thompson 369, Sec. 4490.

16 Ibid.

367

VOL. 89, APRIL 11, 1979

367


ment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, viz.: “to object thereto in writing and demand payment for his share.” Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification.17

It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, “they occupy a fiduciary relation, and in this sense the relation is one of trust.”18 “The ordinary trust relationship of directors of a corporation and stockholders”, according to Ashaman v. Miller,19 “is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property in-

_________________

17 Mobile Press Register, Inc. v. McGowin, 277 Ala. 414, 124 So. 2d 812; Brundage v. The New Jersey Zinc Co., 226 A 2d 585.

18 Fletcher, Cyclopedia Corporations, 1975 Ed., Vol. 3, p. 144, Sec. 838.

19 101 Fed. 2d 85, cited in Aleck, Modern Corporation Law, Vol. 2, Sec. 959.

368

368



terests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof * * *.”

Justice Douglas, in Pepper v. Litton,20 emphatically restated the standard of fiduciary obligation of the directors of corporations, thus:

“A director is a fiduciary. * * * Their powers are powers in trust. * * * He who is in such fiduciary position cannot serve himself first and his cestuis second. * * * He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. * * * He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis.”

And in Cross v. West Virginia Cent, & P. R. R. Co.,21 it was said:

“* * * A person cannot serve two hostile and adverse masters without detriment to one of them. A judge cannot be impartial if personally interested in the cause. No more can a director. Human nature is too weak for this. Take whatever statute provision you please giving power to stockholders to choose directors, and in none will you find any express prohibition against a discretion to select directors having the

company’s interest at heart, and it would simply be going far to deny by mere implication the existence of such a salutary power.

________________

20 308 U.S. 309; 84 L. ed. 281, 289-291.

21 16 S.E. 587, 18 L.R.A. 582.

369

VOL. 89, APRIL 11, 1979

369


“* * * If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director, the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on account of the supposed interest of the wife in her husband’s affairs, and his supposed influence over her. It is perhaps true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or not the action of the Board is authorized and sanctioned by law. * * *.”22

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATE BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation’s Board of Directors. “* * * (A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid.”24 This is based

_________________

22 265 F. Supp., pp. 8-9.

23 Barreto v. Tuason, No. 23923, Mar. 23, 1926, 50 Phil. 888; Severino v. Severino, No. 18058, Jan. 16, 1923, 44 Phil. 343; Thomas v. Pineda, L-2411, June 28, 1951, 89 Phil. 312, 326.

24 2 Fletcher Cyclopedia Corporations, Sec. 297 (1969), p. 87.

370

370



upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment “advances the benefit of the corporation and is good.” An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to add additional qualifications.25 This is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under “the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director.”26

It is also well established that corporate officers “are not permitted to use their position of trust and confidence to further their private interests.”27 In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm’s products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a “faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal.28

________________

25 Costello v. Thomas Cusack Co., 125 A. 15, 94 N.J. Eq. 923, (1923).

26 Hall v. Dekker, 115 P. 2d 15, July 9, 1941.

27 Thaver v. Gaebler, 232 NW 563.

28 Sialkot Importing Corporation v. Berlin, 68 NE 2d 501, 503.

371

VOL. 89, APRIL 11, 1979

371


The doctrine of “corporate opportunity”29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding,

________________

29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132, 137. Chief Justice Garfield quotes the doctrine as follows:

“(5) The doctrine ‘corporate opportunity’ is not new to the law and is but one phase of the cardinal rule of undivided loyalty on the part of the fiduciaries. 3 Fletcher Cyc. Corporations, Perm. Ed., 1965 Revised Volume, section 861.1, page 227; 19 Am. Jur. 2d, Corporations, section 1311, page 717. Our own consideration of the quoted terms as such is mainly in Ontjes v. MacNider, supra, 232 Iowa 562, 579, 5 N.W., 2d 860, 869, which quotes at length with approval from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503, 511, a leading case in this area of the law. The quotation cites several precedents for this: ‘* * * if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself. And, if, in such circumstances, the interests of the corporation are betrayed, the corporation may elect to claim all of the benefits of the transaction for itself, and the law will impress a trust in favor of the corporation upon the property, interests and profits so acquired.”

30 Paulman v. Kritzer, 74 III. App. 2d 284, 291 NE 2d 541; Tower Recreation, Inc. v. Beard, 141 Ind. App. 649, 231 NE 2d 154.

372

372



availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra, the court sustained as valid and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

“* * * A bank director has access to a great deal of information concerning the business and plans of a bank which would likely be injurious to the bank if known to another bank, and it was reasonable and prudent to enlarge this minimum disqualification to include any director, officer, employee, agent, nominee, or attorney of any other bank in California. The Ashkins case, supra, specifically recognizes protection against rivals and others who might acquire information which might be used against the interests of the corporation as a legitimate object of by-law protection. With respect to attorneys or persons associated with a firm which is attorney for another bank, in addition to the direct conflict or potential conflict of interest, there is also the danger of inadvertent leakage of confidential information through casual office discussions or accessibility of files. Defendant’s directors determined that its welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage of confidential information was foreclosed.”

In McKee, the Court further listed qualificational by-laws upheld by the courts, as follows:

373

VOL. 89, APRIL 11, 1979

373


“(1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation. (2) A director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation. (3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation. (4) A director shall be of good moral character as an essential qualification to holding office. (5) No person who is an attorney against the corporation in a law suit is eligible for service on the board.” (At p. 7.)

These are not based on theorical abstractions but on human experience—that a person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner’s primary motive in running for board memberhsip—which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director’s duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by Oleck:31 “The law will not tolerate the passive attitude of directors * * * without active and conscientious participation in the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a

________________

31 Oleck, Modern Corporation Law, Vol. 2, Section 960.

374

374



vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation.”

Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive rival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage.32

There is another important consideration in determining whether or not the amended by-laws are reasonable. The Con-

________________

32 “The CFC and Robina companies, which are reportedly worth more than P500 Million, are principally owned and controlled by Mr. Gokongwei and are in substantial competition to San Miguel. As against his almost 100% ownership in these basically family companies, Mr. Gokongwei’s holding in San Miguel are approximately 4% of the total shareholdings of your Company. As a consequence, One Peso (P1.00) of profit resulting from a sale by CFC and Robina in the lines competing with San Miguel, is earned almost completely by Mr. Gokongwei, his immediate family and close associates. On the other hand, the loss of that sale to San Miguel, resulting in a One Peso (P1.00) loss of profit to San Miguel, in the limes competing with CFC and Robina, would result in a loss in profit of only Four Centavos (P0.04) to Mr. Gokongwei.” (Letter to stockholders of SMC, dated April 3, 1978, Annex “R”, Memo for respondent San Miguel Corporation, rollo, p. 1867).

375

VOL. 89, APRIL 11, 1979

375


stitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides: “The State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.”

Article 186 of the Revised Penal Code also provides:

“Art. 186. Monopolies and combinations in restraint of trade.—The penalty of prision correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market.

2. Any person who shall monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines, or any such merchandise or object of commerce manufactured, produced, processed, assembled in or imported into the Philippines, or of any article in the manufacture of which such manufactured, produced, processed, or imported merchandise or object of commerce is used.”

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade.33

________________

33 Article 28, Civil Code; Section 4, par. 5, of Rep. Act No. 5455; and Section 7 (g) of Rep. Act No. 6173. Cf. Section 17, paragraph 2. of the Judiciary Act.

376

376



Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers’ effectiveness as the final arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule of trade. “It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the highest quality * * *.”34 they operate to forestall concentration of economic power.35 The law against monopolies and combinations in restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade.36

The terms “monopoly”, “combination in restraint of trade” and “unfair competition” appear to have a well defined meaning in other jurisdictions. A “monopoly” embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public.37 In short, it is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired.38 Further, it must be considered that the idea of monopoly is now understood to include a condition produced by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition by the unification of interest or

_________________

34 Standard Oil Co. v. United States, 55 L. Ed. 619.

35 Blake & Jones, Contracts in Antitrust Theory, 65 Columbia L. Rev. 377, 383 (1965).

36 Filipinas Compania de Seguros v. Mandanas, L-19638, June 20, 1966, 17 SCRA 391.

37 Love v. Kozy Theater Co., 236 SW 243, 245, 26 ALR 364.

38 Aldea-Rochelle, Inc. v. American Society of Composers, Authors and Publishers, D.D.N.Y., 80 F. Suppl. 888, 893:

377

VOL. 89, APRIL 11, 1979

377


management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with regard to prices.39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade.40 It is enough that a concert of action is contemplated and that the defendants conformed to the arrangements,41 and what is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the same time as a director in any two or more corporations, if such corporations are, by virtue of their business and location of operation, competitors so that the elimination of competition between them would constitute violation of any provision of the anti-trust laws.42 There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or more competing corporations. A common director of two or more competing corporations would have access to confidential sales, pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:

“The argument for prohibiting competing corporations from sharing even one director is that the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both

_________________

39 National Cotton Oil Co. v. State of Texas, 25 S.T. 379, 383, 49 L. Ed. 689.

40 Norfolk Monument Co. v. Woodlawn Memorial Gardens, Inc., 394 U.S. 700; U.S. v. General Motors Corp., 384 U.S. 127.

41 U.S. v. Paramount Pictures, 334 U.S. 131.

42 Section 8, 15 U.S.C.A. 19.

378

378



Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B; at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete—in the sense of vying for economic advantage at the expense of the other—there can hardly be any reason for an interlock between competitors other than the suppression of competition.”43 (Italics supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it was established that: “By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations * * * to the detriment of the small ones dependent upon them and to the injury of the public.”44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders, shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated. The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC’s costs in

_________________

43 Travers, Interlocks in Corporate Management and the Anti Trust Laws, 46 Texas L. Rev. 819, 840 (1968).

44 51 Cong. Rec. 9091.

379

VOL. 89, APRIL 11, 1979

379


various industries and regions in the country will enable the former to practice price discrimination. CF-Robina can segment the entire consuming population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said section provides in part that “any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of such corporations * *).”

Neither are We persuaded by the claim that the by-law was intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by-law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in

380

380



adopting measures to protect legitimate corporate interests. Thus, “where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those

who are authorized to make by-laws and who have expressed their authority.”45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetuate themselves in power, such fears appear to be misplaced. This power, by its very nature, is subject to certain well established limitations. One of these is inherent in the very concept and definition of the terms “competition” and “competitor”. “Competition” implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade.46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristic activity.47 It is, therefore, obvious that not every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of business, identity of products and area of competition should be taken into consideration. It is, therefore, necessary to show that petitioner’s business covers a substantial portion of the same markets for similar products to the extent of not less than 10% of respondent corporation’s market for competing products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto dis-

_________________

45 People ex rel. Wildi v. Ittner, supra, citing Thompson on Corporation, Section 1002 (2nd Ed.).

46 Schill v. Remington Putnam Book Co., 17 A 2d 175, 180, 179 Md. 83.

47 People ex rel. Broderick v. Goldfogle, 205 NYS 870, 877, 123 Misc. 399.

381

VOL. 89, APRIL 11, 1979

381


qualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders.48 Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to

perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities and Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari.49 Indeed, it is a settled principle that where the action of a Board of Directors

_________________

48 Swanson v. American Consumer Industries, Inc., 288 F. Supp. 60.

49 Sections 3 and 5 of Presidential Decree No. 902-A provides:

“SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations * * * who are grantees of * * * license or permit issued by the government * * *.”

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

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnership or associations.”

382

382



is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority

stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant appropriate relief.50III

Whether or not respondent SEC gravely abused its discretion in denying petitioner’s request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation—

Respondent San Miguel Corporation stated in its memorandum that petitioner’s claim that he was denied inspection rights as stockholder of SMC “was made in the teeth of undisputed facts that, over a specific period, petitioner had been furnished numerous documents and information,” to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders’ meeting of May 18, 1975; (3) a copy of the minutes of the stockholders’ meeting of March 18, 1976; (4) a breakdown of SMC’s P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the US$100 million EuroDollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC’s foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC’s first venture abroad, having started in 1948 with

________________

50 Moore v. Keystone Macaroni Mfg. Co., 29 ALR 2d 1256.

383

VOL. 89, APRIL 11, 1979

383


an initial outlay of P500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC’s former President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400 million; (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US$9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings

having been used in line with a program for the setting up of breweries by SMI.

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the afore-mentioned documents.51

Pursuant to the second paragraph of section 51 of the Corporation Law, “(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours.”

The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership.52 This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation.53 In other words, the inspection has to be germane to the petitioner’s interest as a stockholder, and

________________

51 Annex “A” of SMC’s Comment on Supplemental Petition pp. 680-688, Rollo.

52 Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed. Section 2213, p. 693.

53 Fletcher, Ibid., Section 2218, p. 709.

384

384



has to be proper and lawful in character and not inimical to the interest of the corporation.54 In Grey v. Insular Lumber,55 this Court held that “the right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes.” The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder’s good faith and his purpose and motives in seeking inspection.56 Thus, it was held that “the right given by statute is not absolute and may be refused

when the information is not sought in good faith or is used to the detriment of the corporation.”57 But the “impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive.”58 It appears to be the “general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others.”59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.

________________

54 Fletcher, Ibid., Section 2222, p. 725.

55 40 O.G., 1st Suppl. 1. April 3, 1939, citing 14 C.J.S. 854, 855.

56 Fletcher, supra, p. 716.

57 State v. Monida & Yellowstone Stage Co., 110 Minn. 193, 124 NW 791, 125 NW 676; State v. Cities Service Co., 114 A 463.

58 Fletcher, supra, Section 2220, p. 717.

59 Fletcher, supra, Section 2223, p. 728.

385

VOL. 89, APRIL 11, 1979

385


Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that, where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be required to be produced for examination,60 and that a writ of mandamus may be granted, as the records of the subsidiary were, to all intents and

parposes, the records of the parent even though the subsidiary was not named as a party.61 Mandamus was likewise held proper to inspect both the subsidiary’s and the parent corporation’s books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto.62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary.63 Likewise, inspection of the books of an allied corporation by a stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of “persons having an interest.”64

In the Nash case,65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation “included the right to in-

_________________

60 Martin v. D. B. Martin Co., 10 Del. Ch. 211, 88 A. 612, 102 A. 373.

61 Woodward v. Old Second National Bank, 154 Mich. 459, 117 NW 893, 118 NW 581.

62 Martin v. D. B. Martin Co., supra.

63 State v. Sherman Oil Co., 1 W.W. Harr. (31 Del) 570, 117 A. 122.

64 Lisle v. Shipp, 96 Cal. App. 264, 273 P. 1103.

65 Nash v. Gay Apparel Corp., 193 NYS 2d 246.

386

386



spect corporation’s subsidiaries’ books and records which were in corporation’s possession and control in its office in New York.”

In the Bailey case,66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had identical officers and directors.

In his “Urgent Motion for Production and Inspection of Documents” before respondent SEC, petitioner contended that respondent corporation “had been attempting to suppress information from the stockholders” and that petitioner, “as stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another, respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the corporation.”67 There is no question that stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors.68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in respondent corporation’s possession and control.IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to

________________

66 Bailey v. Boxboard Products Co., 314 Pa. 45, 170 A. 127.

67 Rollo, pp. 50-51.

68 18 Am. Jur. 2d 718.

387

VOL. 89, APRIL 11, 1979

387


ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC’s position is that submission of the investment to the stockholders for ratification is a sound

corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to “invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized” provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary.69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru

________________

69 De la Rama v. Ma-ao Sugar Central Co., Inc., L-17504 and L17506, February 28, 1969, 27 SCRA 247, 260.

388

388



the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Maao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Ma-ao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders’ voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that “there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors.” This

Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

“ ‘j. Power to acquire or dispose of shares or securities.—A private corporation, in order to accomplish is purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporation law; namely, (a) that no agricultural or raining corporation shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall be restricted to own not more than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of trade.’ (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Italics ours.)

“ ‘40. Power to invest corporate funds.—A private corporation has the power to invest its corporate funds “in any other corporation

389

VOL. 89, APRIL 11, 1979

389


or business, or for any purpose other than the main purpose for which it was organized, provided that ‘its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders’ meeting called for that purpose,’ and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation, the approval of the stockholders is not necessary.” “(Id., p. 108.) (Italics ours.)” (pp. 258-259.)

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and

thereby render binding upon it the originally unauthorized acts of its officers or other agents.70 This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. “Mere ultra vires acts”, said this Court in Pirovano,71 “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.”

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently

_________________

70 Boyce v. Chemical Plastics, 175 F 2d 839, citing 13 Am. Jur., Section 972.

71 Pirovano v. De la Rama Steamship Co., L-53-7, 96 Phil. 335, December 29, 1954.

390

390



relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and

De Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc, and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

391

VOL. 89, APRIL 11, 1979

391


Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent’s Board of Directors and petitioner’s disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resumé, subject to the qualifications afore-stated, judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition,* insofar as it assails the validity of the amended by-laws and the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

Makasiar, Santos, Abad Santos and De Castro, JJ., concur.

Castro, C.J., reserves his right to file a separate opinion.

Fernando, J., concurs in the result and reserves his right to file a separate opinion.

Teehankee, Concepcion Jr., Fernandez, and Guerrero, JJ., file a joint separate opinion.

Barredo, J., concurs and reserves the filing of a separate opinion.

Aquino, and Melencio Herrera, JJ., did not take part.

Fernandez, J., concurs in the opinion of Justice Teehankee.

Guerrero, J., concurs and dissents in a separate opinion.

________________

* Includes the Supplemental petitions filed by petitioner.

392

392


Gokongwei, Jr. vs. Securities and Exchange CommissionCERTIFICATION

The undersigned hereby certifies that Justice VICENTE ABAD SANTOS concurred in the opinion of Justice FELIX Q. ANTONIO.JOINT SEPARATE OPINION

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ.:I

As correctly stated in the main opinion of Mr. Justice Antonio, the Court is unanimous in its judgment granting the petitioner as stockholder of respondent San Miguel Corporation the right to inspect, examine and secure copies of the records of San Miguel International, Inc. (SMI), a wholly owned foreign subsidiary corporation of respondent San Miguel Corporation. Respondent commission’s en banc Order No. 449, Series of 1977, denying petitioner’s right of inspection for “not being a stockholder of San Miguel International, Inc.” has been accordingly set aside. It need be only pointed out that:

a) The commission’s reasoning grossly disregards the fact that the stockholders of San Miguel Corporation are likewise the owners of San Miguel International, Inc. as the corporation’s wholly owned foreign subsidiary and therefore have every

right to have access to its books and records, otherwise, the directors and management of any Philippine corporation by the simple device of organizing with the corporation’s funds foreign subsidiaries would be granted complete immunity from the stockholders’ scrutiny of its foreign operations and would have a conduit for dissipating, if not misappropriating, the corporate funds and assets by merely channeling them into foreign subsidiaries’ operations; and

b) Petitioner’s right of examination herein recognized refers to all books and records of the foreign subsidiary SMI

393

VOL. 89, APRIL 11, 1979

393


which are “in respondent corporation’s possession and control”1, meaning to say regardless of whether or not such books and records are physically within the Philippines. All such books and records of SMI are legally within respondent corporation’s “possession and control” and if any books or records are kept abroad, (e.g. in the foreign subsidiary’s state of domicile, as is to be expected), then the respondent corporation’s board and management are obliged under the Court’s judgment to bring and make them (or true copies thereof) available within the Philippines for petitioner’s examination and inspection.II

On the other main issue of the validity of respondent San Miguel Corporation’s amendment of its by-laws2 whereby respondent corporation’s board of directors under its resolution dated April 29, 1977 declared petitioner ineligible to be nominated or to be voted or to be elected as of the board of directors, the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. Aquino upon submittal of the main opinion of Mr. Justice Antonio decided not to take part), failed to reach a conclusive vote or the required majority of 8 votes to settle the issue one way or the other.

Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, considered the issue purely legal and voted to sustain the validity per se of the questioned amended by-laws but nevertheless voted that the prohibition and disqualification therein provided shall not apply to petitioner Gokongwei until and after he shall have been given “a new and proper hearing” by the corporation’s board of directors and the board’s decision of disqualification shall have been sustained on appeal by respon-

________________

1 Main opinion, p. 55.

2 Sec. 2, Art. III of respondent corporation’s By-Laws, reproduced in footnote 1 of the main opinion, pages 3 and 4.

394

394



dent Securities and Exchange Commission and ultimately by this Court.

The undersigned Justices do not consider the issue as purely legal in the light of respondent commission’s Order No. 451, Series of 1977, denying petitioner’s “Motion for Summary Judgment” on the ground that “the Commission en banc finds that there (are) unresolved and genuine issues of fact”3 as well as its position in this case thru the Solicitor General that the case at bar is “premature” and that the administrative remedies before the commission should first be availed of and exhausted.4

We are of the opinion that the questioned amended by-laws, as they are, (adopted after almost a century of respondent corporation’s existence as a public corporation with its shares freely purchased and traded in the open market without restriction and disqualification) which would bar petitioner from qualification, nomination and election as director and worse, grant the board by 3/4 vote the arbitrary power to bar any stockholder from his right to be elected as director by the simple expedient of declaring him to be engaged in a “competitive or antagonistic business” or declaring him as a “nominee” of the “competitive or antagonistic” stockholder are illegal, oppressive, arbitrary and unreasonable.

We consider the questioned amended by-laws as being specifically tailored to discriminate against petitioner and depriving him in violation of substantive due process of his vested substantial rights as stockholder of respondent corporation. We further consider said amended by-laws as violating specific provisions of the Corporation Law which grant and recognize the right of a minority stockholder like petitioner to be elected director by the process of cumulative voting ordained by the Law (secs. 21 and 30) and the right of a minority director once elected not to be removed from office of director except for cause by vote of the stockholders holding 2/3 of the subscribed capital stock (sec. 31). If a minority

_________________

3 Rollo, Vol. I, page 392-E.

4 SEC memo, pages 9 and 10.

395

VOL. 89, APRIL 11, 1979

395


stockholder could be disqualified by such a by-laws amendment under the guise of providing for “qualifications,” these mandates of the Corporation Law would have no meaning or purpose.

These vested and substantial rights granted stockholders under the Corporation Law may not be diluted or defeated by the general authority granted by the Corporation Law itself to corporations to adopt their by-laws (in section 21) which deal principally with the procedures governing their internal business. The by-laws of any corporation must be always within the charter limits. What the Corporation Law has granted stockholders may not be taken away by the corporation’s by-laws. The amendment is further an instrument of oppressiveness and arbitrariness in that the incumbent directors are thereby enabled to perpetuate themselves in office by the simple expedient of disqualifying any unwelcome candidate, no matter how many votes he may have.

However, in view of the inconclusiveness of the vote, we sustain respondent commission’s stand as expressed in its Orders Nos. 450 and 451, Series of 1977 that there are “unresolved and genuine issues of fact” and that it has yet to rule on and finally decide the validity of the disputed by-law provision”, subject to appeal by either party to this Court.

In view of prematurity of the proceedings here (as likewise expressed by Mr. Justice Fernando), the case should as a consequence be remanded to the Securities and Exchange Commission as the agency of primary jurisdiction for a full hearing and reception of evidence of all relevant facts (which should property be submitted to the commission instead of the piecemeal documents submitted as annexes to this Court which is not a trier of facts) concerning not only the petitioner but the members of the board of directors of respondent corporation as well, so that it may determine on the basis thereof the issue of the legality of the questioned amended by-laws, and assuming that it holds the same to be valid whether the same are arbitrarily and unreasonably applied to petitioner vis a vis other directors, who, petitioner claims, should in such event be likewise disqualified from sitting in the board of directors by

396

396



virtue of conflict of interests or their being likewise engaged in “competitive or antagonistic business” with the corporation such as investment and finance, coconut oil mills, cement, milk and hotels.5

It should be noted that while the petition may be dismissed in view of the inconclusiveness of the vote and the Court’s failure to attain the required 8-vote majority to resolve the issue, such as dismissal (for lack of necessary votes) is of no doctrinal value and does not in any manner resolve the issue of the validity of the questioned amended by-laws nor foreclose the same. The same should properly be determined in a proper case in the first instance by the Securities and Exchange Commission as the agency of primary jurisdiction, as above indicated.

The Court is unanimous, therefore, in its judgment that petitioner Gokongwei may run for the office of, and if elected, sit as, member of the board of directors of respondent San Miguel Corporation as stated in the dispositive portion of the main opinion of Mr. Justice Antonio, to wit: Until and after petitioner has been given a “new and proper hearing by the board of directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court” and until “disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner.” In other words, until and after petitioner shall have been given due process and proper hearing by the respondent board of directors as to the question of his qualification or disqualification under the questioned amended by-laws (assuming that the respondent Securities and Exchange Commission ultimately upholds the validity of said bylaws), and such disqualification shall have been sustained by respondent Securities and Exchange Commission and ultimately by final judgment of this Court, petitioner is deemed eligible for all legal purposes and effects to be nominated

________________

5 Petitioner’s memorandum in support of oral argument, pp. 1820.

397

VOL. 89, APRIL 11, 1979

397


and voted and if elected to sit as a member of the board of directors of respondent San Miguel Corporation.

In view of the Court’s unanimous judgment on this point, the portion of respondent commission’s Order No. 450, Series of 1977 which imposed “the condition that he [petitioner] cannot sit as board member if elected until after the Commission shall have finally decided the validity of the disputed by-law provision” has been likewise accordingly set aside.III

By way of recapitulation, so that the Court’s decision and judgment may be clear and not subject to ambiguity, we state the following:

1. With the votes of the six Justices concurring unqualifiedly in the main opinion added to our four votes, plus the Chief Justice’s vote and that of Mr. Justice Fernando, the Court has by twelve (12) votes unanimously rendered judgment granting petitioner’s right to examine and secure copies of the books and records of San Miguel International, Inc. as a foreign subsidiary of respondent corporation and respondent commission’s Order No. 449, Series of 1977, to the contrary is set aside:

2. With the same twelve (12) votes, the Court has also unanimously rendered judgment declaring that until and after petitioner shall have been given due process and proper hearing by the respondent board of directors as to the question of his disqualification under the questioned amended by-laws (assuming that the respondent Securities and Exchange Commission ultimately upholds the validity of said by-laws), and such disqualification shall have been sustained by respondent Securities and Exchange Commission and ultimately by final judgment of this Court petitioner is deemed eligible for all legal purposes and effect to be nominated and voted and if elected to sit as a member of the board of directors of respondent San Miguel Corporation. Accordingly, respondent commission’s Order No. 450, Series of 1977 to the contrary has likewise been set aside; and

398

398



3. The Court’s voting on the validity of respondent corporation’s amendment of the by-laws (sec. 2, Art. III) is inconclusive without the required majority of eight votes to settle the issue one way or the other having been reached.

No judgment is rendered by the Court thereon and the statements of the six Justices who have signed the main opinion on the legality thereof have no binding effect, much less doctrinal value.

The dismissal of the petition insofar as the question of the validity of the disputed by-laws amendment is concerned is not by any judgment with the required eight votes but simply by force of Rule 56, section 11 of the Rules of Court, the pertinent portion of which provides that “where the court en banc is equally divided in opinion, or the necessary majority cannot be had, the case shall be reheard, and if on re-hearing no decision is reached, the action shall be dismissed if originally commenced in the court x x x.” The end result is that the Court has thereby dismissed the petition which prayed that the Court bypass the commission and directly resolved the issue and therefore the respondent commission may now proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the “unresolved and genuine issues of fact” (as per Order No. 451, Series of 1977) and the issues of legality of the disputed by-laws amendment.

Teehankee, Concepcion Jr., and Fernandez, JJ., concur.

Guerrero, J., concurred.SUPPLEMENT TO JOINT SEPARATE OPINION

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ.:

This supplemental opinion is issued with reference to the advance separate opinion of Mr. Justice Barredo issued by him as to “certain misimpressions as to the import of the decision

399

VOL. 89, APRIL 11, 1979

399


in this case” which might be produced by our joint separate opinion of April 11, 1979 and “urgent(ly) to clarify (his) position in respect to the rights of the parties resulting from the dismissal of the petition herein and the outline of the procedure by which the disqualification of petitioner Gokongwei can be made effective.”

1. Mr. Justice Barredo’s advances separate opinion “that as between the parties herein, the issue of the validity of the challenged by-laws is already settled” had, of course, no binding effect. The judgment of the Court is found on pages

59-61 of the decision of April 11, 1979, penned by Mr. Justice Antonio, wherein on the question of the validity of the amended by-laws the Court’s inconclusive voting is set forth as follows:

“Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

“Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

“Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended by-laws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction x x x.”1

As stated in said judgment itself, for lack of the necessary votes, the petition, insofar as it assails the validity of the questioned by-laws, was dismissed.

2. Mr. Justice Barredo now contends contrary to the undersigned’s understanding, as stated on pages 8 and 9 of our joint separate opinion of April 11, 1979 that the legal effect of the dismissal of the petition on the question of validity of the amended by-laws for lack of the necessary votes simply means that “the Court has thereby dismissed the petition which prayed that the Court by-pass the commission and directly resolve the issue and therefore the respondent commission may now proceed, as announced in its Order No. 450, Series of

_________________

1 At p. 60; emphasis supplied.

400

400



1977, to hear the case before it and receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the ‘unresolved and genuine issues of fact’ (as per Order No. 451, Series of 1977) and the issue of legality of the disputed by-laws amendment,” that such dismissal “has no other legal consequence than that it is the law of the case as far as the parties are concerned, albeit the majority of the opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases.”

We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has no applicability for the following reasons:

a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a final and conclusive determination of an issue in the first case later invoked as the law of the case.

Thus, in People vs. Olarte2, we held that

“ ‘Law of the case’ has been defined as the opinion delivered on a former appeal. More specifically, it means that whatever is once irrevocably established as the controlling legal rule of decision between the same parties in the same case continues to be the law of the case, whether correct on general principles or not, so long as the facts on which such decision was predicated continue to be the facts of the case before the court. x x x

- - - - -

“It need not be stated that the Supreme Court, being the court of last resort, is the final arbiter of all legal questions properly brought before it and that its decision in any given case constitutes the law of that particular case. Once its judgment becomes final it is binding on all inferior courts, and hence beyond their power and authority to alter or modify (Kabigting vs. Acting Director of Prisons, G. R. No. L-15548, October 30, 1962).

“ ‘The decision of this Court on that appeal by the government from the order of dismissal, holding that said appeal did not place the

________________

2 19 SCRA 494; citing People vs. Pinnila, L-11374, May 30, 1958, cited in Lee vs. Aligaen, 76 SCRA 416 (1977) per Antonio, J.

401

VOL. 89, APRIL 11, 1979

401


appellants, including Absalon Bignay, in double jeopardy, signed and concurred in by six Justices as against three dissenters headed by the Chief Justice, promulgated way back in the year 1952, has long become the law of the case. It may be erroneous, judged by the law on double jeopardy as recently interpreted by this same Tribunal Even so, it may not be disturbed and modified. Our recent interpretation of the

law may be applied to new cases, but certainly not to an old one finally and conclusively determined. As already stated, the majority opinion in that appeal is now the law of the case.’ ” (People vs. Pinuila)

The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as the question of the validity or invalidity of the amended by-laws is concerned. The Court’s judgment of April 11, 1979 clearly shows that the voting on this question was inconclusive with six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect likewise expressly reserved his vote thereon. No final and conclusive determination could be reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil action originally commenced in this Court, the action was simply dismissed with the result that no law of the case was laid down insofar as the issue of the validity or invalidity of the questioned by-laws is concerned, and the relief sought herein by petitioner that this Court by-pass the SEC which has yet to hear and determine the same issue pending before it below and that this Court itself directly resolve the said issue stands denied.

b) The contention of Mr. Justice Barredo that the result of the dismissal of the case was that “petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of the validity whether in the Securities and Exchange Commission, in this Court or in any other forum, unless he proceeds on the basis of a factual milieu different from the setting of this case. Not even the Securities and Exchange Commission may pass on such question anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf,” appears to us to be untenable.

402

402



The Court through the decision of April 11, 1979, by the unanimous votes of the twelve participating Justices headed by the Chief Justice, ruled that petitioner Gokongwei was entitled to a “new and proper hearing” by the SMC board of directors on the matter of his disqualification under the questioned by-laws and that the board’s “decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court (and) unless disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner.”

The entire Court, therefore, recognized that petitioner had not been given procedural due process by the SMC board on the matter of his disqualification and that he was entitled to a “new and proper hearing”. It stands to reason that in such hearing, petitioner could raise not only questions of fact but questions of law, particularly questions of law affecting the investing public and their right to representation on the board as provided by law—not to mention that as borne out by the fact that no restriction whatsoever appears in the Court’s decision, it was never contemplated that petitioner was to be limited to questions of fact and could not raise the fundamental questions of law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC board. Farthermore, it was expressly provided unanimously in the Court’s decision that the SMC board’s decision on the disqualification of petitioner (“assuming the board of directors of San Miguel Corporation should, after the proper hearing, disqualify him” as qualified in Mr. Justice Barredo’s own separate opinion, at page 2) shall be appealable to respondent Securities and Exchange Commission “deliberating and acting en banc” and “ultimately to this Court.” Again, the Court’s judgment as set forth in its decision of April 11, 1979 contains nothing that would warrant the opinion now expressed that respondent Securities and Exchange Commission may not pass anymore on the question of the invalidity of the amended by-laws. Certainly, it cannot be contended that the Court in dismissing the petition for lack of necessary votes actually by-passed the

403

VOL. 89, APRIL 11, 1979

403


Securities and Exchange Commission and directly ruled itself on the invalidity of the questioned by-laws when it itself could not reach a final and conclusive vote (a minimum of eight votes) on the issue and three other Justices (the Chief Justice and Messrs. Justices Fernando and Aquino) had expressly reserved their vote until after further hearings (first before the Securities and Exchange Commission and ultimately in this Court).

Such a view espoused by Mr. Justice Barredo could conceivably result in an incongruous situation where supposedly under the law of this case the questioned by-laws would be held valid as against petitioner Gokongwei and yet the same may be stricken off as invalid as to all other SMC shareholders in a proper case.

3. It need only be pointed out that Mr. Justice Barredo’s advance separate opinion can in no way affect or modify the judgment of this Court as set forth in the decision of April 11, 1979 and discussed hereinabove. The same bears the

unqualified concurrence of only three Justices out of the six Justices who originally voted for the validity per se of the questioned by-laws, namely, Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando and Makasiar did not concur therein but they instead concurred with the limited concurrence of the Chief Justice touching on the law of the case which guardedly held that the Court has not found merit in the claim that the amended by-laws in question are invalid but without in any manner foreclosing the issue and as a matter of fact and law, without in any manner changing or modifying the above-quoted vote of the Chief Justice as officially rendered in the decision of April 11, 1979, wherein he precisely “reserved (his) vote on the validity of the amended by-laws.”

4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached to the advance separate opinion of Mr. Justice Barredo, Mr. Justice De Castro advances his interpretation as to a restrictive construction of section 13(5) of the Philippine Corporation Law, ignoring or disregarding the fact that during the Court’s deliberations it was brought out that this prohibitory provision was and is not raised in issue in this

404

404



case whether here or in the Securities and Exchange Commission below (outside of a passing argument by Messrs. Angara, Abello, Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their Memorandum of June 26, 1978 that “(T)he disputed By-Laws does not prohibit petitioner from holding onto, or even increasing his SMC investment; it only restricts any shifting on the part of petitioner from passive investor to a director of the company.”3

As a consequence, the Court abandoned the idea of calling for another hearing wherein the parties could properly raise and discuss this question as a new issue and instead rendered the decision in question, under which the question of section 13(5) could be raised at a new and proper hearing before the SMC board and in the Securities and Exchange Commission and in due course before this Court (but with the clear understanding that since both corporations, the Robina and SMC are engaged in agriculture as submitted by the Sorianos’ counsel in their said memorandum, the issue could be raised likewise against SMC and its other shareholders, directors, if not against SMC itself. As expressly stated in the Chief Justice’s reservation of his vote, the matter of the question of the applicability of the said section 13(5) to petitioner would be heard by this Court at the appropriate time after the proceedings below (and necessarily the question of the

validity of the amended by-laws would be taken up anew and the Court would at that time be able to reach a final and conclusive vote).

Mr. Justice De Castro’s personal interpretation of the decision of April 11, 1979 that petitioner may be allowed to ran for election despite adverse decision of both the SMC board and the Securities and Exchange Commission “only if he comes to this Court and obtains an injunction against the enforcement of the decision disqualifying him” is patently contradictory of his vote on the matter as expressly given in the judgment in the Court’s decision of April 11, 1979 (at page 59) that petitioner could run and if elected, sit as director of the respondent SMC and could be disqualified only after a “new and proper hearing by the board of directors of said corporation, whose

________________

3 Soriano’s Memorandum at page 94.

405

VOL. 89, APRIL 11, 1979

405


decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner.”

Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.A D V A N C E S E P A R A T E O P I N I O N

BARREDO, J.:

I reserved the filing of a separate opinion in order to state my own reasons for voting in favor of the validity of the amended by-laws in question. Regrettably, I have not yet finished preparing the same. In view, however, of the joint separate opinion of Justices Teehankee, Concepcion Jr., Fernandez and Guerrero, the full text of which has just come to my attention, and which I am afraid might produce certain misimpressions as to the import of the decision in this case, I consider it urgent to clarify my position in respect to the rights of the parties resulting from the dismissal of the petition herein and the outlining of the procedure by which the disqualification of petitioner Gokongwei can be made effective, hence this advance separate opinion.

To start with, inasmuch as petitioner Gokongwei himself placed the issue of the validity of said amended by-laws

squarely before the Court for resolution, because he feels, rightly or wrongly, he can no longer have due process or justice from the Securities and Exchange Commission, and the private respondents have joined with him in that respect, the six votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of validity of the amended by-laws in question, with only four members of this Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and Justice Fernando reserving their votes thereon, and

406

406



Justices Aquino and Melencio Herrera not voting, thereby resulting in the dismissal of the petition “insofar as it assails the validity of the amended by-laws . . . for lack of necessary votes”, has no other legal consequence than that it is the law of the case as far as the parties herein are concerned, albeit the majority opinion of six against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent for subsequent cases. This means that petitioner Gokongwei and the respondents, including the Securities and Exchange Commission, are bound by the foregoing result, namely, that the Court en banc has not found merit in the claim that the amended by-laws in question are invalid, Indeed, it is one thing to say that dismissal of the case is not doctrinal and entirely another thing to maintain that such dismissal leaves the issue unsettled. It is somewhat of a misreading and misconstruction of Section 11 of Rule 56, contrary to the well-known established norm observed by this Court, to state that the dismissal of a petition for lack of the necessary votes does not amount to a decision on the merits. Unquestionably, the Court is deemed to find no merit in a petition in two ways, namely, (1) when eight or more members vote expressly in that sense and (2) when the required number of justices needed to sustain the same cannot be had.

I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged by-laws is already settled. From which it follows that the same are already enforceable insofar as they are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of validity whether in the Securities and Exchange Commission, in this Court or in any other forum, unless he proceeds on the basis of a factual milieu different from the setting of this case. Not even the Securities and Exchange Commission may pass on such question anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf. The vote of four justices to remand the case thereto cannot alter the situation.

It is very clear that under the decision herein, the issue of validity is a settled matter for the parties herein as the law of the case, and it is only the actual implementation of the im-

407

VOL. 89, APRIL 11, 1979

407


pugned amended by-laws in the particular case of petitioner that remains to be passed upon by the Securities and Exchange Commission, and on appeal therefrom to Us, assuming the board of directors of San Miguel Corporation should, after the proper hearing, disqualify him.

To be sure, the record is replete with substantial indications, nay admissions of petitioner himself, that he is a controlling stockholder of corporations which are competitors of San Miguel Corporation. The very substantial areas of such competition involving hundreds of millions of pesos worth of businesses stand uncontroverted in the records hereof. In fact, petitioner has even offered, if he should be elected, as director, not to take part when the board takes up matters affecting the corresponding areas of competition between his corporation and San Miguel Nonetheless, perhaps, it is best that such evidence be formally offered at the hearing contemplated in Our decision.

As to whether or not petitioner may sit in the board, if he wins, definitely, under the decision in this case, even if petitioner should win, he will have to immediately leave his position or should be ousted, the moment this Court settles the issue of his actual disqualification, either in a full blown decision or by denying the petition for review of corresponding decision of the Securities and Exchange Commission unfavorable to him. And, of course, as a matter of principle, it is to be expected that the matter of his disqualification should be resolved expeditiously and within the shortest possible time, so as to avoid as much juridical injury as possible, considering that the matter of the validity of the prohibition against competitors embodied in the amended by-laws is already unquestionable among the parties herein and to allow him to be in the board for sometime would create an obviously anomalous and legally incongruous situation that should not be tolerated. Thus, all the parties concerned must act promptly and expeditiously.

Additionally, my reservation to explain my vote on the validity of the amended by-laws still stands.

408

408



Castro, C.J., concurs in Justice Barredo’s statement that the dismissal (for lack of necessary votes) of the petition to the extent that “it assails the validity of the amended by-laws,” is the law of the case at bar, which means in effect that as far and only in so far as the parties and the Securities and Exchange Commission are concerned, the Court has not found merit in the claim that the amended by-laws in question are invalid.

Fernando, J., concurs withe the opinion of Chief Justice Castro.

Makasiar, J., concurs with the above opinion of the Chief Justice.

Antonio and Santos, JJ., concur.

De Castro, J., with separate opinion.S E P A R A T E O P I N I O N

DE CASTRO, J.:

As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the amendment to the by-laws in question. What induced me to this view is the practical consideration easily perceived in the following illustration: If a person becomes a stockholder of a corporation and gets himself elected as a director, and while he is such a director, he forms his own corporation competitive or antagonistic to the corporation of which he is a director, and becomes Chairman of the Board and President of his own corporation, he may be removed from his position as director, admittedly one of trust and confidence. If this is so, as seems undisputably to be the case, a person already controlling, and also the Chairman of the Board and President of, a corporation, may be barred from becoming a member of the board of directors of a competitive corporation. This is my view, even as I am for a restrictive interpretation of Section 13(5) of the Philippine Corporation Law, under which I would limit the scope of the provision to corporations engaged In agriculture, but only as the word “agriculture” refers to its more limited meaning as distinguished from its general and broad connotation The

409

VOL. 89, APRIL 11, 1979

409


term would then mean “farming” or raising the natural products of the soil, such as by cultivation, in the manner as is required by the Public Land Act in the acquisition of agricultural land, such as by homestead, before the patent may be issued. It is my opinion that under the public land statute, the development of a certain portion of the land applied for as specified in the law as a condition precedent before the applicant may obtain a patent, is cultivation, not let us say, poultry raising or piggery, which may be included In the term “agriculture” in its broad sense. For under Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it should, because the provision is in derogation of property rights, the petitioner in this case would be disqualified from becoming an officer of either the San Miguel Corporation or his own supposedly agricultural corporations. It is thus beyond my comprehension why, feeling as though I am the only member of the Court for a restricted interpretation of Section 13(5) of Act 1459, doubt still seems to be in the minds of other members giving the cited provision an unrestricted interpretation, as to the validity of the amended by-laws in question, or even holding them null and void.

I concur with the observation of Justice Barredo that despite that less than six votes are for upholding the validity of the by-laws, their validity is deemed upheld, as constituting the “law of the case.” It could not be otherwise, after the present petition is dismissed with the relief sought to declare null and void the said by-laws being denied in effect. A vicious circle would be created if, should petitioner Gokongwei be barred or disqualified from running by the Board of Directors of San Miguel Corporation and the Securities and Exchange Commission sustain the Board, petitioner could come again to Us, raising the same question he has raised in the present petition, unless the principle of the “law of the case” is applied.

Clarifying therefore, my position, I am of the opinion thai with the validity of the by-laws in question standing unimpaired, it is now for petitioner to show that he does not come within the disqualification as therein provided, both to the Board and later to the Securities and Exchange Commission, it

410

410



being a foregone conclusion that, unless petitioner disposes of his stockholdings in the so-called competitive corporations, San Miguel Corporation would apply the by-laws against him. His right, therefore, to run depends on what, on election day, May 8, 1979, the ruling of the Board and/or the Securities

and Exchange Commission on his qualification to run would be, certainly, not the final ruling of this Court in the event recourse thereto is made by the party feeling aggrieved, as intimated in the “Joint Separate Opinion” of Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero, that only after petitioner’s “disqualification” has ultimately been passed upon by this Court should petitioner not be allowed to run. Petitioner may be allowed to run, despite an adverse decision of both the Board and the Securities and Exchange Commission, only if he comes to this Court and obtain an injunction against the enforcement of the decision disqualifying him. Without such injunction being required, all that petitioner has to do is to take his time in coming to this Court, and in so doing, he would in the meantime, be allowed to run, and if he wins, to sit. This would, however, be contrary to the doctrine that gives binding, if not conclusive, effect of findings of facts of administrative bodies exercising quasi-judicial functions upon appellate courts, which should, accordingly, be enforced until reversed by this Tribunal.

Notes.—Where the government enters into commercial business it abandon its sovereign capacity and is to be treated like any other corporation. (PNR vs. Union de Maquinistas, Fugoneros y Motormen, 84 SCRA 223).

A corporation authorize under its articles of incorporation to operate and otherwise deal in automobiles and accessories and to engage in the transportation of persons by water may not engage in the business of land transportation because such would have no necessary connection with the corporation’s legitimate business. (Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCRA 809).

A derivative suit by a stockholder for the purpose of annulling the appointment of a defendant as Chairman of the Board

411

VOL. 89, APRIL 11, 1979

411


of Directors is not a quo warranto proceeding. A stockholder has a cause of action to annul certain actions of the Board of Directors of a bank, which actions were considered anomalous and a breach of trust prejudicial to the bank. (Republic Bank vs. Cuaderno, 19 SCRA 671).

The test to be applied is whether the act of the corporation is in direct and immediate furtherance of its 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. (Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36.)

A stockholder has a cause of action to annul certain action of the Board of Directors of a bank, which actions were considered anomalous and a breach of trust prejudicial to the bank. (Republic Bank vs. Cuaderno, 19 SCRA 671.)

When a corporation was formed to evade subsidiary civil liability, fiction of corporate entity will be disregarded. (Palacio vs. Fely Transportation Company, 5 SCRA 1011 . )

[Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336(1979)]

G.R. No. 85318. June 3, 1991.*COMMART (PHILS.), INC., JESUS, CORAZON, ALBERTO, AND BERNARD all surnamed MAGLUTAC, petitioners, vs. SECURITIES & EXCHANGE COMMISSION and ALICE MAGLUTAC, respondents.

Corporation Law; Securities and Exchange Commission; SEC correctly hold that the case was a minority stockholding’s derivative suit and correctly sustained the hearing panel’s denial of the motions to dismiss.––The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under First Cause of Action, readily shows that it avers the diversion of corporate income into the private bank accounts of petitioner Jesus T. Maglutac and his wife. Likewise, the principal relief prayed for in the complaint is the recovery of a sum of money in favor of the corporation. This being the case, the complaint is definitely a derivative suit. Consequently, the SEC correctly held that the case was a minority stockholder’s derivative suit and correctly sustained the hearing panel’s denia––insofar as Alice Maglutac was concerned––of the motions to dismiss it.

Same; Same; Same; Nature of stockholder’s derivative suit.––A derivative suit has been the principal defense of the minority shareholder against abuses by the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation’s rights.

Same; Same; Jurisdiction; Jurisdiction cannot be made to depend upon the pleas and defenses set up by a defendant in a motion to dismiss or answer otherwise jurisdiction should become dependent almost entirely upon the defendant.––In disposing of this contention

_______________

* SECOND DIVISION.

74

74


Commart (Phils.), Inc. vs. Securities & Exchange Commission

respondent SEC ruled that jurisdiction cannot be made to depend upon the pleas and defenses set up by a defendant in a motion to dismiss or answer, otherwise jurisdiction should become dependent almost entirely upon the defendant (citing Cardenas v. Camus, infra.) But it left the door open to a further consideration of the issue by stating that complainant’s ownership of majority stocks of a rival corporation could not at this stage of the proceedings, defeat complainant’s claims:

PETITION for certiorari to review the order of the Securities and Exchange Commission.


Monsod, Tamargo & Associates for petitioners.

Panganiban, Benitez, Barinaga & Bautista Law Offices for private respondent.

PARAS, J.:

Petitioners, in the instant petition for review on certiorari, seek the reversal of the en banc Order of the respondent Securities & Exchange Commission dated September 12, 1988 denying the petition for certiorari (SEC-EB No. 115-117) filed by the petitioners herein and ordering that the original complaint (SEC Case No. 2673) be remanded to the Securities Investigation and Clearing Department for further proceeding, for having been rendered in grave abuse of discretion amounting to lack of or in excess of jurisdiction and in contravention of existing laws and jurisprudence.

Commart (Phils.), Inc., (Commart for short) is a corporation organized by two brothers, Jesus and Mariano Maglutac, to engage in the brokerage business for the importation of fertilizers and other products/commodities.

Jesus T. Maglutac (Jesus for short) ran the company as president, chairman of the board, and chairman of the executive committee, while Mariano T. Maglutac (Mariano for short) served as executive vice-president and vice-chairman of the executive committee until April 1984.

Sometime in June 1984, the two brothers agreed to go their separate ways, with Mariano being persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the outstanding capital stock. As part of the deal, a “Cooperative

75

VOL. 198, JUNE 3, 1991

75


Agreement” was signed, between Commart (represented by Jesus) and Mariano, in which, among others, Commart ceded to Mariano or to an “acceptable entity” he may create, a portion of its business, with a pledge of mutual cooperation for a certain period so as to enable Mariano to get his own corporation off the ground, so to speak.

Mariano’s wife, Alice M. Maglutac (private respondent herein) who has been for years a stockholder and director of

Commart, did not dispose of her shareholdings, and thus continued as such even after the sale of Mariano’s equity.

As broker and indentor, Commart’s principal income came from commissions paid to it in U.S. dollars by foreign suppliers of fertilizers and other commodities imported by Planters Products, Inc. and other local importers.

Shortly after the sale of his equity in Commart to Jesus, Mariano allegedly discovered that for several years, Jesus and his wife Corazon (who was herself a director) had been siphoning and diverting to their private bank accounts in the United States and in Hongkong gargantuan amounts sliced off from commissions due Commart from some foreign suppliers. Consequently, on August 22, 1989, spouses Mariano and Alice Maglutac filed a complaint (SEC Case No. 2673) with the Securities & Exchange Commission (SEC for short) against Jesus T. Maglu-tac, Victor Cipriano, Clemente Ramos, Carolina de los Reyes, Corazon Maglutac, Alberto Maglutac and Bernardo Maglutac (Jesus as Chairman) and the rest as members of the Board of Directors of Commart).

In their Complaint, Mariano and Alice Maglutac alleged, among others, that “Jesus T. Maglutac, by means of secret arrangements with foreign suppliers, embodied in and evidenced by, correspondences and other documents discovered just recently, has been diverting into his private bank accounts and converting to his own personal benefit and advantage substantial portions of the commission income of the corporation, to the prejudice of the corporation, its stockholders and its creditors. (Petition, Annex B, p. 2; Rollo, p. 20) Thus, complainants prayed, among others, that judgment be rendered as follows––

“(a) Ordering respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano to account for and to turn over or deliver to

76

76



the Corporation the sum of US$2,539,918.97, or its equivalent in Philippine currency, with legal interest thereon from the respective dates of misappropriation or, at the very least, from date of filing of this suit, together with such other and further sums as may be proved to have likewise been misappropriated by them; “(b) Ordering all the respondents, as members of the Board of Directors, to take such remedial steps as would protect the corporation from further depredation of its funds and property;

“(c) Declaring rescinded or annulled the disposition of complainant Mariano T. Maglutac’s shares of stock to respondent Jesus T. Maglutac and ordering the restoration to the former of all his executive positions with all the rights and privileges thereunto appertaining; or, in the alternative, ordering that said complainant be paid the equivalent of one-fourth of the actual market value of COMMART’s present assets including goodwill, taking into consideration also the total sums misappropriated by respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano which rightfully belonged to COM-MART; and “(d) Ordering respondents to pay complainants attorney’s fees equivalent to twenty (20%) per cent of the total amounts awarded and recovered, plus such further sums as may be proved to have been incurred as and by way of litigation expenses.” (pp. 24-25, Rollo)

In response to the aforementioned Complaint, two Motions to Dismiss were filed. The records reveal that:

“(a) On October 17, 1984, Albert and Bernard Maglutac moved to dismiss on the ground that Mariano Maglutac has no capacity to sue and the complaint states no cause of action against them. “(b) On October 20, 1984, Jesus & Corazon Maglutac likewise moved to dismiss on the ground that respondent Commission does not have jurisdiction over the nature of the suit.”

These motions were opposed by complainants Alice and Mariano Maglutac. While said incidents were pending, complainants filed an Amended Complaint whereby Commart was impleaded as party complainant and praying that Commart be placed under receivership and the properties of Jesus & Corazon Maglutac and Victor Cipriano be attached. It is alleged in the Amended Complaint that complainant Commart is the corporation in whose behalf and for whose benefit this derivative suit is brought; that complainant Alice M. Maglutac is a minor-

77

VOL. 198, JUNE 3, 1991

77


ity stockholder in good standing of Commart while her husband complainant Mariano T. Maglutac was, likewise, until June 25, 1984 or thereabouts, a stockholder of Commart.

Motions to dismiss said Amended Complaint were also filed by present petitioners and were also duly opposed by complainants Mariano and his wife.

On May 10, 1985 Commart filed a Manifestation/Notice of Dismissal, manifesting that “it withdraws and dismisses the action taken in its behalf by complainants Mariano T. Maglutac and Alice M. Maglutac against all respondents.” (Petition, Annex E, p. 3; Rollo, pp. 42-44)

This was opposed by complainants on the ground, among other doctrines, that in a derivative suit the corporation is not allowed to be an active participant and has no control over the suit against the real defendants; that the suing shareholder has the right of control.

On May 27, 1985, the Hearing Panel issued an Order denying all the motions to dismiss as well as the so called manifestation/ notice of dismissal on the finding inter alia that––

“Respondents maintain that the present action is basically one for annulment/rescission of sale with alternative prayer for reinstatement of employment status; that the action is not a derivative suit considering that the nature of the action is one for annulment and the fact that complainant Mariano T. Maglutac being a non-stockholder is not qualified to institute a derivative suit; that the action does not in any way make mention of an actionable wrong against respondents Albert and Bernard Maglutac, Clemente Ramos and Carolina de los Reyes.

“By way of opposition, complainants alleged that the instant action should be characterized as a minority stockholders’ derivative suit; that complainant Alice Maglutac is not merely a nominal party but a real party in interest; that Mariano T. Maglutac’s rights as a stockholder have been injured through the machinations and maneuvering of respondent Jesus Maglutac; that the prayer for rescission or annulment of contract is merely the logical consequence of the exercise of jurisdiction by this Commission.

“Respondents’ contention that the Commission has no jurisdiction over the subject matter or the nature of the action is devoid of merit. It is a cardinal principle in legal procedure that what determines the subject matter or the nature of the action are the facts alleged in the complaint as constituting the cause of action. A perusal

78

78



of the complaint, as well as, the amended complaint would show that the action is one for “mismanagement”, for the complainants alleged, inter alia, that ‘x x x respondent Jesus T. Maglutac, by means of secret arrangements with foreign

suppliers embodied in, and evidenced by, correspondences and other documents discovered just recently, has been diverting into his private bank accounts and coverting to his own personal benefit and advantage substantial portions of the commission income of the corporation, to the prejudice of the corporation, its stockholders and its creditors and enumerated immediately thereafter the alleged specific acts of mismanagement. Viewed therefrom, the Commission has jurisdiction.” (pp. 127-128, Rollo)

On June 18, 1985 Commart filed a motion for reconsideration and on August 29, 1985, Jesus and Corazon Maglutac also filed a similar motion to have the Order of May 27, 1985 reconsidered and set aside. These motions were duly opposed by Mariano and Alice Maglutac.

Acting on the Motion for Reconsideration, the Hearing Panel issued on November 12, 1985, an Order modifying its previous order “by dismissing this case insofar as Mariano T. Maglutac is concerned” but affirming the said order “in all other respects.” (Annex F to Petition, pp. 46, 49, Rollo)

Not satisfied with such modification present petitioners as respondents in SEC Case No. 2673 went to the SEC en banc on a petition for certiorari, prohibition and mandamus with prayer for preliminary injunction. They contend––(a) that the Hearing Panel acted with grave abuse of discretion in not dismissing the case for failure of Alice Maglutac to exhaust intra-corporate remedies, and (b) that grave abuse was likewise committed in not dismissing the case on the ground that the complaint did not show clearly that Alice Maglutac was a stockholder at the time the questioned transaction occurred.

On September 12, 1988, the Commission en banc issued an Order denying the aforesaid petition and remanding the case to the Securities Investigation and Clearing Department for further proceedings. It ruled (a) that exhaustion of intra-corporate remedy before filing suit “may be dispensed with where it is clear that it is unavailable or futile” as was the case here. (p. 2, Order of Sept. 12, 1988, Annex A to Petition) citing Everett v. Asia Banking Corp., 49 Phil. 512, and Republic Bank v. Cuaderno, 19 SCRA 671, and (b) that the mere allegation in the

79

VOL. 198, JUNE 3, 1991

79


complaint that complainant is still a stockholder of Commart “is sufficient to vest jurisdiction to this Commission” but complainant must prove at the time of reception of evidence

that she was also a stockholder at the time the acts complained of occurred. (Id., p. 3)

“Although complainant Alice Maglutac failed to exhaust an intracorporate remedy before filing this case, the said condition precedent may be dispensed with where it is clear that it is unavailable or futile. Thus it was held that:

‘Where the board of directors in a corporation is under the complete control of the principal defendants in the case and it is obvious that a demand upon the board of directors to institute an action and prosecute the same effectively would be useless, the action may be brought by one or more of the stockholders without such demand (Everett v. Asia Banking Corp., 49 Phil. 512; Republic Bank v. Cuaderno, et al., No. L-22399, March 30, 1967).’

‘A stockholder can file a derivative suit provided there is an allegation in the complaint that she is such at the time the acts complained of occurred, and at the time the suit is brought (Hawes v. Oakland, 14 Otto [104 U.S.], 450, 456; S.C. 5972, 13 Fletcher 345, cited in Alvendia, The Law of Private Corporations in the Philippines, First Ed., p. 361). The requirement that said facts be pleaded is merely procedural although the necessity of the existence of these facts in order to give rise to the right of action is substantive (Pascual v. Del Saz Orozco, 19 Phil. 97). And equity considerations warrant the liberal interpretation of the rules of procedure to the end that technicalities should not stand in the way of equitable relief (Vol. I, Francisco, Civil Procedure, 2nd ed., p. 157, 1973 ed.) Mere allegation therefore that complainant is still a stockholder of Commart is sufficient to vest jurisdiction to this Commission. Complainant must however prove at the time of reception of evidence that she was also a stockholder at the time the acts complained of occurred.” (pp. 10-11, Memorandum by public respondent)

Hence, this petition.

The petitioners invoke two grounds for reversal of the Order under review thereby raising these two issues, to wit:

1. Did the Securities and Exchange Commission err and/or commit “grave abuse of discretion” in denying the petition for certiorari and remanding the case for further proceedings de-

80

80



spite the so-called “notice of dismissal” filed by Commart?

2. Did the Securities and Exchange Commission err and/or commit “grave abuse of discretion” in its handling of the “conflict of interest issue?” (Petition, p. 6; Rollo, p. 81)

We find the petition devoid of merit.

The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under First Cause of Action, readily shows that it avers the diversion of corporate income into the private bank accounts of petitioner Jesus T. Maglutac and his wife. Likewise, the principal relief prayed for in the complaint is the recovery of a sum of money in favor of the corporation. This being the case, the complaint is definitely a derivative suit. Consequently, the SEC correctly held that the case was a minority stockholder’s derivative suit and correctly sustained the hearing panel’s denial––insofar as Alice Maglutac was concerned––of the motions to dismiss it.

A derivative suit has been the principal defense of the minority shareholder against abuses by the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation’s rights. Indeed, to grant to Commart the right of withdrawing or dismissing the suit, at the instance of majority stockholders and directors who themselves are the persons alleged to have committed breaches of trust against the interest of the corporation, would be to emasculate the right of minority stockholders to seek redress for the corporation. To consider the Notice of Dismissal filed by Commart as quashing the complaint filed by Alice Maglutac in favor of the corporation would be to defeat the very nature and function of a derivative suit and render the right to institute the action illusory.

In any case, the suit is for the benefit of Commart itself, for a judgment in favor of the complainants will necessarily mean recovery by the corporation of the US$2.5 million alleged to have been diverted from its coffers to the private bank accounts of its top managers and directors. Thus, the prayer in the Amended Complaint is for judgment ordering respondents Jesus and Corazon Maglutac, as well as Victor Cipriano, “to account for and to turn over or deliver to the Corporation” the aforesaid sum, with legal interest, and “ordering all the respon-

81

VOL. 198, JUNE 3, 1991

81


dents, as members of the Board of Directors to take such remedial steps as would protect the corporation from further

depredation of the funds and property.” (pars. [a] & [b], Annex 2, Comment)

On the ‘conflict of interest’ issue, petitioners allege that private respondent Alice Maglutac “is a majority stockholder of M.M. International Sales, a business rival/competitor of Commart and holds only less than one percent (1%) of the entire shareholdings of Commart.” According to petitioners, this being the case it is easier to believe that this so called derivative suit was filed because it is to the best interest of the company where she has a bigger and substantial interest, which in this case is M.M. International Sales, Inc.

In disposing of this contention respondent SEC ruled that jurisdiction cannot be made to depend upon the pleas and defenses set up by a defendant in a motion to dismiss or answer, otherwise jurisdiction should become dependent almost entirely upon the defendant (citing Cardenas v. Camus, infra.) But it left the door open to a further consideration of the issue by stating that complainant’s ownership of majority stocks of a rival corporation could not at this stage of the proceedings, defeat complainant’s claims:

“Jurisdiction of the court cannot be made to depend upon the pleas or defenses pleaded by the defendant in his motion to dismiss or answer, for were we to be governed by such rule, the question of jurisdiction would depend almost entirely upon the defendant (Cardenas v. Camus, 5 SCRA 639). Respondents’ assertion in their motion to dismiss of complainant’s ownership of the majority stocks of a rival corporation, could not at this stage of the proceedings, defeat complainant’s claim.” (pp. 83-84, Rollo)

In other words, no real prejudice has been inflicted upon petitioners’ right to be heard on this matter raised by them, since the same can still be looked into during the hearing of a derivative suit on the merits. There was, therefore, neither error nor grave abuse of discretion in the decision of the Securities & Exchange Commission not to dismiss the case but to remand it instead to the Hearing Panel for further proceedings.

WHEREFORE, for lack of merit, this Petition is DISMISSED. Costs against petitioners. [Commart (Phils.), Inc. vs. Securities & Exchange Commission, 198 SCRA 73(1991)]

No. L-22399. March 30, 1967.REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant, vs. MIGUEL CUADERNO, BlENVENIDO DlZON, PABLO ROMAN, THE BOARD OF DlRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.

Corporation; Banks; Derivative suit by stockholder.—An individual stockholder may institute a derivative or representative suit on behalf of the corporation, wherein he holds stock, in order to protect or vindicate corporate rights, whenever the of f icials of the corporation refuse to sue, or are the ones to be sued or hold 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.

Same; When authority of corporation to bring suit is not required.—Such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the board of directors, in which case any demand for intra-corporate remedy would be futile.

Same; Nonjoinder of other stockholders.—The fact that no other stockholder has made common cause with the plaintiff is irrelevant since the smallness of plaintiff’s holding is no ground for denying him relief.

Same; Joinder of corporation.—Whether in a derivative suit filed by a stockholder, the corporation should be joined as a plaintiff or a defendant is not important. What is important is that the corporation should be made a party in order to make the court’s judgment binding upon it and thus bar future relitigations of the issues. Misjoinder of parties is not a ground for dismissing an action.

Same; Derivative suit is not a quo warranto proceeding.—A derivative suit by a stockholder for the purpose of annulling the appointment of a defendant as Chairman of the Board of Directors is not a quo warranto proceeding. The plaintiff is not claiming title to the position of Chairman of the Board of Directors. His action is designed to prevent diversion of the corporate funds for the payment of the salary of said Chairman.

Same; Stockholder’s suit to annul actions of bank’s Board of Directors.—A stockholder has a cause of action to annul certain actions of the Board of Directors of a bank, which actions were considered anomalous and a breach of trust prejudicial to the bank.

Pleadings; Motion to dismiss; Hypothetical admission of facts alleged in the complaint.—The facts pleaded in the com-

672

672


Republic Bank vs, Cuaderno

plaint are deemed hypothetically admitted by the defendants who file a motion to dismiss the complaint for failure to state a cause of action.

Same; Actions; Sufficiency of cause of action.—The test of sufficiency of the facts alleged in the complaint is whether or not the court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint. If the court should doubt the truth of the facts averred, it must not dismiss the complaint but should require an answer and proceed to trial on the merits.

Same; Pendency of other cases.—A case should not be dismissed due to the pendency of other litigations between the same parties if said ground was not invoked in the motion to dismiss, The .fact that said case may be incorporated, by amendment, in any one of the other pending actions does not justify its dismissal since the amendment of the complaint in the other cases rests on the discretion of the court. It is possible that the amendment would not be allowed.

APPEAL from an order of dismissal rendered by the Court of First Instance of Manila. Lantin, 7.


Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant

N.M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.

Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.

REYES, J.B.L,, J.:

Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing the petitioner’s complaint on the ground of failure to state cause of action.

In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the Republic Bank, and the Monetary Board of the Central Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following:

“6. That the relator herein filed the present derivative suit without any further demand on the Board of Directors of

673

VOL. 19, MARCH 30, 1967

673

Republic Bank vs. Cuaderno

the Republic Bank for the reason that such formal demand to institute the present complaint would be a futile formality since the members of the board are personally chosen by defendant Pablo Roman himself.”

For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary Board of the Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, “in grave abuse of his fiduciary duty and taking advantage of his said positions and in connivance with other officials of the Republic Bank”, Roman had fraudulently granted or caused to be granted loans to fictitious and non-existing persons and to their close friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and inflated appraised values of real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an investigation, which was carried out by Bank Examiners; that they and the Superintendent of Banks of the Central Bank reported that certain mortgage loans -amounting to P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic Bank to be elected, which was done, and subsequently approved by the Monetary Board; that on January 5; 1960? the latter accepted the offer of Pablo Roman to put up adequate security for the questioned loans made by the Republic Bank, and such security was made a condition for the resumption of the Bank’s normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of the Banking Act, reported by the Superintendent of Banks, for investigation and prosecution, but no information was filed up to the time of the retirement of Cuaderno in 1961; that other similar frauds were subsequently discovered; that to neutralize the impending action against him, Pablo Roman

674

674



engaged Miguel Cuaderno as technical consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank; that the Board of Directors composed of individuals personally selected and chosen by Roman, connived and confederated in approving the appointment and selection of Cuaderno and Dizon; that such action was motivated by bad faith and without intention to protect the interest of the Republic Bank but were prompted to protect Pablo Roman from criminal prosecution; that the appointment of Cuaderno and his acceptance of the position of technical consultant are immoral, anomalous and illegal, and his compensation highly unconscionable, because court actions involving the actuations of Cuaderno as Governor and Member or Chairman of the Monetary Board are still pending in court; that as member of the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank; that the selection of Dizon as chairman of the Board of the Republic Bank after he was forced to resign from the presidency of the Philippine National Bank and from membership of the Monetary Board and within one year thereafter is in violation of section 3, sub-paragraph (d) of the AntiGraft and Corrupt Practices Act; that both Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the appointment of Cuaderno and Dizon and would do so unless enjoined.

The complaint, therefore, prayed for a writ of preliminary Injunction against the Monetary Board to prevent its confirmation of the appointments of Dizon and Cuaderno; against the Board of Directors of the Republic Bank from recognizing Cuaderno as technical consultant and Dizon as Chairman of the Board; and against Pablo Roman from appointing or selecting officers or directors of the Republic Bank, and against the recognition of any such appointees until final determination of the action. And concluded by praying that after due hearing, judgment be rendered,—

a) making the writ of injunction permanent; b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly compensation of

675

VOL. 19, MARCH 30, 1967

675


P12,500.00 unconscionable, immoral, illegal and null and void; c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank violative of Section 3, sub-paragraph (d) of Republic Act No.

5019, otherwise known as the Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and void; d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real estate mortgage loans in the Republic Bank amounting to P4 million, has no right to select or to be allowed to select person or persons who are his alter egos to manage the Republic Bank, and enjoining the defendant Board of Directors of the Republic Bank from recognizing any officers or directors appointed or selected by defendant Pablo Roman; e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all amounts they may have received either in the form of compensation, remuneration or emolument, with an interest thereon at the rate of 6%; or to order defendant Pablo Roman to refund the amounts paid to said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such reasonable damages to the plaintiff Republic Bank; f) ordering all the defendants to pay the sum of P25,000.00 as attorney’s fees, including all expenses of litigation and costs of this suit.

The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other defendants filed separate motions to dismiss on practically the same grounds: no valid cause of action against the individual movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of intra-corporate remedies. These motions were duly opposed by plaintiff Damaso Perez.

On October 24, 1963, the court, “taking into consideration the grounds alleged in the motions to dismiss and the opposition for the issuance of a writ of preliminary injunction and the affirmative defenses filed by the defendants and the arguments in support thereof”, and “that there are already eight cases pending in the different branches of this court between practically the same parties”, denied the petition for a writ of preliminary injunction and dismissed the case. The court in effect suggested

676

676



that the matter at issue in the case may be presented in any of the pending eight cases by means of amended and supplemental pleadings.

Plaintiff Damaso Perez thereupon appealed to this Court.

The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In this connection, it should be remembered that the defenses of the Monetary

Board of the Central Bank, being interposed in an answer and not in a motion to dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the other defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic Bank.

They mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation wherein he holds stock 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 (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518: Angeles vs. Santos, 64 Phil 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant’s action here is precisely in conformity with these principles. He is neither alleging nor vindicating his own individual interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice.

The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank,

677

VOL. 19, MARCH 30, 1967

677


were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are Roman’s alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman’s creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach

of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos, supra.).

Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to ‘dismiss the complaint for failure to state a cause of action. This is the cardinal principle in the matter. And, it has been ruled that the test of sufficiency of the facts alleged is whether or not the Court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint.1 So rigid is the norm prescribed that if the Court should doubt the truth of the facts averred it must not dismiss the complaint but require an answer and proceed to trial on the merits.2

Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the action taken by the manager and the board of directors of the Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative

________________

1 Paminsan vs. Costales, 28 Phil. 487; Blay vs. Batangas: Transportation Co., 80 Phil. 373; De Jesus vs. Belarmino, 95 Phil. 366; Valencia & Co. vs. Layug, CA-G.R. No. L-11060, May 23, 1958.

2 Piñero vs. Enriquez, 84 Phil. 774; Dimayuga vs. Dimayuga, 96 Phil. 366.

678

678



suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff’s holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence of other stockholders to be of any significance, no issues having even been joined.

There remains the procedural question whether the corporation itself must be made party defendant. The English practice is to make the corporation a party plaintiff, while in the United States, the usage leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised against either method. Absence of

corporate authority would seem to militate against making the corporation a party plaintiff, while joining it as defendant places the entity in the awkward position of resisting an action instituted for its benefit. What is important is that the corporation should be made a party, in order to make the Court’s judgment binding upon it, and thus bar future relitigation of the issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the trial court to direct the making of such amendments of the pleadings, by adding or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)

We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff amounts to a quo warranto proceeding. Plaintiff Perez is not claiming title to Dizon’s position as head of the Republic Bank’s board of directors. The suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect Pablo Roman from criminal prosecution, and not to carry on the corporation’s banking business, Whether the complaint’s allegations to such effect are true or not must be determined after due hearing.

Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a quo gave as a further pretext for the dismissal of the action the pen-

679

VOL. 19, MARCH 30, 1967

679

Bernabe vs. Court of Appeals, et al.

dency of eight other lawsuits between practically the same parties; reasoning that the question at issue in the present case could be incorporated in any one of the other actions by amended or supplemental pleading. We fail to see that this justifies the dismissal of the case under appeal. In the first place, there is no pretense that the cause of action here was already included in any of the other pending cases. As a matter of fact, dismissal of the present action was not sought on the ground of pendency of another action between the same parties. Secondly, the amendment of a complaint after a responsive pleading is filed, would rest upon the discretion of the party and the Court. Hence, this case cannot be dismissed simply because of the possibility that the cause of action here can be incorporated or introduced in any of those of the pending cases.

In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is remanded to the court of origin with instructions to overrule the motions to dismiss and require the defendants to answer the complaint,

Thereafter, the case shall be tried and decided on its merits. Costs against defendants-appellees. So ordered.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

Makalintal, J., did not take part.

Order of dismissal set aside. Case remanded to lower court for further proceedings. [Republic Bank vs. Cuaderno, 19 SCRA 671(1967)]

No. L-23136. August 26, 1974.*ISMAEL MATHAY, JOSEFINA MATHAY, DIOGRACIAS T. REYES and S. ADOR DIONISIO, plaintiffs-appellants, vs. THE CONSOLIDATED BANK AND TRUST COMPANY, JOSE MARINO OLONDRIZ, WILFRIDO C. TECSON, SIMON R. PATERNO, FERMIN Z. CARAM, JR., ANTONIO P. MADRIGAL, JOSE P. MADRIGAL, CLAUDIO TEEHANKEE, and ALFONSO JUAN OLONDRIZ, defendants-appellees. CIPRIANO AZADA, MARIA CRISTINA OLONDRIZ PERTIERRA jointly with her husband ARTURO PERTIERRA, and MARIA DEL PUY OLONDRIZ DE STEVENS, movants-intervenors-appellants.

Civil procedure; Class suit; Requisites of a class suit.—The necessary elements for the maintenance of a class suit are accordingly: (1) that the subject matter of the controversy be one of common or general interest to many persons, and (2) that such persons be so numerous as to make it impracticable to bring them all to the court.

Same; Same; Existence of a class suit depends upon the attending facts, 11 ot upon the designation in the complaint.—An action does not become a class suit merely because it is designated as such in the pleadings. Whether the suit is or is not a class suit depends upon the attending facts, and the complaint, or other pleading initiating the class action should allege the existence of the necessary facts, to wit, the existence of a subject matter of common interest, and the existence of a class and the number of persons in the alleged class, in order that the court might be enabled to determine whether the members of the class are so numerous as to make it impracticable to bring them all before the court, to contrast the number appearing on the record with the number in the class and to determine whether claimants on record adequately represent the class and the subject matter of general or common interest.

Same; Same; Meaning of phrase “subject matter of the action".—By the phrase “subject matter of the action” is meant “the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the defendant.”

________________

* SECOND DIVISION.

560

560


Mathay vs. Consolidated Bank and Trust Company

Same; Same; Class suit will not prosper where brought by stockholders who have determinable, though undivided

interest, in the property in question.—This Court has ruled that a class suit did not lie in an action for recovery of real property where separate portions of the same parcel were occupied and claimed individually by different parties to the exclusion of each other, such that the different parties had determinable, though undivided interests, in the property in question. x x x The interest, subject matter of the class suits in the above-cited cases, is analogous to the interest claimed by appellants in the instant case. The interest that appellants, plaintiffs and intervenors, and the CMI stockholders had in the subject matter of this suit—the portion of stocks offering of the Bank left unsubscribed by CMI stockholders who failed to exercise their right to subscribe on or before January 17, 1963—was several, not common or general in the sense required by the statute. Each one of the appellants and the CMI stockholders had determinable interest; each one had a right, if any, only to his respective portion of the stocks. No one had any right to, or any interest in, the stock to which another was entitled.

Same; Same; Wrongs committed to each individual stockholder would not create community of interest in subject matter of controversy.—Even if it be assumed, for the sake of argument, that the appellants and the CMI stockholders suffered wrongs that had been committed by similar means and even pursuant to a single plan of the Interim Board of Organizers of the Bank, the wrong suffered by each of them would constitute a wrong separate from those suffered by the other stockholders, and those wrongs alone would not create that common or general interest in the subject matter of the controversy as would entitle any one of them to bring a class suit on behalf of the others.

Same; Same; So-called “spurious class action” is merely a permissive joinder device and cannot be regarded as a class suit.—The .spurious class action is merely a permissive joinder device; between the members of the class there is not jural relationship, and the right or liability of each is distinct, the class being formed solely by the presence of a common question of law or fact. This permissive joinder is provided in Section 6 of Rule 3, of our Rules of Court. Such joinder is not and cannot be regarded as a class suit, which this action purported and was intended to be as per averment of the complaint.

Same; Same; Existence of common question of law would not suffice to maintain a class action.—It may be granted that the claims of all the appellants involved the same question of law. But this alone,

561

VOL. 58, AUGUST 26, 1974

561


as said above, did not constitute the common interest over the subject matter indispensable in a class suit. The right to purchase or subscribe to the shares of the proposed Bank, claimed by appellants herein, is analogous to the right of preemption that stockholders have when their corporation increases its capital. The right of preemption, it has been said, is personal to each stockholder, and while a stockholder may maintain a suit to compel the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a representative action on behalf of other stockholders who are similarly situated.

Same; Same; In a class suit there must be a showing that sufficient representative parties had been joined.—Where it appeared that no sufficient representative parties had been joined, the dismissal by the trial court of the action, despite the contention by plaintiffs that it was a class suit, was correct.

Same; Motion to Dismiss; When ground of motion to dismiss is lack of cause of action only allegations of the complaint must be considered.—As a rule the sufficiency of the complaint, when challenged in a motion to dismiss, must be determined exclusively on the basis of the facts alleged therein.

Same; Same; A motion to dismiss based on lack of cause of action hypothetically admits the truth of factual allegations in the complaint.—It is to be noted that only the facts well pleaded in the complaint, and likewise, any inferences fairly deducible therefrom, are deemed admitted by a motion to dismiss. Neither allegations of conclusions nor allegations of facts the falsity of which the court may take judicial notice are deemed admitted.

Same; Same; Test for determining sufficiency of cause of action in motion to dismiss.—The question, therefore, submitted to the Court in a motion to dismiss based on lack of cause of action is not whether the facts alleged in the complaint are true, for they are hypothetically admitted, but whether the facts alleged are sufficient to constitute a cause of action such that the court may render a valid judgment upon the facts alleged therein.

Same; Essential elements of a cause of action.—A cause of action is an act or omission of one party in violation of the legal right of the other. Its essential elements are, namely: (1) the existence of a legal right in the plaintiff, (2) a correlative legal duty in the defendant, and (3) an act or omission of the defendant in violation of plaintiff s right with consequential injury or damage to the plaintiff for which he may

562

562



maintain an action for the recovery of damages or other appropriate relief.

Same; Allegation that one is entitled to something is a conclusion of law.—A bare allegation that one is entitled to something is an allegation of a conclusion. Such allegation adds nothing to the pleading, it being necessary to plead specifically the facts upon which conclusion is founded. The complaint alleged that appellants were stockholders of the CMI; that as such stockholders, they were entitled, by virtue of the resolution of March 28, 1962, to subscribed to the capital stock of the proposed Consolidated Bank & Trust Co., at par value to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI as shown in the latter’s stock book as of January 15, 1963, the right to subscribe to be exercised until January 15, 1963, provided said stockholders of the CMI were qualified under the law to become stockholders of the proposed Bank; that appellants accomplished and filed their respective “Pre-Incorporation Agreements to Subscribe” and fully paid the subscription. These alleged specific facts did not even show that appellants were entitled to subscribe to the capital stock of the proposed Bank, for said right depended on a condition precedent, which was, that they were qualified under the law to become stockholders of the Bank, and there was no direct averment in the complaint of the facts that qualified them to become stockholders of the Bank. The allegation of the fact that they subscribed to the stock did not, by necessary implication, show that they were possessed of the necessary qualifications to become stockholders of the proposed Bank.

Same; Trusts; Question of law and facts; Allegation that defendants held shares as trustees for plaintiffs is a condusion of law.—The allegation in the complaint that the defendants-appellees held their shares “in trust” for plaintiffs-appellants without averment of the facts from which the court could conclude the existence of the alleged trust, was not deemed admitted by the motion to dismiss for that was a conclusion of law.

Same; Question of law and facts; Allegation that one acquired stocks in breach of law, trust or agreement is one of law.—The allegation that the defendants-appellees acquired stockholdings far in excess of what they were lawfully entitled, in violation of law and in breach of trust and of contractual agreement, is also mere conclusion of law.

Same; Same; Allegation that an act was unlawful or wrongful is a

563

VOL. 58, AUGUST 26, 1974

563


mere conclusion of law.—The further allegations that the calling of a special meeting was “falsely certified”, that the seventh position of Director was “illegally created” and that defendant Alfonso Juan Olondriz was “not competent or qualified” to be a director are mere conclusions of law, the same not being necessarily inferable from the ultimate facts stated in the first and second causes of action.

APPEAL from an order of the Court of First Instance of Manila. Arca, J.


Deogracias T. Reyes & Associates for appellants.

Tañada, Teehankee & Carreon for appellees.

Paterno Pedreña for appellee Fermin Z. Caram, Jr.

ZALDIVAR, J.:

In this appeal, appellants-plaintiffs and movants-intervenors; seek the reversal of the order dated March 21,1964 of the Court of First Instance of Manila dismissing the complaint together with all other pending incidents in Civil Case No. 55810.

The complaint in this case, filed on December 24, 1963 as a class suit, under Section 12, Rule 3, of the Rules of Court, contained six causes of action. Under the first cause of action, plaintiffs-appellants alleged that they were, on or before March 28, 1962, stockholders in the Consolidated Mines, Inc. (hereinafter referred to as CMI), a corporation duly organized and existing under Philippine laws; that the stockholders of the CMI, including the plaintiffs-appellants, passed, at a regular stockholders’ meeting, a Resolution providing: (a) that the Consolidated Bank & Trust Co. (hereinafter referred to as Bank) be organized with an authorized capital of P20,000,000.00; (b) that the organization be undertaken by a Board of Organizers composed of the President and Members of the Board of Directors of the CMI; (c) that all stockholders of the CMI, who were legally qualified to become stockholders, would be entitled to subscribe to the capital stock of the proposed Bank “at par value to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI," as shown in its stock books on a date to be fixed by the Board of Directors [which date was subsequently fixed as January 15, 1963], provided that the right to subscribe should

564

564



be exercised within thirty days from the date so fixed, and “that if such right to subscription be not so exercised then the stockholders concerned shall be deemed to have thereby waived and released ipso-facto their right to such subscription in favor of the Interim Board of Organizers of the Defendant Bank or their assignees;” and (d) that the Board of Directors of the CMI be authorized to declare a “special dividend” in an amount it would fix, which the subscribing stockholders might authorize to be paid directly to the treasurer of the proposed Bank in payment of the subscriptions; that the President and members of the Board of Directors of the CMI, who are the individuals-defendants-appellees in the instant case, constituted themselves as the Interim Board of Organizers; that said Board sent out, on or about November 20, 1962, to the CMI stockholders, including the plaintiffs-appellants, circular letters with “Pre-Incorporation Agreement to Subscribe” forms that provided that the payment of the subscription should be made in cash from time to time or by the application of the special dividend declared by the CMI, and that the subscription must be made within the period from December 4, 1962 to January 15, 1963, “otherwise such subscription right shall be deemed to have been thereby ipso facto waived and released in favor of the Board of Organizers of the Defendant Bank and their assignees”; that the plaintiffs-appellants accomplished and filed their respective “Pre-Incorporation Agreement to Subscribe” and paid in full their subscriptions; that plaintiffs-appellants and the other CMI subscribing stockholders in whose behalf the action was brought also subscribed to a very substantial amount of shares; that on June 25, 1963, the Board of Organizers caused the execution of the Articles or Incorporation of the proposed Bank indicating an original subscription of 50,000 shares worth P5,000,000 subscribed and paid only by six of the individuals-defendants-appellees, namely, Antonio P. Madrigal, Jose P. Madrigal Simon R. Paterno, Fermin Z. Caram, Jr., Claudio Teehankee, and Wilfredo C. Tecson, thereby excluding the plaintiffs-appellants and the other CMI subscribing stockholders who had already subscribed; that the execution of said Articles of Incorporation was “in violation of law and in breach of trust and contractual agreement as a means to gain control of Defendant Bank by Defendant Individuals and persons or entities chosen by them and for their personal profit or gain in

565

VOL. 58, AUGUST 26, 1974

565


disregard of the rights of Plaintiffs and other CMI Subscribing Stockholders;” that the paid-in capital stock was raised, as required by the Monetary Board, to P8,000,000.00, and individuals-defendants-appellees caused to be issued from the unissued shares 30,000 shares amounting to P3,000,000.00, all of which were again subscribed and paid for entirely by individuals-defendants-appellees or entities chosen by them “to the exclusion of Plaintiffs and other CMI subscribing stockholders” “in violation of law and breach of trust and of the contractual agreement embodied in the contractual agreement of March 28, 1962"; that the Articles were filed with the Securities and Exchange Commission which issued the Certificate of Incorporation on June 25, 1963; that as of the date of the Complaint, the plaintiffs-appellants and other CMI subscribing stockholders had been denied, through the unlawful acts and manipulation of the defendant Bank and Individuals-defendants-appellees, the right to subscribe at par value, in proportion to their equities established under their respective “Pre-Incorporation Agreements to Subscribe” to the capital stock, i.e., (a) to the original issue of 50,000 shares and/or (b) to the additional issue of 30,000 shares, and/or (c) in that portion of said original or additional issue which was unsubscribed; that the individuals-defendants-appellees and the persons chosen by them had unlawfully acquired stockholdings in the defendant-appellee Bank in excess of what they were lawfully entitled and held such shares “in trust” for the plaintiffs-appellants and the other CMI stockholders; that it would have been vain and futile to resort to intracorporate remedies under the facts and circumstances alleged above. As relief on the first cause of action, plaintiffs-appellants prayed that the subscriptions and shareholdings acquired by the individuals-defendants-appellees and the persons chosen by them, to the extent that plaintiffs-appellants and the other CMI stockholders had been deprived of their right to subscribe, be annulled and transferred to plaintiffs-appellants and other CMI subscribing stockholders.

Besides reproducing all the above allegations in the other causes of action, plaintiffs-appellants further alleged under the second cause of action that on or about August 28, 1963, defendants-appellees Antonio P. Madrigal, Jose P. Madrigal; Fermin Z. Caram, Jr., and Wilfredo C. Tecson “falsely certified to the calling of a special stockholders’ meeting allegedly

566

566



pursuant to due notice and call of Defendant Bank” although plaintiffs-appellants and other CMI stockholders were not

notified thereof, and amended the Articles of Incorporation increasing the number of Directors from 6 to 7, and had the illegally created position of Director filled up by defendant-appellee Alfonso Juan Olondriz, who was not competent or qualified to hold such position. In the third cause of action, plaintiffs-appellants claimed actual damages in an amount equivalent to the difference between the par value of the shares they were entitled, but failed, to acquire and the higher market value of the same shares. In the fourth cause of action, plaintiffs-appellants claimed moral damages; in the fifth, exemplary damages; and in the sixth, attorney’s fees.

In his manifestation to the court on January 4, 1964, Francisco Sevilla, who was one of the original plaintiffs, withdrew. On January 15, 1964 Cipriano Azada, Maria Cristina Olondriz Pertierra, Maria del Puy Olondriz de Stevens (who later withdrew as intervenors-appellants) and Carmen Sievert de Amoyo, filed a motion to intervene, and to join the plaintiffs-appellants on record, to which motion defendants-appellees, except Fermin Z. Caram, Jr., filed, on January 17, 1964 their opposition.

On February 7, 1964 defendants-appellees, except Fermin Z. Caram, Jr., filed a motion to dismiss on the grounds that (a) plaintiffs-appellants had no legal standing or capacity to institute the alleged class suit; (b) that the complaint did not state a sufficient and valid cause of action; and (c) that plaintiffs-appellants’ complaint against the increase of the number of directors did not likewise state a cause of action. Plaintiffs-appellants filed their opposition thereto on February 21,1964.

On March 4,1964 appellants, plaintiffs and intervenors, filed a verified petition for a writ of preliminary injunction to enjoin defendants-appellees from considering or ratifying by resolution, at the meeting of the stockholders of defendant-appellee Bank to be held the following day, the unlawful apportionment of the shares of the defendant-appellee Bank and the illegal amendment to its Articles of Incorporation increasing the number of Directors, The Court, after hearing, granted the writ, but subsequently set it aside upon the appellees’ filing a counterbond.

Some subscribers to the capital stock of the Bank like

567

VOL. 58, AUGUST 26, 1974

567


Concepcion Zuluaga, et al., and Carlos Moran Sison, et al., filed separate manifestations that they were opposing and disauthorizing the suit of plaintiffs-appellants.

On March 7, 1964 defendants-appellees, except Fermin Z. Caram, Jr., filed a supplemental ground for their motion to dismiss, to wit, that the stockholders, except Fermin Z. Caram, Jr., who abstained, had unanimously, at their regular annual meeting held on March 5, 1964, ratified and confirmed all the actuations of the organizers-directors in the incorporation, organization and establishment of the Bank.

In its order, dated March 21,1964, the trial court granted the motion to dismiss, holding, among other things, that the class suit could not be maintained because of the absence of a showing in the complaint that the plaintiffs-appellants were sufficiently numerous and representative, and that the complaint failed to state a cause of action. From said order, appellants, plaintiffs and intervenors, interposed this appeal to this Court on questions of law and fact, contending that the lower court erred as follows:

I. In holding that plaintiffs-appellants could not maintain the present class suit because of the absence of a showing in the complaint that they were sufficiently numerous and representative; II. In holding that the instant action could not be maintained as a class suit because plaintiffs-appellants did not have a common legal interest in the subject matter of the suit; III. In dismissing the present class suit on the ground that it did not meet the requirements of Rule 3, section 12 of the Rules of Court; IV. In holding that the complaint was fatally defective in that it failed to state with particularity that plaintiffs-appellants had resorted to, and exhausted, intra-corporate remedies; V. In resolving defendants-appellees’ motion on the basis of f acts not alleged in the complaint; VI. In holding that plaintiffs-appellants’ complaint stated no valid cause of action against defendants-appellees; VII. In not holding that a trust relationship existed between the Interim Board of Organizers of defendant-appellee Bank and the CMI subscribing stockholders and in not holding that the waiver was in favor of the Board of Trustees for the CMI subscribing stockholders;

568

568



VIII. In holding that the failure of plaintiffs-appellants to allege that they had paid or had offered to pay for the shares allegedly pertaining to them constituted another ground for dismissal; IX. In holding that the allegations under the second cause of action stated no valid cause of action due to a fatal

omission to allege that plaintiffs-appellants were stockholders of record at the time of the holding of the special stockholders’ meeting; X. In holding that plaintiffs-appellants’ complaint stated no cause of action against defendant-appellee Bank; and XI. In considering the resolution of ratification and confirmation and in holding that the resolution rendered the issues in this case moot.

The assigned error revolve around two questions, namely: (1) whether the instant action could be maintained as a class suit, and (2) whether the complaint stated a cause of action. These issues alone will be discussed.

1. Appellants contended in the first three assigned errors that the trial court erred in holding that the present suit could not be maintained as a class suit, and in support thereof argued that the propriety of a class suit should be determined by the common interest in the subject matter of the controversy; that in the instant case there existed such common interest which consisted not only in the recovery of the shares of which the appellants were unlawfully deprived, but also in divesting the individuals-defendants-appellees and the persons or entities chosen by them of control of the appellee Bank.1; that the complaint showed that besides the four plaintiffs-appellants of record, and the four movant-intervenors-appellants there were in the appellee Bank many other stockholders who, though similarly situated as the appellants, did not formally include themselves as parties on record in view of the representative character of the suit; that the test, in order to determine the legal standing of a party to institute a class suit, was not one of number, but whether or not the interest of said party was representative of the persons in whose behalf the class suit was instituted; that granting arguendo, that the plaintiffs-appellants were not sufficiently numerous and representative,

________________

1 Brief for Plaintiffs-Appellants and Movants-Intervenors-Appellants, page 25.

569

VOL. 58, AUGUST 26, 1974

569


the court should not have dismissed the action, for insufficiency of number in a class suit was not a ground for a motion to dismiss, and the court should have treated the suit as an action under Rule 3, section 6, of the Rules of Court which permits a joinder of parties.

Defendants-appellees, on the contrary, stressed that the instant suit was instituted as a class suit and the plaintiffs-appellants did not sue in their individual capacities for the protection of their individual interests; that the plaintiffs-appellants of record could not be considered numerous and representative, as said plaintiffs-appellants were only four out of 1,500 stockholders, and owned only 8 shares out of the 80,000 shares of stock of the appellee Bank; that even if to the four plaintiffs-appellants were added the four movants-intervenors-appellants the situation would be the same as two of the intervenors, to wit, Ma. Cristina Olondriz Pertierra and Ma. del Puy Olondriz de Stevens, could not sue as they did not have their husbands’ consent; that it was necessary that in a class suit the complaint itself should allege facts showing that the plaintiffs were sufficiently numerous and representative, and this did not obtain in the instant case, as the complaint did not even allege how many other CMI stockholders were “similarly situated”; that the withdrawal of one plaintiff, Francisco Sevilla, the subsequent disclaimers of any interest in the suit made in two separate pleadings by other CMI stockholders and the disauthorization of their being represented by plaintiffs-appellants by the 986 (out of 1,663) stockholders who attended the annual meeting of bank stockholders on March 5, 1964, completely negated plaintiffs-appellants’ pretension that they were sufficiently numerous and representative or that there were many other stockholders similarly situated whom the plaintiffs-appellants allegedly represented; that plaintiffs-appellants did not have that common or general interest required by the Rules of Court in the subject matter of the suit.2

In their Reply Brief, appellants insisted that non-compliance with Section 12, Rule 3, not being one enumerated in Rules 16 and 17, was not a ground for dismissal; that the requirements for a class had been complied with; that the required common interest existed even if the interests were several for there was a common question of law or fact and a common relief was

_________________

2 Brief for Defendants-Appellees, pages 54–70.

570

570



sought; that the common or general interest could be in the object of the action, in the result of the proceedings, or in the question involved in the action, as long as there was a common right based on the same essential facts; that plaintiffs-appellants adequately represented the aggrieved group of bank stockholders, inasmuch as appellants’ interests

were not antagonistic to those of the latter, and appellants were in the same position as the group in whose behalf the complaint was filed.

The governing statutory provision for the maintenance of a class suit is Section 12 of Rule 3 of the Rules of Court, which reads as follows:

“Sec. 12. Class suit.—When the subject matter of the controversy is one of common or general interest to many persons, and the parties are so numerous that it is impracticable to bring them all before the court. one or more may sue or defend for the benefit of all. But in such case the court shall make sure that the parties actually before it are sufficiently numerous and representative so that all interests concerned are fully protected. Any party in interest shall have a right to intervene in protection of his individual interest.”

The necessary elements for the maintenance of a class suit are accordingly: (1) that the subject matter of the controversy be one of common or general interest to many persons, and (2) that such persons be so numerous as to make it impracticable to bring them all to the court. An action does not become a class suit merely because it is designated as such in the pleadings. Whether the suit is or is not a class suit depends upon the attending facts, and the complaint, or other pleading initiating the class action should allege the existence of the necessary facts, to wit, the existence of a subject matter of common interest, and the existence of a class and the number of persons in the alleged class,3 in order that the court might be enabled to determine whether the members of the class are so numerous as to make it impracticable to bring them all before the court, to contrast the number appearing on the record with the number in the class and to determine whether claimants on

________________

3 The existence of persons similarly situated must be a reality, not a possibility. A likelihood that there are other persons similarly situated is not enough, Barron and Holtsoff, Federal Practice and Procedure, Vol. 2, page 156.

571

VOL. 58, AUGUST 26, 1974

571


record adequately represent the class and the subject matter of general or common interest.4

The complaint in the instant case explicitly declared that the plaintiffs-appellants instituted the “present class suit under Section 12, Rule 3, of the Rules of Court in behalf of CMI

subscribing stockholders"5 but did not state the number of said CMI subscribing stockholders so that the trial court could not infer, much less make sure as explicitly required by the statutory provision, that the parties actually before it were sufficiently numerous and representative in order that all interests concerned might be fully protected, and that it was impracticable to bring such a large number of parties before the court.

The statute also requires, as a prerequisite to a class suit, that the subject-matter of the controversy be of common or general interest to numerous persons. Although it has been remarked that the “innocent ‘common or general interest’ requirement is not very helpful in determining whether or not the suit is proper",6 the decided cases in our jurisdiction have more incisively certified the matter when there is such common or general interest in the subject matter of the controversy. By the phrase “subject matter of the action” is meant “the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the def endant."7

This Court has ruled that a class suit did not lie in an action for recovery of real property where separate portions of the same parcel were occupied and claimed individually by different parties to the exclusion of each other, such that the different parties had determinable, though undivided interests, in the property in question.8 It has likewise held that a class

________________

4 Cf. Moore’s Federal Practice 2d ed., Vol. III, pages 3423–3424; 4 Federal Rules Service, pages 454–455; Johnson, et al., vs. Riverland Levee Dist., et al., 117 F 2d 711, 715.

5 Record on Appeal, pages 2, 8–9.

6 Moore’s Federal Practice, 2 ed., Vol. III, page 3417.

7 Moran, Comments on the Rules of Court, 1963 ed., Vol. 1, page 92, citing Pomeroy’s Code Remedies, 492.

8 Rallonza vs. Evangelista, 15 Phil. 531; Valencia vs. City of Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096, 1101; Borlasa vs. Polistico, 47 Phil. 345, 349.

572

572



occupying different portions of a big parcel of land, where each defendant had an interest only in the particular portion he was occupying, which portion was completely different from the other portions individually occupied by other defendants, for the applicable section 118 of the Code of Civil Procedure relates to a common and general interest in single specific things and not to distinct ones.9 In an action for the recovery of amounts that represented surcharges allegedly collected by the city from some 30,000 customers of four movie houses, it was held that a class suit did not lie, as no one plaintiff had any right to, or any share in the amounts individually claimed by the others, as each of them was entitled, if at all, only to the return of what he had personally paid.10

The interest, subject matter of the class suits in the abovecited cases, is analogous to the interest claimed by appellants in the instant case. The interest that appellants, plaintiffs and intervenors, and the CMI stockholders had in the subject matter of this suit—the portion of stocks offering of the Bank left unsubscribed by CMI stockholders who failed to exercise their right to subscribe on or before January 15, 1963—was several, not common or general in the sense required by the statute. Each one of the appellants and the CMI stockholders had determinable interest; each one had a right, if any, only to his respective portion of the stocks. No one of them had any right to, or any interest in, the stock to which another was entitled. Anent this point, the trial court correctly remarked:

“It appears to be the theory of the plaintiffs borne out by the prayer, that each subscribing CMI stockholder is entitled to further subscribe to a certain proportion, depending upon his stockholding in the CMI, of the P8 million capital stock of the defendant bank open to subscription (out of the P20 million authorized capital stock) as well as the unsubscribed portion of the P8 million stock offering which were left unsubscribed by those CMI stockholders who for one reason or another had failed to exercise their subscription rights on or before

_________________

9 Berses vs. Villanueva, 25 Phil. 473. It is to be noted that Section 12 of Rule 3 is the same as section 12 of former Rule 3, which was taken from section 118 of Act. 190. Moran, Comments on the Rules of Court, 1963 ed., Vol. 1, page 167.

10 Valencia vs. City of Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096,1101.

573

VOL. 58, AUGUST 26, 1974

573


January 15, 1963. Under the plaintiffs’ theory therefore, each subscribing CMI stockholder was entitled to subscribe to a definite number of shares both in the original offering of P8 million and in that part thereof not subscribed on or before the deadline mentioned, so that one subscribing CMI stockholder may be entitled to subscribe to one share, another to 3 shares and a third to 11 shares, and so on, depending upon the amount and extent of CMI stockholding. But except for the fact that a question of law—the proper interpretation of the waiver provisions of the CMI stockholders’ resolution of March 28, 1962—is common to all, each CMI subscribing stock holder has a legal interest in, and a claim to, only his respective proportion of shares in the defendant bank, and none with regard to any of the shares to which another stockholder is entitled. Thus, plaintiff Ismael Mathay has no legal interest in, or claim to, any share claimed by any or all of his co-plaintiffs from the defendant individuals. Hence, no CMI subscribing stockholder or, for that matter, not any number of CMI stockholders can maintain a class suit in behalf of others, x x x x x".11

Even if it be assumed, for the sake of argument, that the appellants and the CMI stockholders suffered wrongs that had been committed by similar means and even pursuant to a single plan of the Interim Board of Organizers of the Bank, the wrong suffered by each of them would constitute a wrong separate from those suffered by the other stockholders, and those wrongs alone would not create that common or general interest in the subject matter of the controversy as would entitle any one of them to bring a class suit on behalf of the others. Anent this point it has been said that:

“Separate wrongs to separate persons, although committed by similar means and even pursuant to a single plan, do not alone create a’common’ or ‘general’ interest in those who are wronged so as to entitle them to maintain a representative action."12

Appellants, however, insisted, citing American authorities,13

________________

11 Record on Appeal, pages 284–285.

12 Society Milion Athena, Inc., et al. vs. National Bank of Greece, et al., 22 N.E. 2d 374.

13 Prof. Sutherland’s address before the Cincinati Bar Association regarding the new Federal Rules, December 10, 1938; 1 Cincinnati Law Review, page 1; Clark vs. Chase National Bank, 6 Fed. Rule Service 256, cited in Francisco, The Revised Rules of Court, 1973, Vol. I. pages 294, 295.

574

574



that a class suit might be brought even if the interests of plaintiffs-appellants might be several as long as there was a common question of law or fact affecting them and a common relief was sought. We have no conflict with the authorities cited; those were rulings under the Federal Rules of Civil Procedure, pursuant to Rule 23 of which, there were three types of class suits, namely: the true, the hybrid, and the spurious, and these three had only one feature in common, that is, in each the persons constituting the class must be so numerous as to make it impracticable to bring them all before the court. The authorities cited by plaintiffs-appellants refer to the spurious class action (Rule 23 (a) (3) which involves a right sought to be enforced, which is several, and there is a common question of law or fact affecting the several rights and a common relief is sought.14 The spurious class action is merely a permissive joinder device; between the members of the class there is no jural relationship, and the right or liability of each is distinct, the class being formed solely by the presence of a common question of law or fact.15 This permissive joinder is provided in Section 6 of Rule 3, of our Rules of Court. Such joinder is not and cannot be regarded as a class suit, which this action purported and was intended to be as per averment of the complaint.

It may be granted that the claims of all the appellants involved the same question of law. But this alone, as said above, did not constitute the common interest over the subject matter indispensable in a class suit. The right to purchase or subscribe to the shares of the proposed Bank, claimed by appellants herein, is analogous to the right of preemption that stockholders have when their corporation increases its capital. The right of preemption, it has been said, is personal to each stockholder,16 and while a stockholder may maintain a suit to compel the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a representative action on behalf of other stockholders who are

_________________

14 See Barron and Holtsoff, Federal Practice and Procedure Vol 2, page 139.

15 Moore’s Federal Practice, Vol. 3, pages 3442–3443.

16 11 Fletcher’s Cyclopedia of the Law of Private Corporation 1932, page 231.

575

VOL. 58, AUGUST 26, 1974

575


similarly situated.17 By analogy, the right of each of the appellants to subscribe to the waived stocks was personal, and no one of them could maintain on behalf of others similarly situated a representative suit.

Straining to make it appear that appellants and the CMI subscribing stockholders had a common or general interest in the subject matter of the suit, appellants stressed in their brief that one of the reliefs sought in the instant action was “to divest defendant individuals and the persons or entities chosen by them of control of the defendant bank."18 This relief allegedly sought by appellants did not, however, appear either in the text or in the prayer of the complaint.

Appellants, furthermore, insisted that insufficiency of number in a class suit was not a ground for dismissal of one action. This Court has, however, said that where it appeared that no sufficient representative parties had been joined, the dismissal by the trial court of the action, despite the contention by plaintiffs that it was a class suit, was correct.19 Moreover. insofar as the instant case is concerned, even if it be granted for the sake of argument, that the suit could not be dismissed on that ground, it could have been dismissed, nevertheless, on the ground of lack of cause of action which will be presently discussed.

2. Appellants supported their assigned error that the court erred in holding that the complaint stated no valid cause of action, by claiming that paragraph 15 together with the other allegations of the complaint to the effect that defendants-appellees had unlawfully acquired stockholdings in the capital stock of defendant-appellee Bank in excess of what they were lawfully entitled to, in violation of law and in breach of trust and the contractual agreement, constituted a valid and sufficient cause of action;20 and that only the allegations in the complaint should have been considered by the trial court in

_________________

17 Dousman v. Wisconsin & L.S. Min. & Smelting Co., 40 Wis. 418 in 12 L.R.A., New Series, 1908, page 972.

18 Brief for the Plaintiffs-Appellants and Movants-Intervenors-Appellants, page 25.

19 Niembra, et al., vs. Director of Lands, L-20084, July 17, 1964, 11 SCRA 525, 528.

20 Brief for Plaintiffs-Appellants and Movants-Intervenors-Appellants, pages 32–34.

576

576



determining whether the complaint stated a cause of action or not.

Defendants-appellees, on the contrary, maintained that the allegations of the complaint should not be the only ones to be considered in determining whether there is a cause of action; that even if the ultimate facts alleged in the first cause of action of the complaint be the only ones considered, the complaint would still f ail to state a valid cause of action on the following grounds: first, there was no allegation regarding appellants’ qualification to subscribe to the capital stock of the appellee Bank, for under the CMI stockholders’ resolution of March 28, 1962, only those qualified under the law were entitled to subscribe, and under the regulations of the Monetary Board, only natural-born Filipino citizens could be stockholders of a banking corporation organized under the laws of the Philippines, and nowhere did the complaint allege that plaintiffs-appellants were natural born Filipino citizens.21 Second, appellants’ averment in paragraph 8 that they “subscribed,” and their averment in paragraph 15 that they were “denied the right to subscribe x x x to the capital stock of the defendant Bank”, were inconsistent, and hence neutralized each other, thereby leaving in shambles the first cause of action. Third, there was no allegation that appellants had not yet received or had not been issued the corresponding certificates of stock covering the shares they had subscribed and paid for. Fourth, the allegations failed to show the existence of the supposed trust; and fifth, the complaint failed to allege that plaintiffs-appellants had paid or offered to pay for the shares allegedly pertaining to them.22

Let us premise the legal principles governing the motion to dismiss on the ground of lack of cause of action.

Section 1, Rule 16 of the Rules of Court, providing in part that:

Within the time for pleading a motion to dismiss may be made on any of the following grounds: x x x

"(g) That the complaint states no cause of action. x x x”

explicitly requires that the sufficiency of the complaint must be tested exclusively on the basis of the complaint itself and no

________________



577

VOL. 58, AUGUST 26, 1974

577


other should be considered when the ground for motion to dismiss is that the complaint states no cause of action. Pursuant thereto this Court has ruled that:

“As a rule the sufficiency of the complaint, when challenged in a motion to dismiss, must be determined exclusively on the basis of the facts alleged therein."23

It has been likewise held that a motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations of fact made in the complaint.24 It is to be noted that only the facts well pleaded in the complaint, and likewise, any inferences fairly deducible therefrom, are deemed admitted by a motion to dismiss. Neither allegations of conclusions25 nor allegations of facts the falsity of which the court may take judicial notice are deemed admitted.26 The question, therefore, submitted to the Court in a motion to dismiss based on lack of cause of action is not whether the facts alleged in the complaint are true, for these are hypothetically admitted, but whether the facts alleged are sufficient to constitute a cause of action such that the court may render a valid judgment upon the facts alleged therein.

A cause of action is an act or omission of one party in violation of the legal right of the other. Its essential elements are, namely: (1) the existence of a legal right in the plaintiff, (2) a correlative legal duty in the defendant, and (3) an act or omission of the defendant in violation of plaintiff s right with consequential injury or damage to the plaintiff for which he may maintain an action for the recovery of damages or other

_______________

23 Uy Chao vs. De la Rama Steamship Co., Inc. L-14495, September 29, 1962, 6 SCRA 69, 72. See also De Jesus, et al. vs. Belarmino, et al., 95 Phil. 365, 371; Dalandan, et al. vs. Julio, et al., L-19101, February 29, 1964, 10 SCRA 400; Remitere, et al. vs. Montinola Vda. de Yulo, et al., L-19751, February 28, 1966, 16 SCRA 250, 254; Acuña vs. Batac Producers Cooperative Marketing Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526, 531.

24 Alquigue vs. De Leon, L-15059, March 30, 1963, 7 SCRA 513, 515; Salazar, et al. vs. Ortizano, L-20480, 16 SCRA 662, 665; Acuña vs. Batac Producers Cooperative Marketing Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526, 531.

25 Dalandan vs. Julio, L-19101, February 29, 1964, 10 SCRA 400, 410.

26 71 CJS pages 906–912.

578

578



appropriate relief .27 On the other hand, Section 3 of Rule 6 of the Rules of Court provides that the complaint must state the ultimate facts constituting the plaintiffs cause of action. Hence, where the complaint states ultimate facts that constitute the three essential elements of a cause of action, the complaint states a cause of action;28 otherwise, the complaint must succumb to a motion to dismiss on that ground.

The legal principles having been premised, let us now analyze and discuss appellant’s various causes of action.

Appellants’ first cause of action, pursuant to what has been premised above, should.have consisted of: (1) the right of appellants as well as of the other CMI stockholders to subscribe, in proportion to their equities established under their respective “Pre-Incorporation Agreements to Subscribe”, to that portion of the capital stock which was unsubscribed because of failure of the CMI stockholders to exercise their right to subscribe thereto; (2) the legal duty of the appellees to have said portion of the capital stock to be subscribed by appellants and other CMI stockholders; and (3) the violation or breach of said right of appellants and other CMI stockholders by the appellees.

Did the complaint state the important and substantial facts directly forming the basis of the primary right claimed by plaintiffs? Before proceeding to elucidate this question, it should be noted that a bare allegation that one is entitled to something is an allegation of a conclusion. Such allegation adds nothing to the pleading, it being necessary to plead specifically the facts upon which such conclusion is founded.29 The complaint alleged that appellants were stockholders of the CMI; that as such stockholders, they were entitled, by virtue of the resolution of March 28, 1962, to subscribe to the capital stock of the proposed Consolidated Bank and Turst Co., at par value to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI as shown in the latter’s stock book as of January 15, 1963, the right to

________________

27 Ma-ao Sugar Central Co., Inc. vs. Barrios, et al., 79 Phil. 666, 667; Ramitere, et al. vs. Montinola Vda. de Yulo, et al. L-1975l, February 28, 1966, 16 SCRA 251, 255.

28 Community Investment and Finance Corp. vs. Garcia, 88 Phil. 215, 218.


subscribe to be exercised until January 15, 1963, provided said stockholders of the CMI were qualif ied under the law to become stockholders of the proposed Bank;30 that appellants accomplished and filed their respective “Pre-Incorporation Agreements to Subscribe” and fully paid the subscription.31

These alleged specific facts did not even show that appellants were entitled to subscribe to the capital stock of the proposed Bank, for said right depended on a condition precedent, which was, that they were qualified under the law to become stockholders of the Bank, and there was no direct averment in the complaint of the facts that qualified them to become stockholders of the Bank. The allegation of the fact that they subscribed to the stock did not, by necessary implication, show that they were possessed of the necessary qualifications to become stockholders of the proposed Bank.

Assuming arguendo that appellants were qualified to become stockholders of the Bank, they could subscribe, pursuant to the explicit terms of the resolution of March 28, 1962, “to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI' as of January 15, 1963.32 This was the measure of the right they could claim to subscribe to waived stocks. Appellants did not even aver that the stocks waived to the subscription of which they claimed the right to subscribe, were comprised in “the extent and amount” of their respective shareholdings in the CMI. It is not surprising that they did not make such an averment for they did not even allege the amount of shares of stock to which they claimed they were entitled to subscribe. The failure of the complaint to plead specifically the above facts rendered it impossible for the court to conclude by natural reasoning that the appellants and other CMI stockholders had a right to subscribe to the waived shares of stock, and made any allegation to that effect a conclusion of the pleader, not an ultimate fact, in accordance with the test suggested by the California Supreme Court, to wit:

“If from the facts in evidence, the result can be reached by that process of natural reasoning adopted in the investigation of truth, it becomes an ultimate fact, to be found as such. If, on the other hand,

________________



resort must be had to the artifical processes of the law, in order to reach a final determination, the result is a conclusion of law."33

Let us now pass to the second and third elements that would have constituted the first cause of action. Did the complaint allege as ultimate facts the legal duty of defendants-appellees to have a portion of the capital stock subscribed to by appellants? Did the complaint allege as ultimate facts that defendants-appellees had violated appellants’ right?

Even if it be assumed arguendo that defendants-appellees had the duty to have the waived stocks subscribed to by the CMI stockholders, this duty was not owed to all the CMI stockholders, but only to such CMI stockholders as were qualified to become stockholders of the proposed Bank. Inasmuch as it has been shown that the complaint did not contain ultimate facts to show that plaintiffs-appellants were qualified to become stockholders of the Bank, it follows that the complaint did not show that defendants-appellees were under duty to have plaintiffs-appellants subscribe to the stocks of the proposed Bank. It inevitably follows also that the complaint did not contain ultimate facts to show that the right of the plaintiffs-appellants to subscribe to the shares of the proposed Bank had been violated by defendants-appellees. How could a non-existent right be violated?

Let us continue the discussion further. The complaint alleged that by virtue of the resolution of March 28,1962, the President and Members of the Board of Directors of the CMI would be constituted as a Board of Organizers to undertake and carry out the organization of the Bank;34 that the Board of Organizers was constituted and proceeded with the establishment of the Bank;35 that the persons composing the Board of Organizers were the individuals-defendants-appellees;36 that the Board of Organizers sent our circular letters with “Pre-Incorporation Agreement to Subscribe” forms37 which specified, among others, “such subscription right shall be deemed ipso facto waived and released in favor of the

________________Mathay vs. Consolidated Bank and Trust Company

Board of Organizers of the defendant Bank and their assignees";38 that in the Articles of Incorporation prepared by the Board of Organizers, the individuals-defendants-appellees alone appeared to have subscribed to the 50,000 shares;39 and that individuals-defendants-appellees again subscribed to all the additional 30,000 shares.40 From these facts, appellants concluded that they were denied their right to subscribe in proportion to their equities;41 that the individuals-defendants-appellees unlawfully acquired stockholdings far in excess of what they were lawfully entitled in violation of law and in breach of trust and of contractual agreement;42 and that, because of matters already alleged, the individuals-defendants-appellees “hold their shares in the defendant bank in trust for plaintiffs."43

The allegeation in the complaint that the individuals-defendants-appellees held their shares “in trust” for plaintiffs-appellants without averment of the facts from which the court could conclude the existence of the alleged trust, was not deemed admitted by the motion to dismiss for that was a conclusion of law. Express averments “that a party was the beneficial owner of certain property; x x x that property or money was received or held in trust, or for the use of another; that particular funds were trust funds; that a particular transaction created an irrevocable trust; that a person held property as constructive trustee; that on the transfer of certain property a trust resulted” have been considered as mere conclusions of law.44 The facts alleged in the complaint did not, by logical reasoning, necessarily lead to the conclusion that defendants-appellees were trustees in favor of appellants of the shares of stock waived by the CMI stockholders who failed to exercise their right to subscribe. In this connection, it has been likewise said that:

“The general rule is that an allegation of duty in terms unaccompanied by a statement of the facts showing the existence of

________________

38 Paragraph 7(b) of Complaint; Record on Appeal; page 8.

39 Paragraph 9 of Complaint; Record on Appeal, page 9.

40 Paragraphs 11 and 12 of Complaint; Record on Appeal, page 11.

41 Paragraph 15 of Complaint.



44 47 C.J.S., page 78.

582

582



the duty, is a mere conclusion of law, unless there is a relation set forth from which the law raises the duty."45

In like manner, the allegation that individuals-defendants-appellees held said shares in trust was no more than an interpretation by appellants of the effect of the waiver clause of the Resolution and as such it was again a mere conclusion of law. It has been said that:

“The following are also conclusions of law: x x x an allegation characterizing an instrument or purporting to interpret it and state its effects, x x x"46

“Allegations in petition in the nature of conclusions about the meaning of contract, inconsistent with stated terms of the contract, cannot be considered."47

The allegation that the defendants-appellees acquired stockholdings far in excess of what they were lawfully entitled, in violation of law and in breach of trust and of contractual agreement, is also mere conclusion of law.

Of course, the allegation that there was a violation of trust duty was plainly a conclusion of law, for “a mere allegation that it was the duty of a party to do this or that, or that he was guilty of a breach of duty, is a statement of a conclusion, not of fact."48

“An averment x x x that an act was ‘unlawful’ or ‘wrongful’ is a mere legal conclusion or opinion of the pleader."49

Moreover, plaintiffs-appellants did not state in the complaint the amount of subscription the individual defendants-appellees were entitled to; hence there was no basis for the court to determine what amount subscribed to by them was excessive.

From what has been said, it is clear that the ultimate facts stated under the first cause of action are not sufficient to constitute a cause of action.

The further allegations in the second cause of action that the calling of a special meeting was “falsely certified”, that the seventh position of Director was “illegally created” and that

________________

45 71 C.J.S., pages 49–50.

46 41 Am. Jur., page 304.

47 71 C.J.S., page 41, citing D’Oench v. Gillioz, 139 SW 2d 921, 346 Mo. 179.


defendant Alfonso Juan Olondriz was “not competent or qualified” to be a director are mere conclusions of law, the same not being necessarily inferable from the ultimate facts stated in the first and second causes of action. It has been held in this connection that:

“An averment that x x x an act was ‘unlawful’ or ‘wrongful’ is a mere legal conclusion or opinion of the pleader. The same is true of allegations that an instrument was ‘illegally’ certified or x x x that an act was ‘arbitrarily’ done x x x"50

“A pleader states a mere conclusion when he makes any of the following allegations: that a party was incapacitated to enter into a contract or convey property x x x"51

The third, fourth, fifth and sixth causes of action depended on the first cause of action, which, as has been shown, did not state ultimate facts sufficient to constitute a cause of action. It stands to reason, therefore, that said causes of action would also be fatally defective.

It having been shown that the complaint failed to state ultimate facts to constitute a cause of action, it becomes unnecessary to discuss the other assignments of errors.

WHEREFORE, the instant appeal is dismissed, and the order dated March 21, 1964 of the Court of First Instance of Manila dismissing the complaint in Civil Case No. 55810 is affirmed, with costs in this instance against appellants.

It is so ordered.

Fernando, Barredo, Fernandez and Aquino, JJ., concur.

Antonio, J., took no part.

Appeal dismissed, order affirmed.

Notes.—The rules of pleading limit the statement of the cause of action only to such operative facts as give rise to the right of action of the plaintiff to obtain relief against the wrongdoer. The details of probative matter or particulars of evidence, statements of law, inferences and arguments need not be stated (De los Santos vs. Sheriff of Rizal, 64 Phil. 197; Ortiz vs. Garcia, 15 Phil. 192; La Insular vs. Jao Oge, 42 Phil. 366; Valmilero vs. Kong Chang Seng, 33 Phil. 84; Laguna Coconut Oil vs. Bank of the Philippine Islands, 44 Phil. 618).

________________

50 41 Am. Jur., page 303.

51 41 Am. Jur., page 304.

584

584



Neither is it proper to allege in a pleading inferences of facts from facts which are not stated in the complaint for these are not the ultimate facts required by law to be pleaded. (Alzua vs. Johnson, 21 Phil. 308; Tec Bi & Co. vs. Chartered Bank of India, 41 Phil. 596).

General allegations that a contract is valid or lawful, or is just or reasonable are mere conclusions of law. Likewise mere conclusions of law are allegations that a contract is void, voidable, invalid, illegal, ultra vires, or against public policy, without stating facts showing its invalidity. (See Remitere vs. Vda. de Yulo, 16 SCRA 251)

[Mathay vs. Consolidated Bank and Trust Company, 58 SCRA 559(1974)]

No. L-23136. August 26, 1974.*ISMAEL MATHAY, JOSEFINA MATHAY, DIOGRACIAS T. REYES and S. ADOR DIONISIO, plaintiffs-appellants, vs. THE CONSOLIDATED BANK AND TRUST COMPANY, JOSE MARINO OLONDRIZ, WILFRIDO C. TECSON, SIMON R. PATERNO, FERMIN Z. CARAM, JR., ANTONIO P. MADRIGAL, JOSE P. MADRIGAL, CLAUDIO TEEHANKEE, and ALFONSO JUAN OLONDRIZ, defendants-appellees. CIPRIANO AZADA, MARIA CRISTINA OLONDRIZ PERTIERRA jointly with her husband ARTURO PERTIERRA, and MARIA DEL PUY OLONDRIZ DE STEVENS, movants-intervenors-appellants.

Civil procedure; Class suit; Requisites of a class suit.—The necessary elements for the maintenance of a class suit are accordingly: (1) that the subject matter of the controversy be one of common or general interest to many persons, and (2) that such persons be so numerous as to make it impracticable to bring them all to the court.

Same; Same; Existence of a class suit depends upon the attending facts, 11 ot upon the designation in the complaint.—An action does not become a class suit merely because it is designated as such in the pleadings. Whether the suit is or is not a class suit depends upon the attending facts, and the complaint, or other pleading initiating the class action should allege the existence of the necessary facts, to wit, the existence of a subject matter of common interest, and the existence of a class and the number of persons in the alleged class, in order that the court might be enabled to determine whether the members of the class are so numerous as to make it impracticable to bring them all before the court, to contrast the number appearing on the record with the number in the class and to determine whether claimants on record adequately represent the class and the subject matter of general or common interest.

Same; Same; Meaning of phrase “subject matter of the action".—By the phrase “subject matter of the action” is meant “the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the defendant.”

________________

* SECOND DIVISION.

560

560



Same; Same; Class suit will not prosper where brought by stockholders who have determinable, though undivided

interest, in the property in question.—This Court has ruled that a class suit did not lie in an action for recovery of real property where separate portions of the same parcel were occupied and claimed individually by different parties to the exclusion of each other, such that the different parties had determinable, though undivided interests, in the property in question. x x x The interest, subject matter of the class suits in the above-cited cases, is analogous to the interest claimed by appellants in the instant case. The interest that appellants, plaintiffs and intervenors, and the CMI stockholders had in the subject matter of this suit—the portion of stocks offering of the Bank left unsubscribed by CMI stockholders who failed to exercise their right to subscribe on or before January 17, 1963—was several, not common or general in the sense required by the statute. Each one of the appellants and the CMI stockholders had determinable interest; each one had a right, if any, only to his respective portion of the stocks. No one had any right to, or any interest in, the stock to which another was entitled.

Same; Same; Wrongs committed to each individual stockholder would not create community of interest in subject matter of controversy.—Even if it be assumed, for the sake of argument, that the appellants and the CMI stockholders suffered wrongs that had been committed by similar means and even pursuant to a single plan of the Interim Board of Organizers of the Bank, the wrong suffered by each of them would constitute a wrong separate from those suffered by the other stockholders, and those wrongs alone would not create that common or general interest in the subject matter of the controversy as would entitle any one of them to bring a class suit on behalf of the others.

Same; Same; So-called “spurious class action” is merely a permissive joinder device and cannot be regarded as a class suit.—The .spurious class action is merely a permissive joinder device; between the members of the class there is not jural relationship, and the right or liability of each is distinct, the class being formed solely by the presence of a common question of law or fact. This permissive joinder is provided in Section 6 of Rule 3, of our Rules of Court. Such joinder is not and cannot be regarded as a class suit, which this action purported and was intended to be as per averment of the complaint.

Same; Same; Existence of common question of law would not suffice to maintain a class action.—It may be granted that the claims of all the appellants involved the same question of law. But this alone,

561

VOL. 58, AUGUST 26, 1974

561


as said above, did not constitute the common interest over the subject matter indispensable in a class suit. The right to purchase or subscribe to the shares of the proposed Bank, claimed by appellants herein, is analogous to the right of preemption that stockholders have when their corporation increases its capital. The right of preemption, it has been said, is personal to each stockholder, and while a stockholder may maintain a suit to compel the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a representative action on behalf of other stockholders who are similarly situated.

Same; Same; In a class suit there must be a showing that sufficient representative parties had been joined.—Where it appeared that no sufficient representative parties had been joined, the dismissal by the trial court of the action, despite the contention by plaintiffs that it was a class suit, was correct.

Same; Motion to Dismiss; When ground of motion to dismiss is lack of cause of action only allegations of the complaint must be considered.—As a rule the sufficiency of the complaint, when challenged in a motion to dismiss, must be determined exclusively on the basis of the facts alleged therein.

Same; Same; A motion to dismiss based on lack of cause of action hypothetically admits the truth of factual allegations in the complaint.—It is to be noted that only the facts well pleaded in the complaint, and likewise, any inferences fairly deducible therefrom, are deemed admitted by a motion to dismiss. Neither allegations of conclusions nor allegations of facts the falsity of which the court may take judicial notice are deemed admitted.

Same; Same; Test for determining sufficiency of cause of action in motion to dismiss.—The question, therefore, submitted to the Court in a motion to dismiss based on lack of cause of action is not whether the facts alleged in the complaint are true, for they are hypothetically admitted, but whether the facts alleged are sufficient to constitute a cause of action such that the court may render a valid judgment upon the facts alleged therein.

Same; Essential elements of a cause of action.—A cause of action is an act or omission of one party in violation of the legal right of the other. Its essential elements are, namely: (1) the existence of a legal right in the plaintiff, (2) a correlative legal duty in the defendant, and (3) an act or omission of the defendant in violation of plaintiff s right with consequential injury or damage to the plaintiff for which he may

562

562



maintain an action for the recovery of damages or other appropriate relief.

Same; Allegation that one is entitled to something is a conclusion of law.—A bare allegation that one is entitled to something is an allegation of a conclusion. Such allegation adds nothing to the pleading, it being necessary to plead specifically the facts upon which conclusion is founded. The complaint alleged that appellants were stockholders of the CMI; that as such stockholders, they were entitled, by virtue of the resolution of March 28, 1962, to subscribed to the capital stock of the proposed Consolidated Bank & Trust Co., at par value to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI as shown in the latter’s stock book as of January 15, 1963, the right to subscribe to be exercised until January 15, 1963, provided said stockholders of the CMI were qualified under the law to become stockholders of the proposed Bank; that appellants accomplished and filed their respective “Pre-Incorporation Agreements to Subscribe” and fully paid the subscription. These alleged specific facts did not even show that appellants were entitled to subscribe to the capital stock of the proposed Bank, for said right depended on a condition precedent, which was, that they were qualified under the law to become stockholders of the Bank, and there was no direct averment in the complaint of the facts that qualified them to become stockholders of the Bank. The allegation of the fact that they subscribed to the stock did not, by necessary implication, show that they were possessed of the necessary qualifications to become stockholders of the proposed Bank.

Same; Trusts; Question of law and facts; Allegation that defendants held shares as trustees for plaintiffs is a condusion of law.—The allegation in the complaint that the defendants-appellees held their shares “in trust” for plaintiffs-appellants without averment of the facts from which the court could conclude the existence of the alleged trust, was not deemed admitted by the motion to dismiss for that was a conclusion of law.

Same; Question of law and facts; Allegation that one acquired stocks in breach of law, trust or agreement is one of law.—The allegation that the defendants-appellees acquired stockholdings far in excess of what they were lawfully entitled, in violation of law and in breach of trust and of contractual agreement, is also mere conclusion of law.

Same; Same; Allegation that an act was unlawful or wrongful is a

563

VOL. 58, AUGUST 26, 1974

563


mere conclusion of law.—The further allegations that the calling of a special meeting was “falsely certified”, that the seventh position of Director was “illegally created” and that defendant Alfonso Juan Olondriz was “not competent or qualified” to be a director are mere conclusions of law, the same not being necessarily inferable from the ultimate facts stated in the first and second causes of action.

APPEAL from an order of the Court of First Instance of Manila. Arca, J.


Deogracias T. Reyes & Associates for appellants.

Tañada, Teehankee & Carreon for appellees.

Paterno Pedreña for appellee Fermin Z. Caram, Jr.

ZALDIVAR, J.:

In this appeal, appellants-plaintiffs and movants-intervenors; seek the reversal of the order dated March 21,1964 of the Court of First Instance of Manila dismissing the complaint together with all other pending incidents in Civil Case No. 55810.

The complaint in this case, filed on December 24, 1963 as a class suit, under Section 12, Rule 3, of the Rules of Court, contained six causes of action. Under the first cause of action, plaintiffs-appellants alleged that they were, on or before March 28, 1962, stockholders in the Consolidated Mines, Inc. (hereinafter referred to as CMI), a corporation duly organized and existing under Philippine laws; that the stockholders of the CMI, including the plaintiffs-appellants, passed, at a regular stockholders’ meeting, a Resolution providing: (a) that the Consolidated Bank & Trust Co. (hereinafter referred to as Bank) be organized with an authorized capital of P20,000,000.00; (b) that the organization be undertaken by a Board of Organizers composed of the President and Members of the Board of Directors of the CMI; (c) that all stockholders of the CMI, who were legally qualified to become stockholders, would be entitled to subscribe to the capital stock of the proposed Bank “at par value to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI," as shown in its stock books on a date to be fixed by the Board of Directors [which date was subsequently fixed as January 15, 1963], provided that the right to subscribe should

564

564



be exercised within thirty days from the date so fixed, and “that if such right to subscription be not so exercised then the stockholders concerned shall be deemed to have thereby waived and released ipso-facto their right to such subscription in favor of the Interim Board of Organizers of the Defendant Bank or their assignees;” and (d) that the Board of Directors of the CMI be authorized to declare a “special dividend” in an amount it would fix, which the subscribing stockholders might authorize to be paid directly to the treasurer of the proposed Bank in payment of the subscriptions; that the President and members of the Board of Directors of the CMI, who are the individuals-defendants-appellees in the instant case, constituted themselves as the Interim Board of Organizers; that said Board sent out, on or about November 20, 1962, to the CMI stockholders, including the plaintiffs-appellants, circular letters with “Pre-Incorporation Agreement to Subscribe” forms that provided that the payment of the subscription should be made in cash from time to time or by the application of the special dividend declared by the CMI, and that the subscription must be made within the period from December 4, 1962 to January 15, 1963, “otherwise such subscription right shall be deemed to have been thereby ipso facto waived and released in favor of the Board of Organizers of the Defendant Bank and their assignees”; that the plaintiffs-appellants accomplished and filed their respective “Pre-Incorporation Agreement to Subscribe” and paid in full their subscriptions; that plaintiffs-appellants and the other CMI subscribing stockholders in whose behalf the action was brought also subscribed to a very substantial amount of shares; that on June 25, 1963, the Board of Organizers caused the execution of the Articles or Incorporation of the proposed Bank indicating an original subscription of 50,000 shares worth P5,000,000 subscribed and paid only by six of the individuals-defendants-appellees, namely, Antonio P. Madrigal, Jose P. Madrigal Simon R. Paterno, Fermin Z. Caram, Jr., Claudio Teehankee, and Wilfredo C. Tecson, thereby excluding the plaintiffs-appellants and the other CMI subscribing stockholders who had already subscribed; that the execution of said Articles of Incorporation was “in violation of law and in breach of trust and contractual agreement as a means to gain control of Defendant Bank by Defendant Individuals and persons or entities chosen by them and for their personal profit or gain in

565

VOL. 58, AUGUST 26, 1974

565


disregard of the rights of Plaintiffs and other CMI Subscribing Stockholders;” that the paid-in capital stock was raised, as required by the Monetary Board, to P8,000,000.00, and individuals-defendants-appellees caused to be issued from the unissued shares 30,000 shares amounting to P3,000,000.00, all of which were again subscribed and paid for entirely by individuals-defendants-appellees or entities chosen by them “to the exclusion of Plaintiffs and other CMI subscribing stockholders” “in violation of law and breach of trust and of the contractual agreement embodied in the contractual agreement of March 28, 1962"; that the Articles were filed with the Securities and Exchange Commission which issued the Certificate of Incorporation on June 25, 1963; that as of the date of the Complaint, the plaintiffs-appellants and other CMI subscribing stockholders had been denied, through the unlawful acts and manipulation of the defendant Bank and Individuals-defendants-appellees, the right to subscribe at par value, in proportion to their equities established under their respective “Pre-Incorporation Agreements to Subscribe” to the capital stock, i.e., (a) to the original issue of 50,000 shares and/or (b) to the additional issue of 30,000 shares, and/or (c) in that portion of said original or additional issue which was unsubscribed; that the individuals-defendants-appellees and the persons chosen by them had unlawfully acquired stockholdings in the defendant-appellee Bank in excess of what they were lawfully entitled and held such shares “in trust” for the plaintiffs-appellants and the other CMI stockholders; that it would have been vain and futile to resort to intracorporate remedies under the facts and circumstances alleged above. As relief on the first cause of action, plaintiffs-appellants prayed that the subscriptions and shareholdings acquired by the individuals-defendants-appellees and the persons chosen by them, to the extent that plaintiffs-appellants and the other CMI stockholders had been deprived of their right to subscribe, be annulled and transferred to plaintiffs-appellants and other CMI subscribing stockholders.

Besides reproducing all the above allegations in the other causes of action, plaintiffs-appellants further alleged under the second cause of action that on or about August 28, 1963, defendants-appellees Antonio P. Madrigal, Jose P. Madrigal; Fermin Z. Caram, Jr., and Wilfredo C. Tecson “falsely certified to the calling of a special stockholders’ meeting allegedly

566

566



pursuant to due notice and call of Defendant Bank” although plaintiffs-appellants and other CMI stockholders were not

notified thereof, and amended the Articles of Incorporation increasing the number of Directors from 6 to 7, and had the illegally created position of Director filled up by defendant-appellee Alfonso Juan Olondriz, who was not competent or qualified to hold such position. In the third cause of action, plaintiffs-appellants claimed actual damages in an amount equivalent to the difference between the par value of the shares they were entitled, but failed, to acquire and the higher market value of the same shares. In the fourth cause of action, plaintiffs-appellants claimed moral damages; in the fifth, exemplary damages; and in the sixth, attorney’s fees.

In his manifestation to the court on January 4, 1964, Francisco Sevilla, who was one of the original plaintiffs, withdrew. On January 15, 1964 Cipriano Azada, Maria Cristina Olondriz Pertierra, Maria del Puy Olondriz de Stevens (who later withdrew as intervenors-appellants) and Carmen Sievert de Amoyo, filed a motion to intervene, and to join the plaintiffs-appellants on record, to which motion defendants-appellees, except Fermin Z. Caram, Jr., filed, on January 17, 1964 their opposition.

On February 7, 1964 defendants-appellees, except Fermin Z. Caram, Jr., filed a motion to dismiss on the grounds that (a) plaintiffs-appellants had no legal standing or capacity to institute the alleged class suit; (b) that the complaint did not state a sufficient and valid cause of action; and (c) that plaintiffs-appellants’ complaint against the increase of the number of directors did not likewise state a cause of action. Plaintiffs-appellants filed their opposition thereto on February 21,1964.

On March 4,1964 appellants, plaintiffs and intervenors, filed a verified petition for a writ of preliminary injunction to enjoin defendants-appellees from considering or ratifying by resolution, at the meeting of the stockholders of defendant-appellee Bank to be held the following day, the unlawful apportionment of the shares of the defendant-appellee Bank and the illegal amendment to its Articles of Incorporation increasing the number of Directors, The Court, after hearing, granted the writ, but subsequently set it aside upon the appellees’ filing a counterbond.

Some subscribers to the capital stock of the Bank like

567

VOL. 58, AUGUST 26, 1974

567


Concepcion Zuluaga, et al., and Carlos Moran Sison, et al., filed separate manifestations that they were opposing and disauthorizing the suit of plaintiffs-appellants.

On March 7, 1964 defendants-appellees, except Fermin Z. Caram, Jr., filed a supplemental ground for their motion to dismiss, to wit, that the stockholders, except Fermin Z. Caram, Jr., who abstained, had unanimously, at their regular annual meeting held on March 5, 1964, ratified and confirmed all the actuations of the organizers-directors in the incorporation, organization and establishment of the Bank.

In its order, dated March 21,1964, the trial court granted the motion to dismiss, holding, among other things, that the class suit could not be maintained because of the absence of a showing in the complaint that the plaintiffs-appellants were sufficiently numerous and representative, and that the complaint failed to state a cause of action. From said order, appellants, plaintiffs and intervenors, interposed this appeal to this Court on questions of law and fact, contending that the lower court erred as follows:

I. In holding that plaintiffs-appellants could not maintain the present class suit because of the absence of a showing in the complaint that they were sufficiently numerous and representative; II. In holding that the instant action could not be maintained as a class suit because plaintiffs-appellants did not have a common legal interest in the subject matter of the suit; III. In dismissing the present class suit on the ground that it did not meet the requirements of Rule 3, section 12 of the Rules of Court; IV. In holding that the complaint was fatally defective in that it failed to state with particularity that plaintiffs-appellants had resorted to, and exhausted, intra-corporate remedies; V. In resolving defendants-appellees’ motion on the basis of f acts not alleged in the complaint; VI. In holding that plaintiffs-appellants’ complaint stated no valid cause of action against defendants-appellees; VII. In not holding that a trust relationship existed between the Interim Board of Organizers of defendant-appellee Bank and the CMI subscribing stockholders and in not holding that the waiver was in favor of the Board of Trustees for the CMI subscribing stockholders;

568

568



VIII. In holding that the failure of plaintiffs-appellants to allege that they had paid or had offered to pay for the shares allegedly pertaining to them constituted another ground for dismissal; IX. In holding that the allegations under the second cause of action stated no valid cause of action due to a fatal

omission to allege that plaintiffs-appellants were stockholders of record at the time of the holding of the special stockholders’ meeting; X. In holding that plaintiffs-appellants’ complaint stated no cause of action against defendant-appellee Bank; and XI. In considering the resolution of ratification and confirmation and in holding that the resolution rendered the issues in this case moot.

The assigned error revolve around two questions, namely: (1) whether the instant action could be maintained as a class suit, and (2) whether the complaint stated a cause of action. These issues alone will be discussed.

1. Appellants contended in the first three assigned errors that the trial court erred in holding that the present suit could not be maintained as a class suit, and in support thereof argued that the propriety of a class suit should be determined by the common interest in the subject matter of the controversy; that in the instant case there existed such common interest which consisted not only in the recovery of the shares of which the appellants were unlawfully deprived, but also in divesting the individuals-defendants-appellees and the persons or entities chosen by them of control of the appellee Bank.1; that the complaint showed that besides the four plaintiffs-appellants of record, and the four movant-intervenors-appellants there were in the appellee Bank many other stockholders who, though similarly situated as the appellants, did not formally include themselves as parties on record in view of the representative character of the suit; that the test, in order to determine the legal standing of a party to institute a class suit, was not one of number, but whether or not the interest of said party was representative of the persons in whose behalf the class suit was instituted; that granting arguendo, that the plaintiffs-appellants were not sufficiently numerous and representative,

________________

1 Brief for Plaintiffs-Appellants and Movants-Intervenors-Appellants, page 25.

569

VOL. 58, AUGUST 26, 1974

569


the court should not have dismissed the action, for insufficiency of number in a class suit was not a ground for a motion to dismiss, and the court should have treated the suit as an action under Rule 3, section 6, of the Rules of Court which permits a joinder of parties.

Defendants-appellees, on the contrary, stressed that the instant suit was instituted as a class suit and the plaintiffs-appellants did not sue in their individual capacities for the protection of their individual interests; that the plaintiffs-appellants of record could not be considered numerous and representative, as said plaintiffs-appellants were only four out of 1,500 stockholders, and owned only 8 shares out of the 80,000 shares of stock of the appellee Bank; that even if to the four plaintiffs-appellants were added the four movants-intervenors-appellants the situation would be the same as two of the intervenors, to wit, Ma. Cristina Olondriz Pertierra and Ma. del Puy Olondriz de Stevens, could not sue as they did not have their husbands’ consent; that it was necessary that in a class suit the complaint itself should allege facts showing that the plaintiffs were sufficiently numerous and representative, and this did not obtain in the instant case, as the complaint did not even allege how many other CMI stockholders were “similarly situated”; that the withdrawal of one plaintiff, Francisco Sevilla, the subsequent disclaimers of any interest in the suit made in two separate pleadings by other CMI stockholders and the disauthorization of their being represented by plaintiffs-appellants by the 986 (out of 1,663) stockholders who attended the annual meeting of bank stockholders on March 5, 1964, completely negated plaintiffs-appellants’ pretension that they were sufficiently numerous and representative or that there were many other stockholders similarly situated whom the plaintiffs-appellants allegedly represented; that plaintiffs-appellants did not have that common or general interest required by the Rules of Court in the subject matter of the suit.2

In their Reply Brief, appellants insisted that non-compliance with Section 12, Rule 3, not being one enumerated in Rules 16 and 17, was not a ground for dismissal; that the requirements for a class had been complied with; that the required common interest existed even if the interests were several for there was a common question of law or fact and a common relief was

_________________


570

570



sought; that the common or general interest could be in the object of the action, in the result of the proceedings, or in the question involved in the action, as long as there was a common right based on the same essential facts; that plaintiffs-appellants adequately represented the aggrieved group of bank stockholders, inasmuch as appellants’ interests

were not antagonistic to those of the latter, and appellants were in the same position as the group in whose behalf the complaint was filed.

The governing statutory provision for the maintenance of a class suit is Section 12 of Rule 3 of the Rules of Court, which reads as follows:

“Sec. 12. Class suit.—When the subject matter of the controversy is one of common or general interest to many persons, and the parties are so numerous that it is impracticable to bring them all before the court. one or more may sue or defend for the benefit of all. But in such case the court shall make sure that the parties actually before it are sufficiently numerous and representative so that all interests concerned are fully protected. Any party in interest shall have a right to intervene in protection of his individual interest.”

The necessary elements for the maintenance of a class suit are accordingly: (1) that the subject matter of the controversy be one of common or general interest to many persons, and (2) that such persons be so numerous as to make it impracticable to bring them all to the court. An action does not become a class suit merely because it is designated as such in the pleadings. Whether the suit is or is not a class suit depends upon the attending facts, and the complaint, or other pleading initiating the class action should allege the existence of the necessary facts, to wit, the existence of a subject matter of common interest, and the existence of a class and the number of persons in the alleged class,3 in order that the court might be enabled to determine whether the members of the class are so numerous as to make it impracticable to bring them all before the court, to contrast the number appearing on the record with the number in the class and to determine whether claimants on

________________

3 The existence of persons similarly situated must be a reality, not a possibility. A likelihood that there are other persons similarly situated is not enough, Barron and Holtsoff, Federal Practice and Procedure, Vol. 2, page 156.

571

VOL. 58, AUGUST 26, 1974

571


record adequately represent the class and the subject matter of general or common interest.4

The complaint in the instant case explicitly declared that the plaintiffs-appellants instituted the “present class suit under Section 12, Rule 3, of the Rules of Court in behalf of CMI

subscribing stockholders"5 but did not state the number of said CMI subscribing stockholders so that the trial court could not infer, much less make sure as explicitly required by the statutory provision, that the parties actually before it were sufficiently numerous and representative in order that all interests concerned might be fully protected, and that it was impracticable to bring such a large number of parties before the court.

The statute also requires, as a prerequisite to a class suit, that the subject-matter of the controversy be of common or general interest to numerous persons. Although it has been remarked that the “innocent ‘common or general interest’ requirement is not very helpful in determining whether or not the suit is proper",6 the decided cases in our jurisdiction have more incisively certified the matter when there is such common or general interest in the subject matter of the controversy. By the phrase “subject matter of the action” is meant “the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the def endant."7

This Court has ruled that a class suit did not lie in an action for recovery of real property where separate portions of the same parcel were occupied and claimed individually by different parties to the exclusion of each other, such that the different parties had determinable, though undivided interests, in the property in question.8 It has likewise held that a class

________________

4 Cf. Moore’s Federal Practice 2d ed., Vol. III, pages 3423–3424; 4 Federal Rules Service, pages 454–455; Johnson, et al., vs. Riverland Levee Dist., et al., 117 F 2d 711, 715.

5 Record on Appeal, pages 2, 8–9.

6 Moore’s Federal Practice, 2 ed., Vol. III, page 3417.

7 Moran, Comments on the Rules of Court, 1963 ed., Vol. 1, page 92, citing Pomeroy’s Code Remedies, 492.

8 Rallonza vs. Evangelista, 15 Phil. 531; Valencia vs. City of Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096, 1101; Borlasa vs. Polistico, 47 Phil. 345, 349.

572

572



occupying different portions of a big parcel of land, where each defendant had an interest only in the particular portion he was occupying, which portion was completely different from the other portions individually occupied by other defendants, for the applicable section 118 of the Code of Civil Procedure relates to a common and general interest in single specific things and not to distinct ones.9 In an action for the recovery of amounts that represented surcharges allegedly collected by the city from some 30,000 customers of four movie houses, it was held that a class suit did not lie, as no one plaintiff had any right to, or any share in the amounts individually claimed by the others, as each of them was entitled, if at all, only to the return of what he had personally paid.10

The interest, subject matter of the class suits in the abovecited cases, is analogous to the interest claimed by appellants in the instant case. The interest that appellants, plaintiffs and intervenors, and the CMI stockholders had in the subject matter of this suit—the portion of stocks offering of the Bank left unsubscribed by CMI stockholders who failed to exercise their right to subscribe on or before January 15, 1963—was several, not common or general in the sense required by the statute. Each one of the appellants and the CMI stockholders had determinable interest; each one had a right, if any, only to his respective portion of the stocks. No one of them had any right to, or any interest in, the stock to which another was entitled. Anent this point, the trial court correctly remarked:

“It appears to be the theory of the plaintiffs borne out by the prayer, that each subscribing CMI stockholder is entitled to further subscribe to a certain proportion, depending upon his stockholding in the CMI, of the P8 million capital stock of the defendant bank open to subscription (out of the P20 million authorized capital stock) as well as the unsubscribed portion of the P8 million stock offering which were left unsubscribed by those CMI stockholders who for one reason or another had failed to exercise their subscription rights on or before

_________________

9 Berses vs. Villanueva, 25 Phil. 473. It is to be noted that Section 12 of Rule 3 is the same as section 12 of former Rule 3, which was taken from section 118 of Act. 190. Moran, Comments on the Rules of Court, 1963 ed., Vol. 1, page 167.

10 Valencia vs. City of Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096,1101.

573

VOL. 58, AUGUST 26, 1974

573


January 15, 1963. Under the plaintiffs’ theory therefore, each subscribing CMI stockholder was entitled to subscribe to a definite number of shares both in the original offering of P8 million and in that part thereof not subscribed on or before the deadline mentioned, so that one subscribing CMI stockholder may be entitled to subscribe to one share, another to 3 shares and a third to 11 shares, and so on, depending upon the amount and extent of CMI stockholding. But except for the fact that a question of law—the proper interpretation of the waiver provisions of the CMI stockholders’ resolution of March 28, 1962—is common to all, each CMI subscribing stock holder has a legal interest in, and a claim to, only his respective proportion of shares in the defendant bank, and none with regard to any of the shares to which another stockholder is entitled. Thus, plaintiff Ismael Mathay has no legal interest in, or claim to, any share claimed by any or all of his co-plaintiffs from the defendant individuals. Hence, no CMI subscribing stockholder or, for that matter, not any number of CMI stockholders can maintain a class suit in behalf of others, x x x x x".11

Even if it be assumed, for the sake of argument, that the appellants and the CMI stockholders suffered wrongs that had been committed by similar means and even pursuant to a single plan of the Interim Board of Organizers of the Bank, the wrong suffered by each of them would constitute a wrong separate from those suffered by the other stockholders, and those wrongs alone would not create that common or general interest in the subject matter of the controversy as would entitle any one of them to bring a class suit on behalf of the others. Anent this point it has been said that:

“Separate wrongs to separate persons, although committed by similar means and even pursuant to a single plan, do not alone create a’common’ or ‘general’ interest in those who are wronged so as to entitle them to maintain a representative action."12

Appellants, however, insisted, citing American authorities,13

________________

11 Record on Appeal, pages 284–285.

12 Society Milion Athena, Inc., et al. vs. National Bank of Greece, et al., 22 N.E. 2d 374.

13 Prof. Sutherland’s address before the Cincinati Bar Association regarding the new Federal Rules, December 10, 1938; 1 Cincinnati Law Review, page 1; Clark vs. Chase National Bank, 6 Fed. Rule Service 256, cited in Francisco, The Revised Rules of Court, 1973, Vol. I. pages 294, 295.

574

574



that a class suit might be brought even if the interests of plaintiffs-appellants might be several as long as there was a common question of law or fact affecting them and a common relief was sought. We have no conflict with the authorities cited; those were rulings under the Federal Rules of Civil Procedure, pursuant to Rule 23 of which, there were three types of class suits, namely: the true, the hybrid, and the spurious, and these three had only one feature in common, that is, in each the persons constituting the class must be so numerous as to make it impracticable to bring them all before the court. The authorities cited by plaintiffs-appellants refer to the spurious class action (Rule 23 (a) (3) which involves a right sought to be enforced, which is several, and there is a common question of law or fact affecting the several rights and a common relief is sought.14 The spurious class action is merely a permissive joinder device; between the members of the class there is no jural relationship, and the right or liability of each is distinct, the class being formed solely by the presence of a common question of law or fact.15 This permissive joinder is provided in Section 6 of Rule 3, of our Rules of Court. Such joinder is not and cannot be regarded as a class suit, which this action purported and was intended to be as per averment of the complaint.

It may be granted that the claims of all the appellants involved the same question of law. But this alone, as said above, did not constitute the common interest over the subject matter indispensable in a class suit. The right to purchase or subscribe to the shares of the proposed Bank, claimed by appellants herein, is analogous to the right of preemption that stockholders have when their corporation increases its capital. The right of preemption, it has been said, is personal to each stockholder,16 and while a stockholder may maintain a suit to compel the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a representative action on behalf of other stockholders who are

_________________

14 See Barron and Holtsoff, Federal Practice and Procedure Vol 2, page 139.

15 Moore’s Federal Practice, Vol. 3, pages 3442–3443.

16 11 Fletcher’s Cyclopedia of the Law of Private Corporation 1932, page 231.

575

VOL. 58, AUGUST 26, 1974

575


similarly situated.17 By analogy, the right of each of the appellants to subscribe to the waived stocks was personal, and no one of them could maintain on behalf of others similarly situated a representative suit.

Straining to make it appear that appellants and the CMI subscribing stockholders had a common or general interest in the subject matter of the suit, appellants stressed in their brief that one of the reliefs sought in the instant action was “to divest defendant individuals and the persons or entities chosen by them of control of the defendant bank."18 This relief allegedly sought by appellants did not, however, appear either in the text or in the prayer of the complaint.

Appellants, furthermore, insisted that insufficiency of number in a class suit was not a ground for dismissal of one action. This Court has, however, said that where it appeared that no sufficient representative parties had been joined, the dismissal by the trial court of the action, despite the contention by plaintiffs that it was a class suit, was correct.19 Moreover. insofar as the instant case is concerned, even if it be granted for the sake of argument, that the suit could not be dismissed on that ground, it could have been dismissed, nevertheless, on the ground of lack of cause of action which will be presently discussed.

2. Appellants supported their assigned error that the court erred in holding that the complaint stated no valid cause of action, by claiming that paragraph 15 together with the other allegations of the complaint to the effect that defendants-appellees had unlawfully acquired stockholdings in the capital stock of defendant-appellee Bank in excess of what they were lawfully entitled to, in violation of law and in breach of trust and the contractual agreement, constituted a valid and sufficient cause of action;20 and that only the allegations in the complaint should have been considered by the trial court in

_________________

17 Dousman v. Wisconsin & L.S. Min. & Smelting Co., 40 Wis. 418 in 12 L.R.A., New Series, 1908, page 972.

18 Brief for the Plaintiffs-Appellants and Movants-Intervenors-Appellants, page 25.

19 Niembra, et al., vs. Director of Lands, L-20084, July 17, 1964, 11 SCRA 525, 528.

20 Brief for Plaintiffs-Appellants and Movants-Intervenors-Appellants, pages 32–34.

576

576



determining whether the complaint stated a cause of action or not.

Defendants-appellees, on the contrary, maintained that the allegations of the complaint should not be the only ones to be considered in determining whether there is a cause of action; that even if the ultimate facts alleged in the first cause of action of the complaint be the only ones considered, the complaint would still f ail to state a valid cause of action on the following grounds: first, there was no allegation regarding appellants’ qualification to subscribe to the capital stock of the appellee Bank, for under the CMI stockholders’ resolution of March 28, 1962, only those qualified under the law were entitled to subscribe, and under the regulations of the Monetary Board, only natural-born Filipino citizens could be stockholders of a banking corporation organized under the laws of the Philippines, and nowhere did the complaint allege that plaintiffs-appellants were natural born Filipino citizens.21 Second, appellants’ averment in paragraph 8 that they “subscribed,” and their averment in paragraph 15 that they were “denied the right to subscribe x x x to the capital stock of the defendant Bank”, were inconsistent, and hence neutralized each other, thereby leaving in shambles the first cause of action. Third, there was no allegation that appellants had not yet received or had not been issued the corresponding certificates of stock covering the shares they had subscribed and paid for. Fourth, the allegations failed to show the existence of the supposed trust; and fifth, the complaint failed to allege that plaintiffs-appellants had paid or offered to pay for the shares allegedly pertaining to them.22

Let us premise the legal principles governing the motion to dismiss on the ground of lack of cause of action.

Section 1, Rule 16 of the Rules of Court, providing in part that:

Within the time for pleading a motion to dismiss may be made on any of the following grounds: x x x

"(g) That the complaint states no cause of action. x x x”

explicitly requires that the sufficiency of the complaint must be tested exclusively on the basis of the complaint itself and no

________________



577

VOL. 58, AUGUST 26, 1974

577


other should be considered when the ground for motion to dismiss is that the complaint states no cause of action. Pursuant thereto this Court has ruled that:

“As a rule the sufficiency of the complaint, when challenged in a motion to dismiss, must be determined exclusively on the basis of the facts alleged therein."23

It has been likewise held that a motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations of fact made in the complaint.24 It is to be noted that only the facts well pleaded in the complaint, and likewise, any inferences fairly deducible therefrom, are deemed admitted by a motion to dismiss. Neither allegations of conclusions25 nor allegations of facts the falsity of which the court may take judicial notice are deemed admitted.26 The question, therefore, submitted to the Court in a motion to dismiss based on lack of cause of action is not whether the facts alleged in the complaint are true, for these are hypothetically admitted, but whether the facts alleged are sufficient to constitute a cause of action such that the court may render a valid judgment upon the facts alleged therein.

A cause of action is an act or omission of one party in violation of the legal right of the other. Its essential elements are, namely: (1) the existence of a legal right in the plaintiff, (2) a correlative legal duty in the defendant, and (3) an act or omission of the defendant in violation of plaintiff s right with consequential injury or damage to the plaintiff for which he may maintain an action for the recovery of damages or other

_______________

23 Uy Chao vs. De la Rama Steamship Co., Inc. L-14495, September 29, 1962, 6 SCRA 69, 72. See also De Jesus, et al. vs. Belarmino, et al., 95 Phil. 365, 371; Dalandan, et al. vs. Julio, et al., L-19101, February 29, 1964, 10 SCRA 400; Remitere, et al. vs. Montinola Vda. de Yulo, et al., L-19751, February 28, 1966, 16 SCRA 250, 254; Acuña vs. Batac Producers Cooperative Marketing Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526, 531.

24 Alquigue vs. De Leon, L-15059, March 30, 1963, 7 SCRA 513, 515; Salazar, et al. vs. Ortizano, L-20480, 16 SCRA 662, 665; Acuña vs. Batac Producers Cooperative Marketing Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526, 531.

25 Dalandan vs. Julio, L-19101, February 29, 1964, 10 SCRA 400, 410.

26 71 CJS pages 906–912.

578

578



appropriate relief .27 On the other hand, Section 3 of Rule 6 of the Rules of Court provides that the complaint must state the ultimate facts constituting the plaintiffs cause of action. Hence, where the complaint states ultimate facts that constitute the three essential elements of a cause of action, the complaint states a cause of action;28 otherwise, the complaint must succumb to a motion to dismiss on that ground.

The legal principles having been premised, let us now analyze and discuss appellant’s various causes of action.

Appellants’ first cause of action, pursuant to what has been premised above, should.have consisted of: (1) the right of appellants as well as of the other CMI stockholders to subscribe, in proportion to their equities established under their respective “Pre-Incorporation Agreements to Subscribe”, to that portion of the capital stock which was unsubscribed because of failure of the CMI stockholders to exercise their right to subscribe thereto; (2) the legal duty of the appellees to have said portion of the capital stock to be subscribed by appellants and other CMI stockholders; and (3) the violation or breach of said right of appellants and other CMI stockholders by the appellees.

Did the complaint state the important and substantial facts directly forming the basis of the primary right claimed by plaintiffs? Before proceeding to elucidate this question, it should be noted that a bare allegation that one is entitled to something is an allegation of a conclusion. Such allegation adds nothing to the pleading, it being necessary to plead specifically the facts upon which such conclusion is founded.29 The complaint alleged that appellants were stockholders of the CMI; that as such stockholders, they were entitled, by virtue of the resolution of March 28, 1962, to subscribe to the capital stock of the proposed Consolidated Bank and Turst Co., at par value to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI as shown in the latter’s stock book as of January 15, 1963, the right to

________________

27 Ma-ao Sugar Central Co., Inc. vs. Barrios, et al., 79 Phil. 666, 667; Ramitere, et al. vs. Montinola Vda. de Yulo, et al. L-1975l, February 28, 1966, 16 SCRA 251, 255.

28 Community Investment and Finance Corp. vs. Garcia, 88 Phil. 215, 218.

29 41 Am. Jur., page 303.

579

VOL. 58, AUGUST 26, 1974

579


subscribe to be exercised until January 15, 1963, provided said stockholders of the CMI were qualif ied under the law to become stockholders of the proposed Bank;30 that appellants accomplished and filed their respective “Pre-Incorporation Agreements to Subscribe” and fully paid the subscription.31

These alleged specific facts did not even show that appellants were entitled to subscribe to the capital stock of the proposed Bank, for said right depended on a condition precedent, which was, that they were qualified under the law to become stockholders of the Bank, and there was no direct averment in the complaint of the facts that qualified them to become stockholders of the Bank. The allegation of the fact that they subscribed to the stock did not, by necessary implication, show that they were possessed of the necessary qualifications to become stockholders of the proposed Bank.

Assuming arguendo that appellants were qualified to become stockholders of the Bank, they could subscribe, pursuant to the explicit terms of the resolution of March 28, 1962, “to the same extent and in the same amount as said stockholders’ respective shareholdings in the CMI' as of January 15, 1963.32 This was the measure of the right they could claim to subscribe to waived stocks. Appellants did not even aver that the stocks waived to the subscription of which they claimed the right to subscribe, were comprised in “the extent and amount” of their respective shareholdings in the CMI. It is not surprising that they did not make such an averment for they did not even allege the amount of shares of stock to which they claimed they were entitled to subscribe. The failure of the complaint to plead specifically the above facts rendered it impossible for the court to conclude by natural reasoning that the appellants and other CMI stockholders had a right to subscribe to the waived shares of stock, and made any allegation to that effect a conclusion of the pleader, not an ultimate fact, in accordance with the test suggested by the California Supreme Court, to wit:

“If from the facts in evidence, the result can be reached by that process of natural reasoning adopted in the investigation of truth, it becomes an ultimate fact, to be found as such. If, on the other hand,

________________

30 Paragraphs 7 and 7 of Complaint, Record on Appeal, pages 5, 7, 8.

31 Paragraph 8 of Complaint, Record on Appeal, page 8.

32 Paragraph 4 of Complaint, Record on Appeal, page 5.

580

580



resort must be had to the artifical processes of the law, in order to reach a final determination, the result is a conclusion of law."33

Let us now pass to the second and third elements that would have constituted the first cause of action. Did the complaint allege as ultimate facts the legal duty of defendants-appellees to have a portion of the capital stock subscribed to by appellants? Did the complaint allege as ultimate facts that defendants-appellees had violated appellants’ right?

Even if it be assumed arguendo that defendants-appellees had the duty to have the waived stocks subscribed to by the CMI stockholders, this duty was not owed to all the CMI stockholders, but only to such CMI stockholders as were qualified to become stockholders of the proposed Bank. Inasmuch as it has been shown that the complaint did not contain ultimate facts to show that plaintiffs-appellants were qualified to become stockholders of the Bank, it follows that the complaint did not show that defendants-appellees were under duty to have plaintiffs-appellants subscribe to the stocks of the proposed Bank. It inevitably follows also that the complaint did not contain ultimate facts to show that the right of the plaintiffs-appellants to subscribe to the shares of the proposed Bank had been violated by defendants-appellees. How could a non-existent right be violated?

Let us continue the discussion further. The complaint alleged that by virtue of the resolution of March 28,1962, the President and Members of the Board of Directors of the CMI would be constituted as a Board of Organizers to undertake and carry out the organization of the Bank;34 that the Board of Organizers was constituted and proceeded with the establishment of the Bank;35 that the persons composing the Board of Organizers were the individuals-defendants-

appellees;36 that the Board of Organizers sent our circular letters with “Pre-Incorporation Agreement to Subscribe” forms37 which specified, among others, “such subscription right shall be deemed ipso facto waived and released in favor of the

________________

33 Levins vs. Rovegno, 71 Cal. 273, 12 Pa. 161,164.

34 Paragraph 4(a) of Complaint; Record on Appeal, pages 4–5.

35 Paragraph 5 of Complaint; Record on Appeal, pages 6–7.



581

VOL. 58, AUGUST 26, 1974

581


Board of Organizers of the defendant Bank and their assignees";38 that in the Articles of Incorporation prepared by the Board of Organizers, the individuals-defendants-appellees alone appeared to have subscribed to the 50,000 shares;39 and that individuals-defendants-appellees again subscribed to all the additional 30,000 shares.40 From these facts, appellants concluded that they were denied their right to subscribe in proportion to their equities;41 that the individuals-defendants-appellees unlawfully acquired stockholdings far in excess of what they were lawfully entitled in violation of law and in breach of trust and of contractual agreement;42 and that, because of matters already alleged, the individuals-defendants-appellees “hold their shares in the defendant bank in trust for plaintiffs."43

The allegeation in the complaint that the individuals-defendants-appellees held their shares “in trust” for plaintiffs-appellants without averment of the facts from which the court could conclude the existence of the alleged trust, was not deemed admitted by the motion to dismiss for that was a conclusion of law. Express averments “that a party was the beneficial owner of certain property; x x x that property or money was received or held in trust, or for the use of another; that particular funds were trust funds; that a particular transaction created an irrevocable trust; that a person held property as constructive trustee; that on the transfer of certain property a trust resulted” have been considered as mere conclusions of law.44 The facts alleged in the complaint did not, by logical reasoning, necessarily lead to the conclusion that defendants-appellees were trustees in

favor of appellants of the shares of stock waived by the CMI stockholders who failed to exercise their right to subscribe. In this connection, it has been likewise said that:

“The general rule is that an allegation of duty in terms unaccompanied by a statement of the facts showing the existence of

________________

38 Paragraph 7(b) of Complaint; Record on Appeal; page 8.


40 Paragraphs 11 and 12 of Complaint; Record on Appeal, page 11.




44 47 C.J.S., page 78.

582

582



the duty, is a mere conclusion of law, unless there is a relation set forth from which the law raises the duty."45

In like manner, the allegation that individuals-defendants-appellees held said shares in trust was no more than an interpretation by appellants of the effect of the waiver clause of the Resolution and as such it was again a mere conclusion of law. It has been said that:

“The following are also conclusions of law: x x x an allegation characterizing an instrument or purporting to interpret it and state its effects, x x x"46

“Allegations in petition in the nature of conclusions about the meaning of contract, inconsistent with stated terms of the contract, cannot be considered."47

The allegation that the defendants-appellees acquired stockholdings far in excess of what they were lawfully entitled, in violation of law and in breach of trust and of contractual agreement, is also mere conclusion of law.

Of course, the allegation that there was a violation of trust duty was plainly a conclusion of law, for “a mere allegation

that it was the duty of a party to do this or that, or that he was guilty of a breach of duty, is a statement of a conclusion, not of fact."48

“An averment x x x that an act was ‘unlawful’ or ‘wrongful’ is a mere legal conclusion or opinion of the pleader."49

Moreover, plaintiffs-appellants did not state in the complaint the amount of subscription the individual defendants-appellees were entitled to; hence there was no basis for the court to determine what amount subscribed to by them was excessive.

From what has been said, it is clear that the ultimate facts stated under the first cause of action are not sufficient to constitute a cause of action.

The further allegations in the second cause of action that the calling of a special meeting was “falsely certified”, that the seventh position of Director was “illegally created” and that

________________

45 71 C.J.S., pages 49–50.

46 41 Am. Jur., page 304.

47 71 C.J.S., page 41, citing D’Oench v. Gillioz, 139 SW 2d 921, 346 Mo. 179.

48 41 Am Jur., page 303.

49 41 Am. Jur., page 303.

583

VOL. 58, AUGUST 26, 1974

583


defendant Alfonso Juan Olondriz was “not competent or qualified” to be a director are mere conclusions of law, the same not being necessarily inferable from the ultimate facts stated in the first and second causes of action. It has been held in this connection that:

“An averment that x x x an act was ‘unlawful’ or ‘wrongful’ is a mere legal conclusion or opinion of the pleader. The same is true of allegations that an instrument was ‘illegally’ certified or x x x that an act was ‘arbitrarily’ done x x x"50

“A pleader states a mere conclusion when he makes any of the following allegations: that a party was incapacitated to enter into a contract or convey property x x x"51

The third, fourth, fifth and sixth causes of action depended on the first cause of action, which, as has been shown, did not state ultimate facts sufficient to constitute a cause of action. It stands to reason, therefore, that said causes of action would also be fatally defective.

It having been shown that the complaint failed to state ultimate facts to constitute a cause of action, it becomes unnecessary to discuss the other assignments of errors.

WHEREFORE, the instant appeal is dismissed, and the order dated March 21, 1964 of the Court of First Instance of Manila dismissing the complaint in Civil Case No. 55810 is affirmed, with costs in this instance against appellants.

It is so ordered.

Fernando, Barredo, Fernandez and Aquino, JJ., concur.

Antonio, J., took no part.

Appeal dismissed, order affirmed.

Notes.—The rules of pleading limit the statement of the cause of action only to such operative facts as give rise to the right of action of the plaintiff to obtain relief against the wrongdoer. The details of probative matter or particulars of evidence, statements of law, inferences and arguments need not be stated (De los Santos vs. Sheriff of Rizal, 64 Phil. 197; Ortiz vs. Garcia, 15 Phil. 192; La Insular vs. Jao Oge, 42 Phil. 366; Valmilero vs. Kong Chang Seng, 33 Phil. 84; Laguna Coconut Oil vs. Bank of the Philippine Islands, 44 Phil. 618).

________________


Neither is it proper to allege in a pleading inferences of facts from facts which are not stated in the complaint for these are not the ultimate facts required by law to be pleaded. (Alzua vs. Johnson, 21 Phil. 308; Tec Bi & Co. vs. Chartered Bank of India, 41 Phil. 596).

General allegations that a contract is valid or lawful, or is just or reasonable are mere conclusions of law. Likewise mere conclusions of law are allegations that a contract is void, voidable, invalid, illegal, ultra vires, or against public policy, without stating facts showing its invalidity. (See Remitere vs. Vda. de Yulo, 16 SCRA 251)

[Mathay vs. Consolidated Bank and Trust Company, 58 SCRA 559(1974)]

G.R. No. 164588. October 19, 2005.*NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME HOLDINGS, INC. and FERNANDO R. ARGUELLES, JR., petitioners, vs. ROBERTO C. YUMUL, respondent.

Civil Procedure; Appeals; Certiorari; A petition for review under Rule 45 is the proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a petition for certiorari under Rule 65.—A petition for review under Rule 45 is the proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a petition for certiorari under Rule 65. Under Rule 45, decisions, final orders or resolutions of the Court of Appeals is appealed by filing a petition for review, which is a continuation of the appellate process over the original case. On the other hand, the writ of certiorari under Rule 65 is filed when petitioner has no plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. A remedy is considered “plain, speedy and adequate” if it will promptly relieve the petitioner from the injurious effects of the judgment and the acts of the lower court or agency.

Corporation Law; Stockholders; As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.—It is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four incorporators. This is not necessarily illegal. But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.

_______________

* FIRST DIVISION.

416

416


Nautica Canning Corporation vs. Yumul

Same; Same; A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned.—We held in Ponce v. Alsons Cement Corp. that:... [A] transfer of shares of stock

not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates[.]

Civil Procedure; Appeals; Securities and Exchange Commission; Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their consideration.—We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals. Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their consideration, moreso if the same has been upheld by the appellate court, as in this case.

Corporation Law; Statutes; Section 23 of Batas Pambansa (BP) Blg. 68 or the Corporation Code of the Philippines requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director.—Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director. Since Yumul was elected as Nautica’s Director and as President thereof, it follows that he must have owned at least one share of the corpora-

417

VOL. 473, OCTOBER 19, 2005

417


tion’s capital stock. Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the SEC correctly ruled that he has the right to inspect the books and records of Nautica, pursuant to Section 74 of BP Blg. 68 which states that the records of all business

transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

Same; Same; Courts; Jurisdictions; Intra-Corporate Disputes; The Securities Regulation Code (Republic Act No. 8799); Republic Act No. 8799 transferred from the SEC to the regional trial court jurisdiction over cases involving intra-corporate disputes.—When the controversy involves matters purely civil in character, it is beyond the ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of Appeals, the better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties, but also the nature of the question that is the subject of their controversy. This, however, is now moot and academic due to the passage of Republic Act No. 8799 or The Securities Regulation Code which took effect on August 8, 2000. The Act transferred from the SEC to the regional trial court jurisdiction over cases involving intra-corporate disputes. Thus, whether or not the issue is intra-corporate, it is now the regional trial court and no longer the SEC that takes cognizance of the controversy.

PETITION for review on certiorari of the decision and resolution of the Court of Appeals.


Ma. Erlinda R. Calañgi for petitioners.

Law Firm of Zamora, Poblador, Vasquez & Bretana collaborating counsel for petitioners.

Quasha, Ancheta, Peña & Nolasco for respondent.

418

418



YNARES-SANTIAGO, J.:

Petitioners assail the September 26, 2001 Decision1 of the Court of Appeals in CA-G.R. SP No. 61919, affirming in toto the Decision of the Securities and Exchange Commission (SEC) En Banc in SEC Case No. 10-96-5455, as well as the July 16, 2004 Resolution2 denying the motion for reconsideration.

The facts of the case show that Nautica Canning Corporation (Nautica) was organized and incorporated on May 11, 1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par value of P100.00 per share. It had a

subscribed capital stock of P10,000,000 with paid-in subscriptions from its incorporators as follows:3

Name

No. of Shares

Amount Subscribed

Amount Paid

ALVIN Y. DEE

89,991

P8,999,100

P4,499,100

JONATHAN Y. DEE

2

200

200

JOANNA D. LAUREL

2

200

200

DARLENE EDSA MARIE GONZALES

2

200

200

JENNIFER Y. DEE

2

200

200

ROBERTO C. YUMUL

1

100

100

JERRY ANGPING

10,000

1,000,000

500,000

100,000

P10,000,000

P5,000,000

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General Manager of Nautica with a monthly compensation of P85,000 and an addi-

_______________

1 Rollo, pp. 9-29. Penned by Associate Justice Salvador J. Valdez, Jr. and concurred in by Associate Justices Wenceslao I. Agnir, Jr. and Mariano C. Del Castillo.

2 Id., at pp. 30-31.

3 CA Rollo, pp. 80-81.

419

VOL. 473, OCTOBER 19, 2005

419


tional compensation equal to 5% of the company’s operating profit for the calendar year.4 On the same date, First Dominion Prime Holdings, Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase5 up to 15% of the total stocks it subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment6 was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the 14,999 “shares were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE.”

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul representing his 15% share.

After Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter7 to Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nautica’s corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica.

On September 6, 19968 and September 9, 1996,9 Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records.

_______________420



Yumul’s requests were denied allegedly because he neither exercised the option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name.10

On October 12, 2000, the SEC En Banc rendered the Decision,11 the dispositive portion of which reads:

“WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondents, as follows:

1. Declaring petitioner as a stockholder of respondent Nautica; 2. Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and Assignment dated June 22, 1995 3. Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to the pertinent provisions of the Corporation Code; and 4. Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and Assignment dated June 22, 1995.

SO ORDERED.”12

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners’ motion for reconsideration was denied in a Resolution dated July 16, 2004.

Hence, this petition.

_______________

10 Id., at pp. 59-73.

11 Id., at pp. 53-58.

12 Id., at p. 57.

421

VOL. 473, OCTOBER 19, 2005

421


At the outset, we note that petitioners’ recourse to this Court via a “combined” petition under Rule 65 and an appeal under Rule 45 of the Rules of Court is irregular. A petition for review under Rule 45 is the proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a petition for certiorari under Rule 65. Under Rule 45, decisions, final orders or resolutions of the Court of Appeals is appealed by filing a petition for review, which is a continuation of the appellate process over the original

case.13 On the other hand, the writ of certiorari under Rule 65 is filed when petitioner has no plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. A remedy is considered “plain, speedy and adequate” if it will promptly relieve the petitioner from the injurious effects of the judgment and the acts of the lower court or agency.

In this case, petitioners’ speedy, available and adequate remedy is appeal via Rule 45, and not certiorari under Rule 65. Notwithstanding petitioners’ procedural lapse, we shall treat the petition as one filed under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated. They presented China Banking Corporation Check No. A2620636 and Citibank Check No. B82642 as proof of payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate secretary of Nautica to issue a certificate of stock in Yumul’s name but in trust for Dee; and Stock Certificate No. 6 with annotation “ITF Alvin Y. Dee” which means that respondent held said stock “In Trust For Alvin Y. Dee.”

We are not persuaded.

_______________

13 Mercado v. Court of Appeals, G.R. No. 150241, November 4, 2004, 441 SCRA 463, 469.

422

422



Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four incorporators. This is not necessarily illegal.14 But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.15

In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of Nautica, of one share of stock recorded in Yumul’s name, although allegedly held in trust for Dee. Nautica’s Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that Yumul was an incorporator and subscriber of one share.16 Even granting that there was an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only as between them. From the corporation’s vantage point, Yumul is its stockholder with one share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner of the share, after Nautica’s incorporation.

We held in Ponce v. Alsons Cement Corp.17 that:

“. . . [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corpora-

_______________

14 Villanueva, Philippine Corporate Law, 1998, pp. 166-167.

15 Ponce v. Alsons Cement Corporation, 442 Phil. 98, 109-110; 393 SCRA 602, 612 (2002).

16 CA Rollo, p. 56.

17 Supra.

423

VOL. 473, OCTOBER 19, 2005

423


tion is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates[.]”

Moreover, the contents of the articles of incorporation bind the corporation and its stockholders. Its contents cannot be

disregarded considering that it was the basic document which legally triggered the creation of the corporation.18

The Court of Appeals, in affirming the factual findings of SEC, held that:

“The evidence submitted by petitioners to establish trust is palpably incompetent, consisting mainly of the self-serving allegations by the petitioners and the China Banking Corporation checks issued as payment for the shares of stock of Nautica. Dee did not testify on the supposed trust relationship between him and Yumul. While Atty. Arguelles testified, his testimony is barren of probative value since he had no first-hand knowledge of the relationship in question. The isolated fact that Dee might have paid for the share in the name of Yumul did not by itself make the latter a man of straw. Such act of payment is so nebulous and equivocal that it can not yield the meaning which the petitioners would want to squeeze from it without the clarificatory testimony of Dee.”19

We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals. Findings of fact of quasi-judicial agencies, like the SEC, are generally ac-

_______________

18 Lanuza v. Court of Appeals, G.R. No. 131394, March 28, 2005, 454 SCRA 54.

19 Rollo, p. 25.

424

424



corded respect and even finality by the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their consideration,20 moreso if the same has been upheld by the appellate court, as in this case.

Besides, other than petitioners’ self-serving assertion that the beneficial ownership belongs to Dee, they failed to show that the subscription was transferred to Dee after Nautica’s incorporation. The conduct of the parties also constitute sufficient proof of Yumul’s status as a stockholder. On April 4, 1995, Yumul was elected during the regular annual stockholders’ meeting as a Director of Nautica’s Board of Directors.21 Thereafter, he was elected as president of Nautica.22 Thus, Nautica and its stockholders knowingly held

respondent out to the public as an officer and a stockholder of the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director.23 Since Yumul was elected as Nautica’s Director and as President thereof, it follows that he must have owned at least one share of the corporation’s capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the SEC correctly ruled that he has the right to inspect the books and records of Nautica,24 pursuant to Section 74 of BP Blg. 68 which states that the records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection

_______________

20 Quiambao v. Court of Appeals, G.R. No. 128305, March 28, 2005, 454 SCRA 17.

21 CA Rollo, p. 254.

22 Rollo, p. 15.

23 Section 25, BP Blg. 68.

24 CA Rollo, p. 56.

425

VOL. 473, OCTOBER 19, 2005

425


by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of Nautica, petitioners allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to Purchase dated December 19, 1994. However, he failed to exercise the option, thus there was no cause or consideration for the Deed of Trust and Assignment, which makes it void for being simulated or fictitious.25

Anent this issue, the SEC did not make a categorical finding on whether Yumul exercised his option and also on the

validity of the Deed of Trust and Assignment. Instead, it held that:

. . . Although unsubstantiated, the apparent objective of the respondents’ allegation was to refute petitioners claim over the shares covered by the Deed of Trust and Assignment. This must therefore be deemed as nothing but a ploy to deprive petitioner of his right over the shares in question, which to us should not be countenanced.26

Neither did the Court of Appeals rule on the issue as it only held that:

Petitioners also contend that the Deed is a simulated contract.

Simulation is “the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a judicial act which does not exist or is different with that which was really executed.” The characteristic of simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties.

_______________

25 Id., at p. 138.

26 Id., at p. 57.

426

426



The requisites for simulation are: (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. These requisites have not been proven in this case.27

Thus, other than defining and enumerating the requisites of a simulated contract or deed, the Court of Appeals did not make a determination whether the SEC has the jurisdiction to resolve the issue and whether the questioned deed was fictitious or simulated.

In Intestate Estate of Alexander T. Ty v. Court of Appeals,28 we held that:

. . . The question raised in the complaints is whether or not there was indeed a sale in the absence of cause or consideration. The proper forum for such a dispute is a

regular trial court. The Court agrees with the ruling of the Court of Appeals that no special corporate skill is necessary in resolving the issue of the validity of the transfer of shares from one stockholder to another of the same corporation. Both actions, although involving different property, sought to declare the nullity of the transfers of said property to the decedent on the ground that they were not supported by any cause or consideration, and thus, are considered void ab initio for being absolutely simulated or fictitious. The determination whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code, particularly those relative to obligations and contracts. Disputes concerning the application of the Civil Code are properly cognizable by courts of general jurisdiction. No special skill is necessary that would require the technical expertise of the SEC. (Emphasis supplied)

Thus, when the controversy involves matters purely civil in character, it is beyond the ambit of the limited jurisdiction of

_______________

27 Rollo, p. 27.

28 G.R. Nos. 112872 & 114672, April 19, 2001, 356 SCRA 661, 667-668.

427

VOL. 473, OCTOBER 19, 2005

427


the SEC. As held in Viray v. Court of Appeals,29 the better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties, but also the nature of the question that is the subject of their controversy. This, however, is now moot and academic due to the passage of Republic Act No. 8799 or The Securities Regulation Code which took effect on August 8, 2000. The Act transferred from the SEC to the regional trial court jurisdiction over cases involving intra-corporate disputes. Thus, whether or not the issue is intra-corporate, it is now the regional trial court and no longer the SEC that takes cognizance of the controversy.

Considering that the issue of the validity of the Deed of Trust and Assignment is civil in nature, thus, under the competence of the regular courts, and the failure of the SEC and the Court of Appeals to make a determinative finding as to its validity, we are constrained to refrain from ruling on whether or not Yumul can compel the corporate secretary to register said deed. It is only after an appropriate case is filed and decision rendered thereon by the proper forum can the issue be resolved.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 26, 2001 Decision of the Court of Appeals in CA-G.R. SP No. 61919, is AFFIRMED insofar as it declares respondent Roberto C. Yumul as a subscriber and stockholder of one share of stock of Nautica Canning Corporation. The Decision is REVERSED and SET ASIDE insofar as it affirms the validity of the Deed of Trust and Assignment and orders its registration in the Stock and Transfer Book of Nautica Canning Corporation.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Quisumbing, Carpio and Azcuna, JJ., concur.

_______________

29 G.R. No. 92481, November 9, 1990, 191 SCRA 308, 323.

428

428


Re: Cases Left Undecided by Retired Judge Benjamin A. Bongolan of the RTC, Br. 2, Bangued, Abra

Petition partially granted.

Notes.—Where the questioned Court of Appeals decision is a disposition on the merits, and where said Court has no remaining issue to resolve, the proper remedy available to the aggrieved party is a petition for review under Rule 45, not Rule 65 of the Rules of Court. (Siasoco vs. Court of Appeals, 303 SCRA 186 [1999])

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. (Chua vs. Court of Appeals, 443 SCRA 259 [2004])

[Nautica Canning Corporation vs. Yumul, 473 SCRA 415(2005)]G.R. No. 150976. October 18, 2004.*

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER PARAÑAQUE, INC., petitioners, vs. ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO VILLAREAL, respondents.

Corporation Law; Corporation Code; Voting Rights; The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right.—One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through amending the charter, or the by-laws.

_______________

* FIRST DIVISION.

** Sometimes “Arceli” in some parts of the records.

443

VOL. 440, OCTOBER 18, 2004

443

Castillo vs. Balinghasay

Same; Same; Same; Retroactivity; Section 148 of the Corporation Code expressly provides that it shall apply to corporations in existence at the time of the effectivity of the Code.—Section 148 of the Corporation Code expressly provides that it shall apply to corporations in existence at the time of the effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance. When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6 of the Corporation Code expressly prohibits the deprivation of voting rights, except as to “preferred” and “redeemable” shares, then Article VII of the Articles of

Incorporation cannot be construed as granting exclusive voting rights to Class “A” shareholders, to the prejudice of Class “B” shareholders, without running afoul of the letter and spirit of the Corporation Code.

PETITION for review on certiorari of a decision of the Regional Trial Court of Parañaque City, Br. 258.


Gabriel T. Robeniol for petitioners.

Marciano S. Bacalla, Jr. and Ruben C. Ladia for respondents.

QUISUMBING, J.:

For review on certiorari is the Partial Judgment1 dated November 26, 2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of Parañaque City, Branch 258. The trial court declared the February 9, 2001, election of the board of directors of the Medical Center Parañaque, Inc. (MCPI) valid. The Partial Judgment dismissed petitioners’ first cause of action, specifically, to annul said election for depriving petitioners their voting rights and to be voted on as members of the board.

_______________

1 Rollo, pp. 44-47. Penned by Hon. Judge Raul E. De Leon.

444

444



The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI, with the former holding Class “B” shares and the latter owning Class “A” shares.

MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Parañaque City. It was organized sometime in September 1977. At the time of its incorporation, Act No. 1459, the old Corporation Law was still in force and effect. Article VII of MCPI’s original Articles of Incorporation, as approved by the Securities and Exchange Commission (SEC) on October 26, 1977, reads as follows:

“SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (P2,000,000.00) PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of P100 each share, whereby the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating stockholders shall be classified as Class A shares while the other ONE THOUSAND unissued shares shall be considered as Class B shares. Only holders of Class A shares can have the right to vote and the right to be elected as directors or as corporate officers.”2 (Stress supplied)

On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus:

“SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (P5,000,000.00) PESOS, divided as follows:

CLASS

NO. OF SHARES

PAR VALUE

“A”

1,000

P1,000.00

“B”

4,000

P1,000.00

Only holders of Class A shares have the right to vote and the right to be elected as directors or as corporate officers.”3 (Emphasis supplied)

_______________

2 Id., at pp. 128-129.

3 Id., at pp. 83-84.

445

VOL. 440, OCTOBER 18, 2004

445


The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted the right to vote and to be elected as directors or corporate officers only to holders of Class “A” shares, holders of Class “B” stocks were granted the same rights and privileges as holders of Class “A” stocks with respect to the payment of dividends.

On September 9, 1992, Article VII was again amended to provide as follows:

“SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows:

CLASS

NO. OF SHARES

PAR VALUE

“A”

1,000

P1,000.00

“B”

31,000

1,000.00

Except when otherwise provided by law, only holders of Class “A “ shares have the right to vote and the right to be elected as directors or as corporate officers”4 (Stress and Italics supplied).

The SEC approved the foregoing amendment on September 22, 1993.

On February 9, 2001, the shareholders of MCPI held their annual stockholders’ meeting and election for directors. During the course of the proceedings, respondent Rustico Jimenez, citing Article VII, as amended, and notwithstanding MCPI’s history, declared over the objections of herein petitioners, that no Class “B” shareholder was qualified to run or be voted upon as a director. In the past, MCPI had seen holders of Class “B” shares voted for and serve as members of the corporate board and some Class “B” share owners were in fact nominated for election as board members. Nonetheless, Jimenez went on to announce that the candidates holding

_______________

4 Id., at pp. 71-72.

446

446



Class “A” shares were the winners of all seats in the corporate board. The petitioners protested, claiming that Article VII was null and void for depriving them, as Class “B” shareholders, of their right to vote and to be voted upon, in violation of the Corporation Code (Batas Pambansa Blg. 68), as amended.

On March 22, 2001, after their protest was given short shrift, herein petitioners filed a Complaint for Injunction, Accounting and Damages, docketed as Civil Case No. CV-01-0140 before the RTC of Parañaque City, Branch 258. Said complaint was founded on two (2) principal causes of action, namely:

“a. Annulment of the declaration of directors of the MCPI made during the February 9, 2001 Annual Stockholders’ Meeting, and for the conduct of an election whereat all stockholders, irrespective of the classification of the shares they hold, should be afforded their right to vote and be voted for; and

“b. Stockholders’ derivative suit challenging the validity of a contract entered into by the Board of Directors of MCPI for the operation of the ultrasound unit.”5

Subsequently, the complaint was amended to implead MCPI as party-plaintiff for purposes only of the second cause of action.

Before the trial court, the herein petitioners alleged that they were deprived of their right to vote and to be voted on as directors at the annual stockholders’ meeting held on February 9, 2001, because respondents had erroneously relied on Article VII of the Articles of Incorporation of MCPI, despite Article VII being contrary to the Corporation Code, thus null and void. Additionally, respondents were in estoppel, because in the past, petitioners were allowed to vote and to be elected as members of the board. They further claimed that the privilege granted to the Class “A” shareholders was more in the nature of a right granted to founder’s shares.

_______________

5 Id., at p. 377.

447

VOL. 440, OCTOBER 18, 2004

447


In their Answer, the respondents averred that the provisions of Article VII clearly and categorically state that only holders of Class “A” shares have the exclusive right to vote and be elected as directors and officers of the corporation. They denied that the exclusivity was intended only as a privilege granted to founder’s shares, as no such proviso is found in the Articles of Incorporation. The respondents further claimed that the exclusivity of the right granted to Class “A” holders cannot be defeated or impaired by any subsequent legislative enactment, e.g. the New Corporation Code, as the Articles of Incorporation is an intra-corporate contract between the corporation and its members; between the corporation and its stockholders; and among the stockholders. They submit that to allow Class “B” shareholders to vote and be elected as directors would constitute a violation of MCPI’s franchise or charter as granted by the State.

At the pre-trial, the trial court ruled that a partial judgment could be rendered on the first cause of action and required the parties to submit their respective position papers or memoranda.

On November 26, 2001, the RTC rendered the Partial Judgment, the dispositive portion of which reads:

“WHEREFORE, viewed in the light of the foregoing, the election held on February 9, 2001 is VALID as the holders of CLASS “B” shares are not entitled to vote and be voted for and this case based on the First Cause of Action is DISMISSED.

SO ORDERED.”6

In finding for the respondents, the trial court ruled that corporations had the power to classify their shares of stocks, such as “voting and non-voting” shares, conformably with Section 67 of the Corporation Code of the Philippines. It

_______________

6 Rollo, p. 47.

7 SEC. 6. Classification of shares.—The shares of stock of stock corporations may be divided into classes or series of shares, or

448

448



pointed out that Article VII of both the original and amended Articles of Incorporation clearly provided that only Class “A”

_______________

both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of

dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided, That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.

Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

449

VOL. 440, OCTOBER 18, 2004

449


shareholders could vote and be voted for to the exclusion of Class “B” shareholders, the exception being in instances provided by law, such as those enumerated in Section 6, paragraph 6 of the Corporation Code. The RTC found merit in the respondents’ theory that the Articles of Incorporation, which defines the rights and limitations of all its shareholders,

is a contract between MCPI and its shareholders. It is thus the law between the parties and should be strictly enforced as to them. It brushed aside the petitioners’ claim that the Class “A” shareholders were in estoppel, as the election of Class “B” shareholders to the corporate board may be deemed as a mere act of benevolence on the part of the officers. Finally, the court brushed aside the “founder’s shares” theory of the petitioners for lack of factual basis.

Hence, this petition submitting the sole legal issue of whether or not the Court a quo, in rendering the Partial

_______________

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

450

450



Judgment dated November 26, 2001, has decided a question of substance in a way not in accord with law and jurisprudence considering that:

“1. Under the Corporation Code, the exclusive voting right and right to be voted granted by the Articles of Incorporation of the MCPI to Class A shareholders is null and void, or already extinguished;

“2. Hence, the declaration of directors made during the February 9, 2001 Annual Stockholders’ Meeting on the basis of the purported exclusive voting rights is null and void for having been done without the benefit of an election and in violation of the rights of plaintiffs and Class B shareholders; and

“3. Perforce, another election should be conducted to elect the directors of the MCPI, this time affording the holders of Class B shares full voting right and the right to be voted.”8

The issue for our resolution is whether or not holders of Class “B” shares of the MCPI may be deprived of the right to vote and be voted for as directors in MCPI.

Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI, which denied them voting rights, is null and void for being contrary to Section 6 of the Corporation Code. They point out that Section 6 prohibits the deprivation of voting rights except as to preferred and redeemable shares only. Hence, under the present law on corporations, all shareholders, regardless of classification, other than holders of preferred or redeemable shares, are entitled to vote and to be elected as corporate directors or officers. Since the Class “B” shareholders are not classified as holders of either preferred or redeemable shares, then it necessarily follows that they are entitled to vote and to be voted for as directors or officers.

The respondents, in turn, maintain that the grant of exclusive voting rights to Class “A” shares is clearly provided in the

_______________

8 Rollo, p. 23.

451

VOL. 440, OCTOBER 18, 2004

451


Articles of Incorporation and is in accord with Section 59 of the Corporation Law (Act No. 1459), which was the prevailing law when MCPI was incorporated in 1977. They likewise submit that as the Articles of Incorporation of MCPI is in the

_______________

9 SEC. 5. The shares of any corporation formed under this Act may be divided into classes with such rights, voting powers, preferences, and restrictions as may be provided for in the articles of incorporation. Any or all of the shares may have a par value or have no par value, as provided in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, and building and loan associations shall not be permitted to issue no-par value shares of stock. Subject to the laws creating and defining the duties of the Public Service Commission, shares of capital stock without par value may be issued from time to time, (a) for such consideration as may be prescribed in the articles of incorporation; or (b) in the absence of fraud in the transaction, for such consideration as, from time to time, may be fixed by the board of directors pursuant to authority conferred in the articles of incorporation; or (c) for such consideration as shall be consented to or approved by the holders of a majority of the shares entitled to vote at a meeting called in the manner prescribed by the by-laws, provided the call for such meeting shall contain notice of such purpose. Any or all shares so issued shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided, however, That shares without par value may not be issued for a consideration less than the value of five pesos per share. Except as otherwise provided by the

articles of incorporation, and stated in the certificate of stock, each share shall be in all respects equal to every other share.

Preferred shares of stock issued by any corporation the holders of which are entitled to any preference in the distribution of the assets of the corporation in case of liquidation, may be issued only with a stated par value and, in all certificates for such shares of stock, the amount which the holder of each of such preferred shares shall be entitled to receive from the assets of the corporation in preference to holders of other shares, shall be stated.

The entire consideration received by the corporation for its nopar value shares shall be treated as capital, and shall not be available for distribution as dividends.

452

452



nature of a contract between the corporation and its shareholders and Section 6 of the Corporation Code could not retroactively apply to it without violating the non-impairment clause10 of the Constitution.

We find merit in the petition.

When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the phrase “except when otherwise provided by law” was inserted in the provision governing the grant of voting powers to Class “A” shareholders. This particular amendment is relevant for it speaks of a law providing for exceptions to the exclusive grant of voting rights to Class “A” stockholders. Which law was the amendment referring to? The determination of which law to apply is necessary. There are two laws being cited and relied upon by the parties in this case. In this instance, the law in force at the time of the 1992 amendment was the Corporation Code (B.P.

Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed by then.

We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At the time of the incorporation of MCPI in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were explicitly provided for, such that “no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code” and that “there shall always be a class or series of shares which have

_______________

10 THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES, ARTICLE III.

SEC. 10. No law impairing the obligation of contracts shall be passed.

453

VOL. 440, OCTOBER 18, 2004

453


complete voting rights.” Section 6 of the Corporation Code being deemed written into Article VII of the Articles of Incorporation of MCPI, it necessarily follows that unless Class “B” shares of MCPI stocks are clearly categorized to be “preferred” or “redeemable” shares, the holders of said Class “B” shares may not be deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that Class “B” shares were

categorized as either “preferred” or “redeemable” shares. The only possible conclusion is that Class “B” shares fall under neither category and thus, under the law, are allowed to exercise voting rights.

One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through amending the charter, or the by-laws.11

Neither do we find merit in respondents’ position that Section 6 of the Corporation Code cannot apply to MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 14812 of the Corporation Code expressly pro-

_______________

11 WILLIAM MEADE FLETCHER, 5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 2025, 116 (Revised Volume 1976).

12 SEC. 148. Applicability to existing corporations.—All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That where any such corporation is affected by the

454

454



vides that it shall apply to corporations in existence at the time of the effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance. When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6 of the Corporation Code expressly prohibits the deprivation of voting rights, except as to “preferred” and “redeemable” shares, then Article VII of the Articles of Incorporation cannot be construed as granting exclusive voting rights to Class “A” shareholders, to the prejudice of Class “B” shareholders, without running afoul of the letter and spirit of the Corporation Code.

The respondents then take the tack that the phrase “except when otherwise provided by law” found in the amended Articles is only a handwritten insertion and could have been inserted by anybody and that no board resolution was ever passed authorizing or approving said amendment.

Said contention is not for this Court to pass upon, involving as it does a factual question, which is not proper in this petition. In an appeal via certiorari, only questions of law may be reviewed.13 Besides, respondents did not adduce persuasive evidence, but only bare allegations, to support their suspicion. The presumption that in the amendment process, the ordinary course of business has been followed14 and that official duty has been regularly performed15 on the part of the SEC, applies in this case.

_______________

new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. (Emphasis supplied)

13 Bangko Sentral ng Pilipinas v. Santamaria, G.R. No. 139885, 13 January 2003, 395 SCRA 84, 92.

14 See Revised Rules of Court, Rule 131, Section 3(q).

15 Id., at Section 3(m).

455

VOL. 440, OCTOBER 18, 2004

455

Briones vs. Miguel

WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of the Regional Trial Court of Parañaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No pronouncement as to costs.

SO ORDERED.

Davide Jr. (C.J., Chairman), Ynares-Santiago and Car-pio, JJ., concur.

Azcuna, J., On Leave.

Petition granted, partial judgment reversed and set aside.

Note.—A minority stockholder and member of the board of directors has no power or authority to sue on behalf of the corporation. (Tam Wing Tak vs. Makasiar, 350 SCRA 475 [2001])

[Castillo vs. Balinghasay, 440 SCRA 442(2004)]

G.R. No. 152578. November 23, 2005.*REPUBLIC OF THE PHILIPPINES, Represented by the Presidential Commission on Good Government, petitioner, vs. ESTATE OF HANS MENZI (Through its Executor, MANUEL G. MONTECILLO), EMILIO T. YAP, EDUARDO M. COJUANGCO, JR., ESTATE OF FERDINAND MARCOS, SR., and IMELDA R. MARCOS, respondents.

G.R. No. 154487. November 23, 2005.*EDUARDO M. COJUANGCO, JR., petitioner, vs. REPUBLIC OF THE PHILIPPINES, respondent.

G.R. No. 154518. November 23, 2005.*ESTATE OF HANS M. MENZI (Through its Executor, MANUEL G. MONTECILLO), and HANS M. MENZI HOLDINGS AND MANAGEMENT, INC. (HMHMI), petitioners, vs. REPUBLIC OF THE PHILIPPINES, (represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT), respondents.

_______________

* EN BANC.

21

VOL. 476, NOVEMBER 23, 2005

21

Republic vs. Estate of Hans Menzi

Corporation Law; Stock Certificates; Transfer of Ownership; The delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations; The absence of a deed of assignment is not a fatal flaw which renders the transfer invalid.—The Corporation Code acknowledges that the delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the parties. In order to bind third persons, however, the transfer must be recorded in the books of the corporation. Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid as the Republic posits. In fact, as has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals, the execution of a deed of sale does not necessarily make the transfer effective.

Appeals; It is not the function of the Supreme Court to examine and weigh all over again the evidence presented by the parties in the proceedings before the Sandiganbayan.—The Sandiganbayan’s factual findings that the 154 block was sold to US Automotive while Menzi was still alive, and that Atty. Montecillo merely accepted payment by virtue of the authority conferred upon him by Menzi himself are conclusive upon this Court, supported, as they are, by the evidence on record. As held by the Sandiganbayan: … The sale

was made pursuant to the Stock Option executed in 1968 between the parties to the sale, considering the restrictions contained in Bulletin’s Articles of Incorporation as amended in 1968 limiting the transferability of its shares. Negotiations for the sale took place and were concluded before the death of Menzi. After his death, full payment of the entire consideration of the sale, principal and interest, was made only after judicial confirmation thereof in the Probate Case. The transaction was duly supported by the corresponding receipt, voucher, cancelled checks, cancelled promissory note, and BIR certification of payment of the corresponding taxes due thereon. The Supreme Court is not a trier of facts. It is not our function to examine and weigh all over again the evidence presented by the parties in the proceedings before the Sandiganbayan.

Evidence; Burden of Proof; Affirmative Defenses; Pleadings and Practice; It is procedurally required for each party in a case to prove his own affirmative allegations by the degree of evidence required by law; While it is incumbent upon the plaintiff who is claiming a right to prove his case, the defendant must likewise prove his own allega-

22

22



tions to buttress its claim that it is not liable.—It is procedurally required for each party in a case to prove his own affirmative allegations by the degree of evidence required by law. In civil cases such as this one, the degree of evidence required of a party in order to support his claim is preponderance of evidence, or that evidence adduced by one party which is more conclusive and credible than that of the other party. It is therefore incumbent upon the plaintiff who is claiming a right to prove his case. Corollarily, the defendant must likewise prove its own allegations to buttress its claim that it is not liable.

Same; Same; Same; The burden of proof may be on the plaintiff or defendant—it is on the defendant if he alleges affirmative defense which is not a denial of an essential ingredient in the plaintiff’s cause of action, but is one which, if established, will be a good defense, i.e., an “avoidance” of the claim.—The party who alleges a fact has the burden of proving it. The burden of proof may be on the plaintiff or the defendant. It is on the defendant if he alleges an affirmative defense which is not a denial of an essential ingredient in the plaintiff’s cause of action, but is one which, if established, will be a good defense—i.e., an “avoidance” of the claim. In the instant case, Cojuangco’s allegations are in the nature of affirmative defenses which should be adequately substantiated. He did not deny that Bulletin shares were

registered in his name but alleged that he held these shares not as nominee of Marcos, as the Republic claimed, but as nominee of Menzi. He did not, however, present any evidence to support his claim and, in fact, filed a Manifestation dated July 20, 1999 stating that he “sees no need to present any evidence in his behalf.”

Ill-Gotten Wealth; Words and Phrases; Ill-gotten wealth is any asset, property, business enterprise or material possession of persons within the purview of Executive Orders Nos. 1 and 2, acquired by them directly, or indirectly thru dummies, nominees, agents, subordinates and/or business associates by any of the means or similar schemes set out under the Rules and Regulations of the Presidential Commission on Good Government (PCGG).—These pieces of uncontradicted evidence suffice to establish that the 198 and 214 blocks are indeed ill-gotten wealth as defined under the Rules and Regulations of the PCGG, viz.: Sec. 1. Definition.—(A) “Ill-gotten wealth is hereby defined as any asset, property, business enterprise or material possession of persons within the purview of Executive Orders

23


23


Nos. 1 and 2, acquired by them directly, or indirectly thru dummies, nominees, agents, subordinates and/or business associates by any of the following means or similar schemes: (1) Through misappropriation, conversion, misuse or malversation of public funds or raids on the public treasury; (2) Through the receipt, directly or indirectly, of any commission, gift, share, percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government contract or project or by reason of the office or position of the official concerned; (3) By the illegal or fraudulent conveyance or disposition of assets belonging to the government or any of its subdivisions, agencies or instrumentalities or government-owned or controlled corporations; (4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation in any business enterprise or undertaking; (5) Through the establishment of agricultural, industrial or commercial monopolies or other combination and/or by the issuance, promulgation and/or implementation of decrees and orders intended to benefit particular persons or special interests; and (6) By taking undue advantage of official position, authority, relationship or influence for personal gain or benefit.

Same; Corporation Code; Stock Certificates; A stock certificate is merely a tangible evidence of ownership of shares of stock—its presence or absence does not affect the right of the

registered owner to dispose of the shares covered by the stock certificate.—The fact that the stock certificates covering the shares registered under the names of Campos, Cojuangco and Zalamea were found in Menzi’s possession does not necessarily prove that the latter owned the shares. A stock certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate. Hence, as registered owners, Campos and Zalamea validly ceded their shares in favor of the Government. This assignment is now a fait accompli for the benefit of the entire nation.

Same; Presidential Commission on Good Government (PCGG); Sequestration; Exception; While it is true that PCGG is not empowered to sell sequestered assets without prior Sandiganbayan approval, this case clearly presents an exception because the Supreme Court itself directed PCGG to accept the cash deposit offered by Bulletin in payment for the Cojuangco and Zalamea sequestered shares subject to the alternatives mentioned therein and the outcome of the

24

24



remand to the Sandiganbayan on question of ownership of these sequestered shares.—The contention that the sale of the 214 block to the Bulletin was null and void as the PCGG failed to obtain approval from the Sandiganbayan is likewise unmeritorious. While it is true that the PCGG is not empowered to sell sequestered assets without prior Sandiganbayan approval, this case presents a clear exception because this Court itself, in the Teehankee Resolution, directed the PCGG to accept the cash deposit offered by Bulletin in payment for the Cojuangco and Zalamea sequestered shares subject to the alternatives mentioned therein and the outcome of the remand to the Sandiganbayan on the question of ownership of these sequestered shares.

Damages; An award of actual or compensatory damages requires proof of pecuniary loss—in this case, the Republic has not proven with a reasonable degree of certainty, premised on competent proof and the best evidence obtainable, that it has suffered any actual pecuniary loss by reason of the acts of the defendants.—With regard to the Republic’s prayer for damages, we find the same not supported by sufficient evidence. An award of actual or compensatory damages requires proof of pecuniary loss. In this case, the Republic has not proven with a reasonable degree of certainty, premised on competent proof and the best evidence obtainable, that it has suffered any actual

pecuniary loss by reason of the acts of the defendants. Hence, actual or compensatory damages may not be awarded.

Same; While no proof of pecuniary loss is necessary in order that moral, temperate, nominal and exemplary damages may be adjudicated, proof of damage or injury should nonetheless be adduced.—While no proof of pecuniary loss is necessary in order that moral, temperate, nominal and exemplary damages may be adjudicated, proof of damage or injury should nonetheless be adduced. As found by the Sandiganbayan, however, the Republic failed to show the factual basis for the award of moral damages and its causal connection to defendants’ acts. Thus, moral damages, which are designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer, may not be awarded. Temperate, nominal, and exemplary damages, attorney’s fees, litigation expenses and judicial costs may likewise not be adjudicated for failure to present sufficient evidence to establish entitlement to these awards.

25


25


PETITIONS for review on certiorari of a decision of the Sandiganbayan.


The Solicitor General for the Republic of the Philippines.

Francis Gaw for Emilio T. Yap.

Siguion Reyna, Montecillo & Ongsiako for Estate of Hans Menzi.

Estelito P. Mendoza for E.M. Cojuangco, Jr.

Robert A.C. Sison for Imelda R. Marcos.

TINGA, J.:

In the hope-filled but problem-laden aftermath of the EDSA Revolution, President Corazon C. Aquino issued Executive Order (EO) No. 1, creating the Presidential Commission on Good Government (PCGG) tasked with, among others, the recovery of all ill-gotten wealth accumulated by former President Ferdinand Marcos, his immediate family, relatives, subordinates and close associates. This was followed by EO Nos. 2 and 14, respectively freezing all assets and properties in the Philippines in which the former President, his wife, their close relatives, subordinates, business associates,

dummies, agents or nominees have any interest or participation, and defining the jurisdiction over cases involving the ill-gotten wealth. Pursuant to the executive orders, several writs of sequestration were issued by the PCGG in pursuit of the reputedly vast Marcos fortune.

Following a lead that Marcos had substantial holdings in Bulletin Publishing Corporation (Bulletin), the PCGG issued a Writ of Sequestration dated April 22, 1986, sequestering the shares of Marcos, Emilio T. Yap (Yap), Eduardo M. Cojuangco, Jr. (Cojuangco), and their nominees and agents in Bulletin.

26

26



This was followed by another Writ of Sequestration issued on February 12, 1987, this time sequestering the shares of stock, assets, properties, records and documents of Hans Menzi Holdings and Management, Inc. (HMHMI).

The Republic then instituted before the Sandiganbayan on July 29, 1987, a complaint for reconveyance, reversion, accounting, restitution and damages entitled “Republic of the Philippines v. Emilio T. Yap, Manuel G. Montecillo, Eduardo M. Cojuangco, Jr., Cesar C. Zalamea, Ferdinand E. Marcos and Imelda R. Marcos” and docketed as Civil Case No. 0022. The complaint substantially averred that Yap knowingly and willingly acted as the dummy, nominee or agent of the Marcos spouses in appropriating shares of stock in domestic corporations such as the Bulletin, and for the purpose of preventing disclosure and recovery of illegally obtained assets. It also averred that Cesar Zalamea (Zalamea) acted, together with Cojuangco, as dummies, nominees and/or agents of the Marcos spouses in acquiring substantial shares in Bulletin in order to prevent disclosure and recovery of illegally obtained assets, and that Zalamea established, together with third persons, HMHMI which acquired Bulletin.

On March 10, 1988, the complaint was amended joining Cojuangco as Zalamea’s co-actor instead of mere collaborator. The complaint was amended for the second time on October 17, 1990. The amendment consisted of dropping Zalamea as defendant in view of the Deed of Assignment dated October 15, 1987 which he executed, assigning, transferring and ceding to the Government the 121,178 Bulletin shares registered in his name. These shares, as will be explained forthwith, formed part of the 214,424.5 shares (214 block) which became the subject of a case1 that reached this Court.

The Second Amended Complaint also included the Estate of Hans M. Menzi (Estate of Menzi), through its executor,

_______________

1 Bulletin Publishing Corporation v. PCGG, No. L-79126, April 15, 1988, 160 SCRA 716.

27


27


Atty. Manuel G. Montecillo (Atty. Montecillo), as one of the defendants.

The issues presented for resolution as stated in the Sandiganbayan’s Pre-Trial Order dated November 11, 1991 were:

1) Whether or not the sale of 154,470 shares of stock of Bulletin Publishing Co., Inc., subject of this case by the late Hans M. Menzi to the U.S. Automotive Co. Inc. is valid and legal; and 2) Whether or not the shares of stock of Bulletin Publishing Co. Inc. registered and/or issued in the name of defendants Emilio T. Yap, Eduardo Cojuangco, Jr., Cesar Zalamea and the late Hans M. Menzi (and/or his estate and/or his holding company, HM Holding & Investment Corp.) are ill-gotten wealth of the defendants Marcos spouses.

Make of record the oral manifestation of Atty. Estelito Mendoza, counsel for defendant Eduardo Cojuangco. That: (a) whether or not the said 154,470 shares of stock of Bulletin Publishing Co. Inc. legally belonged to the late Hans Menzi before he sold the same to U.S. Automotive Co. Inc. and (b) whether or not plaintiff Republic is entitled to the same, should also be threshed out during the trial on the merits.2

After protracted proceedings which spawned a number of cases3 that went up to this Court, the Sandiganbayan rendered a Decision4 dated March 14, 2002,5 the dispositive portion of which states:

_______________

2 As quoted in the assailed Decision; G.R. No. 152578, Vol. I, Rollo, pp. 10-51, at p. 12.

3 Bulletin Publishing Corporation v. PCGG, No. L-79126, April 15, 1988, 160 SCRA 716; Republic v. Sandiganbayan, G.R. No. 135789, January 31, 2002, 375 SCRA 425; Republic v. Sandiganbayan, G.R. No. 107377, Min. Res., 10-29-92 (EO).

4 Supra note 2. The Decision was penned by Associate Justice Rodolfo G. Palattao and concurred in by Associate Justices Narciso S. Nario and Nicodemo T. Ferrer.

5 Though dated March 5, 2002, the Decision was actually promulgated on March 14, 2002.

28

28



“WHEREFORE, judgment is hereby rendered:

1. Declaring that the following Bulletin shares are the illgotten wealth of the defendant Marcos spouses:

A. The 46,626 Bulletin shares in the name of defendant Eduardo M. Cojuangco, Jr., subject of the Resolution of the Supreme Court dated April 15, 1988 in G.R. No. 79126.

Pursuant to alternative “A” mentioned therein, plaintiff Republic of the Philippines through the PCGG is hereby declared the legal owner of these shares, and is further directed to execute, in accordance with the Agreement which is entered into with Bulletin Publishing Corporation on June 9, 1988, the necessary documents in order to effect transfer of ownership over these shares to the Bulletin Publishing Corporation.

B. The 198,052.5 Bulletin shares in the names of:

No. of Shares

Jose Y. Campos

90,866.5

Eduardo M. Cojuangco, Jr.

90,877.0

Cesar C. Zalamea

16,309.0

Total

198,052.5

which they transferred to HM Holdings and Management, Inc. onAugust 17, 1983, and which the latter sold to Bulletin PublishingCorporation on February 21, 1986. The proceeds from this sale arefrozen pursuant to PCGG’s Writ of Sequestration dated February 12,1987, and this writ is the subject of the Decision of the SupremeCourt dated January 31, 2002 in G.R. No. 135789.

Accordingly, the proceeds from the sale of these 198,052.5 Bulletin shares, under Philtrust Bank Time Deposit Certificate No. 136301 dated March 3, 1986 in the amount of P19,390,156.68 plus interest earned, in the amount of P104,967,112.62 as of February 28, 2002, per Philtrust Bank’s Motion for Leave to Intervene and to consign the Proceeds of Time Deposits of HMHMI, filed on February 28, 2002 with the Supreme Court in G.R. No. 135789, are hereby declared forfeited in favor of the plaintiff Republic of the Philippines.

2. Ordering the defendant Estate of Hans M. Menzi through its Executor, Manuel G. Montecillo, to surrender for cancellation the original eight Bulletin certificates of stock in its possession, which were presented in court as Exhibits …., which are part of the

29


29


212,424.5 Bulletin shares subject of the Resolution of the Supreme Court dated April 15, 1988 in G.R. No. 79126.

3. Declaring that the following Bulletin shares are not the illgotten wealth of the defendant Marcos spouses:

a. The 154,472 Bulletin shares sold by the late Hans M. Menzi to U.S. Automotive Co., Inc., the sale thereof being valid and legal; b. The 2,617 Bulletin shares in the name of defendant Emilio T. Yap which he owns in his own right; and c. The 1 Bulletin share in the name of the Estate of Hans M. Menzi which it owns in its own right.

4. Dismissing, for lack of sufficient evidence, plaintiff’s claim for damages, and defendants’ respective counterclaims.

SO ORDERED.”6

In the present consolidated petitions, the foregoing Sandiganbayan Decision is assailed on different grounds.

The Republic, in G.R. No. 152758, assails the afore-quoted Decision insofar as it declared as not ill-gotten wealth of the Marcos spouses the 154,472 shares (154 block) sold by Menzi to U.S. Automotive Co., Inc. (US Automotive) and dismissed the Republic’s claim for damages.

In G.R. No. 154487, Cojuangco questions paragraphs 1 and 2 of the Sandiganbayan Decision.

In G.R. No. 154518, on the other hand, the Estate of Menzi imputes grave error and misinterpretation of facts and evidence against the Sandiganbayan in declaring that the 46,626 Bulletin shares in the name of Cojuangco, and the 198,052.5 shares (198 block) in the names of Jose Campos (Campos), Cojuangco and Zalamea are ill-gotten wealth of the Marcoses.

The three blocks of Bulletin shares of stock subject of these consolidated petitions are:

_______________

6 Id., at pp. 47-49.

30

30



1. 154,472 shares (154 block) sold by the late Menzi and/or Atty. Montecillo to US Automotive on May 15, 1985 for P24,969,200.09; 2. 198,052.50 (198 block) issued and registered in the names of Campos, Cojuangco, and Zalamea which were transferred to HMHMI and subsequently sold by HMHMI (through Atty. Montecillo) to Bulletin on February 21, 1986 for P23,675,195.85; and 3. 214,424.5 shares (214 block) issued and registered in the names of Campos, Cojuangco, and Zalamea which were the subject of the unanimous Resolution of this Court, through Mr. Chief Justice Claudio Teehankee, in Bulletin v. PCGG7 (Teehankee Resolution) dated April 15, 1988 and the Sandiganbayan Resolutions dated January 2, 1995 and April 25, 1996 in Civil Case No. 0022.

For clarity of presentation, the 154 block, which is the subject of the Republic’s petition in G.R. No. 152578, is treated separately from the 198 and 214 blocks, which are the subjects of the petitions in G.R. No. 154487 and G.R. No. 154518.154 Block

In 1957, Menzi purchased the entire interest in Bulletin from its founder and owner, Mr. Carson Taylor. In 1961, Yap, owner of US Automotive, purchased Bulletin shares from Menzi and became one of the corporation’s major stockholders.

On April 2, 1968, a stock option was executed by and between Menzi and Menzi and Co. on the one hand, and Yap and US Automotive on the other, whereby the parties gave each other preferential right to buy the other’s Bulletin shares.

_______________

7 Supra, note 1.

31


31


On April 22, 1968, the stockholders of Bulletin approved certain amendments to Bulletin’s Articles of Incorporation, consisting of some restrictions on the transfer of Bulletin shares to non-stockholders.8 The amendments were approved

_______________

8 The Amended Articles of Incorporation provides:

“That the subscription and ownership of any and all shares of stock in the corporation are made and taken subject to the condition that any stockholder desiring to sell, transfer, convey or otherwise dispose of his/her shares of stock shall first offer the same to the corporation who shall have priority in acquiring the same. The stockholder concerned shall notify the President and all the other stockholders of the corporation of his/her intention to sell or dispose of his/her stockholdings in writing, and duly receipted for by the President of the corporation at its principal office in the City of Manila and by all the other stockholders. The corporation shall have thirty (30) days from date of receipt of written offer by the President within which to exercise the option. The selling price of the shares shall not be more than the book value thereof based on the balance sheet at the end of the preceding year of the corporation which has been approved by the Board of Directors. Should the corporation fail to exercise the option herein granted, the stockholders concerned shall be free to sell, transfer, convey or otherwise dispose of his/her stockholdings to any person, who must, however, be a Filipino citizen or to a firm or corporation the capital stock of which is 100% Filipino owned or controlled.

…

The foregoing restrictions and limitations shall not apply to the sale, transfer, conveyance or disposition by any stockholder of his/her shares of stock in favor of another stockholder of the corporation or to the disposition by any stockholder of the corporation of his/her shares of stock by will, donation, inheritance, assignment or transfer in favor of his/her legal heirs or direct descendants.

Any transfer of conveyance in violation of the foregoing, terms and conditions shall be null and void and shall not e transferable in the books of the corporation.

32

32



by the Board of Directors of Bulletin and by the Securities and Exchange Commission (SEC).

Several years later, on June 5, 1984, Atty. Amorsolo V. Mendoza (Atty. Mendoza), Vice President of US Automotive, executed a promissory note with his personal guarantee in favor of Menzi, promising to pay the latter the sum of P21,304,921.16 with interest at 18% per annum as

consideration for Menzi’s sale of his 154 block on or before December 31, 1984.

One day after Menzi’s death on June 27, 1984, a petition for the probate of his last will and testament was filed in the Regional Trial Court (RTC) of Manila, Branch 29, by the named executor, Atty. Montecillo, and docketed as Special Proceeding No. 84-25244.

On January 10, 1985, Atty. Montecillo filed a motion praying for the confirmation of the sale to US Automotive of Menzi’s 154 block. The probate court confirmed the sale in its Order dated February 1, 1985.

Accordingly, on May 15, 1985, Atty. Montecillo received from US Automotive two (2) checks in the amounts of P21,304,778.24 and P3,664,421.85 in full payment of the agreed purchase price and interest for the sale of the 154 block. On the same day, Atty. Montecillo signed a company voucher acknowledging receipt of the payment for the shares, indicating on the dorsal portion thereof the certificate numbers of the 12 stock certificates covering the 154 block, the number of shares covered by each certificate and the date of issuance thereof.

Atty. Montecillo also wrote on the lower portion of the promissory note executed by Atty. Mendoza the words “Paid

_______________

The entire provisions of this amendment shall be printed on the stock certificates of the corporation and shall be binding on all stockholders, their successors, assigns, administrators and representatives.” Quoted from the Sandiganbayan Decision, Supra, note 2 at pp. 13-14.

33


33


May 15, 1985 (signed) M.G. Montecillo, Executor of the Estate of Hans M. Menzi.”

Upon these facts, the Sandiganbayan ruled that the sale of the 154 block to US Automotive is valid and legal. According to the Sandiganbayan, the sale was made pursuant to the stock option executed in 1968 between the parties to the sale. Negotiations took place and were concluded before Menzi’s death, and full payment was made only after the probate court had judicially confirmed the sale.

The Sandiganbayan dismissed the Republic’s claim, based on the affidavit of Mariano B. Quimson, Jr. (Quimson) dated

October 9, 1986, that the sale should be nullified because US Automotive only acted as a dummy of Marcos who was the real buyer of the shares. According to the court, the Republic failed to overcome its burden of proof since Quimson’s affidavit was not corroborated by other evidence and was, in fact, refuted by Atty. Montecillo.

In its Memorandum9 dated July 7, 2003 in G.R. No. 152578, the Republic argues that the Sandiganbayan failed to take into account the fact that despite Menzi’s claim that he acquired Bulletin in 1957, he did not include any Bulletin shares in his Last Will and Testament executed in 1977. Atty. Montecillo, the executor of Menzi’s estate, likewise did not include any Bulletin share in the initial inventory of Menzi’s properties filed on May 15, 1985. Neither were any Bulletin shares declared by Atty. Montecillo even after the probate court issued an Order dated November 17, 1992 for the submission of an updated inventory of Menzi’s assets.

The Republic claims that despite these circumstances, coupled with Quimson’s affidavit detailing how Marcos used his dummies to conceal his control over Bulletin, as well as the letters and correspondence between Marcos and Menzi indicating that Menzi consistently updated Marcos on the affairs of Bulletin, the Sandiganbayan ruled that the 154 block was

_______________

9 G.R. No. 152578, Vol. II, Rollo, pp. 1503-1582.

34

34



not ill-gotten wealth of the Marcoses. The Sandiganbayan’s erroneous inference allegedly warrants a review of its findings.

Moreover, the Republic disputes the Sandiganbayan’s ruling that it heavily leaned on the affidavit of Quimson without presenting any other corroborating evidence.10 It argues that

_______________

10 As stated in the assailed Decision, Quimson, former President of Bulletin, testified regarding what he knew about the nominees of Marcos in Bulletin, as follows:

There were three (3) NOMINEES OF THE President and corresponding shares were issued to them after the accompanying infusion of funds, which Menzi got from Marcos. The three (3) nominees were:

Jose Y. Campos

Cesar C. Zalamea

Ramon Cojuangco

Shares of stock representing around 54% of the equity were issued in the name of the above nominees and surrendered to Menzi in 1973. After a short period, Menzi called me and instructed me to change nominee Ramon Cojuangco, in favor of Eduardo Cojuangco, saying that this was upon instruction “of the President.” Ramon Cojuangco’s shares were cancelled and new shares were issued to Eduardo Cojuangco. None of these nominees showed up in any stockholders’ meetings. Nor did they send representative to attend or observe the meetings.

Sometime in 1983, Menzi requested me to prepare a listing of all stock certificates in the name of the nominees, saying that a holding company (which I later on learned as the H M Holdings and Management, Inc.) was being organized by Atty. Manuel Montecillo and Mr. Rolando Gapud to which company all the Bulletin shares in the name of the nominees and shares held by Hans M. Menzi for the President in Liwayway Publishing, Inc. (about 92% of the total shares) Menzi & Co., Inc., Menzi Agricultural, Inc., Menzi Development Corporation, and M & M Consolidated, Inc. will be transferred. I recall Gen. Menzi as saying “He (President Marcos) knows I (Menzi) am sickly; and the children now want a piece of the action.”

35


35


in the proceedings before the PCGG, Quimson was subjected to cross-examination by the lawyers of Bulletin which is controlled by Yap. Further, the evidence it presented before the PCGG purportedly showing that the transfer of Bulletin shares from Menzi to US Automotive was undertaken due to pressure exerted by Marcos on Menzi should have been taken into account.

The Republic insists that the sale between Menzi and U.S. Automotive was a sham because the parties failed to comply with the basic requirement of a deed of sale in the transfer of the subject shares. Further, a number of questions were allegedly not resolved, such as: (a) Who was the seller of the subject shares—the late Menzi as the alleged owner or Atty. Montecillo as then special administrator and later executor of Menzi’s estate; (b) If Menzi sold the shares, was there a need

to confirm the sale? If Atty. Montecillo was the one who sold them, what was his authority to sell the said shares?

The Republic also contends that Menzi and Yap were both dummies of the late President Marcos, used by the latter in order to conceal his interest in Bulletin. Hence, the 154 block should also have been declared ill-gotten wealth and forfeited in favor of the Government.

The foregoing allegedly warrants the award of damages in favor of the Republic which the Sandiganbayan erroneously failed to do.

_______________

About 3 months before his death, Menzi instructed me to follow and implement what he (Menzi) had been told by President Marcos to do, namely, to report monthly results of the operations of both Bulletin Publishing Corporation and Liwayway Publishing, Inc. to Mr. Rolando Gapud of Security Bank and to deliver all the dividends checks (1983) for the three Bulletin nominees (Zalamea, Cojuangco and Campos) to Mr. Gapud. This was faithfully complied with and I saw Mr. Gapud monthly until I retired in May, 1985.

Supra, note 2 at pp. 24-25, 27-28.

36

36



The Republic, therefore, prays that the Sandiganbayan Decision, insofar as it declares the sale of the 154 block to be valid and legal, be reconsidered and judgment accordingly rendered declaring the 154 block as ill-gotten wealth, forfeiting the same or the proceeds thereof in favor of the Republic, and awarding actual, temperate and nominal damages in the Court’s discretion, moral damages in the amount of 50 Billion Pesos, exemplary damages of 1 Billion Pesos, attorney’s fees, litigation expenses and treble judicial costs.

The Estate of Menzi and HMHMI filed a Memorandum11 dated March 10, 2005, averring that the Republic failed to adduce evidence of any kind that the 154 block was ill-gotten wealth of the Marcoses. They claim that the requirements for a valid transfer of stocks, namely: (1) there must be delivery of the stock certificate; (2) the certificate must be indorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (3) the transfer must be recorded in the books of the corporation in order to be valid against third parties, have all been met.

The parties to the sale allegedly confirm the indorsement and delivery of the Bulletin shares of stock representing the 154 block. The requirement that the transfer be recorded in the books of the corporation was also met because US Automotive exercised its rights as shareholder.

It is also allegedly immaterial whether it was Menzi or Atty. Montecillo who indorsed the stock certificates. If it was Menzi, then his indorsement was an act of ownership; if it was Montecillo, then the indorsement was pursuant to the duly executed General Power of Attorney filed with the SEC and, subsequently, on the basis of his authority as Special Administrator and Executor of Menzi’s estate.

In his Memorandum12 dated May 10, 2005, Yap also maintains that the sale of the 154 block was valid and legal. The

_______________

11 Supra, note 9 at pp. 1649-1771.

12 Id., at pp. 1882-1957.

37


37


non-inclusion of the said block of shares in the inventory of Menzi’s estate was purportedly due to the fact that the same had, by then, been sold to US Automotive. Yap also claims that Atty. Montecillo was duly authorized to effect the sale by virtue of the General Power of Authority and the Last Will and Testament executed by Menzi.

The absence of a deed of sale evidencing the sale is allegedly not irregular because the law itself does not require any deed for the validity of the transfer of shares of stock, it being sufficient that such transfer be effected by delivery of the stock certificates duly indorsed. At any rate, a duly notarized Receipt covering the sale was executed.13

Moreover, the BIR certified that the Estate of Menzi paid the final tax on capital gains derived from the sale of the 154 block and authorized the Corporate Secretary to register the transfer of the said shares in the name of US Automotive. Further, a stock certificate covering the 154 block was issued to US Automotive by Quimson himself as Corporate Secretary.

Sec. 63 of the Corporation Code provides the requisites for a valid transfer of shares:

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

_______________

13 Supra, note 2, at p. 16; Exhs. “4” and “4-A”-Yap; Exh. “AA.”

38

38



transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. [Emphasis supplied]

The Corporation Code acknowledges that the delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the parties. In order to bind third persons, however, the transfer must be recorded in the books of the corporation.

Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid as the Republic posits. In fact, as has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals,14 the execution of a deed of sale does not necessarily make the transfer effective.

In that case, petitioners argued that by virtue of the deed of assignment, private respondents had relinquished to them all their rights as stockholders of the bank. This Court, however, ruled that the delivery of the stock certificate duly indorsed by the owner is the operative act that transfers the shares. The absence of delivery is a fatal defect which is not cured by mere execution of a deed of assignment. Consequently, petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned.

There appears to be no dispute in this case that the stock certificates covering the 154 block were duly indorsed and delivered to the buyer, US Automotive. The parties to the sale, in fact, do not question the validity and legality of the transfer.

_______________

14 G.R. No. 124535, September 28, 2001, 366 SCRA 188.

39


39


The objection raised by the Republic actually concerns the authority of Atty. Montecillo, the executor of Menzi’s estate, to indorse the said certificates. However, Atty. Montecillo’s authority to negotiate the transfer and execute the necessary documents for the sale of the 154 block is found in the General Power of Attorney executed by Menzi on May 23, 1984, which specifically authorizes Atty. Montecillo “[T]o sell, assign, transfer, convey and set over upon such consideration and under such terms and conditions as he may deem proper, any and all stocks or shares of stock, now standing or which may thereafter stand in my name on the books of any and all company or corporation, and for that purpose to make, sign and execute all necessary instruments, contracts, documents or acts of assignment or transfer.”15

Atty. Montecillo’s authority to accept payment of the purchase price for the 154 block sold to US Automotive after Menzi’s death springs from the latter’s Last Will and Testament and the Order of the probate court confirming the sale and authorizing Atty. Montecillo to accept payment therefor. Hence, before and after Menzi’s death, Atty. Montecillo was vested with ample authority to effect the sale of the 154 block to US Automotive.

That the 154 block was not included in the inventory is plausibly explained by the fact that at the time the inventory of the assets of Menzi’s estate was taken, the sale of the 154 block had already been consummated. Besides, the non-inclusion of the proceeds of the sale in the inventory does not affect the validity and legality of the sale itself.

At any rate, the Sandiganbayan’s factual findings that the 154 block was sold to US Automotive while Menzi was still alive, and that Atty. Montecillo merely accepted payment by virtue of the authority conferred upon him by Menzi himself

_______________

15 The General Power of Attorney is attached as Annex “3” of Yap’s Memorandum and marked as Yap’s Exhibit “10”; Supra, note 9 at pp. 1973-1976.

40

40



are conclusive upon this Court, supported, as they are, by the evidence on record.16 As held by the Sandiganbayan:

… The sale was made pursuant to the Stock Option executed in 1968 between the parties to the sale, considering the restrictions contained in Bulletin’s Articles of Incorporation as amended in 1968 limiting the transferability of its shares. Negotiations for the sale took place and were concluded before the death of Menzi. After his death, full payment of the entire consideration of the sale, principal and interest, was made only after judicial confirmation thereof in the Probate Case. The transaction was duly supported by the corresponding receipt, voucher, cancelled checks, cancelled promissory note, and BIR certification of payment of the corresponding taxes due thereon.17

The Supreme Court is not a trier of facts. It is not our function to examine and weigh all over again the evidence presented by the parties in the proceedings before the Sandiganbayan.18

It is also significant that even Quimson’s affidavit does not state, in a categorical manner, that Yap was a Marcos dummy used by the latter to conceal his Bulletin shareholdings. In contrast, Quimson unqualifiedly declared that Campos, Co-

_______________

16 Republic v. Sandiganbayan, G.R. No. 128606, December 4, 2000, 346 SCRA 760.

17 Supra note 2 at p. 19.

18 Republic v. Sandiganbayan, G.R. No. 135789, January 31, 2002, 375 SCRA 425. In that case, the Sandiganbayan held that “[B]ased on the evidence the PCGG submitted so far to the Sandiganbayan, the late Hans M. Menzi owned the Bulletin Publishing Corporation almost one hundred (100%) percent since 1957, except those Bulletin shares sold to U.S. Automotive Corporation in 1985, those converted to treasury shares in 1986, and those sold to the general public at public offerings…” (Per Pardo, J. Chief Justice Davide and Associate Justices Puno, Kapunan and Ynares-Santiago, concurring)

41


41


juangco and Zalamea were the former dictator’s nominees to Bulletin.19

We, therefore, agree with the Sandiganbayan that the sale of the 154 block to US Automotive was valid and legal.198 and 214 blocks

HMHMI was incorporated on May 20, 1982 by Menzi, Campos, Cojuangco, Rolando C. Gapud (Gapud) and Zalamea, with an authorized capital stock of P1,000,000.00 divided into 100,000 shares with par value of P10.00 each.

A Deed of Transfer and Conveyance was executed by Menzi, Campos, Cojuangco and Zalamea on August 17, 1983, transferring the shares of stock registered in their names in various corporations to HMHMI in exchange for 6,000,000 shares of the latter’s capital stock, subject to the approval by the SEC of HMHMI’s Certificate of Increase of Capital Stock. The shares of stock transferred included the 198 block of Bulletin shares, 90,866.5 of which were registered in the name of Campos; 90,877 in the name of Cojuangco; and 16,309 in the name of Zalamea.

On February 14, 1984, HMHMI amended its Articles of Incorporation by increasing its authorized capital stock to P100,000,000.00 divided into 10,000,000 shares with par value of P10.00 per share.

On January 15, 1986, the law firm of Siguion Reyna, Montecillo & Ongsiako wrote a letter to Bulletin’s corporate secretary, Atty. Mendoza, requesting that three (3) certificates of stock representing 90,866.5, 90,877, and 16,309 Bulletin shares be issued in favor of HMHMI in exchange for 21 certificates of stock in HMHMI.

Atty. Mendoza acknowledged receipt of the 21 certificates of stock but replied that the transfer by Campos, Cojuangco

_______________

19 Affidavit of Quimson attached as Annex “S” to Cojuangco’s petition in G.R. No. 154487. G.R. No. 154487 Rollo, pp. 522-526.

42

42



and Zalamea of their Bulletin shares to HMHMI cannot be recorded in the books of Bulletin because it was made in violation of Bulletin’s Articles of Incorporation which provides restrictions and limitations on the transferability of the shares of the company by its stockholders. Bulletin, however, offered to buy the shares at the price fixed in the Articles of Incorporation. The offer appears to have been accepted by HMHMI through its President, Atty. Montecillo.

Thus, on January 30, 1986, HMHMI’s Board of Directors passed a resolution approving the sale to Bulletin of the 198 block and authorizing its President or Corporate Secretary to sign and execute the corresponding deed of sale. Accordingly, a Deed of Sale was executed on February 21, 1986 by Atty. Montecillo whereby HMHMI sold the 198 block to Bulletin for the amount of P23,675,195.85.

On April 22, 1986, the shares of Marcos, Yap, Cojuangco and their nominees or agents in the Bulletin were sequestered by virtue of a Sequestration Order issued by the PCGG.

The SEC issued a certification to the effect that as of Feb-ruary 21, 1986, the total subscribed shares of Bulletin was 756,861. Of these, 198,052.5 were treasury shares, leaving the total outstanding shares at 567,808.5. The stockholders of Bulletin and the shares of stock held by each of them were listed as follows:

Name

No. of Shares

Emilio T. Yap

2,617

Menzi Trust Fund

28,977

Estate of Hans M. Menzi

1

U.S. Automotive Co. Inc.

318,084

x x x

x x x

Cesar Zalamea

121,178

Jose Campos

46,620.5

Eduardo Cojuangco

46,626

x x x

x x x

Total

567,808.5

43


43


On February 12, 1987, another Writ of Sequestration was issued by the PCGG, sequestering all the shares of stock, as well as the assets, properties, records and documents of HMHMI. Because of this Sequestration Order, the proceeds from the sale of the 198 block which were deposited with Philtrust Bank were frozen.20

On March 16, 1987, the sequestration of the 2,617 Bulletin shares of Yap was lifted upon the latter’s motion.

On April 14, 1987, the PCGG wrote a letter/order to the Corporate Secretary of Bulletin, asking for the schedule of the annual stockholders’ meeting of the corporation because the sequestered shares consisting of the 214 block will be voted by the Commission. This letter became the subject of a petition21 filed by Bulletin with this Court questioning the validity of the PCGG’s letter/order and seeking to compel PCGG to accept Bulletin’s offer of a cash deposit in the amount of P34,592,903.34 representing the value of the 214 block of sequestered Bulletin shares. The Court issued a temporary restraining order.

On July 31, 1987, the PCGG received from Bulletin the amount of P8,173,506.06 as full payment of 46,620.5 Bulletin shares registered in the name of Campos. The receipt stated that “Mr. Jose Y. Campos has waived the ownership of said shares in favor of the Republic of the Philippines through the Presidential Commission on Good Government.”

A Deed of Assignment was likewise executed by Zalamea on October 15, 1987, assigning and waiving in favor of the Republic his rights to 121,178 Bulletin shares registered in his name. On the same day, Bulletin issued in favor of PCGG

_______________

20 On April 13, 1998, however, the Sandiganbayan lifted the Writ of Sequestration dated February 12, 1987, reasoning that there was no prima facie factual basis for its issuance. This Resolution was affirmed by the Supreme Court in Republic v. Sandiganbayan, G.R. No. 135789, January 31, 2002, 375 SCRA 425.

21 Supra note 5.

44

44



a check in the amount of P21,244,926.96 as full payment of Zalamea’s shares.

This Court, on April 15, 1988, issued the Teehankee Resolution, the dispositive portion of which pertinently states:

2. Directing the Commission to accept the cash deposit of P8,174,470.32 offered by petitioner for the 46,626 sequestered shares in the name of Mr. Eduardo M. Cojuangco, Jr. expressly subject to the alternative conditions (A and B) hereinabove set forth, and likewise directing the Commission to accept the cash deposit, if it has not actually sold the Cesar C. Zalamea Bulletin shares to petitioner (supra,

p. 13, par [2]) of P21,244,926.96 for the sequestered shares of Bulletin in the name of Mr. Cesar Zalamea under the same alternatives already mentioned; and 3. Remanding the case regarding the issue of ownership of the said sequestered Bulletin shares for determination and adjudication to the Sandiganbayan.22

An agreement was thereafter executed between PCGG and Bulletin on June 9, 1988 regarding the 46,626 Bulletin shares of Cojuangco whereby PCGG accepted Bulletin’s deposit in the amount of P8,174,470.32, subject to the alternatives set forth in the Teehankee Resolution, as follows:

Alternative “A”—To standby as full payment plus whatever interest earnings thereon upon final judgment of the Court declaring the Republic of the Philippines as owners of the 46,626 shares, accompanied by the corresponding original stock certificates, issued in the name of the government, duly endorsed in favor of the Bulletin Publishing Corporation, free from liens and encumbrances; or

Alternative “B”—To immediately return to Bulletin Publishing Corporation the cash deposit in the amount of P8,174,470.32 plus whatever interest earnings thereon upon final judgment by the Court declaring that Mr. Eduardo Cojuangco, Jr. is the true owner of the 46,626 shares.23

_______________

22 Id., at p. 728.

23 Id., at p. 727.

45


45


With this factual backdrop, the Sandiganbayan ruled that Campos, Cojuangco and Zalamea were nominees and dummies of Marcos. Hence, the 198 block which these nominees transferred to HMHMI and which, in turn, were sold to Bulletin are ill-gotten wealth.

The Sandiganbayan anchored its finding on the Deposition of Campos taken on November 25, 1994 before the Philippine Consulate General in Vancouver, British Columbia, Canada, that he held shares in Bulletin and HMHMI “per instruction of President Marcos”; that the beneficial owner of these shares “must be President Marcos”; and that he received three (3) dividend checks from Bulletin “for the benefit of President Marcos.”

Based on the Deed of Assignment executed by Zalamea on October 15, 1987, wherein he manifested that he “does not claim true and beneficial ownership” of the 121,178 Bulletin shares registered in his name and that he voluntarily waived and assigned these shares in favor of PCGG, the Sandiganbayan concluded that Zalamea could not have been a nominee of Menzi, as the latter’s estate claims, but of Marcos.

The Sandiganbayan likewise rejected Cojuangco’s contention that the Bulletin and HMHMI shares registered in his name “were not acquired and held by him as dummy, nominee and/or agent of defendants Ferdinand E. Marcos and Imelda Romualdez Marcos, but upon the request, and as nominee, of the late Hans Menzi who owned and delivered to him said shares.” According to the Sandiganbayan, Cojuangco failed to present evidence necessary to establish his affirmative defense.

As regards the 214 block, the Sandiganbayan ruled that there is no longer any dispute concerning the ownership of the 46,620.5 shares held by Campos and the 121,178 shares held by Zalamea in view of the Teehankee Resolution and the fact that these shares have been waived and assigned to PCGG. The Sandiganbayan went on to declare that the only remaining issue pertaining to Cojuangco’s claim to his alleged

46

46



portion of the 214 block should be resolved in favor of the Republic because of Cojuangco’s consistent disavowal of any “proprietary interest in the shares which are the subject matter of the instant case” and his claim that he held the shares as nominee of Menzi.

The Sandiganbayan further ruled that Yap’s shares, which were acquired by him in 1961 before Marcos became President, are not ill-gotten wealth of the Marcoses. Moreover, the one (1) Bulletin share for which dividend checks were issued to and received by the Estate of Menzi was deemed to belong to the latter.

In G.R. No. 154487, petitioner Cojuangco assails paragraphs 1 and 2 of the Sandiganbayan Decision. Allegedly, the Government does not claim that in acquiring the Bulletin shares registered in Cojuangco’s name, the late President Marcos used government funds or resources. Cojuangco raises several issues, namely: (a) Were the Bulletin shares, at any time, of government ownership? (b) Were the Bulletin shares acquired by Marcos and, if so, did he use government funds to acquire them? (c) Did petitioner Cojuangco act as the

“dummy” or “nominee” of Marcos to acquire, or to conceal the acquisition of the shares by the latter?

In the Memorandum for Eduardo M. Cojuangco, Jr.24 dated May 6, 2005, Cojuangco argues that the Republic neither alleged nor presented evidence to prove that that the Bulletin shares registered in his name were owned by the Republic but were taken by the Marcoses “by taking advantage of their public office and/or using their powers, authority, influence, connections or relationship” or that they were acquired by the Marcoses from Menzi with the use of government or public funds. Hence, the conclusion should be sustained that the shares were owned by Menzi and never by the Republic, and no public funds were used in their acquisition.

_______________

24 G.R. No. 154487 Rollo, pp. 1280-1366.

47


47


Cojuangco attacks the Sandiganbayan’s reliance on Quimson’s affidavit saying that it is hearsay because Quimson was not presented in court to affirm the contents of his affidavit and was not subjected to cross-examination as he had already passed away when Civil Case No. 0022 was tried. Quimson’s affidavit is allegedly double hearsay insofar as it alleges that Marcos owned the Bulletin shares and that Cojuangco was merely Marcos’ nominee because Quimson had no contact with Marcos and his knowledge of the latter’s purported ownership of the Bulletin shares was merely relayed to him by Menzi.

Even the supposed corroborating evidence, consisting of the affidavits of Pedro Teodoro, Evelyn S. Singson, Gapud, and Angelita Reyes, have allegedly been declared as having no probative value inasmuch as the affiants did not take the witness stand and could not be cross-examined.

The Republic likewise allegedly failed to prove its contention that Bulletin issued checks in favor of Campos, Cojuangco and Zalamea which were deposited into numbered accounts in Security Bank & Trust Company owned by the Marcoses. Moreover, the dividend checks supposedly indorsed by Cojuangco in blank do not conclusively demonstrate that they were indorsed in favor of the Marcoses.

On the other hand, there is allegedly sufficient evidence on record to prove that Cojuangco was a nominee of Menzi. These documents consist of the testimony of Atty. Montecillo to the effect that, as far as he knew, Cojuangco “really acted

as nominee for the General,” and the originals of the stock certificates covering the Bulletin shares registered in Cojuangco’s name.

Cojuangco further avers that the allegation that the Bulletin shares were registered in his name upon the request, and as nominee, of Menzi is a specific denial and not an affirmative defense as the Sandiganbayan declared. As a specific denial, the allegation need not be proven unless the Republic

48

48



presents adequate evidence proving the allegations in its complaint which, Cojuangco insists, the Republic failed to do.

He likewise argues that the Republic is not entitled to damages of any kind because it failed to establish that it has any proprietary interest in the Bulletin shares registered in his name; that the said shares are owned by the Marcoses; and that it suffered any pecuniary loss by reason of such ownership.

Based on these allegations, Cojuangco prays that he be declared the owner of the 46,626 Bulletin shares registered in his name, together with all cash and stock dividends which have accrued in favor of said shares from October 15, 1987, and ordering the PCGG to return the cash deposit of P8,174,470.32 plus interest to Bulletin.

In its Memorandum25 dated March 17, 2005, the Republic maintains that Cojuangco has consistently denied any proprietary interest in the Bulletin shares. Hence, he cannot claim ownership of the Bulletin shares registered in his name. His allegation that that he was a nominee of Menzi was pleaded by way of defense. Thus, he has the burden of proving this material allegation, set up as new matter, that the shares were not his but Menzi’s.

Since the Bulletin shares were not included in the inventory of Menzi’s assets, it allegedly follows that Cojuangco could not have been a nominee of Menzi who did not own the subject Bulletin shares.

As regards the contention that the Republic failed to show that the shares belong to the Government or were acquired using public funds, the Republic maintains that Marcos acquired the Bulletin shares using his political clout. His very act of participating in a business enterprise using nominees to conceal his ownership of Bulletin shares is already a violation of the Constitution.

_______________

25 Id., at pp. 1191-1262.

49


49


Furthermore, Campos and Zalamea, who, like Cojuangco, held shares in the 198 and 214 blocks, have already surrendered and assigned their respective shares to the Government and acknowledged the right of the Government over the Bulletin registered in their names. Such is allegedly a clear indication that they acted as dummies of Marcos. The admission of Campos and Zalamea that their shares in the 214 block belonged to Marcos may allegedly be used to prove that the 198 block was likewise held by them as dummies of the former dictator.

The Sandiganbayan also allegedly did not rely on the Teehankee Resolution to support its conclusion that the 198 and 214 blocks are ill-gotten wealth but made its own finding after a full-blown trial at which all the parties, except Cojuangco, presented their respective evidence.

Moreover, the evidence presented by the Republic allegedly preponderates in favor of its theory that the Bulletin shares in the names of Campos, Cojuangco and Zalamea were actually held in trust for the benefit of the Marcoses. Notably, the PCGG Resolution dated May 22, 1987, presented by the Republic as its Exhibit “I” declares that Quimson and Teodoro, close associates of Menzi, stated under oath that when Marcos allowed the Bulletin to reopen during Martial Law, Menzi was allowed only 20% participation, and that Marcos put his shares in the names of Campos, Cojuangco and Zalamea.

Besides, Menzi did not execute any deed of trust in his favor as trustor and Campos, Cojuangco and Zalamea as trustees. Neither did the Estate of Menzi claim that Campos, Cojuangco and Zalamea were nominees of Menzi as no crossclaim was filed by the Estate of Menzi even as it claimed ownership of the 198 and 214 blocks.

In their Memorandum26 dated March 10, 2005 in G.R. Nos. 154487 and 154518, the Estate of Menzi and HMHMI argue that the Sandiganbayan erred in not resolving the issue of the

_______________

26 Id., at pp. 1068-1188.

50

50



ownership of the 198 and 214 blocks. The Sandiganbayan instead allegedly relied on its misinterpretation of the Teehankee Resolution to the effect that there is no longer any controversy as regards the ownership of the portion of the 214 block held by Zalamea. According to said respondents, the Teehankee Resolution clearly directed the Sandiganbayan to resolve the issue of ownership of both the Zalamea and Cojuangco portions of the 214 block.

Respondents Estate of Menzi and HMHMI also contend that the Quimson affidavit should have been treated as having no probative value with respect to the 154 block and the 198 and 214 blocks alike. The affidavit was allegedly not at all corroborated by the other documents presented by the Republic and cited in the assailed Decision.

They insist that Campos, Cojuangco and Zalamea were nominees of Menzi, not dummies of Marcos, because, as allegedly established during trial, the stock certificates covering the contested blocks of shares were indorsed in blank and remained in Menzi’s possession. Even Campos allegedly testified that he was never in possession of the stock certificates.

Assuming that Campos was indeed a Marcos dummy, his admission should apply solely to the Bulletin shares registered in his name. Likewise, Zalamea allegedly never declared himself to be a Marcos nominee, only that he does not claim true and beneficial ownership of the Bulletin shares recorded in his name. The dividend checks for Zalamea’s shareholdings, in fact, allegedly indicate the Estate of Menzi as the payee, proving that Zalamea was Menzi’s nominee.

Respondents Estate of Menzi and HMHMI further claim that the 198 and 214 blocks were not mentioned in Menzi’s Last Will and Testament because Menzi knew of the impending promulgation of a decree which would limit to only 20% the ownership of media enterprises by one person or family. Allegedly, in order to get around this restriction, Menzi devised the nominee structure whereby he used three (3) nominees to enable him to retain his 80% stake in Bulletin. Be-

51


51


sides, there was allegedly a legal question as to whether sequestered shares need to be declared for estate tax purposes in the meantime that a case involving these shares was pending.

Said respondents finally posit that assuming that the 198 and 214 blocks are ill-gotten, the shares themselves, and not merely the proceeds, should be forfeited in favor of the Government.

Yap, on the other hand, claims in his Memorandum27 dated May 10, 2005 filed in G.R. Nos. 154487 and 154518 that Cojuangco may not raise in his petition a new specific relief consisting of the prayer that he be declared the owner of the 46,626 Bulletin shares registered in his name which Cojuangco never asked for during the proceedings before the Sandiganbayan. Cojuangco is allegedly bound by his judicial admission that he has no proprietary interest over the said Bulletin shares.

Purportedly, because of this judicial admission, Alternative B mentioned in the Teehankee Resolution was eliminated. The only option which remained was, as held by the Sandiganbayan, to declare that the Government is the legal owner of the shares and direct the PCGG to execute the necessary documents to effect the transfer thereof in accordance with Alternative A.

As regards the prayer that the shares themselves be forfeited in favor of the Government, Yap contends that this cannot be done because the Government is barred by the Constitution from acquiring ownership of private mass media.

The Estate of Menzi and HMHMI should also not be allowed to claim the portion of the 214 block held by Campos and Zalamea whose ownership has allegedly been settled by this Court in the Teehankee Resolution.

_______________

27 Id., at pp. 1368-1443.

52

52



Yap also claims that the Estate of Menzi and HMHMI have unlawfully concealed the stock certificates representing a portion of the shares held by Campos and Zalamea. Their lawyers, specifically Atty. Montecillo, have also allegedly staked an unfounded claim on the Bulletin shares in violation

of their duty, as lawyers of Bulletin for several years, to protect the latter’s interests.

Cojuangco filed a Reply Memorandum28 dated October 17, 2005, substantially reiterating his argument that the Sandiganbayan failed to make a finding that the Bulletin shares are ill-gotten as defined by the pertinent executive orders and that they were owned by the Marcoses. Consequently, he insists that there is no basis for the Sandiganbayan’s conclusion that the Republic is the legal owner of the said shares.

The Republic also filed a Memorandum29 dated March 17, 2005 in G.R. No. 154518, averring that the petition raises factual issues not proper in a petition for review under Rule 45 of the Rules of Court.

The Republic insists that the Decision of the Sandiganbayan relative to the 198 and 214 blocks was not based on Quimson’s affidavit alone but on the totality of the evidence presented to support the complaint. Quimson’s affidavit was allegedly given prominence because it related in detail how Campos, Cojuangco and Zalamea came to be nominees of Marcos. The allegations in Quimson’s affidavit were allegedly confirmed by Menzi’s Last Will and Testament, the initial inventory of his assets, the letters and correspondence between Marcos and Menzi, Campos’ deposition, and the dividend checks issued to Campos, Cojuangco and Zalamea even after they have supposedly transferred their Bulletin shares to HMHMI.

Moreover, Atty. Montecillo did not institute any action against Campos, Cojuangco and Zalamea to recover the

_______________

28 Id., at pp. 1246-1282.

29 G.R. No. 154518, Vol. II, Rollo, pp. 1590-1711.

53


53


shares. This allegedly indicates that the shares were not owned by Menzi and that Campos, Cojuangco and Zalamea did not act as Menzi’s nominees.

As regards the claim that Menzi owned the shares registered in the names of Campos, Cojuangco and Zalamea because the stock certificates covering them were in Menzi’s possession, the Republic maintains that mere possession of the stock certificates does not operate to vest ownership on Menzi

considering that Campos already declared that Marcos owned those shares and Zalamea surrendered his shares to the Government.

Furthermore, the Republic alleges that the Sandiganbayan had already ruled with finality that the Estate of Menzi and HMHMI cannot recover the Campos and Zalamea portions of the 214 block. Specifically, in the Resolution dated January 2, 1995, the Sandiganbayan declared that the Estate of Menzi cannot recover the Campos shares because the latter, who was not a co-defendant in the case, had already voluntarily surrendered the same to the PCGG. Zalamea’s shares could likewise not be recovered because he was also not a party, either as defendant, cross-defendant or third-party defendant. Moreover, in another Resolution dated July 10, 1993, the Sandiganbayan held that the Estate of Menzi has not pleaded any claim of ownership over the Bulletin shares in the names of Campos, Cojuangco and Zalamea, much less has it intervened to express any prejudice to it should any judgment be rendered for or against Campos, Cojuangco and Zalamea.

We again affirm the ruling of the Sandiganbayan.

It should be noted at the outset that there is no more dispute as regards the Bulletin shares registered in the name of Campos. In fact, Campos was not included as a defendant in Civil Case No. 0022. The Bulletin shares registered in his name have been voluntarily surrendered to the PCGG and the proceeds thereof have accordingly been forfeited in favor of the Government.

54

54



The Pre-Trial Order of the Sandiganbayan dated November 11, 1991 likewise does not mention as an issue the ownership of the Campos-held Bulletin shares.

The same cannot be said, however, of the Bulletin shares registered in the name of Zalamea. Although he was dropped as a party-defendant in the Second Amended Complaint dated October 17, 1990 purportedly by reason of the Deed of Assignment he executed on October 15, 1987, the Zalamea-held shares are clearly still covered by the Teehankee Resolution remanding the issue on the ownership of the sequestered Cojuangco and Zalamea shares for determination and adjudication by the Sandiganbayan.

Having said that, we now proceed to determine whether the Sandiganbayan committed reversible error in rendering the assailed Decision.

As with the 154 block, the issues raised by the petitioners assailing the Sandiganbayan’s disposition of the 198 and 214 blocks are largely factual and, therefore, generally beyond the scope of our review under Rule 45 of the Rules of Court. Nonetheless, as will be shown in the following disquisition, there is no cause for this Court to reverse the Sandiganbayan because the evidence on record amply supports its findings and conclusions.

The 46,626 shares registered in the name of Cojuangco which formed part of the 214 block were declared to be illgotten wealth based on the evidence presented by the Republic to show that Cojuangco acted as a nominee of Marcos and on Cojuangco’s unsubstantiated allegation that he acted as a nominee not of Marcos but of Menzi.

Cojuangco counters, however, that the allegation that he acted as Menzi’s nominee is a specific denial which he does not have the burden of proving.

Notably, in the Answer of Defendant Eduardo M. Cojuangco, Jr. dated March 16, 1989, Cojuangco claimed as part of his denial that “whatever shares of stock he may have in Bulletin Publishing Corporation and/or H.M. Holdings and

Management, Inc. were not acquired and held by him as dummy, nominee and/or agent of defendants Ferdinand E. Marcos and Imelda Romualdez Marcos, but upon the request, and as nominee, of the late Hans Menzi who owned and delivered to him said shares.”30

Likewise, in his Pre-Trial Brief dated January 15, 1992, Cojuangco stated that “[I]n regard shares of stock in the name of defendant Cojuangco in Bulletin Publishing Corporation and/or HM Holdings & Management, Inc., he was never, and is not, a nominee of any other person but the late Brig. Gen. Hans M. Menzi. Defendant Cojuangco therefore reiterates that he has no proprietary interest in the shares which are the subject matter of the instant case. They properly belong to the estate of the late Hans Menzi.”31

It is procedurally required for each party in a case to prove his own affirmative allegations by the degree of evidence required by law. In civil cases such as this one, the degree of evidence required of a party in order to support his claim is preponderance of evidence, or that evidence adduced by one party which is more conclusive and credible than that of the other party. It is therefore incumbent upon the plaintiff who is claiming a right to prove his case. Corollarily, the defendant must likewise prove its own allegations to buttress its claim that it is not liable.32

The party who alleges a fact has the burden of proving it. The burden of proof33 may be on the plaintiff or the defendant. It is on the defendant if he alleges an affirmative defense which is not a denial of an essential ingredient in the plain-

_______________

33 Sec. 1. Burden of proof.—Burden of proof is the duty of a party to present evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence required by law. Rule 131, Rules of Court.

tiff’s cause of action, but is one which, if established, will be a good defense—i.e., an “avoidance” of the claim.34

In the instant case, Cojuangco’s allegations are in the nature of affirmative defenses which should be adequately substantiated. He did not deny that Bulletin shares were registered in his name but alleged that he held these shares not as nominee of Marcos, as the Republic claimed, but as nominee of Menzi. He did not, however, present any evidence to support his claim and, in fact, filed a Manifestation dated July 20, 1999 stating that he “sees no need to present any evidence in his behalf.”35

In contrast to Cojuangco’s consistent, albeit unsupported, disclaimer, the Sandiganbayan found the Republic’s evidence to be preponderant. These pieces of evidence consist of: the affidavit of Quimson detailing how Campos, Cojuangco and Zalamea became Marcos’ nominees in Bulletin; the affidavit Teodoro relative to the circumstances surrounding the sale of Menzi’s substantial shares in Bulletin to Marcos’ nominees and Menzi’s retention of only 20% of the corporation; the sworn statement of Gapud describing the business interests and associates of Marcos and stating that Bulletin checks were periodically issued to Campos, Cojuangco and Zalamea but were deposited after indorsement to Security Bank numbered accounts owned by the Marcoses dividend checks issued to Campos, Cojuangco and Zalamea even after their shares have been transferred to HMHMI; the Certificate of Incorporation, Articles of Incorporation and Amended Articles of Incorporation of HMHMI showing that Bulletin shares held by Campos, Cojuangco and Zalamea were used to set up HMHMI; Deed of Transfer and Conveyance showing that Campos, Cojuangco, Zalamea and Menzi transferred several shares, including Bulletin shares, to HMHMI in exchange for

_______________

34 Sambar v. Levi Strauss & Co., G.R. No. 132604, March 6, 2002, 378 SCRA 364; Supreme Transliner Inc. v. Court of Appeals, G.R. No. 125356, November 21, 2001, 370 SCRA 41.


shares of stock in the latter which shares were not issued; the Inventory of Menzi’s assets as of May 15, 1985 which does not include Bulletin shares; notes written by Marcos regarding Menzi’s resignation as aide-de-camp to devote his time to run Bulletin’s operations and the reduction of his shares in the corporation to 12%; and letters and correspondence between Marcos and Menzi regarding the affairs of Bulletin.

These pieces of uncontradicted evidence suffice to establish that the 198 and 214 blocks are indeed ill-gotten wealth as defined under the Rules and Regulations of the PCGG, viz.:

Sec. 1. Definition.—(A) “Ill-gotten wealth is hereby defined as any asset, property, business enterprise or material possession of persons within the purview of Executive Orders Nos. 1 and 2, acquired by them directly, or indirectly thru dummies, nominees, agents, subordinates and/or business associates by any of the following means or similar schemes:

(1) Through misappropriation, conversion, misuse or malversation of public funds or raids on the public treasury; (2) Through the receipt, directly or indirectly, of any commission, gift, share, percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government contract or project or by reason of the office or position of the official concerned; (3) By the illegal or fraudulent conveyance or disposition of assets belonging to the government or any of its subdivisions, agencies or instrumentalities or government-owned or controlled corporations; (4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation in any business enterprise or undertaking; (5) Through the establishment of agricultural, industrial or commercial monopolies or other combination and/or by the issuance, promulgation and/or implementation of decrees and orders intended to benefit particular persons or special interests; and (6) By taking undue advantage of official position, authority, relationship or influence for personal gain or benefit.Cojuangco’s disavowal of any proprietary interest in the Bulletin shares is conclusive upon him. His prayer that he be declared the owner of the said shares, together with all the cash and stock dividends which have accrued thereto since October 15, 1987, and that the PCGG be ordered to return the cash deposit of P8,174,470.32 to Bulletin, therefore, has no legal basis and should perforce be denied.

In this connection, it should be said that Cojuangco apparently desisted from presenting evidence and chose instead to stake his claim with the Estate of Menzi and HMHMI. As found by the Sandiganbayan, however, the Estate of Menzi and HMHMI failed to prove their allegation that Campos, Cojuangco and Zalamea were Menzi’s nominees. Neither did the Estate of Menzi and HMHMI institute an action to recover the shares from Menzi’s nominees.

Significantly, even as they claimed ownership of the Bulletin shares in their Answer to the Republic’s Second Amended Complaint, the Estate of Menzi and HMHMI did not file any cross-claim against the purported Menzi nominees.

Quite revealing, too, is the fact that Campos, in his Answers to Direct Interrogatories36 taken before the Consul General at the Philippine Consulate General in Vancouver, British Columbia, Canada on November 25, 1994, repeatedly

declared that he owned a portion of the 198 block “per instruction of President Marcos”37 and that he “became the shareholder, per instruction of President Marcos.”38

Likewise, in his Deed of Assignment dated October 15, 1987, Zalamea manifested that he “does not claim true and beneficial ownership” of the Bulletin shares registered in his name and that he voluntarily waived and assigned the same in favor of the PCGG.

_______________


These declarations should have alerted the Estate of Menzi and HMHMI to file cross-claims against Campos and Zalamea. The fact that they did not enfeebles their claim of ownership.

It is also important to note that the Estate of Menzi did not include the 198 and 214 blocks in the inventory of the estate’s assets dated May 15, 1985. If, as it claims, the Bulletin shares of Campos, Cojuangco and Zalamea were held by them as nominees of Menzi, then these shares should have been included in the inventory. The justification advanced for the said non-inclusion, which is that the stock certificates covering them were not in the possession of Atty. Montecillo, is nothing but a hollow pretext given the fact that even after the certificates came to Atty. Montecillo’s possession in 1987, an updated inventory declaring the said shares as part of Menzi’s estate was not filed pursuant to the Order of the probate court dated November 17, 1992.

Further, the claim that Menzi would need dummies because of the impending promulgation of a decree which would limit to 20% the ownership of media enterprises by one person or family is incredulous since no such decree was ever issued. Parenthetically, the fact that the stock certificates covering the shares registered under the names of Campos, Cojuangco and Zalamea were found in Menzi’s possession does not necessarily prove that the latter owned the shares. A stock certificate is merely a tangible evidence of ownership of shares of stock.39 Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate. Hence, as registered owners, Campos and Zalamea validly ceded their shares in favor of the Government. This assignment is now a fait accompli for the benefit of the entire nation.

_______________

The contention that the sale of the 214 block to the Bulletin was null and void as the PCGG failed to obtain approval from the Sandiganbayan is likewise unmeritorious. While it is true that the PCGG is not empowered to sell sequestered assets without prior Sandiganbayan approval,40 this case presents a clear exception because this Court itself, in the Teehankee Resolution, directed the PCGG to accept the cash deposit offered by Bulletin in payment for the Cojuangco and Zalamea sequestered shares subject to the alternatives

mentioned therein and the outcome of the remand to the Sandiganbayan on the question of ownership of these sequestered shares.

In light of the foregoing, we are not inclined to disturb the Sandiganbayan’s evaluation of the weight and sufficiency of the evidence presented by the Republic and its finding that the evidence adduced by the Estate of Menzi and HMHMI do not prove their allegation that Campos, Cojuangco and Zalamea are Menzi’s nominees, taking into account the express admission of Campos that he owned the shares upon Marcos’ instruction, the declaration of Zalamea that he does not claim true and beneficial ownership of the shares, and the absolute dearth of evidence regarding Cojuangco’s assertion that he is Menzi’s nominee.

With regard to the Republic’s prayer for damages, we find the same not supported by sufficient evidence.

An award of actual or compensatory damages requires proof of pecuniary loss. In this case, the Republic has not proven with a reasonable degree of certainty, premised on competent proof and the best evidence obtainable, that it has suffered any actual pecuniary loss by reason of the acts of the defendants. Hence, actual or compensatory damages may not be awarded.41

_______________

On the other hand, while no proof of pecuniary loss is necessary in order that moral, temperate, nominal and exemplary damages may be adjudicated, proof of damage or injury should nonetheless be adduced. As found by the Sandiganbayan, however, the Republic failed to show the factual basis for the award of moral damages and its causal connection to defendants’ acts. Thus, moral damages, which are designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer,42 may not be awarded. Temperate, nominal, and exemplary damages, attorney’s fees, litigation expenses and judicial costs may likewise not be adjudicated for failure to present sufficient evidence to establish entitlement to these awards.

WHEREFORE, the petitions in G.R. No. 152578, G.R. No. 154487 and G.R. No. 154518 are DENIED. The Decision of the Sandiganbayan dated March 14, 2002 is AFFIRMED.

SO ORDERED.

Davide, Jr. (C.J.), Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona, Carpio-Morales, Callejo and Garcia, JJ., concur.

Puno, J., In the result.

Azcuna, J., I take no part. I was counsel in the case.

Chico-Nazario, J.,On Leave.

Petitions denied, judgment affirmed.

Notes.—The PCGG is the agency empowered to bring proceedings for forfeiture of property allegedly acquired unlawfully before February 25, 1986, while the power to investigate cases of ill-gotten or unexplained wealth acquired after that date is vested in the Ombudsman. (Republic vs. Sandiganbayan, 237 SCRA 242 [1994])

_______________

42 Pantranco v. Kierulf, G.R. No. 99343, March 13, 1997, 269 SCRA 433.

62

62


Francia, Jr. vs. Power Merge Corporation

Even if the sequestration order over a particular property has already been lifted but the property has not yet been turned over to the alleged owner, the Sandiganbayan still has jurisdiction to look into allegations that the property in question actually belongs to another firm which is listed in a complaint for recovery of ill-gotten wealth pending before said court. (Republic vs. Tacloban City Ice Plant, Inc., 258 SCRA 145 [1996])

[Republic vs. Estate of Hans Menzi, 476 SCRA 20(2005)]

G.R. No. 143312. August 12, 2005.*RICARDO S. SILVERIO, JR., ESSES DEVELOPMENT CORPORATION, and TRI-STAR FARMS, INC., petitioners, vs. FILIPINO BUSINESS CONSULTANTS, INC., respondent.

Actions; Judgments; Appeals; Certiorari; Interlocutory Orders; Pleadings and Practice; Words and Phrases; Interlocutory orders are those that determine incidental matters that do not touch on the merits of the case or put an end to the proceedings; An order staying the execution of the writ of possession is an interlocutory order; The proper remedy to question an improvident interlocutory order is a petition for certiorari under Rule 65, not Rule 45—a petition for review under Rule 45 is the proper mode of redress to question final judgments.—Interlocutory orders are those that determine incidental matters that do not touch on the merits of the case or put an end to the proceedings. The proper remedy to question an improvident interlocutory order is a petition for certiorari under Rule 65, not Rule 45. A petition for review under Rule 45 is the proper mode of redress to question final judgments. An order staying the execution of the writ of possession is an interlocutory order. Clearly, this order cannot be appealed. A petition for certiorari was therefore the correct remedy. Moreover, Silverio, Jr., Esses and Tri-Star pointed out that the RTC Balayan acted on an ex-parte motion to suspend the writ of possession, which is a litigious matter, without complying with the rules on notice and hearing. Silverio, Jr., Esses and Tri-Star also assail the RTC Balayan’s impending move to accept FBCI’s evidence on its subsequent ownership of Esses and Tri-Star. In effect, Silverio, Jr., Esses and Tri-Star accuse the RTC Balayan of acting without or in excess of jurisdiction or with grave abuse of discretion, which is within the ambit of certiorari. However, in the exercise of our judicial discretion, we will treat the appeal as a petition under Rule 65. Technical rules must be suspended whenever the purposes of justice warrant it, such as in this case where substantial and important issues await resolution.

_______________

* FIRST DIVISION.

585

VOL. 466, AUGUST 12, 2005

585

Silverio, Jr. vs. Filipino Business Consultants, Inc.

Same; Forum Shopping; Words and Phrases; Forum shopping consists of filing multiple suits involving the same parties for the same cause of action, either simultaneously or successively, to obtain a favorable judgment.—Silverio, Jr., Esses and Tri-Star are not guilty of forum shopping for filing another action against FBCI with the RTC Las Piñas during the

pendency of this case with the RTC Balayan. Forum shopping consists of filing multiple suits involving the same parties for the same cause of action, either simultaneously or successively, to obtain a favorable judgment. The parties and cause of action in the present case before the RTC Balayan and in the case before the RTC Las Piñas are different. The present case was filed by FBCI against Silverio, Jr., Esses and Tri-Star for the consolidation of title over the Calatagan Property. On the other hand, the case before the RTC Las Piñas was filed by Silverio, Jr., Esses and Tri-Star against FBCI and other defendants for the annulment of contract with damages, tort and culpa aquiliana (civil fraud).

Same; Judgments; The court may stay immediate execution of a judgment when supervening events, occurring subsequent to the judgment, bring about a material change in the situation of the parties; To justify the stay of immediate execution, the supervening events must have a direct effect on the matter already litigated and settled.—The court may stay immediate execution of a judgment when supervening events, occurring subsequent to the judgment, bring about a material change in the situation of the parties. To justify the stay of immediate execution, the supervening events must have a direct effect on the matter already litigated and settled. Or, the supervening events must create a substantial change in the rights or relations of the parties which would render execution of a final judgment unjust, impossible or inequitable making it imperative to stay immediate execution in the interest of justice.

Same; Same; Writs of Possession; Words and Phrases; A writ of possession is an order whereby the sheriff is commanded to place a person in possession of real or personal property.—The issuance of the writ of possession in favor of Silverio, Jr., Esses and Tri-Star is also not a judgment on the merits. A writ of possession is an order whereby the sheriff is commanded to place a person in possession of real or personal property. The issuance of the writ of possession to Silverio, Jr., Esses and Tri-Star is but an order of restitution—a

586

586



consequence of the nullification of the judgment by default. The order of restitution placed the parties in the situation prior to the RTC Balayan’s rendition of the void judgment by default. Title to the Calatagan Property is still in the names of Esses and Tri-Star. Possession of the Calatagan Property must revert to Esses and Tri-Star as legal owners of the property.

Same; Same; Same; Res Judicata; Res judicata does not set in where the court is without jurisdiction over the subject or

person, and therefore, the judgment is a nullity; It is the court issuing the writ of possession that has control and supervision over its processes.—We do not agree with Silverio, Jr., Esses and Tri-Star’s assertion that the RTC Balayan has no power to conduct a hearing on the existence of a supervening event because of res judicata. Res judicata does not set in where the court is without jurisdiction over the subject or person, and therefore, the judgment is a nullity such as the judgment by default in this case. The order that voided the judgment by default and the order of restitution merely recognized the nullity of the judgment by default. The orders did not adjudicate on the merits of the case. Since res judicata had not set in, the case was tried anew upon the proper service of summons on Silverio, Jr., Esses and Tri-Star. Moreover, it is the court issuing the writ of possession that has control and supervision over its processes. The RTC Balayan can therefore hear the evidence on the existence of a supervening event, provided the subject matter is within the jurisdiction of the court, as this could affect the execution of the writ of possession.

Same; Courts; The Supreme Court is dismayed with the RTC Balayan’s referral of the existence of the supervening event to the “higher courts”—courts must not shirk from their duty to rule on an issue; The duty of the appellate or higher courts is to review the findings and rulings of the lower courts, not to issue advisories.—We are, therefore, dismayed with the RTC Balayan’s referral of the existence of the supervening event to the “higher courts.” Courts must not shirk from their duty to rule on an issue. The duty of the appellate or higher courts is to review the findings and rulings of the lower courts, not to issue advisories. Courts must execute its processes and should not succumb to threats by any of the parties to resort to violence in case of such enforcement. Had the RTC Balayan immediately passed upon FBCI’s allegation of a supervening event, it would have been apparent that this claim is without merit. The RTC Ba-

587

VOL. 466, AUGUST 12, 2005

587


layan should have then enforced posthaste the writ of possession in Silverio, Jr., Esses and Tri-Star’s favor.

Same; Judgments; Writs of Possession; Corporation Law; Principle of Separate Juridical Personality; A corporation’s acquisition of substantial and controlling shares of stocks of other corporations does not create a substantial change in the rights or relations of the parties that would entitle the former to possession of the property of the latter—a corporation has a personality distinct from that of its stockholders.—FBCI’s acquisition of the “substantial and

controlling shares of stocks” of Esses and Tri-Star does not create a substantial change in the rights or relations of the parties that would entitle FBCI to possession of the Calatagan Property, a corporate property of Esses and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation has a personality distinct from that of its stockholders. As early as the case of Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, the Court explained the principle of separate juridical personality in this wise: A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant in common of the corporate property (Harton v. Hohnston, 166 Ala., 317, 51 So., 992).

Same; Same; Same; Same; Same; A corporation’s alleged controlling shareholdings in other corporations merely represent a proportionate or aliquot interest in the properties of the latter, and even assuming that it is the controlling shareholder, it does not legally make it the owner of the property legally owned by the latter corporations as distinct juridical persons.—FBCI’s alleged controlling

588

588



shareholdings in Esses and Tri-Star merely represent a proportionate or aliquot interest in the properties of the two corporations. Such controlling shareholdings do not vest FBCI with any legal right or title to any of Esses and Tri-Star’s corporate properties. As a stockholder, FBCI has an interest in Esses and Tri-Star’s corporate properties that is only equitable or beneficial in nature. Even assuming that FBCI is the controlling shareholder of Esses and Tri-Star, it does not legally make it the owner of the Calatagan Property, which is legally owned by Esses and Tri-Star as distinct juridical persons. As such, FBCI is not entitled to the possession of any definite portion of the Calatagan Property or any of Esses and

Tri-Star’s properties or assets. FBCI is not a co-owner or tenant in common of the Calatagan Property or any of Esses and Tri-Star’s corporate properties.



Vicente B. Chuidian for petitioners.

Carmelo M. Mendoza for respondent.

CARPIO, J.:The Case

Before us is a petition for review of the Order of the Regional Trial Court, Fourth Judicial Region, Branch XI, Balayan, Batangas (“RTC Balayan”) dated 26 May 2000.1 The order suspended the enforcement of the writ of possession that the RTC Balayan had previously issued in favor of petitioners Ricardo S. Silverio, Jr. (“Silverio, Jr.”), Esses Development Corporation (“Esses”) and Tri-Star Farms, Inc. (“Tri-Star”). Filipino Business Consultants, Inc. (“FBCI”), now Filipino Vastland Company, Inc. sought to suspend the writ of possession on the ground of a supervening event. FBCI claimed that it had just acquired all the stocks of Esses and

_______________

1 Penned by Judge Roberto L. Makalintal.

589

VOL. 466, AUGUST 12, 2005

589


Tri-Star. As the new owner of Esses and Tri-Star, FBCI asserted its right of possession to the disputed property. Petitioners Silverio, Jr., Esses and Tri-Star question the RTC Balayan’s suspension of the writ of possession and its jurisdiction to hold hearings on the supervening event.The Antecedent Facts

The parties are wrangling over possession of a 62 hectare-land in Calatagan, Batangas (“Calatagan Property”). Silverio, Jr. is the President of Esses and Tri-Star. Esses and Tri-Star were in possession of the Calatagan Property, covered by TCT No. T-55200 and registered in the names of Esses and Tri-Star.

On 22 September 1995, Esses and Tri-Star executed a Deed of Sale with Assumption of Mortgage in favor of FBCI. Esses and Tri-Star failed to redeem the Calatagan Property.

On 27 May 1997, FBCI filed a Petition for Consolidation of Title of the Calatagan Property with the RTC Balayan.2

FBCI obtained a judgment by default. Subsequently, TCT No. T-55200 in the names of Esses and Tri-Star was cancelled and TCT No. T-77656 was issued in FBCI’s name. On 20 April 1998, the RTC Balayan issued a writ of possession in FBCI’s favor. FBCI then entered the Calatagan Property.

When Silverio, Jr., Esses and Tri-Star learned of the judgment by default and writ of possession, they filed a petition for relief from judgment and the recall of the writ of possession. Silverio, Jr., Esses and Tri-Star alleged that the judgment by default is void because the RTC Balayan did not acquire jurisdiction over them. FBCI allegedly forged the service of summons on them.

On 28 December 1998, the RTC Balayan nullified and set aside the judgment by default and the writ of possession. The RTC Balayan found that the summons and the complaint

_______________

2 Docketed as Civil Case No. 3356.

590

590



were not served on Silverio, Jr., Esses and Tri-Star. The RTC Balayan directed the service of summons anew on Silverio, Jr., Esses and Tri-Star.

The RTC Balayan denied FBCI’s motion for reconsideration of the order. FBCI then filed a petition for certiorari with the Court of Appeals questioning the RTC Balayan’s 28 December 1998 Order.3 On 28 April 2000, the Court of Appeals denied FBCI’s petition. The Court of Appeals also denied FBCI’s motion for reconsideration. On 13 August 2001, the Supreme Court denied FBCI’s petition.

On 14 April 1999, the RTC Balayan modified its 28 December 1998 Order by upholding FBCI’s possession of the Calatagan Property. The RTC Balayan ruled that FBCI could not be deprived of possession of the Calatagan Property because FBCI made substantial improvements on it. Possession could revert to Silverio, Jr., Esses and Tri-Star only if they reimburse FBCI. The RTC Balayan gave Silverio, Jr., Esses and Tri-Star 15 days to file their responsive pleadings.

Silverio, Jr., Esses and Tri-Star moved for the partial reconsideration of the 14 April 1999 Order. Silverio, Jr., Esses

and Tri-Star argued that since the judgment by default was nullified, they should be restored to their possession of the Calatagan Property. FBCI did not file any opposition to the motion.

On 9 November 1999, the RTC Balayan reversed its 14 April 1999 Order by holding that Silverio, Jr., Esses and Tri-Star had no duty to reimburse FBCI. The RTC Balayan pointed out that FBCI offered no evidence to substantiate its claim for expenses. The 9 November 1999 Order also restored possession of the Calatagan Property to Silverio, Jr., Esses and Tri-Star pursuant to Rule 39, Section 5 of the 1997 Rules of Civil Procedure. This provision provides for restitution in case of reversal of an executed judgment. On 7 January 2000, the RTC Balayan denied FBCI’s motion for reconsideration.

_______________

3 Docketed as CA-G.R. SP No. 56924.

591

VOL. 466, AUGUST 12, 2005

591


On 8 May 2000, the RTC Balayan issued the writ of possession to Silverio, Jr., Esses and Tri-Star.

On 12 May 2000, FBCI filed with the RTC Balayan a Manifestation and Motion to Recall Writ of Possession on the ground that the decision of the Court of Appeals in CA-G.R. SP No. 56924 was not yet final and FBCI’s motion for reconsideration was still pending. The RTC Balayan set the hearing on 26 May 2000.

On 23 May 2000, FBCI filed with the RTC Balayan an Urgent Ex-Parte Motion to Suspend Enforcement of Writ of Possession. FBCI pointed out that it is now the new owner of Esses and Tri-Star having purchased the “substantial and controlling shares of stocks”4 of the two corporations.

On the 26 May 2000 hearing, FBCI reiterated its claim of a supervening event, its ownership of Esses and Tri-Star. FBCI informed the RTC Balayan that a new board of directors for Esses and Tri-Star had been convened following the resignation of the members of the board of directors. The previous actions of the former board of directors have been abandoned and the services of Atty. Vicente B. Chuidian, the counsel of petitioners Silverio, Jr., Esses and Tri-Star, have been terminated.

On the same day, the RTC Balayan issued the order suspending the writ of possession it had earlier issued to Silverio, Jr., Esses and Tri-Star. The RTC Balayan reasoned that

it would violate the law on forum shopping if it executed the writ while FBCI’s motion for reconsideration of the Court of Appeals’ decision and urgent motion to suspend the issuance of the writ of possession remained pending with the Court of Appeals. The RTC Balayan noted that because of FBCI’s strong resistance, Silverio, Jr., Esses and Tri-Star have still to take possession of the Calatagan Property. More than ten days had already passed from the time that the RTC Balayan had issued the writ of possession. FBCI had barricaded the

_______________

4 Rollo, pp. 70-71.

592

592



Calatagan Property, threatening bloodshed if possession will be taken away from it. The RTC Balayan believed that if it would not restrain Silverio, Jr., Esses and Tri-Star from taking possession of the Calatagan Property, a violent confrontation between the parties might erupt as reported in the Tempo newspaper in its 26 May 2000 issue. Without issuing a restraining order, the RTC Balayan suspended the writ by requesting the counsel of Silverio, Jr., Esses and Tri-Star to allow the court to study the voluminous records of the case, which are to be presented at the hearing on 16 June 2000. The hearing would determine the existence of a supervening event.

On 15 June 2000, the RTC Balayan issued an Order cancelling the 16 June 2000 hearing so that the Court of Appeals could resolve the issue regarding the existence of a supervening event. However, the RTC Balayan declared that the suspension of the writ of possession would be lifted on 17 June 2000.

On 8 August 2000, Silverio, Jr., Esses and Tri-Star filed a complaint for annulment of contracts with damages with the Regional Trial Court of Las Piñas City, Branch 275 (“RTC Las Piñas”).5Issues

Silverio, Jr., Esses and Tri-Star argue that:

I

An ex parte motion cannot legally constitute an initiatory basis for the RTC Balayan to conduct additional hearings in order to validate certain new allegations. Neither can said ex parte motion be the basis for the suspension of a writ of possession being implemented.

_______________

5 Docketed as Civil Case No. LP-00-0163.

593

VOL. 466, AUGUST 12, 2005

593


II

When the RTC Balayan suspended the writ of possession, it was barred from hearing intra-corporate disputes. And though Congress has now amended our law on the matter, the RTC still cannot proceed because of due process and res judicata reasons.

III

A final and executory judgment cannot be enjoined except by an appropriate petition for relief, a direct attack in another action or a collateral act in another action.

IV

Respondent FBCI is asking for a suspension of the writ of possession while at the same time threatening violence if the writ of possession were to be implemented. The RTC Balayan had no lawful basis to suspend the writ under these admitted circumstances.

V

Respondent has not directly answered petitioners’ legal theory. The petition is founded on admitted facts upon which relief is sought under Rule 45. Respondent has altered these facts—presenting its so called “counterstatements of facts and issues”—which involve questions of fact that are still litis pendentia at the RTC Balayan. And which even involve an attempt to vary res judicata.

VI

Contrary to respondent’s claims, that the RTC order of 15 June 2000 has rendered this case “moot and academic”—quite on the contrary—said order calls upon the Supreme Court to decide whether or not, the RTC Balayan may continue to conduct its hearings on suspending the writ of possession.

VII

Respondent’s theory that an order suspending a writ of possession is interlocutory in nature, and therefore inappealable, is not supported by jurisprudence.

VIII

Respondent’s views on when suspending a writ of execution is appropriate—would “make the exception as rule.” And respondent’s

594

594



reliance on Flores vs. CA, et al. is totally misplaced. In the Flores case, the party being dispossessed was a judgment creditor, who was admitted by the adverse party to be the owner.

IX

The question of jus possessionis on the Calatagan Property is already res judicata while the question of jus possidendi is still under litis pendentia. For that reason, respondent has lost all his legal options in retaining the property procured under a “faked service” of summons.

X

Respondents arguments in his 11-06-01 Memo—on (a) “forum shopping,” (b) “petitioners’ lack of capacity to sue,” (c) “service of summons already served” (d) “no intra-corporate dispute” and (e) “the relief herein preempted by events”—are ratiocinations of miniscule weight, meriting only the slightest comment.6

FBCI raises the following issues:

1. Whether the present case has been rendered moot and academic by the Order of the RTC Balayan dated 15 June 2000 and the filing of an action with the Regional Trial Court of Las Piñas City; 2. Whether the present appeal should be dismissed on the ground of forum shopping; 3. Whether the RTC Balayan had the authority to suspend enforcement of the writ of possession and to conduct hearings on a new set of facts; 4. Whether the present case involves an intra-corporate controversy; 5. Whether appeal by certiorari under Rule 45 is the proper remedy under the given facts of the case.7

_______________

6 Rollo, pp. 356-357.

7 Ibid., p. 231.

595

VOL. 466, AUGUST 12, 2005

595

Silverio, Jr. vs. Filipino Business Consultants, Inc.The Ruling of the Court

The petition has merit.Procedural Issues

Before resolving the threshold issue, which is the existence of a supervening event, we first address the following procedural issues: (1) whether appeal is the proper remedy against an order suspending the execution of a writ of possession; (2) whether the issue of possession was mooted by the 15 June 2000 Order of the RTC Balayan; and (3) whether the filing of a civil case with the RTC Las Piñas constitutes forum shopping.

First, interlocutory orders are those that determine incidental matters that do not touch on the merits of the case or put an end to the proceedings.8 The proper remedy to question an improvident interlocutory order is a petition for certiorari under Rule 65, not Rule 45.9 A petition for review under Rule 45 is the proper mode of redress to question final judgments.10

An order staying the execution of the writ of possession is an interlocutory order.11 Clearly, this order cannot be appealed. A petition for certiorari was therefore the correct remedy. Moreover, Silverio, Jr., Esses and Tri-Star pointed out that the RTC Balayan acted on an ex-parte motion to suspend the writ of possession, which is a litigious matter, without complying with the rules on notice and hearing. Silverio, Jr., Esses and Tri-Star also assail the RTC Balayan’s impending move to accept FBCI’s evidence on its subsequent ownership of Esses and Tri-Star. In effect, Silverio, Jr., Esses and Tri-Star accuse the RTC Balayan of acting without or in

_______________

8 Diesel Construction Company, Inc. v. Jollibee Foods Corporation, 380 Phil. 813; 323 SCRA 844 (2000).

9 Ibid.

10 Ibid.

11 Ibid.

596

596



excess of jurisdiction or with grave abuse of discretion, which is within the ambit of certiorari.

However, in the exercise of our judicial discretion, we will treat the appeal as a petition under Rule 65.12 Technical rules must be suspended whenever the purposes of justice warrant it, such as in this case where substantial and important issues await resolution.

Second, the RTC Balayan’s 15 June 2000 Order lifting the suspension of the writ of possession was issued to correct its action on FBCI’s ex-parte motion, which did not have the required notice and hearing. This issue has thus become a fait accompli. However, while the 15 June 2000 Order is supposed to have mooted the suspension of the execution of the writ of possession by lifting the suspension on 17 June 2000, Silverio, Jr., Esses and Tri-Star claim that the writ has not been executed in their favor. Thus, the issues in this petition are far from being moot. Also, the existence of a supervening event is another issue that must be resolved since the RTC Balayan had instead submitted to the “higher courts” the resolution of this issue.

Third, Silverio, Jr., Esses and Tri-Star are not guilty of forum shopping for filing another action against FBCI with the RTC Las Piñas during the pendency of this case with the RTC Balayan. Forum shopping consists of filing multiple suits involving the same parties for the same cause of action, either simultaneously or successively, to obtain a favorable judgment.13

The parties and cause of action in the present case before the RTC Balayan and in the case before the RTC Las Piñas are different. The present case was filed by FBCI against Silverio, Jr., Esses and Tri-Star for the consolidation of title

_______________

12 Ibid.; Go v. Court of Appeals, 358 Phil. 214; 297 SCRA 574 (1998).

13 The Executive Secretary v. Gordon, 359 Phil. 266; 298 SCRA 736 (1998).

597

VOL. 466, AUGUST 12, 2005

597


over the Calatagan Property. On the other hand, the case before the RTC Las Piñas was filed by Silverio, Jr., Esses and Tri-Star against FBCI and other defendants for the annulment of contract with damages, tort and culpa aquiliana (civil fraud).

In its complaint before the RTC Las Piñas, Silverio, Jr., Esses and Tri-Star informed the court that there is a pending case with the RTC Balayan over the Calatagan Property.14 Silverio, Jr., Esses and Tri-Star made it clear in the complaint that the case before the RTC Las Piñas will focus on the Makati Tuscany property and any reference to the Calatagan Property is “meant to serve only as proof or evidence of the plan, system, scheme, habit, etc., lurking behind defendants’ interlocking acts constituting interlocking tort and interlocking fraud.”15 Clearly, FBCI’s claim of forum shopping against Silverio, Jr., Esses and Tri-Star has no basis.No Supervening Event in this Case

FBCI took possession of the Calatagan Property after the RTC Balayan rendered a judgment by default in FBCI’s favor. The judgment by default was nullified after the RTC Balayan found out that the service of summons on Silverio, Jr., Esses and Tri-Star was procured fraudulently. The RTC Balayan thus recalled the writ of possession it had issued to FBCI. Silverio, Jr., Esses and Tri-Star were served anew with summons. The RTC Balayan restored possession of the Calatagan Property to Silverio, Jr., Esses and Tri-Star as restitution resulting from the annulment of the judgment by default. The order restoring possession of the Calatagan Property to Silverio, Jr., Esses and Tri-Star has attained finality. This case then proceeded to pre-trial.

FBCI has resisted the enforcement of the writ of possession by barricading the Calatagan Property and threatening vio-

_______________

14 Rollo, p. 253.

15 Ibid.

598

598



lence if its possession of the property is taken away from it. To avoid bloodshed, as FBCI also claimed that Silverio, Jr. had armed civilians threatening to shoot FBCI’s representatives,16

the RTC Balayan momentarily suspended the execution of the writ. The RTC Balayan also had to rule on FBCI’s claim of a supervening event that would allegedly make the execution of the writ absurd,17 as FBCI alleges it now owns the controlling interest in Esses and Tri-Star. The RTC Balayan lifted the suspension of the writ but it cancelled the hearings on the supervening event to give way to the Court of Appeals’ action on this issue. The RTC Balayan decided to await the appellate court’s resolution because it did not want to violate the rule against forum shopping.

Silverio, Jr., Esses and Tri-Star argue that the RTC Balayan has no power to conduct hearings on the supervening event because res judicata has set in on the issue. They also contend that the supervening event is an intra-corporate controversy that is within the jurisdiction of the Securities and Exchange Commission, not the trial court. Silverio, Jr., Esses and Tri-Star point out that despite the lifting of the suspension RTC Balayan has still to execute the writ of possession in their favor. On the other hand, FBCI maintains that its acquisition of Esses and Tri-Star is a supervening event, which the RTC Balayan could hear and is sufficient ground to stay the execution of the writ of possession.

We rule in favor of Silverio, Jr., Esses and Tri-Star.

The court may stay immediate execution of a judgment when supervening events, occurring subsequent to the judgment, bring about a material change in the situation of the parties.18 To justify the stay of immediate execution, the supervening events must have a direct effect on the matter

_______________

16 Ibid., p. 74.

17 Ibid.

18 Serrano v. Court of Appeals, G.R. No. 133883, 10 December 2003, 417 SCRA 415.

599

VOL. 466, AUGUST 12, 2005

599


already litigated and settled.19 Or, the supervening events must create a substantial change in the rights or relations of the parties which would render execution of a final judgment unjust, impossible or inequitable making it imperative to stay immediate execution in the interest of justice.20

In this case, there is no judgment on the merits, only a judgment on a technicality. Even then, the judgment of

default rendered in FBCI’s favor was voided because the RTC Balayan did not acquire jurisdiction over Silverio, Jr., Esses and Tri-Star due to a fraudulent service of summons. The case for consolidation of title, from which this petition stemmed, is in fact still being litigated before the RTC Balayan.

The issuance of the writ of possession in favor of Silverio, Jr., Esses and Tri-Star is also not a judgment on the merits.21 A writ of possession is an order whereby the sheriff is commanded to place a person in possession of real or personal property.22 The issuance of the writ of possession to Silverio, Jr., Esses and Tri-Star is but an order of restitution—a consequence of the nullification of the judgment by default. The order of restitution placed the parties in the situation prior to the RTC Balayan’s rendition of the void judgment by default. Title to the Calatagan Property is still in the names of Esses and Tri-Star. Possession of the Calatagan Property must revert to Esses and Tri-Star as legal owners of the property.

However, with the reinstitution of the case for consolidation of title with the RTC Balayan, possession of the Calatagan Property is now subject to the outcome of the case. Nonetheless, while this case is still under litigation—it is only in the pre-trial stage—Esses and Tri-Star in whose names the

_______________

19 Ibid.

20 Ibid.

21 See OSCAR M. HERERRA, REMEDIAL LAW, Vol. II, 2000 ed., p. 451.

22 Ibid.

600

600



Calatagan Property is titled and in whose favor the order of restitution was issued, are the ones entitled to possession of the property.

We do not agree with Silverio, Jr., Esses and Tri-Star’s assertion that the RTC Balayan has no power to conduct a hearing on the existence of a supervening event because of res judicata. Res judicata does not set in where the court is without jurisdiction over the subject or person, and therefore, the judgment is a nullity23 such as the judgment by default in this case. The order that voided the judgment by default and the order of restitution merely recognized the

nullity of the judgment by default. The orders did not adjudicate on the merits of the case. Since res judicata had not set in, the case was tried anew upon the proper service of summons on Silverio, Jr., Esses and Tri-Star.

Moreover, it is the court issuing the writ of possession that has control and supervision over its processes.24 The RTC Balayan can therefore hear the evidence on the existence of a supervening event, provided the subject matter is within the jurisdiction of the court, as this could affect the execution of the writ of possession.

We are, therefore, dismayed with the RTC Balayan’s referral of the existence of the supervening event to the “higher courts.” Courts must not shirk from their duty to rule on an issue. The duty of the appellate or higher courts is to review the findings and rulings of the lower courts, not to issue advisories. Courts must execute its processes and should not succumb to threats by any of the parties to resort to violence in case of such enforcement. Had the RTC Balayan immediately passed upon FBCI’s allegation of a supervening event, it

_______________

23 Arevalo v. Hon. Benedicto, 157 Phil. 175; 58 SCRA 186 (1974).

24 Heirs of Francisco Guballa, Sr. v. Court of Appeals, G.R. No. 78223, 19 December 1988, 168 SCRA 518 citing Vda. de Dimayuga vs. Raymundo and Nable, 76 Phil. 143 (1946).

601

VOL. 466, AUGUST 12, 2005

601


would have been apparent that this claim is without merit. The RTC Balayan should have then enforced posthaste the writ of possession in Silverio, Jr., Esses and Tri-Star’s favor.

FBCI’s acquisition of the “substantial and controlling shares of stocks”25 of Esses and Tri-Star does not create a substantial change in the rights or relations of the parties that would entitle FBCI to possession of the Calatagan Property, a corporate property of Esses and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation has a personality distinct from that of its stockholders. As early as the case of Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila,26 the Court explained the principle of separate juridical personality in this wise:

A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the

corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant in common of the corporate property (Harton v. Hohnston, 166 Ala., 317, 51 So., 992).

_______________

25 Rollo, pp. 70-71.

26 G.R. No. L-18216, 30 October 1962, 6 SCRA 373; See also Martinez v. Court of Appeals, G.R. No. 131673, 10 September 2004, 438 SCRA 130; Good Earth Emporium, Inc. v. Court of Appeals, G.R. No. 82797, 27 February 1991, 194 SCRA 544; Magsaysay-Labrador v. Court of Appeals, G.R. No. 58168, 19 December 1989, 180 SCRA 266.

602

602



Thus, FBCI’s alleged controlling shareholdings in Esses and Tri-Star merely represent a proportionate or aliquot interest in the properties of the two corporations. Such controlling shareholdings do not vest FBCI with any legal right or title to any of Esses and Tri-Star’s corporate properties. As a stockholder, FBCI has an interest in Esses and Tri-Star’s corporate properties that is only equitable or beneficial in nature. Even assuming that FBCI is the controlling shareholder of Esses and Tri-Star, it does not legally make it the owner of the Calatagan Property, which is legally owned by Esses and Tri-Star as distinct juridical persons. As such, FBCI is not entitled to the possession of any definite portion of the Calatagan Property or any of Esses and Tri-Star’s properties or assets. FBCI is not a co-owner or tenant in common of the Calatagan Property or any of Esses and Tri-Star’s corporate properties.

We see no reason why the execution of the writ of possession has been long delayed. Possession of the Calatagan Property must be restored to Esses and Tri-Star through their

representative, Silverio, Jr. There is no proof on record that Silverio, Jr. has ceased to be the representative of Esses and Tri-Star in this case.

WHEREFORE, we GRANT the petition. The Regional Trial Court, Branch XI, Balayan, Batangas is ordered to immediately execute the writ of possession in Civil Case No. 3356 in favor of Esses Development Corporation and Tri-Star Farms, Inc. through their representative, Ricardo S. Silverio, Jr. No costs.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Quisumbing, Ynares-Santiago and Azcuna, JJ., concur.

Petition granted.

603

VOL. 466, AUGUST 12, 2005

603


Notes.—Respondent court’s invocation of General Order No. 3 of September 21, 1972 is nothing short of an unwarranted abdication of judicial authority, which no judge duly imbued with the implications of the paramount principle of independence of the judiciary should ever think of doing. It is unfortunate indeed that respondent judge is apparently unaware that it is a matter of highly significant historical fact that this Court has always deemed General Order No. 3 including its amendment by General Orders No. 3-a as practically inoperative even in the light of Proclamation 1081 of September 21, 1972 and Proclamation 1104 of January 17, 1973 placing the whole Philippines under martial law. While the members of the Court are not agreed on whether or not particular instances of attack against the validity of certain Presidential Decrees raise political questions which the judiciary would not interfere with, there is unanimity among Us in the view that it is for the Court rather than the Executive to determine whether or not we may take cognizance of any given case involving the validity of acts of the Executive Department purportedly under the authority of the martial law proclamations. (Lina vs. Purisima, 82 SCRA 344 [1978])

While certiorari is generally not available to challenge an interlocutory order of a trial court, the Supreme Court may allow certiorari as a mode of redress where the assailed order is patently erroneous and appeal would not afford adequate and expeditious relief. (Salcedo-Ortañez vs. Court of Appeals, 235 SCRA 111 [1994]) [Silverio, Jr. vs. Filipino Business Consultants, Inc., 466 SCRA 584(2005)]

G.R. No. 140667. August 12, 2004.*WOODCHILD HOLDINGS, INC., petitioner, vs. ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.

Corporations; Corporate Officers; Apparent Authority; Agency; The property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation’s board of directors.—A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation’s board of direc-tors. Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, 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.” Indubitably, a corporation may act only through its board of directors or, when authorized either by its by-laws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. . . .

Same; Same; Same; Estoppel; Acts done by corporate officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them.— Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them: 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. Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation.

_______________

* SECOND DIVISION.

236

236


Woodchild Holdings, Inc. vs. Roxas Electric and Construction Company, Inc.

Same; Same; Same; Same; Power of Attorney; Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from deeds which do not sufficiently include property or subject under which the agent is to deal.—Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from deeds which do not sufficiently include property or subject under which the agent is to deal.The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally identical with that authorized to be done.

Same; Same; Same; Same; The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.—It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority. There can be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or conduct of the principal must have been known and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a change of position to its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.

Same; Same; Same; Elements; For the principle of apparent authority to apply, the petitioner was burdened to prove the following.—For the principle of apparent authority to apply, the petitioner was burdened to prove the following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b) knowledge thereof by the respondent which is sought to be held; and, (c) reliance thereon by the petitioner consistent with ordinary care and prudence.

Same; Same; Same; Implied Ratification; Ratification cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent.—For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name. Ratification is based on waiver—the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent.

Moreover, if a writing is required to grant an authority to do a particular act, ratification of that act must also be in writing.

237

VOL. 436, AUGUST 12, 2004

237




Castro and Associates for petitioner.

J.O. Villanueva Law Office for private respondent.

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 56125 reversing the Decision2 of the Regional Trial Court of Makati, Branch 57, which ruled in favor of the petitioner.The Antecedents

The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric and Construction Company, was the owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.

At a special meeting on May 17, 1991, the respondent’s Board of Directors approved a resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213 square meters, at a price and under such terms and conditions which he deemed most reasonable and advantageous to the corporation; and to execute, sign and deliver the pertinent sales documents and receive the proceeds of the sale for and on behalf of the company.3

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT No. 78086 on which it planned to construct its warehouse building, and a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van would be able to readily enter or leave the property. In a Letter to Roxas dated

_______________

1 Penned by Associate Justice Salome A. Montoya, with Associate Justices Conrado M. Vasquez, Jr. and Teodoro P. Regino, concurring.

2Penned by Judge Francisco X. Velez.

3Exhibit “L”, Records, p. 213.

238

238



June 21, 1991, WHI President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for P1,000 per square meter or at the price of P7,213,000.4 One of the terms incorporated in Dy’s offer was the following provision:

5. This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER, that he holds a good and registrable title to the property, which shall be conveyed CLEAR and FREE of all liens and encumbrances, and that the area of 7,213 square meters of the subject property already includes the area on which the right of way traverses from the main lot (area) towards the exit to the Sumulong Highway as shown in the location plan furnished by the Owner/Seller to the buyer. Furthermore, in the event that the right of way is insufficient for the buyer’s purposes (example: entry of a 45-foot container), the seller agrees to sell additional square meter from his current adjacent property to allow the buyer to full access and full use of the property.5

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later or on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI, as vendee, executed a contract to sell in which RECCI bound and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6 On September 5, 1991, a Deed of Absolute Sale7 in favor of WHI was issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for P5,000,000, receipt of which was acknowledged by Roxas under the following terms and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use of and a right of way from Sumulong Highway to the property herein conveyed consists of 25 square meters wide to be used as the latter’s egress from and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering area for Vendee’s vehicles.

The Vendor agrees that in the event that the right of way is insufficient for the Vendee’s use (ex entry of a 45-foot container) the Vendor agrees to sell additional square meters from its current adjacent property to allow the Vendee full access and full use of the property.

. . .

_______________

4Exhibit “M”, Id., at p. 214.

5Ibid.

6Exhibit “N”, Id., at p. 216.

7Exhibit “C”, Id., at pp. 192-195.

239

VOL. 436, AUGUST 12, 2004

239


The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to the parcel of land and improvements herein conveyed, against all claims of any and all persons or entities, and that the Vendor hereby warrants the right of the Vendee to possess and own the said parcel of land and improvements thereon and will defend the Vendee against all present and future claims and/or action in relation thereto, judicial and/or administrative. In particular, the Vendor shall eject all existing squatters and occupants of the premises within two (2) weeks from the signing hereof. In case of failure on the part of the Vendor to eject all occupants and squatters within the two-week period or breach of any of the stipulations, covenants and terms and conditions herein provided and that of contract to sell dated 1 July 1991, the Vendee shall have the right to cancel the sale and demand reimbursement for all payments made to the Vendor with interest thereon at 36% per annum.8

On September 10, 1991, the Wimbeco Builder’s, Inc. (WBI) submitted its quotation for P8,649,000 to WHI for the construction of the warehouse building on a portion of the property with an area of 5,088 square meters.9 WBI proposed to start the project on October 1, 1991 and to turn over the building to WHI on February 29, 1992.10

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed its lease agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be constructed at the rental rate of P65 per square meter. Ponderosa emphasized the need for the warehouse to be

ready for occupancy before April 1, 1992.11 WHI accepted the offer. However, WBI failed to commence the construction of the warehouse in October 1, 1991 as planned because of the presence of squatters in the property and suggested a renegotiation of the contract after the squatters shall have been evicted.12 Subsequently, the squatters were evicted from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the warehouse building for P11,804,160.13 The contractor started construction in April 1992 even before the

_______________

8Id., at pp. 193-194.

9Exhibit “D”, Id., at p. 196.

10Exhibit “D-1”, Id., at p. 197.

11Exhibit “G”, Id., at p. 201.

12Exhibit “E”, Id., at p. 198.

13Exhibit “F”, Id., at p. 199.

240

240



building officials of Antipolo City issued a building permit on May 28, 1992. After the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by the building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as lessee, executed a contract of lease over a portion of the property for a monthly rental of P300,000 for a period of three years from March 1, 1993 up to February 28, 1996.14

In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a portion of the property over which WHI had been granted a right of way. Roxas promised to look into the matter. Dy and Roxas discussed the need of the WHI to buy a 500-square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in the deed of absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI wrote the RECCI, reiterating its verbal requests to purchase a portion of the said lot as provided for in the deed of absolute sale, and complained about the latter’s failure to eject the squatters within the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 for its beneficial use within 72 hours from notice thereof, otherwise the appropriate action would be filed against it. RECCI rejected the demand of WHI. WHI reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court of Makati, for specific performance and damages, and alleged, inter alia, the following in its complaint:

5. The “current adjacent property” referred to in the aforequoted paragraph of the Deed of Absolute Sale pertains to the property covered by Transfer Certificate of Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the name of herein defendant Roxas Electric. 6. Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the stipulated beneficial use and right of way consisting of 25 square meters and 55 square meters to the prejudice of the plaintiff. 7. Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild Holdings for its beneficial use is inadequate as

_______________

14Exhibit “H”, Id., at pp. 202-206.

241

VOL. 436, AUGUST 12, 2004

241


turning and/or maneuvering area of its 45-foot container van, Woodchild Holdings manifested its intention pursuant to para. 5 of the Deed of Sale to purchase additional square meters from Roxas Electric to allow it full access and use of the purchased property, however, Roxas Electric refused and failed to merit Woodchild Holdings’ request contrary to defendant Roxas Electric’s obligation under the Deed of Absolute Sale (Annex “A”). 8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the premises within the stipulated time frame and as a consequence thereof, plaintiff’s planned construction has been considerably delayed for seven (7) months due to the squatters who continue to trespass and obstruct the subject property, thereby Woodchild Holdings incurred substantial losses amounting to P3,560,000.00

occasioned by the increased cost of construction materials and labor. 9. Owing further to Roxas Electric’s deliberate refusal to comply with its obligation under Annex “A,” Woodchild Holdings suffered unrealized income of P300,000.00 a month or P2,100,000.00 supposed income from rentals of the subject property for seven (7) months. 10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply with its obligations and warranties under the Deed of Absolute Sale but notwithstanding such demand, defendant Roxas Electric refused and failed and continue to refuse and fail to heed plain-tiff’s demand for compliance. Copy of the demand letter dated April 15, 1992 is hereto attached as Annex “B” and made an integral part hereof. 11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas Electric to particularly annotate on Transfer Certificate of Title No. N-78085 the agreement under Annex “A” with respect to the beneficial use and right of way, however, Roxas Electric unjustifiably ignored and disregarded the same. Copy of the letter request dated 29 May 1992 is hereto attached as Annex “C” and made an integral part hereof. 12. By reason of Roxas Electric’s continuous refusal and failure to comply with Woodchild Holdings’ valid demand for compliance under Annex “A”, the latter was constrained to litigate, thereby incurring damages as and by way of attorney’s fees in the amount of P100,000.00 plus costs of suit and expenses of litigation.15

The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:

_______________

15Records, pp. 2-4.

242

242



WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild Holdings and ordering Roxas Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and 55 square meters; b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access and use of the purchased property pursuant to para. 5 of the Deed of Absolute Sale;

c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right of way granted to Woodchild Holdings under the Deed of Absolute Sale; d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages and unrealized income; e) to pay attorney’s fees in the amount of P100,000.00; and f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.16

In its answer to the complaint, the RECCI alleged that it never authorized its former president, Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to sell any portion thereof or create a lien or burden thereon. It alleged that, under the Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086. As such, the grant of a right of way and the agreement to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said deed are ultra vires. The RECCI further alleged that the provision therein that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements of a binding contract.17

In its amended answer to the complaint, the RECCI alleged that the delay in the construction of its warehouse building was due to the failure of the WHI’s contractor to secure a building permit thereon.18

During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot No. 491-A-3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal portion of which reads:

_______________

16Id., at pp. 4-5.

17Id., at pp. 24-25.

18Id., at p. 247.

243

VOL. 436, AUGUST 12, 2004

243


“WHEREFORE, judgment is hereby rendered directing defendant:

‘(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m. and 55 sq. m.; ‘(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said plaintiff full access and use of the purchased property pursuant to Par. 5 of their Deed of Absolute Sale; ‘(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by their Deed of Absolute Sale; ‘(4) To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff’s unrealized income; ‘(5) To pay plaintiff P100,000 representing attorney’s fees; and

To pay the costs of suit.

SO ORDERED.’ ”19

The trial court ruled that the RECCI was estopped from disowning the apparent authority of Roxas under the May 17, 1991 Resolution of its Board of Directors. The court reasoned that to do so would prejudice the WHI which transacted with Roxas in good faith, believing that he had the authority to bind the WHI relating to the easement of right of way, as well as the right to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a decision on November 9, 1999 reversing that of the trial court, and ordering the dismissal of the complaint. The CA ruled that, under the resolution of the Board of Directors of the RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of way in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the petitioner to buy a portion thereof. The appellate court also ruled that the grant of a right of way and an option to the respondent were so lopsided in favor of the respondent because the latter was authorized to fix the location as well as the price of the portion of its property to be sold to the respondent. Hence, such provisions contained in the deed of absolute sale were not binding on the RECCI. The appellate court ruled that the delay in the construction of WHI’s warehouse was due to its fault.

_______________

19 Id., at p. 482.

244

244


Woodchild Holdings, Inc. vs. Roxas Electric and Construction Company, Inc.The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE (EXH. “C”) IS ULTRA VIRES.

II.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. “C”).

III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. “C”) WERE DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED DECISION.

V.

THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. “C”).

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND PLAINTIFF’S UNREALIZED INCOME AS WELL AS ATTORNEY’S FEES.20

_______________

20Rollo, pp. 22-23.

245

VOL. 436, AUGUST 12, 2004

245


The threshold issues for resolution are the following: (a) whether the respondent is bound by the provisions in the deed of absolute sale granting to the petitioner beneficial use and a right of way over a portion of Lot No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner to buy a portion thereof, and, if so, whether such agreement is enforceable against the respondent; (b) whether the respondent failed to eject the squatters on its property within two weeks from the execution of the deed of absolute sale; and, (c) whether the respondent is liable to the petitioner for damages.

On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the respondent authorized Roxas, then its president, to grant a right of way over a portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and an option for the respondent to buy a portion of the said property. The petitioner contends that when the respondent sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide the petitioner with a means of ingress to or egress from the property to the Sumulong Highway, since the latter had no adequate outlet to the public highway. The petitioner asserts that it agreed to buy the property covered by TCT No. 78085 because of the grant by the respondent of a right of way and an option in its favor to buy a portion of the property covered by TCT No. 78085. It contends that the respondent never objected to Roxas’ acceptance of its offer to purchase the property and the terms and conditions therein; the respondent even allowed Roxas to execute the deed of absolute sale in its behalf. The petitioner asserts that the respondent even received the purchase price of the property without any objection to the terms and conditions of the said deed of sale. The petitioner claims that it acted in good faith, and contends that after having been benefited by the said sale, the respondent is estopped from assailing its terms and conditions. The petitioner notes that the respondent’s Board of Directors never approved any resolution rejecting the deed of absolute sale executed by Roxas for and in its behalf. As such, the respondent is obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with an area of 500 square meters at the price of P1,000 per square meter, based on its evidence and Articles 649 and 651 of the New Civil Code.

For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of its Board of Directors to

246

246



impose a burden or to grant a right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent was not bound by such provisions contained in the deed of absolute sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a portion of the said property since there was no agreement in the deed of absolute sale on the price thereof as well as the specific portion and area to be purchased by the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:

A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation’s board of directors. Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, 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.”

Indubitably, a corporation may act only through its board of directors or, when authorized either by its by-laws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. . . .22

Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them:

_______________

21296 SCRA 631 (1998).

22Id., at pp. 644-645.

247

VOL. 436, AUGUST 12, 2004

247


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.

Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation.23

In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an assumed agency, whether the assumed agency be a general or special one, are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it.

In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden thereon. The petitioner was thus burdened to prove that the respondent so authorized Roxas to sell the same and to create a lien thereon.

Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the respondent, which is worded as follows:

RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested buyer, its 7,213-sq.-meter property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and on terms and conditions which he deems most reasonable and advantageous to the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as he is hereby authorized to execute, sign and deliver the pertinent sales documents and receive the proceeds of sale for and on behalf of the company.25

_______________

23 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.

24211 SCRA 112 (1992).

25 Records, p. 213.

248

248



Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner “on such terms and conditions which he deems most reasonable and advantageous.” Under paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is required to convey real rights over immovable property.26 Article 1358 of the New Civil Code requires that contracts which have for their object the creation of real rights over immovable property must appear in a public document.27 The petitioner cannot feign ignorance of the need for Roxas to have been specifically authorized in writing by the Board of Directors to be able to

_______________

26Art. 1878. Special powers of attorney are necessary in the following cases:

. . .

(5) To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration;

. . .

(12) To create or convey real rights over immovable property;

. . .

(14) To ratify or recognize obligations contracted before the agency;

(15) Any other act of strict dominion.

27 Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and 1405;

. . .

(3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person;

(4) The cession of actions or rights proceeding from an act appearing in a public document.

249

VOL. 436, AUGUST 12, 2004

249


validly grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that if the act of the agent is one which requires authority in writing, those dealing with him are charged with notice of that fact.28

Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from deeds which do not sufficiently include property or subject under which the agent is to deal.29 The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally identical with that authorized to be done.30 In sum, then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it.

We reject the petitioner’s submission that, in allowing Roxas to execute the contract to sell and the deed of absolute sale and fail-ing to reject or disapprove the same, the respondent thereby gave him apparent authority to grant a right of way over Lot No. 491-A-3-B-1 and to grant an option for the respondent to sell a portion thereof to the petitioner. Absent estoppel or ratification, apparent authority cannot remedy the lack of the written power required under the statement of frauds.31 In addition, the petitioner’s fallacy is its wrong assumption of the unproved premise that the respondent had

full knowledge of all the terms and conditions contained in the deed of absolute sale when Roxas executed it.

It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority.32 There can be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or

_______________

28 State v. Sellers and Resolute Insurance Company, 258 N.W.2d 292 (1977).

29Prior v. Hager, 440 S.W.2d 167 (1969).

30Lang v. Bair, 36 Mo. 85, Id.

31Union Camp Corporation v. Dyal, Jr., 460 F.2d 678 (1972).

32 Banker’s Protective Life Insurance Co. v. Addison, 273 S.W.2d 694 (1951).

250

250



conduct of the principal must have been known and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a change of position to its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.33

For the principle of apparent authority to apply, the petitioner was burdened to prove the following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b) knowledge thereof by the respondent which is sought to be held; and, (c) reliance thereon by the petitioner consistent with ordinary care and prudence.34 In this case, there is no evidence on record of specific acts made by the respondent35 showing or indicating that it had full knowledge of any representations made by Roxas to the petitioner that the respondent had authorized him to grant to the respondent an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that the respondent allowed him to do so.

The petitioner’s contention that by receiving and retaining the P5,000,000 purchase price of Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell a portion thereof, is barren of merit. It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the respondent had the right to retain the P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name.36 Ratification is based on waiver—the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a principal has a right to do independently of the unauthorized act of the agent. Moreover, if a writing is re-

_______________

33 Id., at p. 696.

34Residon v. Miller Distributors Co., Inc., 139 N.W.2d 12 (1966).

35 See Wells Fargo Business v. Kozoff, 695 F.2d 940 (1983).

36 The Board of Supervisors v. Schack, 18 L.E.2d 556 (1897); American Food Corporation v. Central Carolina Bank & Trust Company, 291 S.W.2d 892.

251

VOL. 436, AUGUST 12, 2004

251


quired to grant an authority to do a particular act, ratification of that act must also be in writing.37 Since the respondent had not ratified the unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent’s retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its complaint for damages against the respondent on its finding that the delay in the construction of its warehouse was due to its (petitioner’s) fault. The petitioner asserts that the CA should have affirmed the ruling of the trial court that the respondent failed to cause the eviction of the squatters from the property on or before September 29,

1991; hence, was liable for P5,660,000. The respondent, for its part, asserts that the delay in the construction of the petitioner’s warehouse was due to its late filing of an application for a building permit, only on May 28, 1992.

The petitioner’s contention is meritorious. The respondent does not deny that it failed to cause the eviction of the squatters on or before September 29, 1991. Indeed, the respondent does not deny the fact that when the petitioner wrote the respondent demanding that the latter cause the eviction of the squatters on April 15, 1992, the latter were still in the premises. It was only after receiving the said letter in April 1992 that the respondent caused the eviction of the squatters, which thus cleared the way for the petitioner’s contractor to commence the construction of its warehouse and secure the appropriate building permit therefor.

The petitioner could not be expected to file its application for a building permit before April 1992 because the squatters were still occupying the property. Because of the respondent’s failure to cause their eviction as agreed upon, the petitioner’s contractor failed to commence the construction of the warehouse in October 1991 for the agreed price of P8,649,000. In the meantime, costs of construction materials spiraled. Under the construction contract entered into between the petitioner and the contractor, the petitioner was obliged to pay P11,804,160,39 including the additional

_______________

37 Reuschlin and Gregory, The Law of Agency and Partnership, 2nd ed., p. 75.

38Article 1403, New Civil Code (infra).

39 Exhibit “F”, Records, p. 199.

252

252



work costing P1,441,500, or a net increase of P1,712,980.40 The respondent is liable for the difference between the original cost of construction and the increase thereon, conformably to Article 1170 of the New Civil Code, which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the lease of the property to the Ponderosa Leather Goods Company. The respondent is, thus, liable to the petitioner for the said amount, under Articles 2200 and 2201 of the New Civil Code:

Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.

In sum, we affirm the trial court’s award of damages and attorney’s fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the assailed Decision of the Court of Appeals WITH MODIFICATION. The respondent is ordered to pay to the petitioner the amount of P5,612,980 by way of actual damages and P100,000 by way of attorney’s fees. No costs.

SO ORDERED.

Puno (Chairman), Austria-Martinez, Tinga and Chico-Nazario, JJ., concur.

Judgment affirmed with modification.

_______________

40 TSN, 30 September 1993, p. 13.Note.—If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts. (Soler vs. Court of Appeals, 358 SCRA 57 [2001])

[Woodchild Holdings, Inc. vs. Roxas Electric and Construction Company, Inc., 436 SCRA 235(2004)]

G.R. No. 150959. August 4, 2006.*

UNITED PARAGON MINING CORPORATION, petitioner, vs. COURT OF APPEALS, former 12th DIVISION, ATTY. MURLY P. MENDEZ and CESARIO1 F. ERMITA, respondents.

Corporation Law; The power of a corporation to sue and be sued in any court is lodged with its board of directors that exercises its corporate powers, and in turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors.—We start with the basic concept that a corporation, like petitioner UPMC, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises

_______________

* SECOND DIVISION.

1 Also referred as Ceasario.

639

VOL. 497, AUGUST 4, 2006

639

United Paragon Mining Corporation vs. Court of Appeals

said powers through its board of directors and/or its duly authorized officers and agents. It has thus been observed that the power of a corporation to sue and be sued in any court is lodged with its board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors.

Same; Parties; Being not a real party-in-interest, a Personnel Superintendent has no right to file a petition in behalf of the corporation without any authority from its board of directors—it is basic in law that a corporation has a legal personality entirely separate and distinct from that of its officers and the latter cannot act for and on its behalf without being so authorized by its governing board.—Throughout the proceedings before the Voluntary Arbitrator, that is, from the filing of the position papers up to the filing of the motion for reconsideration, UPMC was duly represented by its counsel, Atty. Archimedes O. Yanto. True it is that Cesario’s complaint for illegal dismissal was filed against the corporation and Daniel. It appears obvious to us, however, that Daniel was merely a nominal party in that proceedings, as in fact he was impleaded thereat in his capacity as UPMC’s Personnel

Superintendent who signed the termination letter. For sure, Cesario’s complaint contains no allegation whatsoever for specific claim or charge against Daniel in whatever capacity. As it is, Daniel was not in anyway affected by the outcome of the illegal dismissal case because only the corporation was made liable therein to Cesario. Being not a real party-in-interest, Daniel has no right to file the petition in CA-G.R. SP No. 44450 in behalf of the corporation without any authority from its board of directors. It is basic in law that a corporation has a legal personality entirely separate and distinct from that of its officers and the latter cannot act for and on its behalf without being so authorized by its governing board. In Premium Marble Resources, Inc. v. Court of Appeals, 264 SCRA 11 (1996), we made it clear that in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the latter.

Procedural Rules and Technicalities; To merit the Court’s liberal consideration, a party must show reasonable cause justifying non-compliance with the rules and must convince the Court that the outright dismissal of the petition would defeat the administration of

640

640



justice.—Ample jurisprudence exists to the effect that subsequent and substantial compliance of a petitioner may call for the relaxation of the rules of procedure in the interest of justice. But to merit the Court’s liberal consideration, petitioner must show reasonable cause justifying non-compliance with the rules and must convince the Court that the outright dismissal of the petition would defeat the administration of justice. Here, petitioner has not adequately explained its failure to have the certification against forum shopping signed by its duly authorized officer. Instead, it merely persisted in its thesis that it was not necessary to show proof that its Personnel Superintendent was duly authorized to file that petition and to sign the verification thereof and the certification against forum shopping despite the absence of the necessary board authorization, thereby repeating in the process its basic submission that CA-G.R. SP No. 44450 is merely a continuation of the proceedings before the Voluntary Arbitrator and that its Personnel Superintendent was impleaded as one of the respondents in Cesario’s complaint for illegal dismissal.



Archimedes O. Yanto for petitioner.

Leopoldo S. Perillo, Sr. for respondent Cesario F. Ermita.

GARCIA, J.:

Assailed and sought to be set aside in this petition for review under Rule 45 of the Rules of Court is the Decision2 dated July 24, 2001 of the Court of Appeals (CA), as reiterated in its Resolution3 of November 7, 2001, dismissing the

_______________

2 Penned by Associate Justice Conrado M. Vasquez, Jr. and concurred in by Associate Justices Martin S. Villarama, Jr. and Sergio L. Pestaño; Rollo, pp. 28-32.

3 Id., at p. 33-A.

641

VOL. 497, AUGUST 4, 2006

641


petition for certiorari with prayer for a temporary restraining order and preliminary injunction thereat filed by the herein petitioner in CA-G.R. SP No. 44450, entitled United Paragon Mining Corporation, represented by Feliciano M. Daniel v. Atty. Murly P. Mendez, in his capacity as Accredited Voluntary Arbitrator, Region V, and Cesario F. Ermita.

The facts:

Prior to the instant controversy, private respondent Cesario F. Ermita (Cesario, for brevity) was a regular employee working as a foreman of petitioner United Paragon Mining Corporation (UPMC, hereafter).

On January 18, 1996, Cesario received a termination letter bearing date January 16, 1996 and signed by UPMC’s Personnel Superintendent, Feliciano M. Daniel, informing Cesario that his employment as foreman is terminated effective thirty days after his receipt of the letter. As stated in the letter, the termination was on account of Cesario’s violation of company rules against infliction of bodily injuries on a co-employee, it being alleged therein that Cesario inflicted bodily injuries on a co-employee, a certain Jerry Romero, as well as for unlawfully possessing a deadly weapon, a bolo, again in violation of company rules.

As a result of the termination, the matter was brought to the grievance machinery as mandated under the Collective Bargaining Agreement existing at that time between UPMC and the United Paragon Supervisors Union. Having failed to

reach a settlement thereat, the parties agreed to submit the dispute to voluntary arbitration. Accordingly, the complaint for illegal dismissal was referred to Voluntary Arbitrator Atty. Murly P. Mendez of the National Conciliation and Mediation Board, Regional Branch No. V, Legaspi City, whereat the same was docketed as VA Case No. RB5-657-04-002-96.

On February 28, 1997, Voluntary Arbitrator Mendez rendered a decision4 in Cesario’s favor, stating that although the

_______________

4 Id., at p. 98.

642

642



procedural requirements in the termination of an employee had been complied with, the termination of Cesario was unjustified because it was arrived at through gross misapprehension of facts. Explains the Voluntary Arbitrator:

An analysis of the tenor of the termination letter would seem to indicate that Ceasario Ermita was separated from service simply because his explanation was not acceptable to the company. Stated more bluntly, Ermita was terminated not because there was a definite finding of fact relative to his supposed culpability, but because his answer did not find favor with management.

x x x x x x x x x

The evidence on record partakes of the uncorroborated statement of Jerry Romero claiming that he was assaulted by [Cesario]. This claim has been disputed and is denied by [Cesario] in the statement executed by him on January 2, 1996 as well as in his written explanation (Annex “6,” Respondent’s Position Paper).

On this point, it can be argued that since this is a case of one’s word against another, the best that could be said of management’s evidence is that it has achieved a level at an equi-poise with that of the Constitution. The spirit of prevailing jurisprudence as well as a liberal interpretation of the new Constitutional provision on labor, would mandate that where a doubt exists, the same should be resolved in favor of labor. The position of [Cesario] appears to have been strengthened by the document jointly signed by [him] and Jerry Romero, the supposed victim of the assault charged.

This amicable settlement would serve to negate the charge of physical injury against [Cesario] as a basis for termination, it

appearing that even [his] supposed victim, Jerry Romero, who has been made to appear as a complainant in the proceedings which resulted in the termination letter, has admitted in this amicable settlement (Annex “A”, Complainant’s Position Paper) that “hindi naming sinasadya yon at itong ginawa naming sulat na ito ay siya ang magpapatunay na ayos kaming dalawa at walang problema sa isa’t isa.”

This admission, that comes no less from the supposed accuser of [Cesario], clearly establishes the fact that whatever may have happened between them on New Year’s eve was something that neither of them willfully and voluntarily did. Since it has been established that the supposed scuffle between [Cesario] and Romero was

643

VOL. 497, AUGUST 4, 2006

643


“hindi sinasadya,” then it would necessarily follow that there could not have been a willful and voluntary assault by [Cesario] upon Romero. This situation is further rendered more puzzling by the fact that the suspected assailant was himself the bearer of the tell-tale marks of injury.

x x x x x x x x x

It has been established to the satisfaction of this Arbitrator that the bolo seen that night was used to chop wood to be burnt in the bonfire. This statement by people who happened to be unbiased and disinterested remains uncontested and undisputed.

Further, the preponderance of evidence shows that it was not [Cesario] who used said bolo, but his son.

x x x x x x x x x

On these points, it is the finding of this Arbitrator, and it is so ruled, that Ceasario Ermita was unjustifiably terminated.5 (Words in brackets supplied).

On the basis of the above, the Voluntary Arbitrator, in his aforementioned decision of February 28, 1997, ordered Cesario’s reinstatement, to wit:

“WHEREFORE, judgment is hereby issued ordering respondent United Paragon Mining Corporation to immediately reinstate Ceasario F. Ermita to his former position prior to the termination without loss of seniority nor interruption of service, and to pay said Ceasario F. Ermita his back wages, including such other fringe benefits as he would

have been entitled to, from the date of his termination effective February 17, 1996 up to the time of actual reinstatement. Attorney’s fees are hereby granted equivalent to 10 per cent of such monetary award as the complainant is entitled to.

For lack of merit, all other claims for damages are hereby dismissed.

SO ORDERED.”

In time, UPMC moved for a reconsideration of the decision insofar as it ordered Cesario’s reinstatement which UPMC

_______________

5 Id., at pp. 93-94.

644

644



sought to avert by offering separation pay instead. UPMC cites the following against the decreed reinstatement: 1) Cesario’s position has already been filled up; and 2) reinstatement is no longer appropriate in view of the supposed strained relations between Cesario and UPMC.

In his Order6 of April 22, 1997, the Voluntary Arbitrator denied the desired reconsideration stressing that UPMC’s management misapprehended the facts when it caused Cesario’s termination, which cannot support the claim of the existence of strained relations between him and the corporation.

Unsatisfied, UPMC, thru its Personnel Superintendent Feliciano M. Daniel, elevated the case to the CA on a Petition for Certiorari with Prayer for Temporary Restraining Order and Injunction, thereat docketed as CA-G.R. SP No. 44450, asserting that the Voluntary Arbitrator committed grave abuse of discretion, erroneous interpretation of the law and denial of substantial justice.

In the herein assailed Decision7 dated July 24, 2001, the CA, without going into the merits of the petition, dismissed the same on the following grounds:

1) The petition for certiorari was not the proper remedy in order to seek review or nullify decisions or final orders issued by the Labor Arbiter;

2) The verification in the petition is ineffective and insufficient because it was merely signed by the company’s

Personnel Superintendent without alleging or showing that he is authorized for the said purpose and that the verification was based on knowledge and information;

3) The petitioner’s ground of grave abuse of discretion, erroneous interpretation of the law and denial of justice are actually dwelling on the appreciation of facts, which cannot be entertained in a petition for certiorari.

_______________

6 Id., at pp. 102-105.

7 Supra note 2.

645

VOL. 497, AUGUST 4, 2006

645


With its motion for reconsideration having been denied by the CA in its Resolution of November 7, 2001,8 petitioner UPMC is now with this Court via the present recourse, submitting for our consideration the following questions:

I

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PROPER REMEDY SHOULD HAVE BEEN A PETITION FOR REVIEW ON CERTIORARI AND NOT A PETITION FOR CERTIORARI;

II

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE VERIFICATION PORTION OF THE PETITION WAS INEFFECTIVE AND INSUFFICIENT IN THE ABSENCE OF ALLEGATION OR SHOWING THAT FELICIANO DANIEL, AS PERSONNEL SUPERINTENDENT WAS DULY AUTHORIZED TO FILE THE PETITION;

III

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PETITION LACKS MERIT BECAUSE IT DWELLED ON THE APPRECIATION OF FACTS WHICH IS NOT PROPER IN PETITION FOR CERTIORARI.

The recourse must have to be DENIED, no reversible error having been committed by the CA in its challenged decision.

We start with the basic concept that a corporation, like petitioner UPMC, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. It has thus been observed that the power of a corporation to sue and be sued in any court is

_______________

8 Supra note 3.

646

646



lodged with its board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors.9

It is petitioner’s posture that there is no necessity for a board resolution authorizing its Personnel Superintendent to file in its behalf the certiorari petition in CA-G.R. SP No. 44450 because said petition arose out of the labor dispute filed against it and its Personnel Superintendent, Feliciano M. Daniel. It is argued that in Cesario’s complaint for illegal dismissal, Daniel was made a co-respondent of the corporation. Upon this premise, UPMC argues that Daniel has all the right to answer the complaint and to appeal an unfavorable judgment therein, which he actually did, in his capacity as the corporation’s Personnel Superintendent and as its representative. Plodding on, petitioner contends that were the CA to insist that Daniel could not represent the corporation, it follows that the proceedings before the Voluntary Arbitrator could only be binding as against Daniel because the company then could not have been duly represented in said proceedings.

Throughout the proceedings before the Voluntary Arbitrator, that is, from the filing of the position papers up to the filing of the motion for reconsideration, UPMC was duly represented by its counsel, Atty. Archimedes O. Yanto. True it is that Cesario’s complaint for illegal dismissal was filed against the corporation and Daniel. It appears obvious to us, however, that Daniel was merely a nominal party in that proceedings, as in fact he was impleaded thereat in his capacity as UPMC’s Personnel Superintendent who signed the termination letter. For sure, Cesario’s complaint contains no allegation whatsoever for specific claim or charge against Daniel in whatever

_______________

9 Monfort Hermanos Agricultural Development Corporation v. Monfort III, G.R. No. 152542, July 8, 2004, 434 SCRA 27.

647

VOL. 497, AUGUST 4, 2006

647


capacity. As it is, Daniel was not in anyway affected by the outcome of the illegal dismissal case because only the corporation was made liable therein to Cesario. Being not a real party-in-interest, Daniel has no right to file the petition in CA-G.R. SP No. 44450 in behalf of the corporation without any authority from its board of directors. It is basic in law that a corporation has a legal personality entirely separate and distinct from that of its officers and the latter cannot act for and on its behalf without being so authorized by its governing board.

In Premium Marble Resources, Inc. v. Court of Appeals,10 we made it clear that in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the latter:

“We agree with the finding of public respondent Court of Appeals, that “in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessary fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellant’s subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities and Exchange Commission.”

Given the reality that the petition in CA-G.R. SP No. 44450 was filed by Daniel in behalf of and in representation of petitioner UPMC without an enabling resolution of the latter’s board of directors, that petition was fatally defective, inclusive of the verification and the certification of non-forum shopping executed by Daniel himself.

True, ample jurisprudence exists to the effect that subsequent and substantial compliance of a petitioner may call for the relaxation of the rules of procedure in the interest of jus-

_______________

10 G.R. No. 96551, November 4, 1996, 264 SCRA 11.

648

648



tice.11 But to merit the Court’s liberal consideration, petitioner must show reasonable cause justifying non-compliance with the rules and must convince the Court that the outright dismissal of the petition would defeat the administration of justice.12 Here, petitioner has not adequately explained its failure to have the certification against forum shopping signed by its duly authorized officer. Instead, it merely persisted in its thesis that it was not necessary to show proof that its Personnel Superintendent was duly authorized to file that petition and to sign the verification thereof and the certification against forum shopping despite the absence of the necessary board authorization, thereby repeating in the process its basic submission that CA-G.R. SP No. 44450 is merely a continuation of the proceedings before the Voluntary Arbitrator and that its Personnel Superintendent was impleaded as one of the respondents in Cesario’s complaint for illegal dismissal.

With the view we take of this case, we deem it unnecessary to address petitioner’s other grievances.

WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are AFFIRMED.

Costs against petitioner.

SO ORDERED.

Puno (Chairperson), Sandoval-Gutierrez, Corona and Azcuna, JJ., concur.

Petition denied, assailed decision and resolution affirmed.

Notes.—A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it—obligations incurred by the corporation, acting through its [United Paragon Mining Corporation vs. Court of Appeals, 497 SCRA 638(2006)]

G.R. No. 144880. November 17, 2004.*PASCUAL AND SANTOS, INC., petitioner, vs. THE MEMBERS OF THE TRAMO WAKAS NEIGHBORHOOD ASSOCIATION, INC. represented by DOMINGA MAGNO, respondents.

Rules of Court; Sworn Certification against Forum Shopping; Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of Court mandates that a petition for review shall contain a sworn certification against forum shopping in which petitioner shall attest that he has not commenced any other action involving the same issues in this Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is pending before this Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five days therefrom.—Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of Court mandates that a petition for review shall contain a sworn certification against forum shopping in which the

_______________

* THIRD DIVISION.

439


439

Pascual and Santos, Inc. vs. The Members of the Tramo Wakas Neighborhood Association, Inc.

petitioner shall attest that he has not commenced any other action involving the same issues in this Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is pending before this Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five days therefrom.

Same; Same; The requirement that the petitioner should sign the certificate of non-forum shopping applies even to corporations, considering that the mandatory directives of the Rules of Court make no distinction between natural and juridical persons.—The requirement that the petitioner should sign the certificate of non-forum shopping applies even to corporations, considering that the mandatory directives of the Rules of Court make no distinction between natural and juridical persons.

Corporation Law; Corporations; Board of Directors; Corporate Officers; 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.—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. 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.

Remedial Law; Relaxation of Rules of Court; Corporation Law; Corporate Authority; This Court has ruled that the subsequent submission of proof of authority to act on behalf of a petitioner corporation justifies the relaxation of the Rules for the purpose of allowing its petition to be given due course.—This Court has ruled that the subsequent submission of proof of authority to act on behalf of a petitioner corporation justifies the relaxation of the Rules for the purpose of allowing its petition to be given due course.

440

440



Same; Same; Equity and Substantial Justice; At all events, strict adherence to rules of procedure must give way to considerations of equity and substantial justice where, as in this case, there is evidence showing that the appeal was filed on time.—At all events, strict adherence to rules of procedure must give way to considerations of equity and substantial justice where, as in this case, there is evidence showing that the appeal was filed on time.

PETITION for review on certiorari of the resolutions of the Court of Appeals.


Sycip, Salazar, Hernandez and Gatmaitan for petitioner.

Alfonso A. Orioste for respondent.

CARPIO-MORALES, J.:

At bar is a petition for review on certiorari assailing the May 17, 2000 and August 8, 2000 Resolutions1 of the Court of Appeals (CA) in CA-G.R. No. 57274 which respectively, dismissed the appeal instituted by petitioner Pascual and San-tos, Inc. (petitioner) and denied its motion for reconsideration.

The Members of Tramo Wakas Neighborhood Association, represented by Dominga Magno (respondents), lodged before the Presidential Action Center a petition dated January 12, 1994 praying that ownership over three (3) parcels of land situated in Barangay San Dionisio, Parañaque, Metro Manila, identified as Lot Nos. 4087, 4088 and 5003, Psu-118886, Cad. 229 with an aggregate area of 35,195 square meters be awarded to them. In their petition, respondents alleged that petitioner claims ownership of the subject lots which they have openly, peacefully and continuously occupied since 1957.

The petition was referred to the Land Management Bureau (LMB) where it was docketed as LMB Case No. 2-96, for investigation and hearing.

_______________

1 Rollo at pp. 10-20.

441


441


By Decision2 of February 21, 1996, Director Abelardo G. Palad, Jr. of the LMB found for respondents. The dispositive portion of the decision reads, quoted verbatim:

“WHEREFORE, it is ordered that the claim of Pascual and Santos, Inc., over Lot 4087, Lot 4088 and Lot 5003, situated at Brgy. San Dionisio, Parañaque, Metro Manila be, as hereby it is, dismissed. The individual members of TRAMO WAKAS NEIGHBORHOOD ASSOCIATION, now represented by Dominga Magno, if qualified may file appropriate public land applications over the land they actually possessed and occupied. An individual survey shall be conducted on the land at their own expense and after approval of the said survey the same shall be given due course.

“SO ORDERED.”3

Its Motion for Reconsideration having been denied by Order of June 26, 1996, petitioner lodged an appeal before the Office of the Department of Environment and Natural

Resources (DENR) Secretary, docketed as DENR Case No. 7816.

By Decision4 of November 25, 1997, then DENR Secretary Victor O. Ramos dismissed the appeal for lack of merit and affirmed in toto the decision of the Director of the LMB. Petitioner’s Motion for Reconsideration of the decision having been denied by Order5 of May 18, 1998, it filed an appeal before the Office of the President (OP), docketed as O.P. Case No. 98-F-8459, which was likewise dismissed for lack of merit by Decision6 of January 20, 2000. The November 25, 1997 DENR decision was affirmed in toto.

Petitioner received a copy of the OP’s dismissal of its appeal on February 1, 2000,7 following which or on February 16,

_______________

2 Id., at pp. 277-286.

3 Id., at p. 286.

4 Id., at pp. 209-217.

5 Id., at pp. 219-220.

6 Id., at pp. 202-207.

7 Id., at p. 65.

442

442



2000, it filed a “Petition for Time”8 before the CA for an additional period of fifteen days or until March 2, 2000 within which to file its petition for review.

By Resolution9 of February 21, 2000, the CA granted petitioner’s Petition for Time, giving it a non-extendible period of fifteen days from February 16, 2000 or until March 2, 2000 within which to file the petition.

Petitioner subsequently filed its Petition for Review10 dated March 2, 2000 with the CA, praying that judgment be rendered (1) reversing and setting aside the January 20, 2000 OP Decision and the November 25, 1997 DENR Decision and May 18, 1998 Order, and (2) declaring the subject lots as no longer forming part of the public domain and have been validly acquired by petitioner; or in the alternative, (1) allowing it to present additional evidence in support of its claim to the subject lots, (2) reversing and setting aside the

aforementioned Decisions and Order of the OP and the DENR, and (3) declaring the subject lots as no longer forming part of the public domain and have been validly acquired by petitioner.11

By Resolution of May 17, 2000, the CA dismissed the appeal due to infirm Verification and Certification of non-forum shopping and belated filing.

For one, the Verification and Certification of non-forum shopping was signed merely by Estela Lombos and Anita Pascual who allege that they are the duly authorized representatives of petitioner corporation, without showing any proof whatsoever of such authority.

For another, and importantly, the petition for review was filed a day after the period petitioner corporation expressly sought. As indicated in its “Petition for Time,” petitioner corporation asked for an additional fifteen (15) days, or until March 2, 2000, within which

_______________

8 CA Rollo at pp. 1-4.

9 Id., at p. 6.

10 Id., at pp. 16-131.

11 Id., at pp. 36-37.

443


443


to file its petition, which was granted by the Court per Resolution dated February 21, 2000. However, despite the foregoing, petitioner corporation filed the same only on MARCH 3, 2000 as indicated by the date stamped on the envelope which contains the petition for review.12 (Citations omitted; underscoring supplied)

On June 14, 2000, petitioner filed a Motion for Reconsideration13 of the CA May 17, 2000 Resolution, arguing that there was no showing that the persons acting on its behalf were not authorized to do so and that its petition was filed within the additional 15-day period granted by the CA. Attached to the Motion was a Secretary’s Certificate14 dated June 14, 2000 showing that petitioner’s Board of Directors approved a Resolution on February 11, 2000 appointing Estela Lombos and Anita Pascual, incumbent directors of the corporation, as its duly authorized

representatives who may sign all papers, execute all documents, and do such other acts as may be necessary to prosecute the petition for review that it would file with the CA assailing the decision rendered in OP Case No. 98-G-8459.15

By Resolution of August 23, 2000, the CA denied petitioner’s Motion for Reconsideration for lack of merit.

x x x It must be stressed that any person who claims authority to sign, in behalf of another, the Certificate of Non-Forum Shopping, as required by the rules, must show sufficient proof thereof. Bare allegations are not proof, and the representation of one who acts in behalf of another cannot, by itself, serve as proof of his authority to act as agent or of the extent of his authority as agent. Thus, absent such clear proof, the Court cannot accept at face value, such authority to sign in behalf of the corporation.

x x x

_______________

12 Rollo at pp. 14-15.

13 Id., at pp. 90-101.

14 Id., at p. 98.

15 Ibid.

444

444



Another perusal of the registry return receipts attached to the petition for review (Nos. 182, 183 and 184) shows that copies of the Manifestation and Petition for Review were served to private respondent’s (sic) counsel, the Office of the President, and the Department of Environment and Natural Resources, on March 2, 2000. However, it does not indicate therein when the petition for review was filed with the Court. The registry return receipts (No. 185, 186, 187 and 188) being referred to by petitioner shows (sic) the date March 2, 2000 only on that numbered 188, and does (sic) not show the dates on those numbered 185-187. In fact, said receipts do not even indicate which pertain to the copy filed with the Court.

Moreover, the Court cannot sustain petitioner’s supposition that a post office employee might have stamped the wrong date, March 3, 2000, without any proof whatsoever of such

error. The date stamped on the envelope which contained the Manifestation and Petition for Review clearly shows that the same was filed on March 3, 2000, and petitioner having failed to rebut the presumption of regularity in the performance of official functions, the same must prevail.16 (Citations omitted; emphasis in the original; italics supplied)

Petitioner thus filed on September 27, 2000 before this Court a “Petition For Time” to file its petition for review.

On October 30, 2000, petitioner filed a Petition for Review on Certiorari raising the following issues:

I

WHETHER OR NOT THE PERSONS WHO EXECUTED THE VERIFICATION AND CERTIFICATION OF NON-FORUM SHOPPING ATTACHED TO PSI’S MANIFESTATION/PETITION FOR REVIEW FILED WITH THE COURT OF APPEALS WERE AUTHORIZED TO DO SO.

II

WHETHER OR NOT PSI’S MANIFESTATION/PETITION FOR REVIEW WAS FILED WITHIN THE REGLEMENTARY PERIOD.17

_______________

16 Id., at pp. 11-12.

17 Id., at p. 29.

445


445


By Resolution18 of December 6, 2000, this Court denied the Petition for Review in view of petitioner’s failure to submit a valid affidavit of service pursuant to Section 13 of Rule 13 and Sections 3 and 5 of Rule 45 in relation to Section 5 (d) of Rule 56 of the Rules of Court and attach to the petition a duplicate original or certified true copy of the assailed CA resolutions pursuant to Sections 4 (d) and 5 of Rule 45 in relation to Section 5 (d) of Rule 56 of the Rules of Court.

Petitioner filed a Motion for Reconsideration,19 averring that it had already attached certified true copies of the assailed resolutions of the CA in its “Petition for Time” filed before this Court on September 27, 2000, and while it was the affidavit before the CA which was inadvertently attached to its petition before this Court, the messengerial staff of petitioner’s counsel did in fact serve copies of the petition on

counsel for respondents, the DENR, the OP and the court a quo as evidenced by registry receipts and return cards20 which it attached to its Motion for Reconsideration.

By Resolution21 of March 7, 2001, this Court, finding petitioner’s explanation satisfactory, granted the Motion for Reconsideration and reinstated the petition, now the subject of this Decision.

The petition is impressed with merit.

Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of Court mandates that a petition for review shall contain a sworn certification against forum shopping in which the petitioner shall attest that he has not commenced any other action involving the same issues in this Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereaf-

_______________

18 Id., at pp. 102-103.

19 Id., at pp. 105-121.

20 Id., at pp. 120, 139 and 140.

21 Id., at p. 142.

446

446



ter learn that a similar action or proceeding has been filed or is pending before this Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five days therefrom.

For failure to comply with this mandate, Section 7 of Rule 43 provides:

SEC. 7. Effect of failure to comply with requirements.—The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof.

The requirement that the petitioner should sign the certificate of non-forum shopping applies even to corporations, considering that the mandatory directives of the Rules of Court make no distinction between natural and juridical persons.22

In the case at bar, the CA dismissed the petition before it on the ground that Lombos and Pascual, the signatories to the verification and certification on non-forum shopping, failed to show proof that they were authorized by petitioner’s board of directors to file such a petition.

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.23 Thus, its power to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers.24 Physical acts, like the

_______________

22 Zulueta v. Asia Brewery, 354 SCRA 100, 108 (2001).

23 National Steel Corporation v. Court of Appeals, 388 SCRA 85, 91-92 (2002) (citation omitted), BA Savings Bank v. Sia, 336 SCRA 484, 488 (2000).

24 Shipside Incorporated v. Court of Appeals, 352 SCRA 334, 345 (2001) (citation omitted).

447


447


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.25

It is undisputed that when the petition for certiorari was filed with the CA, there was no proof attached thereto that Lombos and Pascual were authorized to sign the verification and non-forum shopping certification. Subsequent to the CA’s dismissal of the petition, however, petitioner filed a motion for reconsideration to which it attached a certificate issued by its board secretary stating that on February 11, 2000 or prior to the filing of the petition, Lombos and Pascual had been authorized by petitioner’s board of directors to file the petition before the CA.

This Court has ruled that the subsequent submission of proof of authority to act on behalf of a petitioner corporation

justifies the relaxation of the Rules for the purpose of allowing its petition to be given due course.26

Thus, in Shipside Incorporated v. Court of Appeals,27 this Court held:

x x x Moreover, in Loyola, Roadway and Uy, the Court excused non-compliance with the requirement as to the certificate of non-forum shopping. With more reason should we allow the instant petition since petitioner herein did submit a certification on non-forum shopping, failing only to show proof that the signatory was authorized to do so. That petitioner subsequently submitted a secretary’s certificate attesting that Balbin was authorized to file an action on behalf of petitioner likewise mitigates this oversight.

It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory, nonetheless the

_______________

25 Firme v. Bukal Enterprises and Development Corporation, 414 SCRA 190, 209 (2003) (citation omitted).

26 Novelty Philippines, Inc. v. Court of Appeals, 411 SCRA 211, 219 (2003) (citation omitted), National Steel Corporation v. Court of Appeals, 388 SCRA 84, 92 (2002), BA Savings Bank v. Sia, 336 SCRA 484, 489 (2000).

27 352 SCRA 334 (2001).

448

448



requirements must not be interpreted too literally and thus defeat the objective of preventing the undesirable practice of forum shopping.28

As for the timeliness of the filing of its petition for review before the CA, petitioner maintains in the affirmative.

Sections 3 and 12 of Rule 13 of the Rules of Court provide:

SEC. 3. Manner of filing.—The filing of pleadings, appearances, motions, notices, orders, judgments and all other papers shall be made by presenting the original copies thereof, plainly indicated as such, personally to the clerk of court or by sending them by registered mail. In the first case, the clerk of court shall endorse on the pleading the date and hour of filing. In the second case, the date of the mailing of

motions, pleadings, or any other papers or payments or deposits, as shown by the post office stamp on the envelope or the registry receipt, shall be considered as the date of their filing, payment, or deposit in court. The envelope shall be attached to the record of the case.

SEC. 12. Proof of filing.—The filing of a pleading or paper shall be proved by its existence in the record of the case. If it is not in the record, but is claimed to have been filed personally, the filing shall be proved by the written or stamped acknowledgment of its filing by the clerk of court on a copy of the same; if filed by registered mail, by the registry receipt and by the affidavit of the person who did the mailing, containing a full statement of the date and place of depositing the mail in the post office in a sealed envelope addressed to the court, with postage fully prepaid, and with instructions to the postmaster to return the mail to the sender after ten (10) days if not delivered.

Registry Receipt Nos. 185-188 covering the envelopes bearing the copies of the petition which were sent to the CA indicate that such copies were filed by registered mail at the Domestic Airport Post Office (DAPO) on March 2, 2000.29

_______________

28 Id., at pp. 346-347.

29 Rollo at p. 87.

449


449


The Affidavit of Service30 filed by the person who did the mailing of the petition in behalf of petitioner states that such petition was filed by registered mail by depositing seven copies thereof in four separate sealed envelopes and mailing the same to the Clerk of Court of the CA through the DAPO on March 2, 2000. The affidavit likewise states that on even date, the petition was served on counsel for respondents, the DENR and the OP by depositing copies of the same in sealed envelopes and mailing them to said parties’ respective addresses through the DAPO.

And in the Certification31 dated October 26, 2000 issued by Postmaster Cesar A. Felicitas of the DAPO, he states that the registered mail matter covered by Registry Receipt Nos. 185-188 addressed to the Clerk of Court of the CA was posted at their office for mailing on March 2, 2000, but that it was “dispatched to the CMEC on March 3, 2000 for proper disposition.” This could very well explain why the latter date

was stamped on the envelope received by the CA containing the petition.

At all events, strict adherence to rules of procedure must give way to considerations of equity and substantial justice where, as in this case, there is evidence showing that the appeal was filed on time.32

WHEREFORE, the petition is GRANTED. The Resolutions dated May 17, 2000 and August 23, 2000 of the Court of Appeals are SET ASIDE. The case, CA-G.R. SP No. 57274, is

_______________

30 Id., at p. 40.

31 Id., at p. 89.

32 South Villa Chinese Restaurant v. National Labor Relations Commission, 250 SCRA 246 (1995).

450

450


Rigor vs. People

REMANDED to the appellate court which is hereby directed to give due course to the appeal of petitioner.

No costs.

SO ORDERED.

Panganiban (Chairman), Sandoval-Gutierrez and Garcia, JJ., concur.

Corona, J., On Leave.

Petition granted, assailed resolutions set aside. [Pascual and Santos, Inc. vs. The Members of the Tramo Wakas Neighborhood Association, Inc., 442 SCRA 438(2004)]

G.R. No. 145901. December 15, 2005.*EASYCALL COMMUNICATIONS PHILS., INC., petitioner, vs. EDWARD KING, respondent.

Remedial Law; Jurisdictions; Securities and Exchange Commission; National Labor Relations Commission; Under Section 5 of PD 902-A, the law applicable at the time this controversy arose, the Securities and Exchange Commission, not the National Labor Relations Commission had original and exclusive jurisdiction over cases involving the removal of corporate officers; But it had to be first established that the person removed or dismissed was a corporate officer before the removal or dismissal could properly fall within the jurisdiction of the Securities and Exchange Commission and not the National Labor Relations Commission.—Under Section 5 of PD 902A, the law applicable at the time this controversy arose, the SEC, not the NLRC, had original and exclusive jurisdiction over cases involving the removal of corporate officers. Section 5(c) of PD 902-A applied to a corporate officer’s dismissal for his dismissal was a corporate act and/or an intra-corporate controversy. However, it had to be first established that the person removed or dismissed was a corporate officer before the removal or dismissal could properly fall within the jurisdiction of the SEC and not the NLRC. Here, aside from its bare allegation, petitioner failed to show that respondent was in fact a corporate officer.

Same; Same; Same; Same; Under Section 25 of the Corporation Code, the “corporate officers” are the president, secretary, treasurer and such other officers as may be provided for in the by-laws.—“Corporate officers” in the context of PD 902-A are those officers of a corporation who are given that character either by the Corporation Code or by the corporation’s by-laws. Under Section 25 of the Corporation Code, the “corporate officers” are the president, secretary, treasurer and such other officers as may be provided for in the by-laws.

Same; Same; Same; Same; Respondent was an employee not a “corporate officer”; Court of Appeals is correct in ruling that jurisdiction over the case was properly with the National Labor Relations

_______________

* THIRD DIVISION.

103

VOL. 478, DECEMBER 15, 2005

103

Easycall Communications Phils., Inc. vs. King

Commission, not the Securities and Exchange Commission.—An “office” is created by the charter of the corporation and

the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. In this case, respondent was appointed vice president for nationwide expansion by Malonzo, petitioner’s general manager, not by the board of directors of petitioner. It was also Malonzo who determined the compensation package of respondent. Thus, respondent was an employee, not a “corporate officer.” The CA was therefore correct in ruling that jurisdiction over the case was properly with the NLRC, not the SEC.

Labor Law; Dismissals; Loss of Confidence; While loss of confidence is a valid ground for dismissing an employee, it should not be simulated; To be a valid ground for an employee’s dismissal, loss of trust and confidence must be based on a willful breach and founded on clearly established facts.—While loss of confidence is a valid ground for dismissing an employee, it should not be simulated. It must not be indiscriminately used as a shield by the employer against a claim that the dismissal of an employee was arbitrary. To be a valid ground for an employee’s dismissal, loss of trust and confidence must be based on a willful breach and founded on clearly established facts. A breach is willful if it is done intentionally, knowingly and purposely, without justifiable excuse, as distinguished from an act done carelessly, thoughtlessly, heedlessly or inadvertently. Thus, a willful breach cannot be a breach resulting from mere carelessness.

Same; Same; Same; Grounds cited by petitioner were not sufficient to support a claim of loss of confidence as a ground for dismissal.—The grounds cited by petitioner, i.e., respondent’s alleged poor sales performance and the allegedly excessive time he spent in the field, were not sufficient to support a claim of loss of confidence as a ground for dismissal.

Same; Same; Same; The promotion of an employee negates the employer’s claim that it has lost its trust and confidence in the employee.—The promotion of an employee negates the employer’s claim that it has lost its trust and confidence in the employee. Hence,

104

104



petitioner’s claim of loss of confidence crumbles in the light of respondent’s promotion not only to assistant vice-president but to the even higher position of vice- president.

Same; Same; Due Process; The twin requirements of notice and hearing constitute the essential elements of due process.—The twin requirements of notice and hearing constitute the essential elements of due process. The law requires the employer to furnish the employee sought to be dismissed with two written notices before termination of employment can be legally effected: (1) a written notice apprising the employee of the particular acts or omissions for which his dismissal is sought in order to afford him an opportunity to be heard and to defend himself with the assistance of counsel, if he desires, and (2) a subsequent notice informing the employee of the employer’s decision to dismiss him. This procedure is mandatory and its absence taints the dismissal with illegality.

Same; Same; Same; The series of dialogues and consultations between petitioner’s management and respondent could not validly substitute for the actual observance of notice and hearing.—In this case, respondent was served with one notice only●the notice of his termination. The series of dialogues between petitioner’s management and respondent was not enough as it failed to show that the latter was apprised of the cause of his dismissal. These dialogues or consultations could not validly substitute for the actual observance of notice and hearing.



Filomeno A. Arteche III and Amer I. Macapundag for petitioner.

Romero, Valdecantos & Valencia Law Office for private respondent.

105


105


CORONA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court assails the February 10, 2000 decision1 and November 8, 2000 resolution of the Court of Appeals (CA) in CA-G.R. SP No. 53510. The assailed decision nullified the November 27, 1998 decision and April 29, 1999 resolution of the National Labor Relations Commission (NLRC) and entered a new one declaring that the respondent Edward King was illegally dismissed and awarding him backwages, separation pay and attorney’s fees.

Petitioner Easycall Communications Phils., Inc. was a domestic corporation primarily engaged in the business of message handling. On May 20, 1992, petitioner, through its gen-eral manager, Roberto B. Malonzo, hired the services of respondent as assistant to the general manager. He was given the responsibility of ensuring that the expansion plans outside Metro Manila and Metro Cebu were achieved at the soonest possible time.

In an August 14, 1992 memorandum, Mr. R.T. Casas, respondent’s immediate superior, recommended his promotion to assistant vice president for nationwide expansion. On December 22, 1992, respondent was appointed to the even higher position of vice president for nationwide expansion. Respondent’s promotion was based on his performance during the six months preceding his appointment. As vice president for nationwide expansion, he became responsible for the sales and rentals of pager units in petitioner’s expansion areas. He was also in charge of coordinating with the dealers in these areas.

Sometime in March 1993, Malonzo reviewed the sales performance of respondent. He also scrutinized the status of

_______________

1 Penned by Associate Justice Elvi John S. Asuncion and concurred in by Associate Justices Buenaventura J. Guerrero and Hilarion L. Aquino of the Eighth Division of the Court of Appeals.

106

106



petitioner’s Nationwide Expansion Program (NEP) which was under respondent’s responsibility. He found that respondent’s actual sales for the period October 1992–March 1993 was 78% of his sales commitment and 70% of his sales target.

Malonzo also checked the frequency and duration of the provincial sales development visits made by respondent for the same period to expansion areas under his jurisdiction. He discovered that the latter spent around 40% of the total number of working days for that period in the field.

The management then confronted respondent regarding his sales performance and provincial sales development visits. A series of dialogues between petitioner’s management and respondent ensued.

On April 16, 1993, Rockwell Gohu, petitioner’s deputy general manager, talked to respondent to discuss his sales performance. In the course of the conversation, Gohu informed respondent that Malonzo wanted his resignation. This prompted respondent to write a memorandum to Malonzo. In his memorandum, he inquired whether Malonzo really wanted him to resign. He emphasized that his work performance had yet to be evaluated. He also stated that, based on the approved budget for fiscal year ending in June 1993, he was within the budget and targets set forth by petitioner. He further declared that he had no intention of resigning from his position.

On April 19, 1993, respondent received a notice of termination signed by Malonzo. The notice informed him of the termination of his employment with petitioner effective April 30, 1993. In particular, the relevant portion of the notice read:

“This is to inform you that management is no longer confident that you are the right manager for the position you are occupying. Our series of discussions on the various aspects of your functions

107


107


with you did not convince us that it is to the best interest of Easy Call to retain your services. x x x”2 (Emphasis supplied)

Aggrieved, the respondent filed a complaint for illegal dismissal with the NLRC. It was docketed as NLRC Case No. 00-04-02913-93.

In his June 24, 1997 decision, the labor arbiter found that the termination of respondent’s employment on the ground of loss of confidence was valid. Consequently, the labor arbiter dismissed the complaint for lack of merit.

On appeal, the NLRC affirmed the decision of the labor arbiter in its November 27, 1998 decision, with the modification that petitioner was ordered to indemnify respondent in the amount of P10,000 for violating respondent’s right to due process. Respondent filed a partial motion for reconsideration praying that the NLRC reverse its ruling insofar as it declared that he was validly dismissed for cause. The NLRC, however, denied the motion for lack of merit in a April 29, 1999 resolution. The NLRC also dismissed the complaint for lack of jurisdiction.

Respondent filed a petition for certiorari with the CA. The CA granted the petition and ruled that the NLRC erred in holding

that it lacked jurisdiction over the case. The CA also ruled that the dismissal of respondent was illegal for having been done without cause and in violation of his right to due process.

Petitioner moved for a reconsideration of the CA decision but the motion was denied in the CA’s November 8, 2000 resolution. Hence, this petition.

Petitioner now raises the following errors:

I.

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT SUBSTITUTED ITS OWN

_______________

2 CA Decision, Rollo, p. 27.

108

108



FINDINGS TO THAT OF THE NLRC IN VIOLATION OF THE RULE THAT REGULAR COURTS SHOULD ACCORD GREAT RESPECT TO FINDINGS OF ADMINISTRATIVE AGENCIES CONSIDERING THAT THERE IS SUBSTANTIAL EVIDENCE TO SUPPORT THE SIMILAR FINDINGS OF BOTH THE LABOR ARBITER AND THE COMMISSIONERS OF NLRC.

II.

FURTHERMORE, GLARING IS THE FACT THAT THE HONORABLE COURT OF APPEALS SIMPLY DISREGARDED THE SUBSTANTIAL EVIDENCE ON RECORD WHICH INDISPUTABLY SHOWED THAT RESPONDENT WAS TOTALLY REMISS IN HIS DUTIES AS VICE PRESIDENT FOR NATIONWIDE EXPANSION.

III.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT FAILED TO CONSIDER THAT BEING A CORPORATE OFFICER, THE NLRC HAS NO JURISDICTION OVER THE SUBJECT UNDER PD 902-A.3

We shall rule first on the issue of jurisdiction as it is decisive. If the NLRC had no jurisdiction, then it would be unnecessary to consider the validity of respondent’s dismissal.

Petitioner argues that since respondent was a “corporate officer,” the NLRC had no jurisdiction over the subject matter under PD 902-A. In support of its contention, petitioner invokes Paguio v. NLRC4 where we held that the removal of a

corporate officer, whether elected or appointed, is an intracorporate controversy over which the NLRC has no jurisdiction. The petitioner also cites our ruling in de Rossi v. NLRC5 to the effect that the SEC, not the NLRC, has original and exclusive jurisdiction over cases involving the removal of corporate officers.

_______________

3 Rollo, p. 10.

4 323 Phil. 203; 253 SCRA 166 (1996).

5 373 Phil. 17; 314 SCRA 245 (1999).

109


109


Under Section 5 of PD 902-A, the law applicable at the time this controversy arose,6 the SEC, not the NLRC, had original and exclusive jurisdiction over cases involving the removal of corporate officers. Section 5(c) of PD 902-A applied to a corporate officer’s dismissal for his dismissal was a corporate act and/or an intra-corporate controversy.7

However, it had to be first established that the person removed or dismissed was a corporate officer before the removal or dismissal could properly fall within the jurisdiction of the SEC and not the NLRC. Here, aside from its bare allegation, petitioner failed to show that respondent was in fact a corporate officer.

“Corporate officers” in the context of PD 902-A are those officers of a corporation who are given that character either by the Corporation Code or by the corporation’s by-laws.8 Under Section 25 of the Corporation Code, the “corporate officers” are the president, secretary, treasurer and such other officers as may be provided for in the by-laws.

_______________

6 Section 5 of PD 902 has been amended by the enactment of RA 8799, otherwise known as the Securities Regulations Code, in 2000. In particular, Section 5.2 of RA 8799 provides:

“The [SEC]’s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided that the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The [SEC] shall retain jurisdiction over

pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The [SEC] shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.”

7 Velarde v. Lopez, Inc., G.R. No. 153886, 14 January 2004, 419 SCRA 422; Ongkingco v. National Labor Relations Commission, 337 Phil. 299; 273 SCRA 613 (1997).

8 Gurrea v. Lezama, 103 Phil. 553 (1958).

110

110



A careful look at de Rossi (as well as the line of cases involving the removal of corporate officers where we held that it was the SEC and not the NLRC which had jurisdiction9) will show that the person whose removal was the subject of the controversy was a corporate officer whose position was provided for in the by-laws. That is not by any means the case here.

The burden of proof is on the party who makes the allegation.10 Here, petitioner merely alleged that respondent was a corporate officer. However, it failed to prove that its by-laws provided for the office of “vice president for nationwide expansion.” Since petitioner failed to satisfy the burden of proof that was required of it, we cannot sanction its claim that respondent was a “corporate officer” whose removal was cognizable by the SEC under PD 902-A and not by the NLRC under the Labor Code.

An “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders.11 On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.12

_______________

9 Philippine School of Business Administration v. Leaño, 212 Phil. 716; 127 SCRA 778 (1984); Dy v. National Labor Relations Commission, 229 Phil. 234; 145 SCRA 211 (1986); Cagayan de Oro Coliseum v. Office of the Minister of Labor and Employment, G.R. No. 71589, 17 December 1990, 192 SCRA 315; Lozon v. National Labor Relations Commission, 310 Phil. 1; 240 SCRA 1 (1995); Espino v. National Labor Relations Commission, 310 Phil. 60; 240 SCRA 52 (1995); Tabang v.

National Labor Relations Commission, 334 Phil. 424; 266 SCRA 471 (1997); Ongkingco v. National Labor Relations Commission, supra.

10 Rufina Patis Factory v. Alusitain, G.R. No. 146202, 14 July 2004, 434 SCRA 418; Stolt-Nielsen Marine Services, Inc. v. National Labor Relations Commission, 360 Phil. 881; 300 SCRA 713 (1998).

11 Tabang v. National Labor Relations Commission, supra.

12 Id.

111


111


In this case, respondent was appointed vice president for nationwide expansion by Malonzo, petitioner’s general manager, not by the board of directors of petitioner. It was also Malonzo who determined the compensation package of respondent. Thus, respondent was an employee, not a “corporate officer.” The CA was therefore correct in ruling that jurisdiction over the case was properly with the NLRC, not the SEC.

We now proceed to the substantive issue of the validity of the dismissal of respondent.

While loss of confidence is a valid ground for dismissing an employee, it should not be simulated.13 It must not be indiscriminately used as a shield by the employer against a claim that the dismissal of an employee was arbitrary.14

To be a valid ground for an employee’s dismissal, loss of trust and confidence must be based on a willful breach and founded on clearly established facts.15 A breach is willful if it is done intentionally, knowingly and purposely, without justifiable excuse, as distinguished from an act done carelessly, thoughtlessly, heedlessly or inadvertently.16 Thus, a willful breach cannot be a breach resulting from mere carelessness.

In this case, the labor arbiter’s finding, affirmed by the NLRC, was that the sales record of respondent and the time he spent in the field were “clear indications of complainant’s

_______________

13 Pepsi-Cola Bottling Co. v. National Labor Relations Commission, G.R. No. 101900, 23 June 1992, 210 SCRA 277; General Bank and Trust Co. v. Court of Appeals, 220 Phil. 243; 135 SCRA 569 (1985).

14 Sulpicio Lines, Inc. v. Gulde, 427 Phil. 805; 377 SCRA 525 (2002).

15 Asia Pacific Chartering (Phils.), Inc. v. Farolan, 441 Phil. 776; 393 SCRA 454 (2002); National Bookstore, Inc. v. Court of Appeals, 428 Phil. 235; 378 SCRA 194 (2002).

16 Id.

112

112



inefficiency and/or negligence.”17 Inefficiency implies negligence, incompetence, ignorance and carelessness.18 Negligence is the want or lack of care required by the circumstances.19

The grounds cited by petitioner, i.e., respondent’s alleged poor sales performance and the allegedly excessive time he spent in the field, were not sufficient to support a claim of loss of confidence as a ground for dismissal.

Furthermore, the alleged loss of confidence was not founded on clearly established facts.20 First, petitioner included the sales performance of respondent for the period covering October 1992 to December 1992 in arriving at the conclusion that his sales record was dismal. However, as the CA correctly pointed out, petitioner previously recognized that respondent’s performance for that period “was not merely satisfactory” but “more than extra-ordinary that it merited his promotion not only to the position of assistant vice president, to which he was recommended by his supervisor, but to the even higher position of vice president.”21 This self-contradictory position of petitioner negates its claim of loss of confidence in respondent.

Moreover, the promotion of an employee negates the employer’s claim that it has lost its trust and confidence in the

_______________

17 Rollo, p. 104; Decision dated June 24, 1997 in NLRC Case No. 00-04-02913-93, p. 8.

18 Cuaresma v. Enriquez, A.M. No. MTJ-91-608, 20 September 1995, 248 SCRA 454; Suroza v. Honrado, 196 Phil. 514; 110 SCRA 388 (1981).

19 Cruz v. Gangan, 443 Phil. 856; 395 SCRA 711 (2003) citing Valenzuela v. Court of Appeals, 323 Phil. 374; 253 SCRA 303 (1996).

20 While the general rule is that the Court’s jurisdiction in a petition for review is limited to reviewing errors of law allegedly committed by the appellate court, this rule admits of exceptions. This case falls under one of the exceptions—the findings of fact of the CA are contrary to that of the labor arbiter and the NLRC.

21 Rollo, p. 30, CA decision dated February 10, 2000, p. 5.

113


113


employee.22 Hence, petitioner’s claim of loss of confidence crumbles in the light of respondent’s promotion not only to assistant vice-president but to the even higher position of vice-president.

Second, the sales record of respondent for the period October 1992–December 1992 was recognized as so exemplary that it merited his promotion. Later, however, this very same record was suddenly deemed poor and dismal to justify loss of confidence. Thus, petitioner interpreted one and the same sales record as proof of respondent’s simultaneous efficiency and inefficiency. This could only mean that there was no sufficient standard with which to measure the performance of respondent, an indication of the arbitrariness of petitioner.

Finally, during the hearing of this case before the labor arbiter, Malonzo stated that the percentage of the time spent by respondent in his sales area was actually “not below par.”23 This admission of petitioner’s general manager only proves all the more the lack of sufficient standard for determining respondent’s performance.

The lack of just cause in respondent’s dismissal was aggravated by the absence of due process.

The twin requirements of notice and hearing constitute the essential elements of due process. The law requires the employer to furnish the employee sought to be dismissed with two written notices before termination of employment can be legally effected: (1) a written notice apprising the employee of the particular acts or omissions for which his dismissal is sought in order to afford him an opportunity to be heard and to defend himself with the assistance of counsel, if he desires, and (2) a subsequent notice informing the employee of the

_______________

22 Norkis Distributors, Inc. v. National Labor Relations Commission, 316 Phil. 634; 246 SCRA 525 (1995).

23 Rollo, pp. 153 and 221; Comment, p. 9 and Memorandum, p. 13 both citing TSN of July 28, 1995, pp. 11-13.

114

114



employer’s decision to dismiss him.24 This procedure is mandatory and its absence taints the dismissal with illegality.25

In this case, respondent was served with one notice only—the notice of his termination. The series of dialogues between petitioner’s management and respondent was not enough as it failed to show that the latter was apprised of the cause of his dismissal.26 These dialogues or consultations could not validly substitute for the actual observance of notice and hearing.27

WHEREFORE, the petition is hereby DENIED. The February 10, 2000 decision and November 8, 2000 resolution of the Court of Appeals in CA-G.R. SP No. 53510 are AFFIRMED.

Costs against the petitioner.

SO ORDERED.

Panganiban (Chairman), Sandoval-Gutierrez, Carpio-Morales and Garcia, JJ., concur.

Petition denied, judgment and resolution affirmed.

Note.—The twin requirements of notice and hearing must be complied before a valid dismissal can take place. (Anflo Management and Investment Corporation vs. Bolanio, 390 SCRA 473 [2002])

[Easycall Communications Phils., Inc. vs. King, 478 SCRA 102(2005)]

Date post:	19-Jan-2016
Category:	Documents
Upload:	dayday-able
View:	71 times
Download:	2 times