1
Republic of the Philippines WHEREFORE, the instant action is hereby
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-51001 January 18, 1982
RICARDO LU and VENUS M. LU, petitioners,
vs
NUMERIANO L. VALERIANO and THE COURT
OF APPEALS, respondents.
BARREDO, J.:
Petition for review of the decision of the Court of
Appeals in CA-G.R. No. SP-08792, Valeriano vs.
Sayo, setting aside the writ of immediate execution
purportedly issued under Section 2 of Rule 39 of
the Revised Rules of Court in Civil Case No. C-
6551, Valeriano vs. Manila Banking Corporation,
after the said trial court had rendered, upon motion
of petitioners herein, an amended judgment
dismissing therein plaintiff's (herein respondent
Valerians) complaint for rescission of a contract of
sale and sentenced plaintiff to deliver possession of
and pay rentals to herein petitioners for the real
property or premises in question.
The trial court had earlier rendered a decision on
November 13, 1978 dismissing plaintiff's complaint
without costs and without pronouncement as to the
payment of damages and expenses of litigation.
Immediately after receipt of the decision, or on
November 17, 1978, the plaintiff, herein private
respondent, filed his notice of appeal, on November
23, 1978 his appeal bond and subsequently, in due
time, his record on appeal. Meanwhile, under date
of November 16, 1978, herein petitioners, the Lus,
for short, filed a motion for reconsideration seeking
judgment on their counterclaim for possession and
rentals. This, the herein private respondent
opposed. On December 14, 1978, the trial court,
whose presiding judge then had succeeded Judge
Serafin Salvador, who had retired, rendered the
amendatory judgment above-referred to, the
dispositive portion of which reads:
dismissed without costs.
On the counterclaim of defendants Ricardo Lu and
Venus L-14 judgment is hereby rendered ordering
plaintiff and any one claiming right under him to
vacate the four (4) lots in question, more
particularly described in T.C.T. Nos. C-9142, C-
9143, C-9144 and C-9145 of the Registry of Deeds
of Caloocan City and turn over possession thereof
to defendants Ricardo Lu and Venus Lu. Plaintiff is
further ordered to pay said defendants the amount
of P10,000.00 a month as reasonable
compensation for the use and occupation of the
four (4) lot in question, since January 26, 1978 until
he vacates the said premises.
There is no pronouncement as to the payment of
damages, as well as expenses of litigation.
SO ORDERED. (p. 169, Record.)
On December 19,1978, the Lus filed a motion for
immediate execution upon the grounds that (1) they
had purchased the land in question precisely for the
use of the Phil.-Jap. Industrial and Manufacturing
Corporation, 86% of the capital of which
indisputably was theirs, engaged (a) in the sale of
second hand machineries and (b) in the
manufacture of automobile and motorcycle spare
parts, and for want of space had to use part of the
public street in front of their factory bodega to keep
or put some of their machineries, to the
inconvenience of the public and the traffic on said
street, thereby incurring the ire of the authorities of
Caloocan City who threatened to take action
against them, including the cancellation of their
permit and closure of their factory; (2) the appeal of
Valeriano, herein respondent, was purely dilatory;
and (3) they were ready, willing and able to file a
bond of P40,000.00 to answer for damages that
may be suffered by Valeriano.
In opposition, Valeriano alleged that it was not the
Lus but the corporation, not a party in the case, that
needed the immediate possession and that the
appeal was not dilatory and dismissed lengthily the
alleged errors of the amended judgment.
Incidentally, upon motion of the other defendant
therein, Manila Banking Corporation, a motion for
reconsideration and completion of the decision of
Judge Salvador was also timely filed praying for
judgment on their counterclaim, and over the
opposition of Valeriano, on January 17, 1979 the
2
trial court further amended the amended decision of
December 14, 1978, by finding the grounds therefor
as well taken and modifying the dispositive portion
thus:
WHEREFORE, the instant action is hereby
dismissed without costs.
On the counterclaim of defendants Ricardo Lu and
Venus L-14 judgment is hereby rendered ordering
plaintiff and anyone claiming right under him to
vacate the four (4) lots in question, more
particularly described in T.C.T. Nos. C-9142, C-
9143, C-9144 and C-9145 of the Registry of Deeds
of Caloocan City and turn over possession thereof
to defendants Ricardo Lu and Venus Lu Plaintiff is
further ordered to pay said defendants the amount
of P10,000.00 a month as reasonable
compensation for the use and occupation of the
four (4) lots in question, since January 26, 1978
until he vacates the said premises
On the counterclaim of defendant Manila Banking
Corporation, judgment is hereby rendered ordering
plaintiff to pay defendant Manila Banking
Corporation the sum of Pl,250.00 as reasonable
rental of 5/6 of the property covered by T.C.T. No.
216989 of the Registry of Deeds of Quezon City,
from February 16, 1976 until he and/or his relatives
or privies Vacate the Said property.
There is no pronouncement as to the payment of
damages, as well as expenses of litigation.
SO ORDERED. (pp. 239-240, Record.)
In regard to the two aforequoted amended
judgments, Valerians kept completely silent. He did
not file any manifestation nor motion of any kind
relative thereto, much less did he take any step to
appeal therefrom.
And so, there are now two main issues submitted to
Us for resolution, namely: (1) Did not the failure of
Valeriano to move accordingly for the protection of
his interests in relation to the amended and
reamended decisions have the effect of making the
reamended decision which incorporated the original
and the amended decisions final and executory,
thus rendering useless completely his appeal from
the original decision?; and (2) Did the Court of
Appeals err in holding that the trial court gravely
abused its discretion in granting the immediate
execution of the amended decision insofar as the
award of possession of the premises in question to
the Lus is concerned?
Notwithstanding that both parties would want Us to
rule squarely on whether or not Valeriano's appeal
of the original decision may no longer be given due
course, We have opted to postpone final resolution
of that issue later after the Court of Appeals has
reviewed the evidence. In other words, We hold
now that the appeal of the original decision may be
considered by the Court of Appeals particularly on
the factual issues of whether or not (1) the
arrangement between Valeriano and the
management of Manila Banking and the receipt
from him of P500,000.00 by an officer thereof "as
full payment" of his obligation was indeed subject to
approval by the board of directors of the Bank; (2)
the offer and payment whether in whole or in part
by the Lus of a higher price were made on or
before July 29, 1977; and (3) Valeriano failed to
match the higher offer, all of which details formed
part of the circumstances that would justify or not
the sale by the Bank of the property to the Lus By
then, there would be more basis in law and in
equity for the Court to determine whether or not the
procedural point raised by petitioner as to the
finality of the amended judgment, a point which is
not only of substantial but could even be of
jurisdictional nature, would be fair and just.
Now, on the issue of immediate execution which, to
be sure, is the real matter before Us, it is Our
considered opinion that the trial court did not
commit any grave abuse of discretion in granting
the same, contrary to the finding and holding of the
Court of Appeals. Trite to say, this question is
primarily addressed to the sound discretion of the
trial court. On this score, petitioners herein
presented evidence, without contradiction by
respondent, that they needed the premises very
badly. That petitioners owned only 86% of the
capital stock of the Phil-Jap. Manufacturing
Corporation which owned the machineries which
had to be kept in the streets is too technical and
thin a thread, unrealistic, indeed, to use as an
excuse for holding that petitioners did not have the
required interest in the immediate execution. It is
unnecessary for Us to indulge in any disquisition in
this connection of the doctrine on piercing the veil
of corporate fiction. We are faced with the cold fact
that the Lus needed the property for the business in
which they were undeniably the persons most
interested and affected in a very substantial
degree. What would hurt the corporation would
3

indubitably hurt them most, fiction or no fiction vis-

a-vis the corporation.

Besides, petitioners offered and did file a bond of

P40,000.00 to answer for any damages the
respondent might suffer. Actually, as We see the
record, Valeriano's pretension of damages had very
little leg to stand on. His supposed business in the
premises, according to the extant evidence, did not
or was no longer existing on the dates material in
this controversy.

Furthermore, more or less, the trial court was in a

fairly good position to opine whether or not the
appeal of Valeriano would be dilatory only. There is
always a degree of presumption of correctness in
the decisions of trial courts. Statistically speaking,
there is warrant for the conclusion that only an
insubstantial number of them are reverse on
appeal. In this particular case, a cursory glance at
the pleadings of the parties and decisions of the
trial court and the Court of Appeals evinces, in Our
view, that that presumption has not been
sufficiently overcome even prima facie by private
respondent.

Altogether, these three circumstances We have just

discuss ed constitute the good reasons for the
execution pending appeal allowed by Section 2 of
Rule 39. It was a legal error for the Court of
Appeals to have held otherwise.

IN VIEW OF ALL THE FOREGOING, the judgment

of the Court of Appeals is hereby reversed and the
immediate writ of execution issued by the trial court
is hereby upheld and declared enforceable effective
immediately. Costs against respondent.
4
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20457 October 29, 1966
ELTON W. CHASE, as minority stockholder and on
behalf of the stockholders similarly situated and for
the benefit of AMERICAN MACHINERY AND
PARTS MANUFACTURING, INC., petitioner,
vs.
THE COURT of FIRST INSTANCE OF MANILA,
BRANCH XIV, DR. VICTOR BUENCAMINO, SR.,
VICTOR BUENCAMINO, JR., DOLORES A.
BUENCAMINO and JULIO B. FRANCIA, JR.,
respondents.
Norberto J. Quisumbing and Bumanglag for petitioner.
Ponce Enrile, Siguion-Reyna, Montecillo and Belo for
respondents.
DIZON, J.:
This is an action for certiorari filed by Elton Chase to
review and annul the orders of the Court of First
Instance of Manila, Branch XIV, in Civil Case No.
43946 entitled "Elton W. Chase, etc. vs. Dr. Victor
Buencamino, Sr., et al." denying his application for
receivership of American Machinery & Parts
Manufacturing, Inc., a domestic corporation hereinafter
referred to as AMPARTS.
On August 20, 1960, petitioner, a minority stockholder
of AMPARTS, filed a derivative suit in the Court of
First Instance of Manila against Dr. Victor Buencamino
Sr., Victor Buencamino, Jr., Dolores A. Buencamino and
Julio B. Francia, Jr., majority stockholders and corporate
directors of AMPARTS charging them with breach of
trust; praying for their removal as directors and, if
necessary, for the dissolution and liquidation of said
corporation. Attached to the complaint was an
application for the appointment of a receiver of
AMPARTS.
Respondents opposed the application for receivership
and subsequently filed their answer to the complaint.
After a hearing on the application the court, then
presided by the Hon. Magno S. Gatmaitan, issued an
order dated June 10, 1961 denying the same, but
requiring respondents to file bond in the amount of
P100,000.00 to answer for whatever damages petitioner
might suffer by reason of the denial. Petitioner's motion
for reconsideration was likewise denied.
After trial on the merits, the court rendered judgment
finding Dr. Buencamino guilty of mismanagement and
condemning him "to pay Amparts the sum of P1,970,200
with legal interest from date of the filing of the
complaint; he is also prohibited from collecting any
interest on the sum of P300,000.00 paid by him on the
15th July, 1955 on the initial subscription, and such
interest as has already been paid to him is ordered
refunded with legal interest from the date of the filing of
the complaint . . ."
On May 8, 1962, petitioner filed a motion for the
appointment of Lawrence Moran as receiver of Amparts
until the full amount of the above judgment against
respondent Buencamino is fully satisfied or until the
dissolution or liquidation of said corporation.
On May 12, 1962, the Court issued the following order:
After hearing the parties and with a view to
protect the interests of both and to prevent a
possibility of abuse, the Court resolves that until
further orders, the hereinafter while the case is
pending:
(1) Mr. Chase shall have free access to
AMPARTS and its records personally and/or
through representative duly authorized;
(2) Decisions of Dr. Buencamino and/or
management of AMPARTS shall be made
known to Chase who shall have the right to
object and if so, the matter shall be notified to
the Court which shall resolve the difficulties; in
the interim, pending the objection, the decision
shall not be enforced or made operative;
With this resolution, the Court disposes for the
present of the issue of receivership.
Supplementing the above-quoted order, the respondent
court, now presided by the Hon. Jesus De Veyra, issued
the following order of August 27, 1962:
As for the appointment of a receiver, Judge
Gatmaitan decided on the temporary measure of
giving plaintiff (petitioner herein) a veto right,
appealable to this Court, on all decisions of
5

management. Considering that up to the present,

the Buencaminos own 2/3 of the stock of the
corporation, the solution is equitable and must
be allowed to continue subject to the condition
that once a decision of management is made
known to plaintiff, he must make known his
objection thereto to the Court within five (5)
days from receipt of said decision, otherwise he
shall be deemed to have waived any objection to
the decision.

The only issue to be resolved, considering the above

facts, is whether or not the respondent court committed a
grave abuse of discretion in issuing its orders of June 10,
1961, June 21, 1961, May 12, 1962, and August 27 of
the same year mentioned heretofore.

It is well settled in this jurisdiction that where corporate

directors are guilty of a breach of trust and intracorporate
remedy is futile, the minority stockholders may resort to
the courts for appropriate relief and, incidentally, ask for
the appointment of a receiver for the protection of their
rights. In such case, however, the appointment of a
receiver is a matter addressed to the sound discretion of
the court, and it has been frequently held that such
discretion to appoint a receiver who would take over the
administration of the corporate business should be
exercised with great caution and only when the necessity
therefor is clear.

The facts of the present case show that, in connection

with the order of June 10, 1961, which denied
petitioner's application for the appointment of a receiver,
the court required respondents herein to file a bond in
the amount of P100,000.00 to answer for whatever
damages petitioner might suffer by reason of the denial.
Again, perhaps by reason of the judgment rendered
against Dr. Buencamino finding him guilty of
mismanagement etc., the respondent court, through the
Hon. Jesus de Veyra, issued the order of August 27,
1962 whose pertinent portion is quoted above.

Upon the facts of the case, and considering the

precautionary measures adopted by the respondent court
for the protection of petitioner's rights and interest in
AMPARTS, We can not find our way clear to ruling that
said court had committed a grave abuse of discretion in
issuing the orders complained of.

WHEREFORE, the petition for certiorari is dismissed,

with costs.
6
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16982 September 30, 1961
CATALINA R. REYES, petitioner,
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court
of First Instance of Manila, Branch XIII and
FRANCISCA R. JUSTINIANI, respondents.
Jose W. Diokno for petitioner.
Norberto J. Quisumbing for respondents.
LABRADOR, J.:
This is a petition for certiorari to review and set aside an
order of the Court of First Instance of Manila, Hon.
Bienvenido A. Tan, presiding, in Civil Case No. 42375,
entitled "Francisca R. Justiniani vs. Wadhumal Dalamal,
et al.", appointing a receiver of the corporation Roxas-
Kalaw Textile Mills, Inc. In said action, plaintiff
Justiniani asks the court to order the directors of the
corporation, jointly and severally, to repair the damage
caused to the corporation, of which all the plaintiff and
defendants are members. The action was filed about
January of 1960 and the order for the appointment of the
receiver issued on February 15, 1960, while the
designation of the receiver was made in an order of the
court dated April 30, 1960.
In the complaint in said Civil Case No. 42375, it is
alleged that the corporation, Roxas-Kalaw Textile Mills,
Inc., was organized on June 5, 1954 by defendants Cesar
K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose
Ma. Barcelona and Morris Wilson, for and on behalf of
the following primary principals with the following
shareholdings: Adelia K. Roxas, 1200 Class A shares; I.
Sherman, 900 Class A shares; Robert W. Born, 450
Class A shares and Morris Wilson, 450 Class A shares;
that the plaintiff holds both Class A and Class B shares
and number and value thereof are is follows: Class A
50 shares, Class B 1,250 shares; that on May 8, 1957,
the Board of Directors approved a resolution designating
one Dayaram as co-manager with the specific
understanding that he was to act as defendant Wadhumal
Dalamal's designee, Morris Wilson was likewise
designated as co-manager with responsibilities for the
management of the factory only, that an office in New
York was opened for the purpose of supervising
purchases, which purchases must have the unanimous
agreement of Cesar K. Roxas, New York resident
member of the board of directors, Robert Born and
Wadhumal Dalamal or their respective representatives;
that several purchases aggregating $289,678.86 were
made in New York for raw materials such as greige
cloth, rayon and grey goods for the textile mill and
shipped to the Philippines, which shipment were found
out to consist not of raw materials but already finished
products, such as, West Point Khaki rayon suiting
materials dyed in the piece, finished rayon tafetta in
cubes, cotton eyelets, etc., for which reasons the Central
Bank of the Philippines stopped all dollar allocations for
raw materials for the corporation which necessarily led
to the paralyzation of the operation of the textile mill and
its business; that the supplier of the aforesaid finished
goods was the United Commercial Company of New
York in which defendant Dalamal had interests and the
letter of credit for said goods were guaranteed by the
Indian Commercial Company and the Indian Traders in
which firms defendant Dalamal likewise held interests;
that the resale of the finished goods was the business of
the Indian Commercial Company of Manila, which
company could not obtain dollar allocations for
importations of finished goods under the Central Bank
regulations; that plaintiff and some members of the
board of directors urged defendants to proceed against
Dalamal, exposing his offense to the Central Bank, and
to initiate suit against Dalamal for his fraud against the
corporation; that defendants refused to proceed against
Dalamal and instead continued to deal with the Indian
Commercial Company to the damage and prejudice of
the corporation. The prayer asks for the appointment of a
receiver and a judgment marking defendants jointly and
severally liable for the damages.
After a denial of a motion to dismiss and the filing of an
answer alleging that the complaint states no cause of
action, the motion for the appointment of a receiver was
set for hearing and subsequently the court entered the
order for the appointment of a receiver. The court found
and held:
The second ground of the defendant's motion to
dismiss and or deny the petition is the allegedly
want of a cause of action of the plaintiff's
complaint. Philippine jurisprudence is complete
with authorities upholding the principle that this
ground for dismissal must appear in the face of
the complaint itself; and that to determine the
sufficiency of the cause of action, only the facts
alleged in the complaint and no other, should be
7
considered; in fine, the test of sufficiency of
cause of action is whether or not, admitting the
facts alleged in the complaint, the Court could
render a valid judgment upon the same in
accordance with the prayer of the petition (e.g.,
Paminsan v. Costales, 29 Phil. 587, 489). The
complaint in the instant case abounds with
arguments establishing and supporting plaintiff's
cause of action for and in behalf of the Roxas-
Kalaw Textile Mills, Inc. against all the
defendants (See e.g. paragraphs 4, 5, 6 and 7 of
the Complaint). Taking these paragraphs of the
complaint in context, it is clear that the plaintiff
has sufficient averred facts constituting a cause
or basis for a derivative suit for "injuries to the
corporation, as by negligence, mismanagement
or fraud of its directors, are normally dealt with
as wrong to the whole group of share holders in
their corporate capacity, to be redressed in a suit
by or on behalf of the corporation.1awphl.nt
Evident from the defendants' motion to dismiss
and/or to deny the petition for receivership is
their complete failure to come up with a valid
and substantial defense against or denial of the
complaint's allegations of mismanagement, if
not the actual commission of ultra vires and
illegal acts. Invariably the props of defendants'
motion consist of the unconvincing
countercharges of the plaintiff's non-observance
of the technicalities of our procedural law and
disregard of technical and evidently futile
intracorporate remedies to redress the violations
charged against the defendants. It is clear that
the controlling majority did nothing for two
years to protect the interests of corporation. (See
pars. 5-7, complaint.)
The defendants themselves having admitted in
open court during the oral discussion of their
motion to dismiss and the plaintiff's motion for
receivership that the majority stockholders will
under any condition entertain any suggestion of
the minority shareholders, the appointment of an
independent third party in the management of
the corporation becomes imperative for the
survival of the company. (Order dated Feb. 15,
1960).
On April 30, 1960, the court issued mother order which
reads as follows:
After this incident wherein it was clearly shown
that the minority stockholders, represented by
the plaintiff, have no recourse whatsoever before
the majority stockholders of the company, and
after it has been shown that the majority has
violated the law by importing into the
Philippines finished goods instead of raw
materials as stipulated in their license, and since
these acts are prejudicial to the company
because it might result in the cancellation of
their license, the Court is of the opinion and so
holds that the appointment of a receiver is
absolutely necessary for the protection not only
of the rights of the minority but also those of the
majority stockholders of the company.
In the first assignment of error, petitioner claims that
respondent Justiniani neither alleged nor proved the
existence of an emergency requiring the immediate
appoinment of a receiver of the Roxas-Kalaw Textile
Mill, Inc.; that the alleged fraudulent transaction took
place more than two years before the application for
receivership, and so was the refusal of the directors to
sue or prosecute Dalamal. This contention is not well
founded. At the hearing of the petition for the
appointment of a receiver held on January 30, 1960,
various records of shipments of finished textile goods on
dollar allocations for raw materials were exhibited.
Publicity had also been given to the importations of
textiles by the corporation, in place of cotton raw
materials. The record shows the list of the various
documents proving the purchase of letters of credit for
textiles. These textiles were denied importation and had
to be re-exported. The fact of the importation of finished
textiles on dollar allocations for raw materials in
violation of Central Bank regulations was, therefore,
conclusively shown.
It is also not denied by petitioner that the allocation of
dollars to the corporation for the importation of raw
materials was suspended. In the eyes of the court below,
as well as in our own, the importation of textiles instead
of raw materials, as well as the failure of the Board of
Directors to take action against those directly
responsible for the misuse of dollar allocations constitute
fraud, or consent thereto on the part of the directors.
Therefore, a breach of trust was committed which
justified the derivative suit by a minority stockholder on
behalf of the corporation.
It is well settled in this jurisdiction that where
corporate directors are guilty of a breach of trust
not of mere error of judgment or abuse of
discretion and intracorporate remedy is futile
or useless, a stockholder may institute a suit in
behalf of himself and other stockholders and for
8
the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the
corporation and indirectly upon the
stockholders. An illustration of a suit of this
kind is found in the case of Pascual vs. Del Saz
Orozco (19 Phil. 82), decided by this Court as
early as 1911. In that case, the Banco Espaol-
Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an
employee of the bank, which losses, it was
contended, could have been avoided if the
president and directors had been more vigilant in
the administration of the affairs of the bank. The
stockholders constituting the minority brought a
suit in behalf of the bank against the directors to
recover damages, and this over the objection of
the majority of the stockholders and the
directors. This court held that the suit could
properly be maintained. (64 Phil., Angeles vs.
Santos [G.R. No. L-43413, prom. August 31,
1937] p. 697).
The claim that respondent Justiniani did not take steps to
remedy the illegal importation for a period of two years
is also without merit. During that period of time
respondent had the right to assume and expect that the
directors would remedy the anomalous situation of the
corporation brought about by their own wrong doing.
Only after such period of time had elapsed could
respondent conclude that the directors were remiss in
their duty to protect the corporation property and
business.
Counsel for petitioner claims that respondent Justiniani
was treasurer of the corporation for sometime and had
control of funds and this notwithstanding, she had not
taken the steps to remedy the situation. In answer we
state that the fraud consisted in importing finished textile
instead of raw cotton for the textile mill; the fraud,
therefore, was committed by the manager of the business
and was consented to by the directors, evidently beyond
reach of respondent.
The directors permitted the fraudulent transaction to go
unpunished and nothing appears to have been done to
remove the erring purchasing managers. In a way the
appointment of a receiver may have been thought of by
the court below so that the dollar allocation for raw
material may be revived and the textile mill placed on an
operating basis. It is possible that if a receiver in which
the Central Bank may have confidence is appointed, the
dollar allocation for raw material may be restored. Claim
is made that if a receiver is appointed, the Philippine
National Bank to which the corporation owes
considerable sums of money might be led to foreclose
the mortgage. Precisely the appointment of a receiver in
whom the bank may have had confidence might
rehabilitate the business and bring a restoration of the
dollar allocation much needed for raw material and an
improvement in the business and assets the corporation,
thus insuring the collection of the bank's loan.
Considering the above circumstances we are led to agree
with the judge below that the appointment of a receiver
was not only expedient but also necessary to restore the
faith and confidence of the Central Bank authorities in
the administration of the affairs of the corporation, thus
ultimately leading to a restoration of the dollar allocation
so essential to the operation of the textile mills. The first
assignment of error is, therefore, overruled.
In the second assignment of error, petitioner claims that
the management has been changed and the new
management has not been afforded a chance to show
what it can do. This ground of the petition was not
mentioned or raised as a ground of defense or objection
to the appointment of a receiver in the court below. It is
only raised for the first time before Us in the petition for
certiorari. The principle has long ago been enunciated
by Us that an appellate court may not consider any
ground of objection that was not raised in the court
below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v.
Grao, 54 Phil. 744; Vda. de Villaruel, et al. v. Manila
Motor Co., Inc., et al., G.R. No. L-10394, Dec. 13, 1958;
Collector of Internal Revenue v. Estate of F. P. Buan, et
al., G.R. Nos. L-11438-39, and L-11542-46, July 31,
1958; S.V.S. Pictures, Inc., et al. v. The Court of
Appeals, et al., G.R. No. L-7075, January 29, 1960;
Elena Peralta Vda. de Caina vs. Hon. Andres Reyes, et
al., G.R. No. L-15792, May 30, 1960).
The supposed new management, alleged as a ground for
the reversal of the order of the court below appointing a
receiver, is not in itself a ground of objection to the
appointment of a receiver. The parties found to be guilty
of the fraud, as a cause of which receivership
proceedings were instituted, were the Board of Directors,
which took no action to stop the anomalies being
perpetrated by the management. But it appears that the
management must have acted directly under orders of
the Board of Directors. The appointment of a new
management, therefore, would not remedy the
anomalous situation in which the corporation is found,
because such situation was not due to the management
alone but principally because of direction of the Board of
Directors.
9

The second ground for the petition is, therefore, also

without merit.

WHEREFORE, the court finds that the court below did

not commit an abuse of discretion in appointing a
receiver for the corporation and the petition to set aside
the order for the appointment of a receiver should be, as
it is hereby, dismissed. With costs against the petitioner.
10

Civil Case No. 00-1553 (entitled "Accounting of All

Corporate Funds and Assets, and Damages") which denied
petitioner Oscar C. Reyes (Oscar) Motion to Declare
SECOND DIVISION Complaint as Nuisance or Harassment Suit.

OSCAR C. REYES, G.R. No. 165744 BACKGROUND FACTS

Petitioner,
Oscar and private respondent Rodrigo C. Reyes
Present:
(Rodrigo) are two of the four children of the spouses Pedro
QUISUMBING, J., Chairperson,
and Anastacia Reyes. Pedro, Anastacia, Oscar, and
*CORONA,
- versus - Rodrigo each owned shares of stock of Zenith Insurance
CARPIO MORALES,
VELASCO, JR., and
Corporation (Zenith), a domestic corporation established
BRION, JJ.
by their family. Pedro died in 1964, while Anastacia died
in 1993. Although Pedros estate was judicially partitioned
HON. REGIONAL TRIAL COURT OF Promulgated:
MAKATI, Branch 142, ZENITH among his heirs sometime in the 1970s, no similar
INSURANCE CORPORATION, and August 11, 2008
settlement and partition appear to have been made with
RODRIGO C. REYES,
Respondents. Anastacias estate, which included her shareholdings in
Zenith. As of June 30, 1990, Anastacia owned 136,598
shares of Zenith; Oscar and Rodrigo owned 8,715,637 and
x -------------------------------------------------------------------------------------------x
4,250 shares, respectively.3[3]
DECISION

BRION, J.:
On May 9, 2000, Zenith and Rodrigo filed a
This Petition for Review on Certiorari under Rule complaint4[4] with the Securities and Exchange
45 of the Rules of Court seeks to set aside the Decision of Commission (SEC) against Oscar, docketed as SEC Case
the Court of Appeals (CA)1[1] promulgated on May 26, No. 05-00-6615. The complaint stated that it is a
2004 in CA-G.R. SP No. 74970. The CA Decision derivative suit initiated and filed by the complainant
affirmed the Order of the Regional Trial Court (RTC), Rodrigo C. Reyes to obtain an accounting of the funds
Branch 142, Makati City dated November 29, 20022[2] in and assets of ZENITH INSURANCE CORPORATION
11
which are now or formerly in the control, custody, and/or
possession of respondent [herein petitioner Oscar] and to
determine the shares of stock of deceased spouses Pedro
and Anastacia Reyes that were arbitrarily and
fraudulently appropriated [by Oscar] for himself [and]
which were not collated and taken into account in the
partition, distribution, and/or settlement of the estate of
the deceased spouses, for which he should be ordered to
account for all the income from the time he took these
shares of stock, and should now deliver to his brothers and
sisters their just and respective shares.5[5] [Emphasis
supplied.]
In his Answer with Counterclaim,6[6] Oscar
denied the charge that he illegally acquired the shares of
Anastacia Reyes. He asserted, as a defense, that he
purchased the subject shares with his own funds from the
unissued stocks of Zenith, and that the suit is not a bona
fide derivative suit because the requisites therefor have not
been complied with. He thus questioned the SECs
jurisdiction to entertain the complaint because it pertains
to the settlement of the estate of Anastacia Reyes.
When Republic Act (R.A.) No. 87997[7] took
effect, the SECs exclusive and original jurisdiction over
cases enumerated in Section 5 of Presidential Decree
(P.D.) No. 902-A was transferred to the RTC designated
as a special commercial court.8[8] The records of
Rodrigos SEC case were thus turned over to the RTC,
Branch 142, Makati, and docketed as Civil Case No. 00-
1553.
On October 22, 2002, Oscar filed a Motion to
Declare Complaint as Nuisance or Harassment Suit.9[9]
He claimed that the complaint is a mere nuisance or
harassment suit and should, according to the Interim Rules
of Procedure for Intra-Corporate Controversies, be
dismissed; and that it is not a bona fide derivative suit as
it partakes of the nature of a petition for the settlement of
estate of the deceased Anastacia that is outside the
jurisdiction of a special commercial court. The RTC, in its
Order dated November 29, 2002 (RTC Order), denied the
motion in part and declared:
A close reading of the Complaint
disclosed the presence of two (2) causes
of action, namely: a) a derivative suit for
accounting of the funds and assets of the
corporation which are in the control,
custody, and/or possession of the
respondent [herein petitioner Oscar] with
prayer to appoint a management
committee; and b) an action for
determination of the shares of stock of
deceased spouses Pedro and Anastacia
Reyes allegedly taken by respondent, its
accounting and the corresponding
delivery of these shares to the parties
brothers and sisters. The latter is not a
derivative suit and should properly be
threshed out in a petition for settlement of
estate.
Accordingly, the motion is
denied. However, only the derivative suit
consisting of the first cause of action will
12

be taken cognizance of by this Interim Rules of Procedure of Intra-

Court.10[10]
Corporate Controversies; and
2. that the complaint is not a bona fide
derivative suit but is in fact in the
Oscar thereupon went to the CA on a petition for
nature of a petition for settlement of
certiorari, prohibition, and mandamus11[11] and prayed
estate; hence, it is outside the
that the RTC Order be annulled and set aside and that the
jurisdiction of the RTC acting as a
trial court be prohibited from continuing with the
special commercial court.
proceedings. The appellate court affirmed the RTC Order
and denied the petition in its Decision dated May 26,
2004. It likewise denied Oscars motion for
reconsideration in a Resolution dated October 21, 2004. Accordingly, he prays for the setting aside and annulment
of the CA decision and resolution, and the dismissal of
Rodrigos complaint before the RTC.

Petitioner now comes before us on appeal

through a petition for review on certiorari under Rule 45
of the Rules of Court. THE COURTS RULING

ASSIGNMENT OF ERRORS We find the petition meritorious.

The core question for our determination is

Petitioner Oscar presents the following points as
conclusions the CA should have made:
1. that the complaint is a mere
nuisance or harassment suit that
should be dismissed under the
whether the trial court, sitting as a special commercial
court, has jurisdiction over the subject matter of Rodrigos
complaint. To resolve it, we rely on the judicial principle
that jurisdiction over the subject matter of a case is
conferred by law and is determined by the allegations of
the complaint, irrespective of whether the plaintiff is
13

entitled to all or some of the claims asserted and/or of the

stockholders,
therein.12[12]
partners,
members of
associations
or
organizations
JURISDICTION OF SPECIAL COMMERCIAL registered
COURTS with the
Commission.
b)
Controversies
arising out of
P.D. No. 902-A enumerates the cases over which intra-
corporate or
the SEC (now the RTC acting as a special commercial
partnership
court) exercises exclusive jurisdiction: relations,
between and
among
SECTION 5. In addition to
stockholders,
the regulatory and
members, or
adjudicative functions of the
associates;
Securities and Exchange
between any
Commission over
or all of them
corporations, partnership,
and the
and other forms of
corporation,
associations registered with
partnership or
it as expressly granted under
association of
existing laws and decrees, it
which they
shall have original and
are
exclusive jurisdiction to hear
stockholders,
and decide cases involving:
members, or
a) associates,
Devices or respectively;
schemes and between
employed by such
or any acts of corporation,
the board of partnership or
directors, association
business and the State
associates, its insofar as it
officers or concerns their
partners, individual
amounting to franchise or
fraud and right to exist
misrepresenta as such entity;
tion which and
may be
c)
detrimental to
Controversie
the interest of
s in the
the public
election or
14

appointment In an attempt to hold Oscar responsible for

of directors,
corporate fraud, Rodrigo alleged in the complaint the
trustees,
officers, or following:
managers of
such
3. This is a complaintto
corporations,
determine the shares of
partnerships,
stock of the deceased
or
spouses Pedro and
associations.
Anastacia Reyes that were
arbitrarily and
fraudulently appropriated
for himself [herein
The allegations set forth in Rodrigos complaint petitioner Oscar] which
were not collated and taken
principally invoke Section 5, paragraphs (a) and (b) above
into account in the partition,
as basis for the exercise of the RTCs special court distribution, and/or
settlement of the estate of the
jurisdiction. Our focus in examining the allegations of the
deceased Spouses Pedro and
complaint shall therefore be on these two provisions. Anastacia Reyes, for which
he should be ordered to
account for all the income
from the time he took these
shares of stock, and should
Fraudulent Devices and Schemes now deliver to his brothers
and sisters their just and
respective shares with the
corresponding equivalent
amount of P7,099,934.82
The rule is that a complaint must contain a plain, plus interest thereon from
1978 representing his
concise, and direct statement of the ultimate facts obligations to the Associated
constituting the plaintiffs cause of action and must specify Citizens Bank that was paid
for his account by his late
the relief sought.13[13] Section 5, Rule 8 of the Revised mother, Anastacia C. Reyes.
Rules of Court provides that in all averments of fraud or This amount was not collated
or taken into account in the
mistake, the circumstances constituting fraud or partition or distribution of the
mistake must be stated with particularity.14[14] These estate of their late mother,
Anastacia C. Reyes.
rules find specific application to Section 5(a) of P.D. No.
902-A which speaks of corporate devices or schemes that 3.1. Respondent
Oscar C. Reyes, through
amount to fraud or misrepresentation detrimental to the other schemes of fraud
public and/or to the stockholders. including
misrepresentation,
unilaterally, and for his
own benefit, capriciously
transferred and took
15
possession and control of
the management of Zenith
Insurance Corporation which
is considered as a family
corporation, and other
properties and businesses
belonging to Spouses Pedro
and Anastacia Reyes.
xxxx
4.1. During the
increase of capitalization of
Zenith Insurance
Corporation, sometime in
1968, the property covered
by TCT No. 225324 was
illegally and fraudulently
used by respondent as a
collateral.
xxxx
5. The complainant
Rodrigo C. Reyes discovered
that by some manipulative
scheme, the shareholdings
of their deceased mother,
Doa Anastacia C. Reyes,
shares of stocks and [sic]
valued in the corporate
books at P7,699,934.28,
more or less, excluding
interest and/or dividends,
had been transferred solely
in the name of respondent.
By such fraudulent
manipulations and
misrepresentation, the
shareholdings of said
respondent Oscar C. Reyes
abruptly increased to
P8,715,637.00 [sic] and
becomes [sic] the majority
stockholder of Zenith
Insurance Corporation,
which portion of said shares
must be distributed equally
amongst the brothers and
sisters of the respondent
Oscar C. Reyes including the
complainant herein.
xxxx
9.1 The
shareholdings of deceased
Spouses Pedro Reyes and
Anastacia C. Reyes valued
at P7,099,934.28 were
illegally and fraudulently
transferred solely to the
respondents [herein
petitioner Oscar] name and
installed himself as a
majority stockholder of
Zenith Insurance
Corporation [and] thereby
deprived his brothers and
sisters of their respective
equal shares thereof
including complainant
hereto.
xxxx
10.1 By refusal of
the respondent to account
of his [sic] shareholdings in
the company, he illegally
and fraudulently
transferred solely in his
name wherein [sic] the
shares of stock of the
deceased Anastacia C.
Reyes [which] must be
properly collated and/or
distributed equally
amongst the children,
including the complainant
Rodrigo C. Reyes herein, to
their damage and
prejudice.
xxxx
11.1 By continuous
refusal of the respondent to
account of his [sic]
shareholding with Zenith
Insurance Corporation[,]
particularly the number of
shares of stocks illegally and
fraudulently transferred to
him from their deceased
parents Sps. Pedro and
Anastacia Reyes[,] which are
all subject for collation
and/or partition in equal
16

shares among their children. Not every allegation of fraud done in a corporate
[Emphasis supplied.]
setting or perpetrated by corporate officers will bring the
case within the special commercial courts jurisdiction. To
fall within this jurisdiction, there must be sufficient nexus
showing that the corporations nature, structure, or powers
were used to facilitate the fraudulent device or scheme.
Allegations of deceit, machination, false
Contrary to this concept, the complaint presented a
pretenses, misrepresentation, and threats are largely
reverse situation. No corporate power or office was
conclusions of law that, without supporting statements of
alleged to have facilitated the transfer of the shares;
the facts to which the allegations of fraud refer, do not
rather, Oscar, as an individual and without reference to his
sufficiently state an effective cause of action.15[15] The
corporate personality, was alleged to have transferred the
late Justice Jose Feria, a noted authority in Remedial Law,
shares of Anastacia to his name, allowing him to become
declared that fraud and mistake are required to be averred
the majority and controlling stockholder of Zenith, and
with particularity in order to enable the opposing party to
eventually, the corporations President. This is the essence
controvert the particular facts allegedly constituting such
of the complaint read as a whole and is particularly
fraud or mistake.16[16]
demonstrated under the following allegations:

Tested against these standards, we find that the 5. The complainant

Rodrigo C. Reyes discovered
charges of fraud against Oscar were not properly that by some manipulative
supported by the required factual allegations. While the scheme, the shareholdings of
their deceased mother, Doa
complaint contained allegations of fraud purportedly Anastacia C. Reyes, shares of
committed by him, these allegations are not particular stocks and [sic] valued in the
corporate books at
enough to bring the controversy within the special P7,699,934.28, more or less,
commercial courts jurisdiction; they are not statements of excluding interest and/or
dividends, had been
ultimate facts, but are mere conclusions of law: how and transferred solely in the name
why the alleged appropriation of shares can be of respondent. By such
fraudulent manipulations
characterized as illegal and fraudulent were not explained and misrepresentation, the
nor elaborated on. shareholdings of said
respondent Oscar C. Reyes
abruptly increased to
P8,715,637.00 [sic] and
becomes [sic] the majority
stockholder of Zenith
Insurance Corporation,
which portion of said shares
17
must be distributed equally
amongst the brothers and
sisters of the respondent
Oscar C. Reyes including the
complainant herein.
xxxx
9.1 The
shareholdings of deceased
Spouses Pedro Reyes and
Anastacia C. Reyes valued
at P7,099,934.28 were
illegally and fraudulently
transferred solely to the
respondents [herein
petitioner Oscar] name and
installed himself as a
majority stockholder of
Zenith Insurance
Corporation [and] thereby
deprived his brothers and
sisters of their respective
equal shares thereof
including complainant
hereto. [Emphasis supplied.]
In ordinary cases, the failure to specifically allege
the fraudulent acts does not constitute a ground for
dismissal since such defect can be cured by a bill of
particulars. In cases governed by the Interim Rules of
Procedure on Intra-Corporate Controversies, however, a
bill of particulars is a prohibited pleading.17[17] It is
essential, therefore, for the complaint to show on its face
what are claimed to be the fraudulent corporate acts if the
complainant wishes to invoke the courts special
commercial jurisdiction.
We note that twice in the course of this case,
Rodrigo had been given the opportunity to study the
propriety of amending or withdrawing the complaint, but
he consistently refused. The courts function in resolving
issues of jurisdiction is limited to the review of the
allegations of the complaint and, on the basis of these
allegations, to the determination of whether they are of
such nature and subject that they fall within the terms of
the law defining the courts jurisdiction. Regretfully, we
cannot read into the complaint any specifically alleged
corporate fraud that will call for the exercise of the courts
special commercial jurisdiction. Thus, we cannot affirm
the RTCs assumption of jurisdiction over Rodrigos
complaint on the basis of Section 5(a) of P.D. No. 902-
A.18[18]
Intra-Corporate Controversy
A review of relevant jurisprudence shows a
development in the Courts approach in classifying what
constitutes an intra-corporate controversy. Initially, the
main consideration in determining whether a dispute
constitutes an intra-corporate controversy was limited to
a consideration of the intra-corporate relationship existing
between or among the parties.19[19] The types of
18

relationships embraced under Section 5(b), as declared in intra-corporate relationship that gives rise to an intra-
the case of Union Glass & Container Corp. v. SEC,20[20] corporate controversy; to rely on the relationship test
were as follows: alone will divest the regular courts of their jurisdiction for
the sole reason that the dispute involves a corporation, its
directors, officers, or stockholders. We saw that there is
a) between the corporation,
partnership, or association no legal sense in disregarding or minimizing the value of
and the public; the nature of the transactions which gives rise to the
b) between the corporation,
partnership, or association dispute.
and its stockholders,
partners, members, or
officers;
c) between the corporation,
partnership, or association Under the nature of the controversy test, the
and the State as far as its
franchise, permit or license incidents of that relationship must also be considered for
to operate is concerned; and the purpose of ascertaining whether the controversy itself
d) among the stockholders,
partners, or associates is intra-corporate.22[22] The controversy must not only
themselves. [Emphasis be rooted in the existence of an intra-corporate
supplied.]
relationship, but must as well pertain to the enforcement
of the parties correlative rights and obligations under the
Corporation Code and the internal and intra-corporate
regulatory rules of the corporation. If the relationship and
The existence of any of the above intra-corporate its incidents are merely incidental to the controversy or if
relations was sufficient to confer jurisdiction to the SEC, there will still be conflict even if the relationship does not
regardless of the subject matter of the dispute. This came exist, then no intra-corporate controversy exists.
to be known as the relationship test.

The Court then combined the two tests and

However, in the 1984 case of DMRC Enterprises declared that jurisdiction should be determined by
v. Esta del Sol Mountain Reserve, Inc.,21[21] the Court considering not only the status or relationship of the
introduced the nature of the controversy test. We parties, but also the nature of the question under
declared in this case that it is not the mere existence of an controversy.23[23] This two-tier test was adopted in the
19

recent case of Speed Distribution, Inc. v. Court of Given these standards, we now tackle the
Appeals:24[24] question posed for our determination under the specific
circumstances of this case:
To determine
whether a case involves an
intra-corporate controversy,
and is to be heard and
decided by the branches of
the RTC specifically
designated by the Court to try Application of the Relationship Test
and decide such cases, two
elements must concur: (a) the
status or relationship of the
parties; and (2) the nature of
the question that is the
subject of their controversy.
Is there an intra-corporate relationship between
The first element
the parties that would characterize the case as an intra-
requires that the controversy
must arise out of intra- corporate dispute?
corporate or partnership
relations between any or all
of the parties and the
corporation, partnership, or
association of which they are We point out at the outset that while Rodrigo
stockholders, members or
associates; between any or all holds shares of stock in Zenith, he holds them in two
of them and the corporation, capacities: in his own right with respect to the 4,250
partnership, or association of
which they are stockholders, shares registered in his name, and as one of the heirs of
members, or associates, Anastacia Reyes with respect to the 136,598 shares
respectively; and between
such corporation, registered in her name. What is material in resolving the
partnership, or association issues of this case under the allegations of the complaint
and the State insofar as it
concerns their individual is Rodrigos interest as an heir since the subject matter of
franchises. The second the present controversy centers on the shares of stocks
element requires that the
dispute among the parties be belonging to Anastacia, not on Rodrigos personally-
intrinsically connected with owned shares nor on his personality as shareholder
the regulation of the
corporation. If the nature of owning these shares. In this light, all reference to shares
the controversy involves of stocks in this case shall pertain to the shareholdings of
matters that are purely civil
in character, necessarily, the the deceased Anastacia and the parties interest therein as
case does not involve an her heirs.
intra-corporate controversy.
20

Article 777 of the Civil Code declares that the the names of the parties to
the transaction, the date of
successional rights are transmitted from the moment of
the transfer, the number of
death of the decedent. Accordingly, upon Anastacias the certificate or
certificates, and the
death, her children acquired legal title to her estate (which
number of shares
title includes her shareholdings in Zenith), and they are, transferred. [Emphasis
supplied.]
prior to the estates partition, deemed co-owners
thereof.25[25] This status as co-owners, however, does No shares of stock against
which the corporation holds
not immediately and necessarily make them stockholders
any unpaid claim shall be
of the corporation. Unless and until there is compliance transferable in the books of
the corporation.
with Section 63 of the Corporation Code on the manner
of transferring shares, the heirs do not become registered
stockholders of the corporation. Section 63 provides:

Simply stated, the transfer of title by means of

Section 63. Certificate of succession, though effective and valid between the parties
stock and transfer of shares.
The capital stock of stock involved (i.e., between the decedents estate and her heirs),
corporations shall be divided does not bind the corporation and third parties. The
into shares for which
certificates signed by the transfer must be registered in the books of the corporation
president or vice-president, to make the transferee-heir a stockholder entitled to
countersigned by the
secretary or assistant recognition as such both by the corporation and by third
secretary, and sealed with the parties.26[26]
seal of the corporation shall
be issued in accordance with
the by-laws. Shares of stock
so issued are personal
property and may be We note, in relation with the above statement,
transferred by delivery of the
certificate or certificates that in Abejo v. Dela Cruz27[27] and TCL Sales
indorsed by the owner or his Corporation v. Court of Appeals28[28] we did not require
attorney-in-fact or other
person legally authorized to the registration of the transfer before considering the
make the transfer. No transferee a stockholder of the corporation (in effect
transfer, however, shall be
valid, except as between the upholding the existence of an intra-corporate relation
parties, until the transfer is between the parties and bringing the case within the
recorded in the books of the
corporation so as to show jurisdiction of the SEC as an intra-corporate controversy).
21
A marked difference, however, exists between these cases
and the present one.
In Abejo and TCL Sales, the transferees held
definite and uncontested titles to a specific number of
shares of the corporation; after the transferee had
established prima facie ownership over the shares of
stocks in question, registration became a mere formality
in confirming their status as stockholders. In the present
case, each of Anastacias heirs holds only an undivided
interest in the shares. This interest, at this point, is still
inchoate and subject to the outcome of a settlement
proceeding; the right of the heirs to specific, distributive
shares of inheritance will not be determined until all the
debts of the estate of the decedent are paid. In short, the
heirs are only entitled to what remains after payment of
the decedents debts;29[29] whether there will be residue
remains to be seen. Justice Jurado aptly puts it as follows:
No succession shall
be declared unless and until a
liquidation of the assets and
debts left by the decedent
shall have been made and all
his creditors are fully paid.
Until a final liquidation is
made and all the debts are
paid, the right of the heirs to
inherit remains inchoate.
This is so because under our
rules of procedure,
liquidation is necessary in
order to determine whether
or not the decedent has left
any liquid assets which may
be transmitted to his
heirs.30[30] [Emphasis
supplied.]
Rodrigo must, therefore, hurdle two obstacles
before he can be considered a stockholder of Zenith with
respect to the shareholdings originally belonging to
Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and
this can be determined only in a settlement of the
decedents estate. No such proceeding has been
commenced to date. Second, he must register the transfer
of the shares allotted to him to make it binding against the
corporation. He cannot demand that this be done unless
and until he has established his specific allotment (and
prima facie ownership) of the shares. Without the
settlement of Anastacias estate, there can be no definite
partition and distribution of the estate to the heirs.
Without the partition and distribution, there can be no
registration of the transfer. And without the registration,
we cannot consider the transferee-heir a stockholder who
may invoke the existence of an intra-corporate
relationship as premise for an intra-corporate controversy
within the jurisdiction of a special commercial court.
In sum, we find that insofar as the subject shares
of stock (i.e., Anastacias shares) are concerned Rodrigo
cannot be considered a stockholder of Zenith.
Consequently, we cannot declare that an intra-corporate
relationship exists that would serve as basis to bring this
case within the special commercial courts jurisdiction
under Section 5(b) of PD 902-A, as amended. Rodrigos
complaint, therefore, fails the relationship test.
22

when Rodrigo claimed in paragraph 10.1 of the complaint

that:

10.1 By refusal of
the respondent to account of
Application of the Nature of Controversy Test [sic] his shareholdings in the
company, he illegally and
fraudulently transferred
solely in his name wherein
[sic] the shares of stock of
the deceased Anastacia C.
Reyes [which] must be
The body rather than the title of the complaint properly collated and/or
determines the nature of an action.31[31] Our distributed equally amongst
the children including the
examination of the complaint yields the conclusion that, complainant Rodrigo C.
more than anything else, the complaint is about the Reyes herein to their damage
and prejudice.
protection and enforcement of successional rights. The
controversy it presents is purely civil rather than
corporate, although it is denominated as a complaint for
We particularly note that the complaint contained no
accounting of all corporate funds and assets.
sufficient allegation that justified the need for an
accounting other than to determine the extent of
Anastacias shareholdings for purposes of distribution.
Contrary to the findings of both the trial and
appellate courts, we read only one cause of action alleged
in the complaint. The derivative suit for accounting of the
Another significant indicator that points us to the
funds and assets of the corporation which are in the
control, custody, and/or possession of the respondent real nature of the complaint are Rodrigos repeated claims

[herein petitioner Oscar] does not constitute a separate of illegal and fraudulent transfers of Anastacias shares by

cause of action but is, as correctly claimed by Oscar, only Oscar to the prejudice of the other heirs of the decedent;

an incident to the action for determination of the shares of he cited these allegedly fraudulent acts as basis for his

stock of deceased spouses Pedro and Anastacia Reyes demand for the collation and distribution of Anastacias

allegedly taken by respondent, its accounting and the shares to the heirs. These claims tell us unequivocally that

corresponding delivery of these shares to the parties the present controversy arose from the parties relationship

brothers and sisters. There can be no mistake of the as heirs of Anastacia and not as shareholders of Zenith.

relationship between the accounting mentioned in the Rodrigo, in filing the complaint, is enforcing his rights as

complaint and the objective of partition and distribution a co-heir and not as a stockholder of Zenith. The injury he
seeks to remedy is one suffered by an heir (for the
23

impairment of his successional rights) and not by the Matters which involve
settlement and distribution
corporation nor by Rodrigo as a shareholder on record.
of the estate of the decedent
fall within the exclusive
province of the probate
court in the exercise of its
limited jurisdiction.
More than the matters of injury and redress, what
Rodrigo clearly aims to accomplish through his xxxx
allegations of illegal acquisition by Oscar is the It is clear that trial courts
distribution of Anastacias shareholdings without a prior trying an ordinary action
cannot resolve to perform
settlement of her estate an objective that, by law and acts pertaining to a special
established jurisprudence, cannot be done. The RTC of proceeding because it is
subject to specific prescribed
Makati, acting as a special commercial court, has no rules. [Emphasis supplied.]
jurisdiction to settle, partition, and distribute the estate of
a deceased. A relevant provision Section 2 of Rule 90 of
the Revised Rules of Court that contemplates properties
of the decedent held by one of the heirs declares: That an accounting of the funds and assets of
Zenith to determine the extent and value of Anastacias
Questions as to
shareholdings will be undertaken by a probate court and
advancement made or
alleged to have been made by not by a special commercial court is completely consistent
the deceased to any heir may
with the probate courts limited jurisdiction. It has the
be heard and determined
by the court having power to enforce an accounting as a necessary means to
jurisdiction of the estate
its authority to determine the properties included in the
proceedings; and the final
order of the court thereon inventory of the estate to be administered, divided up, and
shall be binding on the
distributed. Beyond this, the determination of title or
person raising the questions
and on the heir. [Emphasis ownership over the subject shares (whether belonging to
supplied.]
Anastacia or Oscar) may be conclusively settled by the
probate court as a question of collation or advancement.
We had occasion to recognize the courts authority to act
on questions of title or ownership in a collation or
Worth noting are this Courts statements in the case of advancement situation in Coca v. Pangilinan33[33]
Natcher v. Court of Appeals:32[32]
where we ruled:

It should be clarified that

whether a particular matter should be
resolved by the Court of First Instance in
24

the exercise of its general jurisdiction or DERIVATIVE SUIT

of its limited probate jurisdiction is in
reality not a jurisdictional question. In
essence, it is a procedural question
involving a mode of practice "which may
be waived." Rodrigos bare claim that the complaint is a
derivative suit will not suffice to confer jurisdiction on the
As a general rule, the question as
to title to property should not be passed RTC (as a special commercial court) if he cannot comply
upon in the testate or intestate with the requisites for the existence of a derivative suit.
proceeding. That question should be
ventilated in a separate action. That These requisites are:
general rule has qualifications or
exceptions justified by expediency and a. the party bringing suit
convenience. should be a shareholder
during the time of the act or
Thus, the probate court may transaction complained of,
provisionally pass upon in an intestate or the number of shares not
testate proceeding the question of being material;
inclusion in, or exclusion from, the b. the party has tried to
inventory of a piece of property without exhaust intra-corporate
prejudice to its final determination in a remedies, i.e., has made a
separate action. demand on the board of
directors for the appropriate
Although generally, a probate relief, but the latter has failed
court may not decide a question of title or refused to heed his plea;
or ownership, yet if the interested and
parties are all heirs, or the question is c. the cause of action actually
one of collation or advancement, or the devolves on the corporation;
parties consent to the assumption of the wrongdoing or harm
jurisdiction by the probate court and the having been or being caused
rights of third parties are not impaired, to the corporation and not to
the probate court is competent to the particular stockholder
decide the question of ownership. bringing the suit.34[34]
[Citations omitted. Emphasis supplied.]

Based on these standards, we hold that the

In sum, we hold that the nature of the present
allegations of the present complaint do not amount to a
controversy is not one which may be classified as an intra-
derivative suit.
corporate dispute and is beyond the jurisdiction of the
special commercial court to resolve. In short, Rodrigos
complaint also fails the nature of the controversy test.
First, as already discussed above, Rodrigo is not
a shareholder with respect to the shareholdings originally
belonging to Anastacia; he only stands as a transferee-heir
25

whose rights to the share are inchoate and unrecorded. alleged any particular cause or wrongdoing against the
With respect to his own individually-held shareholdings, corporation that he can champion in his capacity as a
Rodrigo has not alleged any individual cause or basis as a shareholder on record.36[36]
shareholder on record to proceed against Oscar.

In summary, whether as an individual or as a

Second, in order that a stockholder may show a
right to sue on behalf of the corporation, he must allege
with some particularity in his complaint that he has
exhausted his remedies within the corporation by making
a sufficient demand upon the directors or other officers
for appropriate relief with the expressed intent to sue if
relief is denied.35[35] Paragraph 8 of the complaint
hardly satisfies this requirement since what the rule
contemplates is the exhaustion of remedies within the
corporate setting:
derivative suit, the RTC sitting as special commercial
court has no jurisdiction to hear Rodrigos complaint since
what is involved is the determination and distribution of
successional rights to the shareholdings of Anastacia
Reyes. Rodrigos proper remedy, under the circumstances,
is to institute a special proceeding for the settlement of the
estate of the deceased Anastacia Reyes, a move that is not
foreclosed by the dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition

8. As members of the and REVERSE the decision of the Court of Appeals
same family, complainant
Rodrigo C. Reyes has dated May 26, 2004 in CA-G.R. SP No. 74970. The
resorted [to] and exhausted complaint before the Regional Trial Court, Branch 142,
all legal means of resolving
the dispute with the end view Makati, docketed as Civil Case No. 00-1553, is ordered
of amicably settling the case, DISMISSED for lack of jurisdiction.
but the dispute between them
ensued.

Lastly, we find no injury, actual or threatened,

alleged to have been done to the corporation due to Oscars
acts. If indeed he illegally and fraudulently transferred
Anastacias shares in his own name, then the damage is not
to the corporation but to his co-heirs; the wrongful
transfer did not affect the capital stock or the assets of
Zenith. As already mentioned, neither has Rodrigo
26

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by

EDUARDO DE LOS ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III,
BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR.,
EDUARDO SORIANO, RALPH KAHN and
RAMON DEL ROSARIO, JR., respondents.

Romulo, Mabanta, Buenaventura, Sayoc & De Los

Angeles petitioner.

Roco & Bunag Law Offices for respondent Ernest

Kahn.

Siguion Reyna, Montecillo and Ongsiako for other

respondents.

NARVASA, J.:

On December 15, 1983, 33,133,266 shares of the

outstanding capital stock of the San Miguel
Corporation were acquired 1 by fourteen (14) other
corporations, 2 and were placed under a Voting
Trust Agreement in favor of the late Andres
Soriano, Jr. When the latter died, Eduardo M.
Cojuangco, Jr. was elected Substitute Trustee on
April 9, 1984 with power to delegate the trusteeship
in writing to Andres Soriano III. 3 Shortly after the
Revolution of February, 1986, Cojuangco left the
country amid "persistent reports" that "huge and
27
unusual cash disbursements from the funds of
SMC" had been irregularly made, and the
resources of the firm extensively used in support of
the candidacy of Ferdinand Marcos during the snap
elections in February, 1986 .4
On March 26, 1986, an "Agreement" was executed
between Andres Soriano III, as "Buyer," and the 14
corporations, as "Sellers," for the purchase by
Soriano, "for himself and as agent of several
persons," of the 33,133,266 shares of stock at the
price of P100.00 per share, or "an aggregate sum
of Three Billion Three Hundred Thirteen Million
Three Hundred Twenty Six Thousand Six Hundred
(P3,313,326,600.00) Pesos payable in specified
installments. 5 The Agreement revoked the voting
trust above mentioned, and expressed the desire of
the 14 corporations to sell the shares of stock "to
pay certain outstanding and unpaid debts," and
Soriano's own wish to purchase the same "in order
to institutionalize and stabilize the management of
the COMPANY in .. (himself) and the professional
officer corps, mandated by the COMPANY's By-
laws, and to direct the COMPANY towards giving
the highest priority to its principal products and
extensive support to agriculture programme of' the
Government ... 6 Actually, according to Soriano and
the other private respondents, the buyer of the
shares was a foreign company, Neptunia
Corporation Limited (of Hongkong, a wholly owned
subsidiary of San Miguel International which is, in
turn, a wholly owned subsidiary of San Miguel
Corporation; 7 and it was Neptunia which on or
about April 1, 1986 had made the down payment of
P500,000,000.00, "from the proceeds of certain
loans". 8
At this point the 33,133,266 SMC shares were
sequestered by the Presidential Commission on
Good Government (PCGG), on the ground that the
stock belonged to Eduardo Cojuangco, Jr.,
allegedly a close associate and dummy of former
President Marcos, and the sale thereof was "in
direct contravention of .. Executive Orders
Numbered 1 and 2 (.. dated February 28, 1986 and
March 12, 1986, respectively) which prohibit .. the
transfer, conveyance, encumbrance, concealment
or liquidation of assets and properties acquired by
former President Ferdinand Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates. 9 The
sequestration was subsequently lifted, and the sale
allowed to proceed, on representations by San
Miguel Corporation x x that the shares were 'owned
by 1.3 million coconut farmers;' the seller
corporations were 'fully owned' by said farmers and
Cojuangco owned only 2 shares in one of the
companies, etc. However, the sequestration was
soon re-imposed by Order of the PCGG dated May
19, 1986 .. The same order forbade the SMC
corporate Secretary to register any transfer or
encumbrance of any of the stock without the
PCGG's prior written authority. 10
San Miguel promptly suspended payment of the
other installments of the price to the fourteen (14)
seller corporations. The latter as promptly sued for
rescission and damages.11
On June 4,1986, the PCGG directed San Miguel
Corporation"to issue qualifying shares" in the
corporation to seven (7) individuals, including
Eduardo de los Angeles, "from the sequestered
shares registered as street certificates under the
control of Anscor- Hagedorn Securities, Inc.," to "be
held in trust by .. (said seven [7] persons) for the
benefit of Anscor-Hagedom Securities, Inc. and/or
whoever shall finally be determined to be the
owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution
No. 86-122, "decided to assume the loans incurred
by Neptunia for the down payment ((P500M)) on
the 33,133,266 shares." The Board opined that
there was "nothing illegal in this assumption (of
liability for the loans)," since Neptunia was "an
indirectly wholly owned subsidiary of SMC," there
"was no additional expense or exposure for the
SMC Group, and there were tax and other benefits
which would redound to the SMC group of
companies. 13
However, at the meeting of the SMC Board on
January 30, 1987, Eduardo de los Angeles, one of
the PCGG representatives in the SMC board,
impugned said Resolution No. 86-12-2, denying
that it was ever adopted, and stating that what in
truth was agreed upon at the meeting of December
4, 1986 was merely a "further study" by Director
Ramon del Rosario of a plan presented by him for
the assumption of the loan. De los Angeles also
pointed out certain "deleterious effects" thereof. He
was however overruled by private respondents. 14
When his efforts to obtain relief within the
corporation and later the PCGG proved futile, he
repaired to the Securities and Exchange
Commission (SEC).lwph1.t
28
He filed with the SEC in April, 1987, what he
describes as a derivative suit in behalf of San
Miguel Corporation, against ten (10) of the fifteen-
member Board of Directors who had "either voted
to approve and/or refused to reconsider and revoke
Board Resolution No. 86-12-2." 15 His Amended
Petition in the SEC recited substantially the
foregoing antecedents and the following additional
facts, to wit:
a) On April 1, 1986 Soriano, Kahn
and Roxas, as directors of' Neptunia
Corporation, Ltd., had met and
passed a resolution authorizing the
company to borrow up to US
$26,500,000.00 from the Hongkong
& Shanghai Banking Corporation,
Hongkong "to enable the Soriano
family to initiate steps and sign an
agreement for the purchase of some
33,133,266 shares of San ,Miguel
Corporation. 16
b) The loan of $26,500,000.00 was
obtained on the same day, the
corresponding loan agreement
having been signed for Neptunia by
Ralph Kahn and Carl Ottiger. At the
latter's request, the proceeds of the
loan were deposited in different
banks 17 for the account of
"Eduardo J. Soriano".
c) Three (3) days later, on April 4,
1986, Soriano III sent identical
letters to the stockholders of San
Miguel Corporation, 18 inter alia
soliciting their proxies and
announcing that "the Soriano family,
friends and affiliates acquired a
considerable block of San Miguel
Corporation shares only a few days
ago .., the transaction .. (having
been) made through the facilities of
the Manila Stock Exchange, and
33,133,266 shares .. (having thereby
been) purchased for the aggregate
price of' P3,313,326,600.00." The
letters also stated that the purchase
was "an exercise of the Sorianos'
right to buy back the same number
of shares purchased in 1983 by the
.. (14 seller corporations)."
d) In implementing the assumption
of the Neptunia loan and the
purchase agreement for which said
loan was obtained, which
assumption constituted an improper
use of corporate funds to pay
personal obligations of Andres
Soriano III, enabling him; to
purchase stock of the corporation
using funds of' the corporation itself,
the respondents, through various
subsequent machinations and
manipulations, for interior motives
and in breach of fiduciary duty,
compound the damages caused San
Miguel Corporation by, among other
things: (1) agreeing to pay a higher
price for the shares than was
originally covenanted in order to
prevent a rescission of the purchase
agreement by the sellers; (2) urging
UCPB to accept San Miguel
Corporation and Neptunia as buyers
of the shares, thereby committing
the former to the purchase of its own
shares for at least 25% higher than
the price at which they were fairly
traded in the stock exchanges, and
shifting to said corporations the
personal obligations of Soriano III
under the purchase agreement; and
(3) causing to be applied to the part
payment of P1,800,000.00 on said
purchase, various assets and
receivables of San Miguel
Corporation.
The complaint closed with a prayer for injunction
against the execution or consummation of any
agreement causing San Miguel Corporation to
purchase the shares in question or entailing the use
of its corporate funds or assets for said purchase,
and against Andres Soriano III from further using or
disposing of the funds or assets of the corporation
for his obligations; for the nullification of the SMC
Board's resolution of April 2, 1987 making San
Miguel Corporation a party to the purchase
agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles'
derivative suit on two grounds, to wit:
1 De los Angeles has no legal
capacity to sue because
29

a) hands;
having and
been
merely 2. The Securities & Exchange
impose Commission has no jurisdiction over
d by the controversy because the matters
the involved are exclusively within the
PCGG business judgment of the Board of
as a Directors. 19
directo
r on Kahn's motion to dismiss was subsequently
San adopted by his correspondents .20
Miguel,
he has The motion to dismiss was denied by SEC Healing
no Officer Josefina L. Pasay Paz, by order dated
standin September 4, 1987. 21 In her view
g to
bring a 1) the fact that de los Angeles was a
minorit PCGG nominee was irrelevant
y because in law, ownership of even
derivati one share only, sufficed to qualify a
ve suit; person to bring a derivative suit;
b) he 2) it is indisputable that the action
person had been brought by de los Angeles
ally for the benefit of the corporation and
holds all the other stockholders;
only 20
shares
3) he was a stockholder at the time
and
of the commission of the acts
hence
complained of, the number of shares
cannot
owned by him being to repeat,
fairly
immaterial;
and
adequ
ately 4) there is no merit in the assertion
repres that he had come to Court with
ent the unclean hands, it not having been
minorit shown that he participated in the act
y complained of or ratified the same;
stockh and
olders
of the 5) where business judgment
corpor transgresses the law, the securities
ation; and Exchange Commission always
has competence to inquire thereinto.
c) he
has Kahn filed a petition for certiorari and prohibition
not with the Court of Appeals, seeking the annulment of
come this adverse resolution of the SEC Hearing Officer
to and her perpetual inhibition from proceeding with
court SEC Case No. 3152.
with
clean
30
A Special Division of that Court sustained him,
upon a vote of three-to-two. The majority 22 ruled
that de los Angeles had no egal capacity to institute
the derivative suit, a conclusion founded on the
following propositions:
1) a party "who files a derivative suit
should adequately represent the
interests of the minority
stockholders;" since "De los Angeles
holds 20 shares of stock out of
121,645,860 or 0.00001644%
(appearing to be undisputed), (he)
cannot even be remotely said to
adequately represent the interests of
the minority stockholders,
(e)specially so when .. de los
Angeles was put by the PCGG to
vote the majority stock," a situation
generating "a genuine conflict of
interest;"
2) de los Angeles has not met this
conflict-of-interest argument, i.e.,
that his position as PCGG-
nominated director is inconsistent
with his assumed role of
representative of minority
stockholders; not having been
elected by the minority, his voting
would expectedly consider the
interest of the entity which placed
him in the board of directors;
3) Baseco v. PCGG, May 27,1987,
23 has laid down the principle that
the (a) PCGG cannot exercise acts
of dominion over sequestered
property, (b) it has only powers of
administration, and (c) its voting of
sequestered stock must be done
only pursuant to its power of
administration; and
4) de los Angeles' suit is not a
derivative suit, a derivative suit being
one brought for the benefit of the
corporation.
The dissenting Justices, 24 on the other hand, were
of the opinion that the suit had been properly
brought by de los Angeles because
1) the number of shares owned by
him was immaterial, he being a
stockholder in his own right;
2) he had not voted in favor of the
resolution authorizing the purchase
of the shares; and
3) even if PCGG was not the owner
of the sequestered shares, it had the
right to seek the protection of the
interest of the corporation, it having
been held that even an unregistered
shareholder or an equitable owner of
shares and pledgees of shares may
be deemed a shareholder for
purposes of instituting a derivative
suit.
De los Angeles has appealed to this Court. He
prays for reversal of the judgment of the Court of
Appeals, imputing to the latter the following errors:
1) having granted the writ of
certiorari despite the fact that Kahn
had not first resorted to the plain
remedy available to him, i.e., appeal
to the SEC en banc and despite the
fact that no question of jurisdiction
was involved;
2) having ruled on Kahn's petition on
the basis merely of his factual
allegations, although he (de los
Angeles) had disputed them and
there had been no trial in the SEC;
and
3) having held that he (de los
Angeles) could not file a derivative
suit as stockholder and/or director of
the San Miguel Corporation.
For their part, and in this Court, the respondents
make the following assertions:
1) SEC has no jurisdiction over the
dispute at bar which involves the
ownership of the 33,133,266 shares
of SMC stock, in light of this Court's
Resolution in G.R. Nos. 74910,
5075, 75094, 76397, 79459 and
31
79520, promulgated on August 10,
1988; 25
2) de los Angeles was beholden to
the controlling stockholder in the
corporation (PCGG), which had
"imposed" him on the corporation;
since the PCGG had a clear conflict
of interest with the minority, de los
Angeles, as director of the former,
had no legal capacity to sue on
behalf of the latter;
3) even assuming absence of
conflict of interest, de los Angeles
does not fairly and adequately
represent the interest of the minority
stockholders;
4) the respondents had properly
applied for certiorari with the Court
of Appeals because
a) that Court had, by law, exclusive
appellate jurisdiction over officers
and agencies exercising quasi-
judicial functions, and hence file
competence to issue the writ of
certiorari;
b) the principle of exhaustion of
administrative remedies does not
apply since the issue involved is one
of law;
c) said respondents had no plain,
speedy and adequate remedy within
SEC;
d) the Order of the SEC
Investigating Officer denying the
motion to dismiss was issued
without or in excess of jurisdiction,
hence was correctly nullified by the
Court of Appeals; and
e) de los Angeles had not raised the
issue of absence of a motion for
reconsideration by respondents in
the SEC case; in any event, such a
motion was unnecessary in the
premises.
De los Angeles' Reply seeks to make the following
points:
1) since the law lays down three (3)
requisites for a derivative suit, viz:
a) the party bringing
suit should be a
shareholder as of the
time of the act or
transaction
complained of,
b) he has exhausted
intra-corporate
remedies, i.e., has
made a demand on
the board of directors
for the appropriate
relief but the latter
has failed or refused
to heed his plea; and
c) c)the cause of
action actually
devolves on the
corporation, the
,wrongdoing or harm
having been caused
to the corporation and
not to .the particular
stockholder bringing
the suit;
and since (1) he is admittedly the owner of 20
shares of SMC stock in his own right, having
acquired those shares as early as 1977, (2) he had
sought without success to have the board of'
directors remedy with wrong, and (3) that wrong
was in truth a 'wrong against the stockholders of
the corporation, generally, ,and not against him
individually and it was the corporation, and not
he, particularly, that would be entitled to the
appropriate' relief the propriety of his suit cannot
be gainsaid;
2) Kahn had not limited himself to
questions of law in the proceedings
in the Court of Appeals and hence
could not claim exclusion from the
scope of the doctrine of exhaustion
of remedies; moreover, Rule 65,
invoked by him, bars a resort to
certiorari. where a plain, speedy and
32
accurate remedy was available to
him in this case, to wit, a motion for
reconsideration before the Sec en
banc and, contrary to the
respondent's claim, De Los Angeles
had in fact asserted to this
propositions before the Appellate
Tribunal; and
3) the respondent had not raised the
issue of jurisdiction before the Court
of Appeals; indeed, they admit to
their Comment that that
issue has not yet been resolved by
the SEC," be this as it may, the
derivative suit does not fall within the
BASECO doctrine since it does not
involve any question of ownership of
the 33,133,266 sequestered SMC
shares but rather, the validity of the
resolution of the board of directors
for the assumption by the
corporation, for the benefit of certain
of its officers and stockholders, of
liability for loans contracted by
another corporation, which is an
intra-corporate dispute within the
exclusive jurisdiction of the SEC.
1. De los Angeles is not opposed to
the asserted position of the PCGG
that the sequestered SMC shares of
stock belong to Ferdinand Marcos
and/or his dummies and/or cronies.
His consent to sit in the board as
nominee of PCGG unquestionably
indicates his advocacy of the PCGG
position. He does not here seek, and
his complaint in the SEC does not
pray for, the annulment of the
purchase by SMC of the stock in
question, or even the subsequent
purchase of the same stock by
others 26 which proposition was
challenged by (1) one Evio, in SEC
Case No. 3000; (2) by the 14
corporations which sold the stock to
SMC, in Civil Case No. 13865 of the
Manila RTC, said cases having later
become subject of G.R. No. 74910
of this Court; (3) by Neptunia, SMC,
and others, in G.R. No. 79520 of this
Court; and (4) by Eduardo
Cojuangco and others in Civil Case
No. 16371 of the RTC, Makati, [on
the theory that the sequestered
stock in fact belonged to coconut
planters and oil millers], said case
later having become subject of G.R.
No. 79459 of this court .27 Neither
does de los Angeles impugn,
obviously, the right of the PCGG to
vote the sequestered stock thru its
nominee directors as was done
by United Coconut Planters Bank
and the 14 seller corporations (in
SEC Case No. 3005, later
consolidated with SEC Case No.
3000 above mentioned, these two
(2) cases later having become
subject of G.R.No. 76397) as well as
by one Clifton Ganay, a UCPB
stockholder (in G.R. No. 75094 of
this Court).lwph1.t 28
The subject matter of his complaint in the SEC
does not therefore fall within the ambit of this
Court's Resolution of August 10, 1988 on the cases
just mentioned, to the effect that, citing PCGG v.
Pena, et al 29 an cases of the Commission
regarding 'the funds, moneys, assets, and
properties illegally acquired or misappropriated by
former President Ferdinand Marcos, Mrs. Imelda
Romualdez Marcos, their close relatives,
Subordinates, Business Associates, Dummies,
Agents, or Nominees, whether civil or criminal, are
lodged within the exclusive and original jurisdiction
of the Sandiganbayan,' and all incidents arising
from, incidental to, or related to, such cases
necessarily fall likewise under the Sandiganbayan's
exclusive and original jurisdiction, subject to review
on certiorari exclusively by the Supreme Court." His
complaint does not involve any property illegally
acquired or misappropriated by Marcos, et al., or
"any incidents arising from, incidental to, or related
to" any case involving such property, but assets
indisputably belonging to San Miguel Corporation
which were, in his (de los Angeles') view, being
illicitly committed by a majority of its board of
directors to answer for loans assumed by a sister
corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the
issue of the validity of the assumption by the
corporation of the indebtedness of Neptunia Co.,
Ltd., allegedly for the benefit of certain of its officers
and stockholders, an issue evidently distinct from,
33
and not even remotely requiring inquiry into the
matter of whether or not the 33,133,266 SMC
shares sequestered by the PCGG belong to
Marcos and his cronies or dummies (on which-
issue, as already pointed out, de los Angeles, in
common with the PCGG, had in fact espoused the
affirmative). De los Angeles' dispute, as
stockholder and director of SMC, with other SMC
directors, an intra-corporate one, to be sure, is of
no concern to the Sandiganbayan, having no
relevance whatever to the ownership- of the
sequestered stock. The contention, therefore, that
in view of this Court's ruling as regards the
sequestered SMC stock above adverted to, the
SEC has no jurisdiction over the de los Angeles
complaint, cannot be sustained and must be
rejected. The dispute concerns acts of the board of
directors claimed to amount to fraud and
misrepresentation which may be detrimental to the
interest of the stockholders, or is one arising out of
intra-corporate relations between and among
stockholders, or between any or all of them and the
corporation of which they are stockholders .30
2. The theory that de los Angeles
has no personality to bring suit in
behalf of the corporation because
his stockholding is minuscule, and
there is a "conflict of interest"
between him and the PCGG
cannot be sustained, either.
It is claimed that since de los Angeles 20 shares
(owned by him since 1977) represent only.
00001644% of the total number of outstanding
shares (1 21,645,860), he cannot be deemed to
fairly and adequately represent the interests of the
minority stockholders. The implicit argument that
a stockholder, to be considered as qualified to bring
a derivative suit, must hold a substantial or
significant block of stock finds no support
whatever in the law. The requisites for a derivative
suit 31 are as follows:
a) the party bringing suit should be a
shareholder as of the time of the act
or transaction complained of, the
number of his shares not being
material; 32
b) he has tried to exhaust intra-
corporate remedies, i.e., has made a
demand on the board of directors for
the appropriate relief but the latter
has failed or refused to heed his
plea; 33 and
c) the cause of action actually
devolves on the corporation, the
wrongdoing or harm having been, or
being caused to the corporation and
not to the particular stockholder
bringing the suit. 34
The bona fide ownership by a stockholder of stock
in his own right suffices to invest him with standing
to bring a derivative action for the benefit of the
corporation. The number of his shares is immaterial
since he is not suing in his own behalf, or for the
protection or vindication of his own particular right,
or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the
corporation.
3. Neither can the "conflict-of-
interest" theory be upheld. From the
conceded premise that de los
Angeles now sits in the SMC Board
of Directors by the grace of the
PCGG, it does not follow that he is
legally obliged to vote as the PCGG
would have him do, that he cannot
legitimately take a position
inconsistent with that of the PCGG,
or that, not having been elected by
the minority stockholders, his vote
would necessarily never consider
the latter's interests. The proposition
is not only logically indefensible, non
sequitur, but also constitutes an
erroneous conception of a director's
role and function, it being plainly a
director's duty to vote according to
his own independent judgment and
his own conscience as to what is in
the best interests of the company.
Moreover, it is undisputed that apart
from the qualifying shares given to
him by the PCGG, he owns 20
shares in his own right, as regards
which he cannot from any aspect be
deemed to be "beholden" to the
PCGG, his ownership of these
shares being precisely what he
invokes as the source of his
authority to bring the derivative suit.
34
4. It is also theorized, on the
authority of the BASECO decision,
that the PCGG has no power to vote
sequestered shares of stock as an
act of dominion but only in
pursuance to its power of
administration. The inference is that
the PCGG's act of voting the stock
to elect de los Angeles to the SMC
Board of Directors was unauthorized
and void; hence, the latter could not
bring suit in the corporation's behalf.
The argument is strained and
obviously of no merit. As already
more than plainly indicated, it was
not necessary for de los Angeles to
be a director in order to bring a
derivative action; all he had to be
was a stockholder, and that he was
owning in his own right 20 shares of
stock, a fact not disputed by the
respondents.
Nor is there anything in the Baseco decision which
can be interpreted as ruling that sequestered stock
may not under any circumstances be voted by the
PCGG to elect a director in the company in which
such stock is held. On the contrary, that it held such
act permissible is evident from the context of its
reference to the Presidential Memorandum of June
26, 1986 authorizing the PCGG, "pending the
outcome of proceedings to determine the
ownership of .. sequestered shares of stock,"'to
vote such shares .. at all stockholders' meetings
called for the election of directors ..," the only
caveat being that the stock is not to be voted simply
because the power to do so exists, whether it be to
oust and replace directors or to effect substantial
changes in corporate policy, programs or practice,
but only "for demonstrably weighty and defensible
grounds" or "when essential to prevent
disappearance or wastage of corporate property."
The issues raised here do not peremptorily call for
a determination of whether or not in voting
petitioner de los Angeles to the San Miguel Board,
the PCGG kept within the parameters announced in
Baseco; and absent any showing to the contrary,
consistently with the presumption that official duty
is regularly performed, it must be assumed to have
done so.
WHEREFORE, the petition is GRANTED. The
appealed decision of the Court of Appeals in CA-
G.R. SP No. 12857 setting aside the order of
September 4, 1987 issued in SEC Case No. 3153
and dismissing said case is REVERSED AND
SET ASIDE. The further disposition in the appealed
decision for the issuance of a writ of preliminary
injunction upon the filing and approval of a bond of
P500,000.00 by respondent Ernest Kahn (petitioner
in the Appellate Court) is also SET ASIDE, and any
writ of injunction issued pursuant thereto is lifted.
Costs against private respondents.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 78508 March 21, 1994
PHILIPPINE NATIONAL BANK, petitioner,
vs.
FILEMON REMIGIO and the HON. COURT OF
APPEALS, respondents.
The Chief Legal Counsel, PNB for petitioner.
Alfredo S. Remigio for private respondent.
VITUG, J.:
Questioned in this appeal instituted by petitioner
Philippine National Bank is the decision, dated 05
May 1987, of the appellate court, which has
reversed the decision of the then Court of First
Instance ("CFI" and now Regional Trial Court) of
Isabela, Branch 5, Echague, by ruling in favor of
private respondent Filemon Remigio.
The facts, by and large, are undisputed. In
chronology, the events leading to this appeal may
be recited, thus:
(1) On 25 August 1967, private respondent
obtained from petitioner a P65,000.00 loan secured
by a real estate mortgage covering five (5) parcels
of land in Isabela described in and embraced by
Transfer Certificates of Title ("TCT") No. T-11326,
35
T-681, T-100, and T-27 and Original Certificate of
Title No. I-1673.
(2) Private respondent defaulted; hence on 17
November 1970, petitioner bank extrajudicially
foreclosed on the mortgage, and it acquired the
encumbered assets for the sum of P87,082.00. The
sheriff's sale was registered with the Office of the
Register of Deeds of Isabela only on 11 October
1972.
(3) In its letter-offer of 15 February 1971, petitioner
bank invited private respondent to repurchase the
foreclosed property for P87,082.00 plus interest
and other charges. Before that, or on 18 November
1970 (or one day after the foreclosure sale), private
respondent already had paid an initial P10,000.00
to redeem the property. Subsequently, additional
payments were made by private respondent, i.e.,
P10,000.00 on 26 April 1971 and another
P20,000.00 on 17 May 1971.
(4) On 21 October 1972, Presidential Decree
("P.D.") No. 27 was enacted into law that mandated
an agrarian reform. Pursuant thereto, an "Operation
Land Transfer Program" was launched; among the
areas it covered were the parcels of land under
TCT No. T-100, T-11326 and T-681.
(5) On 17 April 1974, private respondent offered to
buy the foreclosed property for P284,000.00 which
was the market and appraised value thereof fixed
by petitioner bank. On 24 December 1974, the
Deed of Promise to Sell was executed between
petitioner bank and private respondent.
(6) In a letter, dated 25 August 1978, sent to and
received by petitioner bank on even date, private
respondent, through counsel, inquired why he was
still being made to buy the property for
P284,000.00 when, in truth, he had already paid
P40,000.00 of the P87,082.00 previously offered by
petitioner for the redemption of the property. There
was no reply or response from petitioner. As of 02
November 1977, private respondent had paid
petitioner the total sum of P207,243.85, itemized,
as follows:
1. 18 November 1970 P10,000.00
609324-E
2. 26 April 1971 10,000.00
614980-E
3. 14 May 1971 20,000.00
615701-E
4. 17 April 1974 5,000.00
898926-F
5. 23 May 1974 16,000.00
902110-F
6. 27 May 1974 15,000.00
902305-F
7. 14 June 1974 10,000.00
903771-F
8. 20 December 1974 14,000.00
40135-H
9. 17 December 1976 40,030.75
165395-I
10. 7 January 1977 22,213.10
166579-I
11. 2 November 1977 45,000.00
32641
(7) Private respondent, on 20 September 1978,
instituted an action for "Annulment of Foreclosure
Deed, Breach of Contract, Sum of Money and
Damages" at the CFI, Echague, Isabela, against
petitioner bank and its Branch Manager Leuterio
Genato.
(8) On 19 March 1980, while the case was yet
pending with the trial court, petitioner bank
additionally received from the Land Bank of the
Philippines P26,348.12 in cash and P160,000.00
worth of Land Bank Bonds in payment of the
foreclosed parcels covered by TCT No. T-100, T-
11326, and T-681.
On 05 December 1981, after trial, the court a quo
rendered judgment in favor of petitioner bank, the
dispositive portion of which read:
WHEREFORE, in the light of the
foregoing considerations, judgment
is hereby rendered:
1. DECLARING the foreclosure sale
of the plaintiff's mortgaged
properties, covered by and
embraced in Original Certificate of
Title No. I-1673 and Transfer
Certificates of Title Nos. T-11326, T-
681, T-100 and T-27, all of the
Registry of Deeds of Isabela, as
valid;
2. DECLARING the right of the
plaintiff to redeem his foreclosed
properties as forever lost;
36
3. DECLARING the deed of promise
the sell executed between the
plaintiff and the defendant bank as
valid;
4. DECLARING that the outstanding
obligation of the plaintiff to the bank
is P186,874.16 from which shall be
deducted whatever payments are
made and/or to be made by the
Land Bank of the Philippines as a
result of its Operation Land Transfer
Program;
5. ORDERING that whatever
balance thereof shall be paid by the
plaintiff to the defendant bank with
twelve per cent (12%) interest until
fully paid and conversely, whatever
excess thereof shall be refunded by
the defendant bank to the plaintiff;
6. ORDERING the defendant bank
to execute the corresponding deed
of conveyance of the lands to and in
favor of the plaintiff after payment is
made in accordance with the above;
7. ORDERING the defendant bank
to deliver to the plaintiff the
certificates of title covering the
properties mentioned above;
8. DISMISSING the complaint, with
costs against the plaintiff;
9. ORDERING the plaintiff to pay to
the defendant, Leuterio Genato, the
sum of TEN THOUSAND PESOS
(P10,000.00) as attorney's fees and
FIVE THOUSAND PESOS
(P5,000.00) as expenses of
litigation; and
10. DENYING the defendant bank's
counterclaim. (pp. 128-129, Rollo.)
Private respondent went to the Court of Appeals,
which, on 05 May 1987, rendered a decision,
reversing the trial court and entering a new one in
favor of private respondent. The appellate court
adjudged, as follows:
WHEREFORE, the decision
appealed from is set aside and a
new one entered declaring the
foreclosure of the mortgaged
properties to be without force and
effect; ordering the defendant bank
to release the properties and the
plaintiff to transfer the rights to the
tenants-beneficiaries in favor of the
Land Bank of the Philippines;
declaring the deed of promise to sell
executed by the plaintiff and the
defendant bank rescinded; ordering
the defendant bank and the Land
Bank of the Philippines to
recalculate the amounts of payments
due for the transfer of the subject
properties in accordance with this
Decision subject to the provisions of
P.D. No. 27 and in accordance with
the mechanics of the Operation
Land Transfer; and annulling the
order of the lower court for the
plaintiff to pay the defendant the
expenses of litigation and attorney's
fees.
Hence, this petition for review on certiorari.
The petition cannot be sustained.
When Presidential Decree No. 27, "Decreeing the
Emancipation of Tenants from the Bondage of the
Soil, Transferring to them the Ownership of the
Land They Till and Providing the Instruments and
Mechanism therefor," was enacted on 21 October
1972, the parcels of land in dispute were clearly still
subject to private respondent's right of redemption.
In the foreclosure of real property by banking
institutions, as well as in the extrajudicial
foreclosure by any other mortgagee, the mortgagor
could redeem the property within one year from
date of registration of the deed of sale in the
appropriate Registry of Deeds (Santos vs. Register
of Deeds of Manila, 38 SCRA 42; Reyes vs.
Noblejas, 21 SCRA 1027). In Medida vs. Court of
Appeals (208 SCRA 887), we ruled that the "title to
the land sold under a mortgage foreclosure remains
with the mortgagor or his grantee until the
expiration of the redemption period . . ." The Court
of Appeals committed no error when it thereby held:
. . . The foreclosure proceedings
were instituted in 1970, and on this,
37
there appears to be no question.
The registration of the sheriff's sale
was, however, effected only on
October 11, 1972. From this date,
therefore, the period of redemption
begins to run since, according to
judicial construction, the period of
redemption begins to run not from
the date of the sale but from the date
of registration of the sale in the office
of the Register of Deeds, applying
this rule not only to an execution
sale but also to an extrajudicial
foreclosure sale of registered land
(Salazar vs. Meneses, 118 Phil. 512;
Reyes vs. Noblejas and Santos, 65
O.G. 21, May 26, 1969; Santos vs.
RFC, 101 Phil. 980; Reyes vs.
Tolentino, G.R. No. L-29142, Nov.
29, 1971) as required under Section
27 of Rule 39 of the Rules of Court
in relation to Section 50 of Act No.
496. For this reason, the foreclosure
proceedings were not completed
since the period of redemption,
counted from October 11, 1972,
would expire on October 12, 1973.
This would thereby bring the
disputed properties under the
operation and under the ambit of the
said Opinion which interprets
Operation Land Transfer under P.D.
No. 27. . . (Rollo, pp. 87-88.)
It was not thus all that consequential for the
appellate court to still rule on the efficacy or
inefficacy of the foreclosure.
In passing, the Secretary of the Department of
Justice has himself opined thus:
I am aware that a ruling that lands
covered by P.D. No. 27 may not be
the object of the foreclosure
proceedings after the promulgation
of said decree on October 21, 1972,
would concede that P.D. No. 27 had
the effect of impairing the obligation
of the duly executed mortgage
contracts affecting said lands. There
is no question, however, that the
land reform program of the
government as accelerated under
P.D. No. 27 and mandated by the
Constitution itself (Art. XIV, Sec. 12),
was undertaken in the exercise of
the police power of the state. It is
settled in a long line of decisions of
the Supreme Court that the
Constitutional guaranty of non-
impairment of obligations of contract
is limited by the exercise of the
police power of the state (citations
omitted). One limitation on the
contract clause arises from the
police power, the reason being that
public welfare is superior to private
rights (citation omitted). The
situation here, is like that in eminent
domain proceedings, where the
state expropriates private property
for public use, and the only condition
to be complied with is the payment
of just compensation. Technically,
the condemnation proceedings do
not impair the contract to destroy its
obligations, but merely appropriate
or take for public use (citation
omitted). As the Land Bank is
obliged to settle the obligations
secured by the mortgage, the
mortgagee is not left without any
compensation. (Opinion No. 92,
Series of 1978; Rollo, pp. 88-89.)
The opinion deserves respect (42 Am. Jur. p. 421;
Cagayan Valley Enterprises, Inc. vs. Court of
Appeals, 179 SCRA 218; Ramon Salaria vs. Hon.
Carlos R. Buenviaje, et al., 81 SCRA 722). This
Court, likewise, in a number of cases has
expressed the dictum that police power
subordinates the non-impairment clause of the
Constitution (Ortigas and Co. Ltd. Partnership vs.
Feati Bank and Trust Co., 94 SCRA 533; Kabiling
vs. National Housing Authority, 156 SCRA 623;
Anglo-Fil Trading Corporation vs. Lazaro, 124
SCRA 494).
Petitioner contends that the Court of Appeals has
erred in holding that the bank is entitled only to
P87,012.00, and not to P284,000.00, which it
considers to be the fair market value of the property
foreclosed. Here, the Court of Appeals has
explained:
We come to the respective liabilities
and obligations of the parties. To
date, the defendant bank has
38
received P207,243.85 from the
plaintiff (Stipulation of Facts, No.
15). In addition, the defendant bank
has also been the recipient of bonds
worth P160,000.00 and cash in the
amount of P26,348.12 from the Land
Bank in payment for the properties
covered by TCTs Nos. T-100, T-
11326 and T-681 or a total amount
of P186,348.12. The defendant bank
has accepted payment of the latter
amount at P170,348.12. All in all, the
bank has received payments in cash
and bonds in the amount of
P377,591.97 as compensation for
the plaintiff's original obligation of
P65,000.00. The total amounts paid
by plaintiff represent the
consideration in part of the market
price of the properties as found by
the Loans and Discount Section of
the defendant bank irrespective of
whether or not the lands are covered
by Operation Land Transfer. The
cash and bonds payments made by
the Land Bank to the PNB on the
other hand, represent payments for
the lands covered by Operation
Land Transfer, namely T-100, T-
11326 and T-681. For its part, the
lower court ruled that the plaintiff's
obligation to the defendant bank
amounts to P186,874.16 based on
the market price as determined by
the Loans and Discount Section of
the defendant bank which market
price amounts to P284,000.00. In
view of Our conclusion that the
subject mortgaged properties fall
under the ambit and purview of
Operation Land Transfer under P.D.
No. 27, it appears that said adjudged
amount is in excess of the rightful
amount that is due the defendant
bank by the plaintiff. We hold,
therefore, that the defendant bank is
entitled to a payment of P87,012.00
representing the offer of the
defendant bank to the plaintiff in the
same bank's letter to the plaintiff
dated February 15, 1971. The
plaintiff is, therefore, entitled to a
refund of whatever over payments
were made by him in favor of the
defendant bank. The amount of
P87,012.00 represents the
redemption price of the foreclosed
properties and as a release of the
said properties for redistribution to
qualified tenants. (pp. 89-90, Rollo.)
In Development Bank of the Philippines vs. Mirang,
66 SCRA 141, we have ruled that the right of
redemption by the mortgagor could be exercised by
paying to the creditor bank all the amounts owing to
the latter "on the date of the sale, with interest on
the total indebtedness at the rate agreed upon in
the obligation from said date." In the case of
foreclosures by the Philippine National Bank
particularly, Section 20 of its own charter provides:
Sec. 20. Right of Redemption of
property foreclosed. The
mortgagor shall have the right, within
the year after the sale of real estate
as a result of the foreclosure of a
mortgage, to redeem the property by
paying the amount fixed by the court
in the order of execution, with
interest thereon at the rate specified
in the mortgage, and all the costs
and other judicial expenses incurred
by the Bank by reason of the
execution and sale and for the
custody of said property. (Republic
Act No. 1300)
Accordingly, the appellate court did not commit any
reversible error in ordering petitioner bank and the
Land Bank of the Philippines to recalculate the
amounts of payments due for the transfer of the
foreclosed property.
WHEREFORE, the appealed decision is
AFFIRMED.
SO ORDERED.
39

FIRST DIVISION

[G.R. No. 51765. March 3, 1997]

REPUBLIC PLANTERS BANK, petitioner, vs.

HON. ENRIQUE A. AGANA, SR., as Presiding
Judge, Court of First Instance of Rizal, Branch
XXVIII, Pasay City, ROBES-FRANCISCO
REALTY & DEVELOPMENT CORPORATION
and ADALIA F. ROBES, respondents.

DECISION

HERMOSISIMA, JR., J.:

This is a petition for certiorari seeking the

annulment of the Decisioni[1] of the then Court of
First Instance of Rizalii[2] for having been rendered
in grave abuse of discretion. Private respondents
Robes-Francisco Realty and Development
Corporation (hereafter, "the Corporation") and
Adalia F. Robes filed in the court a quo, an action
for specific performance to compel petitioner to
redeem 800 preferred shares of stock with a face
value of P8,000.00 and to pay 1% quarterly interest
thereon as quarterly dividend owing them under the
terms and conditions of the certificates of stock.

The court a quo rendered judgment in favor of

private respondents; hence, this instant petition.

Herein parties debate only legal issues, no issues of

fact having been raised by them in the court a quo.
For ready reference, however, the following
narration of pertinent transactions and events is in
order:

On September 18, 1961, private respondent

Corporation secured a loan from petitioner in the
amount of P120,000.00. As part of the proceeds of
40
the loan, preferred shares of stocks were issued to
private respondent Corporation, through its officers
then, private respondent Adalia F. Robes and one
Carlos F. Robes. In other words, instead of giving
the legal tender totaling to the full amount of the
loan, which is P120,000.00, petitioner lent such
amount partially in the form of money and partially
in the form of stock certificates numbered 3204 and
3205, each for 400 shares with a par value of
P10.00 per share, or for P4,000.00 each, for a total
of P8,000.00. Said stock certificates were in the
name of private respondent Adalia F. Robes and
Carlos F. Robes, who subsequently, however,
endorsed his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms
and conditions:
"The Preferred Stock shall have the following
rights, preferences, qualifications and limitations, to
wit:
1. Of the right to receive
a quarterly dividend
of One Per Centum
(1%), cumulative
and participating.
xxx
2. That such preferred
shares may be
redeemed, by the
system of drawing
lots, at any time after
two (2) years from
the date of issue at
the option of the
Corporation. x x x."
On January 31, 1979, private respondents proceeded
against petitioner and filed a Complaint anchored
on private respondents' alleged rights to collect
dividends under the preferred shares in question and
to have petitioner redeem the same under the terms
and conditions of the stock certificates. Private
respondents attached to their complaint, a letter-
demand dated January 5, 1979 which, significantly,
was not formally offered in evidence.
Petitioner filed a Motion to Dismissiii[3] private
respondents' Complaint on the following grounds:
(1) that the trial court had no jurisdiction over the
subject-matter of the action; (2) that the action was
unenforceable under substantive law; and (3) that
the action was barred by the statute of limitations
and/or laches.
Petitioner's Motion to Dismiss was denied by the
trial court in an Order dated March 16, 1979.iv[4]
Petitioner then filed its Answer on May 2, 1979.v[5]
Thereafter, the trial court gave the parties ten (10)
days from July 30, 1979 to submit their respective
memoranda after the submission of which the case
would be deemed submitted for resolution.vi[6]
On September 7, 1979, the trial court rendered the
herein assailed decision in favor of private
respondents. In ordering petitioner to pay private
respondents the face value of the stock certificates
as redemption price, plus 1% quarterly interest
thereon until full payment, the trial court ruled:
"There being no issue of fact raised by either of the
parties who filed their respective memoranda
delineating their respective contentions, a judgment
on the pleadings, conformably with an earlier order
of the Court, appears to be in order.
From a further perusal of the pleadings, it appears
that the provision of the stock certificates in
question to the effect that the plaintiffs shall have
the right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating, clearly
and unequivocably [sic] indicates that the same are
'interest bearing stocks' which are stocks issued by a
corporation under an agreement to pay a certain rate
of interest thereon (5 Thompson, Sec. 3439). As
such, plaintiffs become entitled to the payment
thereof as a matter of right without necessity of a
prior declaration of dividend.
On the question of the redemption by the defendant
of said preferred shares of stock, the very wordings
of the terms and conditions in said stock certificates
clearly allows the same.
To allow the herein defendant not to redeem said
preferred shares of stock and/or pay the interest due
thereon despite the clear import of said provisions
by the mere invocation of alleged Central Bank
Circulars prohibiting the same is tantamount to an
41
impairment of the obligation of contracts enshrined
in no less than the fundamental law itself.
Moreover, the herein defendant is considered in
estoppel from taking shelter behind a General
Banking Act provision to the effect that it cannot
buy its own shares of stocks considering that the
very terms and conditions in said stock certificates
allowing their redemption are its own handiwork.
As to the claim by the defendant that plaintiffs'
cause of action is barred by prescription, suffice it
to state that the running of the prescriptive period
was considered interrupted by the written
extrajudicial demands made by the plaintiffs from
the defendant."vii[7]
Aggrieved by the decision of the trial court,
petitioner elevated the case before us essentially on
pure questions of law. Petitioner's statement of the
issues that it submits for us to adjudicate upon, is as
follows:
"A. RESPONDENT JUDGE
COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF
JURISDICTION IN ORDERING
PETITIONER TO PAY
RESPONDENT ADALIA F.
ROBES THE AMOUNT OF
P8,213.69 AS INTERESTS FROM
1961 To 1979 ON HER
PREFERRED SHARES.
B. RESPONDENT JUDGE
COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF
JURISDICTION IN ORDERING
PETITIONER TO REDEEM
RESPONDENT ADALIA F.
ROBES' PREFERRED SHARES
FOR P8,000.00
C. RESPONDENT JUDGE
COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF
JURISDICTION IN
DISREGARDING THE ORDER OF
THE CENTRAL BANK TO
PETITIONER TO DESIST FROM
REDEEMING ITS PREFERRED
SHARES AND FROM PAYING
DIVIDENDS THEREON x x x.
D. THE TRIAL COURT
ERRED IN NOT HOLDING THAT
THE COMPLAINT DOES NOT
STATE A CAUSE OF ACTION.
E. THE TRIAL COURT
ERRED IN NOT HOLDING THAT
THE CLAIM OF RESPONDENT
ADALIA F. ROBES IS BARRED
BY PRESCRIPTION OR
LACHES."viii[8]
The petition is meritorious.
Before passing upon the merits of this petition, it
may be pertinent to provide an overview on the
nature of preferred shares and the redemption
thereof, considering that these issues lie at the heart
of the dispute.
A preferred share of stock, on one hand, is one
which entitles the holder thereof to certain
preferences over the holders of common stock. The
preferences are designed to induce persons to
subscribe for shares of a corporation.ix[9] Preferred
shares take a multiplicity of forms. The most
common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred
shares as to dividends. The former is a share which
gives the holder thereof preference in the
distribution of the assets of the corporation in case
of liquidation;x[10] the latter is a share the holder of
which is entitled to receive dividends on said share
to the extent agreed upon before any dividends at all
are paid to the holders of common stock.xi[11] There
is no guaranty, however, that the share will receive
any dividends. Under the old Corporation Law in
force at the time the contract between the petitioner
and the private respondents was entered into, it was
provided that "no corporation shall make or declare
any dividend except from the surplus profits arising
from its business, or distribute its capital stock or
property other than actual profits among its
42
members or stockholders until after the payment of
its debts and the termination of its existence by
limitation or lawful dissolution."xii[12] Similarly, the
present Corporation Codexiii[13] provides that the
board of directors of a stock corporation may
declare dividends only out of unrestricted retained
earnings.xiv[14] The Code, in Section 43, adopting
the change made in accounting terminology,
substituted the phrase unrestricted retained
earnings," which may be a more precise term, in
place of "surplus profits arising from its business"
in the former law. Thus, the declaration of
dividends is dependent upon the availability of
surplus profit or unrestricted retained earnings, as
the case may be. Preferences granted to preferred
stockholders, moreover, do not give them a lien
upon the property of the corporation nor make them
creditors of the corporation, the right of the former
being always subordinate to the latter. Dividends
are thus payable only when there are profits earned
by the corporation and as a general rule, even if
there are existing profits, the board of directors has
the discretion to determine whether or not dividends
are to be declared.xv[15] Shareholders, both common
and preferred, are considered risk takers who invest
capital in the business and who can look only to
what is left after corporate debts and liabilities are
fully paid.xvi[16]
Redeemable shares, on the other hand, are shares
usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a
certain redemption price.xvii[17] A redemption by the
corporation of its stock is, in a sense, a repurchase
of it for cancellation.xviii[18] The present Code allows
redemption of shares even if there are no
unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect
qualifies the general rule that the corporation cannot
purchase its own shares except out of current
retained earnings.xix[19] However, while redeemable
shares may be redeemed regardless of the existence
of unrestricted retained earnings, this is subject to
the condition that the corporation has, after such
redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is
insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its
debts as they mature.xx[20]
We come now to the merits of the case. The
petitioner argues that it cannot be compelled to
redeem the preferred shares issued to the private
respondent. We agree. Respondent judge, in ruling
that petitioner must redeem the shares in question,
stated that:
"On the question of the redemption by the
defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock
certificates clearly allows the same."xxi[21]
What respondent Judge failed to recognize was that
while the stock certificate does allow redemption,
the option to do so was clearly vested in the
petitioner bank. The redemption therefore is clearly
the type known as "optional". Thus, except as
otherwise provided in the stock certificate, the
redemption rests entirely with the corporation and
the stockholder is without right to either compel or
refuse the redemption of its stock.xxii[22]
Furthermore, the terms and conditions set forth
therein use the word "may". It is a settled doctrine
in statutory construction that the word "may"
denotes discretion, and cannot be construed as
having a mandatory effect. We fail to see how
respondent judge can ignore what, in his words, are
the "very wordings of the terms and conditions in
said stock certificates" and construe what is clearly
a mere option to be his legal basis for compelling
the petitioner to redeem the shares in question.
The redemption of said shares cannot be allowed.
As pointed out by the petitioner, the Central Bank
made a finding that said petitioner has been
suffering from chronic reserve deficiency,xxiii[23] and
that such finding resulted in a directive, issued on
January 31, 1973 by then Gov. G. S. Licaros of the
Central Bank, to the President and Acting Chairman
of the Board of the petitioner bank prohibiting the
latter from redeeming any preferred share, on the
ground that said redemption would reduce the assets
of the Bank to the prejudice of its depositors and
creditors.xxiv[24] Redemption of preferred shares was
prohibited for a just and valid reason. The directive
issued by the Central Bank Governor was obviously
meant to preserve the status quo, and to prevent the
43
financial ruin of a banking institution that would
have resulted in adverse repercussions, not only to
its depositors and creditors, but also to the banking
industry as a whole. The directive, in limiting the
exercise of a right granted by law to a corporate
entity, may thus be considered as an exercise of
police power. The respondent judge insists that the
directive constitutes an impairment of the obligation
of contracts. It has, however, been settled that the
Constitutional guaranty of non-impairment of
obligations of contract is limited by the exercise of
the police power of the state, the reason being that
public welfare is superior to private rights.xxv[25]
The respondent judge also stated that since the stock
certificate granted the private respondents the right
to receive a quarterly dividend of one Per Centum
(1%), cumulative and participating, it "clearly and
unequivocably (sic) indicates that the same are
'interest bearing stocks' or stocks issued by a
corporation under an agreement to pay a certain rate
of interest thereon. As such, plaintiffs (private
respondents herein) become entitled to the payment
thereof as a matter of right without necessity of a
prior declaration of dividend."xxvi[26] There is no
legal basis for this observation. Both Sec. 16 of the
Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock
dividend without the approval of stockholders,
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special
meeting duly called for the purpose. These
provisions underscore the fact that payment of
dividends to a stockholder is not a matter of right
but a matter of consensus. Furthermore, "interest
bearing stocks", on which the corporation agrees
absolutely to pay interest before dividends are paid
to common stockholders, is legal only when
construed as requiring payment of interest as
dividends from net earnings or surplus only.xxvii[27]
Clearly, the respondent judge, in compelling the
petitioner to redeem the shares in question and to
pay the corresponding dividends, committed grave
abuse of discretion amounting to lack or excess of
jurisdiction in ignoring both the terms and
conditions specified in the stock certificate, as well
as the clear mandate of the law.
Anent the issue of prescription, this Court so holds
that the claim of private respondent is already
barred by prescription as well as laches. Art. 1144
of the New Civil Code provides that a right of
action that is founded upon a written contract
prescribes in ten (10) years. The letter-demand
made by the private respondents to the petitioner
was made only on January 5, 1979, or almost
eighteen years after receipt of the written contract in
the form of the stock certificate. As noted earlier,
this letter-demand, significantly, was not formally
offered in evidence, nor were any other evidence of
demand presented. Therefore, we conclude that the
only time the private respondents saw it fit to assert
their rights, if any, to the preferred shares of stock,
was after the lapse of almost eighteen years. The
same clearly indicates that the right of the private
respondents to any relief under the law has already
prescribed. Moreover, the claim of the private
respondents is also barred by laches. Laches has
been defined as the failure or neglect, for an
unreasonable length of time, to do that which by
exercising due diligence could or should have been
done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a
presumption that the party entitled to assert it either
has abandoned it or declined to assert it.xxviii[28]
Considering that the terms and conditions set forth
in the stock certificate clearly indicate that
redemption of the preferred shares may be made at
any time after the lapse of two years from the date
of issue, private respondents should have taken it
upon themselves, after the lapse of the said period,
to inquire from the petitioner the reason why the
said shares have not been redeemed. As it is, not
only two years had lapsed, as agreed upon, but an
additional sixteen years passed before the private
respondents saw it fit to demand their right. The
petitioner, at the time it issued said preferred shares
to the private respondents in 1961, could not have
known that it would be suffering from chronic
reserve deficiency twelve years later. Had the
private respondents been vigilant in asserting their
rights, the redemption could have been effected at a
time when the petitioner bank was not suffering
from any financial crisis.
WHEREFORE, the instant petition, being
impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside
44

and the complaint against the petitioner is Costs against the private respondents.
dismissed.
SO ORDERED.