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GSIS v CA

DECISION
TINGA, J.:
These are the undisputed facts.
The annual stockholders meeting (annual meeting) of the Manila Electric Company
(Meralco) was scheduled on 27 May 2008.[1] In connection with the annual meeting,
proxies[2] were required to be submitted on or before 17 May 2008, and the proxy
validation was slated for five days later, or 22 May.[3]
In view of the resignation of Camilo Quiason,[4] the position of corporate secretary of
Meralco became vacant.[5] On 15 May 2008, the board of directors of Meralco designated
Jose Vitug[6] to act as corporate secretary for the annual meeting.[7] However, when the
proxy validation began on 22 May, the proceedings were presided over by respondent
Anthony Rosete (Rosete), assistant corporate secretary and in-house chief legal counsel of
Meralco.[8] Private respondents nonetheless argue that Rosete was the acting corporate
secretary of Meralco.[9] Petitioner Government Service Insurance System (GSIS), a major
shareholder in Meralco, was distressed over the proxy validation proceedings, and the
resulting certification of proxies in favor of the Meralco management.[10]
On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay
City, docketed as R-PSY-08-05777-C4 seeking the declaration of certain proxies as invalid.
[11] Three days
later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the
complaint.[12] On the same day, GSIS filed an Urgent Petition[13] with the Securities and
Exchange Commission (SEC) seeking to restrain Rosete from recognizing, counting and
tabulating, directly or indirectly, notionally or actually or in whatever way, form, manner or
means, or otherwise honoring the shares covered by the proxies in favor of respondents
Manuel Lopez,[14] Felipe Alfonso,[15] Jesus Francisco,[16] Oscar Lopez, Christian
Monsod,[17] Elpidio Ibaez,[18] Francisco Giles-Puno[19] or any officer representing
MERALCO Management, and to annul and declare invalid said proxies.[20] GSIS also
prayed for the issuance of a Cease and Desist Order (CDO) to restrain the use of said
proxies during the annual meeting scheduled for the following day.[21] A CDO[22] to that
effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the same
day the complaint was filed. During the annual meeting held on the following day, Rosete
announced that the meeting would push through, expressing the opinion that the CDO is
null and void.[23]

On 28 May 2008, the SEC issued a Show Cause Order (SCO)[24] against private
respondents, ordering them to appear before the Commission on 30 May 2008 and explain
why they should not be cited in contempt. On 29 May 2008, respondents filed a petition for
certiorari with prohibition[25] with the Court of Appeals, praying that the CDO and the
SCO be annulled. The petition was docketed as CA-G.R. SP No. 103692.
Many developments involving the Court of Appeals handling of CA-G.R. SP No. 103692
and the conduct of several of its individual justices are recounted in our Resolution dated 9
September 2008 in A.M. No. 08-8-11-CA (Re: Letter Of Presiding Justice Conrado M.
Vasquez, Jr. On CA-G.R. SP No. 103692).[26] On 23 July 2008, the Court of Appeals
Eighth Division promulgated a decision in the case with the following dispositive portion:
WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the
SEC is hereby DISMISSED due to SECs lack of jurisdiction, due to forum shopping by
respondent GSIS, and due to splitting of causes of action by respondent GSIS.
Consequently, the SECs undated cease and desist order and the SECs May 28, 2008 show
cause order are hereby DECLARED VOID AB INITIO and without legal effect and their
implementation are hereby permanently restrained.
The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being
considered, out of equitable considerations, as an election contest in the RTC, because the
prescriptive period of 15 days from the May 27, 2008 Meralco election to file an election
contest in the RTC had already run its course, pursuant to Sec. 3, Rule 6 of the interim
Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, due to
deliberate act of GSIS in filing a complaint in the SEC instead of the RTC.
Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of
the Chief Justice and three (3) copies to the Office of the Court Administrator:
(1)
for sanction by the Supreme Court against the GSIS LAW OFFICE for unauthorized
practice of law,
(2)
for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty.
Estrella Elamparo-Tayag, Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other
GSIS lawyers for violation of Sec. 27 of Rule 138 of the Revised Rules of Court, pursuant
to Santayana v. Alampay, A.C. No. 5878, March 21, 2005 454 SCRA 1, and pursuant to
Land Bank of the Philippines v. Raymunda Martinez, G.R. No. 169008, August 14, 2007:
(a)
for violating express provisions of law and defying public policy in deliberately
displacing the Office of the Government Corporate Counsel (OGCC) from its duty as the
exclusive lawyer of GSIS, a government owned and controlled corporation (GOCC), by
admittedly filing and defending cases as well as appearing as counsel for GSIS, without
authority to do so, the authority belonging exclusively to the OGCC;
(b)
for violating the lawyers oath for failing in their duty to act as faithful officers of
the court by engaging in forum shopping;
(c)
for violating express provisions of law most especially those on jurisdiction which
are mandatory; and

(d)
for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately
splitting causes of action in order to file multiple complaints: (i) in the RTC of Pasay City
and (ii) in the SEC, in order to ensure a favorable order.[27]
The promulgation of the said decision provoked a searing controversy, as detailed in our
Resolution in A.M. No. 08-8-11-CA. Nonetheless, the appellate courts decision spawned
three different actions docketed with their own case numbers before this Court. One of
them, G.R. No. 183933, was initiated by a Motion for Extension of Time to File Petition
for Review filed by the Office of the Solicitor General (OSG) in behalf of the SEC,
Commissioner Martinez in his capacity as officer-in-charge of the SEC, and Hubert
Guevarra in his capacity as Director of the Compliance and Enforcement Department of the
SEC.[28] However, the OSG did not follow through with the filing of the petition for
review adverted to; thus, on 19 January 2009, the Court resolved to declare G.R. No.
183933 closed and terminated.[29]
The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No.
183905 pertains to a petition for certiorari and prohibition filed by GSIS, against the Court
of Appeals, and respondents Rosete, Lopez, Alfonso, Francisco, Monsod, Ibaez and Puno,
all of whom serve in different corporate capacities with Meralco or First Philippines
Holdings Corporation, a major stockholder of Meralco and an affiliate of the Lopez Group
of Companies. This petition seeks of the Court to declare the 23 July 2008 decision of the
Court of Appeals null and void, affirm the SECs jurisdiction over the petition filed before it
by GSIS, and pronounce that the CDO and the SCO orders are valid. This petition was filed
in behalf of GSIS by the GSIS Law Office; it was signed by the Chief Legal Counsel and
Assistant Legal Counsel of GSIS, and three self-identified Attorney[s], presumably holding
lawyer positions in GSIS.[30]
The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its
petitioners the SEC, Commissioner Martinez in his capacity as OIC of the SEC, and Hubert
Guevarra in his capacity as Director of the Compliance and Enforcement Department of the
SEC the same petitioners in the aborted petition for review initially docketed as G.R. No.
183933. Unlike what was adverted to in the motion for extension filed by the same
petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is one for certiorari under
Rule 65 as indicated on page 3 thereof,[31] and not a petition for review. Interestingly, save
for the first page which leaves the docket number blank, all 86 pages of this petition for
certiorari carry a header wrongly identifying the pleading as the non-existent petition for
review under G.R. No. 183933. This petition seeks the reversal of the assailed decision of
the Court of Appeals, the recognition of the jurisdiction of the SEC over the petition of
GSIS, and the affirmation of the CDO and SCO.
II.
Private respondents seek the expunction of the petition filed by the SEC in G.R. No.
184275. We agree that the petitioners therein, namely: the SEC, Commissioner Marquez
and Guevarra, are not real parties-in-interest to the dispute and thus bereft of capacity to

file the petition. By way of simple illustration, to argue otherwise is to say that the trial
court judge, the National Labor Relations Commission, or any quasi-judicial agency has
the right to seek the review of an appellate court decision reversing any of their rulings.
That prospect, as any serious student of remedial law knows, is zero.
The Court, through the Resolution of the Third Division dated 2 September 2008, had
resolved to treat the petition in G.R. No. 184275 as a petition for review on certiorari, but
withheld giving due course to it.[32] Under Section 1 of Rule 45, which governs appeals by
certiorari, the right to file the appeal is restricted to a party, meaning that only the real
parties-in-interest who litigated the petition for certiorari before the Court of Appeals are
entitled to appeal the same under Rule 45. The SEC and its two officers may have been
designated as respondents in the petition for certiorari filed with the Court of Appeals, but
under Section 5 of Rule 65 they are not entitled to be classified as real parties-in-interest.
Under the provision, the judge, court, quasi-judicial agency, tribunal, corporation, board,
officer or person to whom grave abuse of discretion is imputed (the SEC and its two
officers in this case) are denominated only as public respondents. The provision further
states that public respondents shall not appear in or file an answer or comment to the
petition or any pleading therein.[33] Justice Regalado explains:
[R]ule 65 involves an original special civil action specifically directed against the person,
court, agency or party a quo which had committed not only a mistake of judgment but an
error of jurisdiction, hence should be made public respondents in that action brought to
nullify their invalid acts. It shall, however be the duty of the party litigant, whether in an
appeal under Rule 45 or in a special civil action in Rule 65, to defend in his behalf and the
party whose adjudication is assailed, as he is the one interested in sustaining the correctness
of the disposition or the validity of the proceedings.
xxx The party interested in sustaining the proceedings in the lower court must be joined as
a co-respondent and he has the duty to defend in his own behalf and in behalf of the court
which rendered the questioned order. While there is nothing in the Rules that prohibit the
presiding judge of the court involved from filing his own answer and defending his
questioned order, the Supreme Court has reminded judges of the lower courts to refrain
from doing so unless ordered by the Supreme Court.[[34]] The judicial norm or mode of
conduct to be observed in trial and appellate courts is now prescribed in the second
paragraph of this section.
xxx
A person not a party to the proceedings in the trial court or in the Court of Appeals cannot
maintain an action for certiorari in the Supreme Court to have the judgment reviewed.[35]

Rule 65 does recognize that the SEC and its officers should have been designated as public
respondents in the petition for certiorari filed with the Court of Appeals. Yet their
involvement in the instant petition is not as original party-litigants, but as the quasi-judicial
agency and officers exercising the adjudicative functions over the dispute between the two
contending factions within Meralco. From the onset, neither the SEC nor Martinez or

Guevarra has been considered as a real party-in-interest. Section 2, Rule 3 of the 1997
Rules of Civil Procedure provides that every action must be prosecuted or defended in the
name of the real party in interest, that is the party who stands to be benefited or injured by
the judgment in the suit, or the party entitled to the avails of the suit. It would be facetious
to assume that the SEC had any real interest or stake in the intra-corporate dispute within
Meralco.
We find our ruling in Hon. Santiago v. Court of Appeals[36] quite apposite to the question
at hand. Petitioner therein, a trial court judge, had presided over an expropriation case. The
litigants had arrived at an amicable settlement, but the judge refused to approve the same,
even declaring it invalid. The matter was elevated to the Court of Appeals, which promptly
reversed the trial court and approved the amicable settlement. The judge took the
extraordinary step of filing in his own behalf a petition for review on certiorari with this
Court, assailing the decision of the Court of Appeals which had reversed him. In
disallowing the judges petition, the Court explained:

While the issue in the Court of Appeals and that raised by petitioner now is whether the
latter abused his discretion in nullifying the deeds of sale and in proceeding with the
expropriation proceeding, that question is eclipsed by the concern of whether Judge Pedro
T. Santiago may file this petition at all.
And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal by
certiorari from a judgment of the Court of Appeals by filing with this Court a petition for
review on certiorari. But petitioner judge was not a party either in the expropriation
proceeding or in the certiorari proceeding in the Court of Appeals. His being named as
respondent in the Court of Appeals was merely to comply with the rule that in original
petitions for certiorari, the court or the judge, in his capacity as such, should be named as
party respondent because the question in such a proceeding is the jurisdiction of the court
itself (See Mayol v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules of Court,
Moran, Vol. II, 1979 ed., p. 471). "In special proceedings, the judge whose order is under
attack is merely a nominal party; wherefore, a judge in his official capacity, should not be
made to appear as a party seeking reversal of a decision that is unfavorable to the action
taken by him. A decent regard for the judicial hierarchy bars a judge from suing against the
adverse opinion of a higher court,. . . ." (Alcasid v. Samson, 102 Phil. 785, 740 [1957])
ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the
petitioner.[37]

Justice Isagani Cruz added, in a Concurring Opinion in Santiago: The judge is not an active
combatant in such proceeding and must leave it to the parties themselves to argue their

respective positions and for the appellate court to rule on the matter without his
participation.[38]
Note that in Santiago, the Court recognized the good faith of the judge, who perceived the
amicable settlement as a manifestly iniquitous and illegal contract.[39] The SEC could
have similarly felt in good faith that the assailed Court of Appeals decision had unduly
impaired its prerogatives or caused some degree of hurt to it. Yet assuming that there are
rights or prerogatives peculiar to the SEC itself that the appellate court had countermanded,
these can be vindicated in the petition for certiorari filed by GSIS, whose legal capacity to
challenge the Court of Appeals decision is without question. There simply is no plausible
reason for this Court to deviate from a time-honored rule that preserves the purity of our
judicial and quasi-judicial offices to accommodate the SECs distrust and resentment of the
appellate courts decision. The expunction of the petition in G.R. No. 184275 is accordingly
in order.

At this point, only one petition remainsthe petition for certiorari filed by GSIS in G.R. No.
183905. Casting off the uncritical and unimportant aspects, the two main issues for
adjudication are as follows: (1) whether the SEC has jurisdiction over the petition filed by
GSIS against private respondents; and (2) whether the CDO and SCO issued by the SEC
are valid.
II.
It is our resolute inclination that this case, which raises interesting questions of law, be
decided solely on the merits, without regard to the personalities involved or the wellreported drama preceding the petition. To that end, the Court has taken note of reports in
the media that GSIS and the Lopez group have taken positive steps to divest or
significantly reduce their respective interests in Meralco.[40] These are developments that
certainly ease the tension surrounding this case, not to mention reason enough for the two
groups to make an internal reassessment of their respective positions and interests in
relation to this case. Still, the key legal questions raised in the petition do not depend at all
on the identity of any of the parties, and would obtain the same denouement even if this
case was lodged by unknowns as petitioners against similarly obscure respondents.
With the objective to resolve the key questions of law raised in the petition, some of the
issues raised diminish as peripheral. For example, petitioners raise arguments tied to the
behavior of individual justices of the Court of Appeals, particularly former Justice Vicente
Roxas, in relation to this case as it was pending before the appellate court. The Court takes
cognizance of our Resolution in A.M. No. 08-8-11-CA dated 9 September 2008, which
duly recited the various anomalous or unbecoming acts in relation to this case performed
by two of the justices who decided the case in behalf of the Court of Appealsformer Justice

Roxas (the ponente) and Justice Bienvenido L. Reyes (the Chairman of the 8th Division) as
well as three other members of the Court of Appeals. At the same time, the consensus of
the Court as it deliberated on A.M. No. 08-8-11-CA was to reserve comment or conclusion
on the assailed decision of the Court of Appeals, in recognition of the reality that however
stigmatized the actions and motivations of Justice Roxas are, the decision is still the
product of the Court of Appeals as a collegial judicial body, and not of one or some rogue
justices. The penalties levied by the Court on these appellate court justices, in our
estimation, redress the unwholesome acts which they had committed. At the same time,
given the jurisprudential importance of the questions of law raised in the petition, any
result reached without squarely addressing such questions would be unsatisfactory, perhaps
derelict even.
III.

The argument, stripped of extravagance, is that since proxy solicitations following Section
20.1 have to be made in accordance with rules and regulations issued by the SEC, it is the
SEC under Section 53.1 that has the jurisdiction to investigate alleged violations of the
rules on proxy solicitations. The GSIS petition invoked AIRR-AIRR-SRC Rule 20,
otherwise known as The Proxy Rule, which enumerates the requirements as to form of
proxy and delivery of information to security holders. According to GSIS, the information
statement Meralco had filed with the SEC in connection with the annual meeting did not
contain any proxy form as required under AIRR-SRC Rule 20.

We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To
recall, SEC has sought to enjoin the use and annul the validation, of the proxies issued in
favor of several of the private respondents, particularly in connection with the annual
meeting.

On the other hand, private respondents argue before us that under Section 5.2 of the SRC,
the SECs jurisdiction over all cases enumerated in Section 5 of Presidential Decree No.
902-A was transferred to the courts of general jurisdiction or the appropriate regional trial
court. The two particular classes of cases in the enumeration under Section 5 of Presidential
Decree No. 902-A which private respondents especially refer to are as follows:

A.

xxx

Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions
of Rep. Act No. 8799, otherwise known as the Securities Regulation Code (SRC), its
implementing rules (Amended Implementing Rules or AIRR-SRC), and other related rules
to support their competing contentions that either the SEC or the trial courts has exclusive
original jurisdiction over the dispute.

(2) Controversies arising out of intra-corporate, partnership, or association relations,


between and among stockholders, members, or associates; or association of which they are
stockholders, members, or associates, respectively;

GSIS primarily anchors its argument on two correlated provisions of the SRC. These are
Section 53.1 and Section 20.1, which we cite:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The Commission
may, in its discretion, make such investigations as it deems necessary to determine whether
any person has violated or is about to violate any provision of this Code, any rule,
regulation or order thereunder, or any rule of an Exchange, registered securities association,
clearing agency, other self-regulatory organization, and may require or permit any person
to file with it a statement in writing, under oath or otherwise, as the Commission shall
determine, as to all facts and circumstances concerning the matter to be investigated. The
Commission may publish information concerning any such violations, and to investigate
any fact, condition, practice or matter which it may deem necessary or proper to aid in the
enforcement of the provisions of this Code, in the prescribing of rules and regulations
thereunder, or in securing information to serve as a basis for recommending further
legislation concerning the matters to which this Code relates: xxx (emphasis supplied)
SEC. 20. Proxy Solicitations. 20.1. Proxies must be issued and proxy solicitation must be
made in accordance with rules and regulations to be issued by the Commission;

3) Controversies in the election or appointment of directors, trustees, officers or managers


of corporations, partnerships, or associations;
xxx

In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies


(Interim Rules) promulgated by this Court in 2001, most pertinently, Section 2 of Rule 6
(on Election Contests), which defines election contests as follows:

SEC. 2. Definition. An election contest refers to any controversy or dispute involving title
or claim to any elective office in a stock or nonstock corporation, the validation of proxies,
the manner and validity of elections and the qualifications of candidates, including the
proclamation of winners, to the office of director, trustee or other officer directly elected by
the stockholders in a close corporation or by members of a nonstock corporation where the
articles of incorporation or bylaws so provide. (emphasis supplied)

The correct answer is not clear-cut, but there is one. In private respondents favor, the
provisions of law they cite pertain directly and exclusively to the statutory jurisdiction of
trial courts acquired by virtue of the transfer of jurisdiction following the passage of the
SRC. In contrast, the SRC provisions relied upon by GSIS do not immediately or directly
establish that bodys jurisdiction over the petition, since it necessitates the linkage of
Section 20 to Section 53.1 of the SRC before the point can bear on us.
On the other hand, the distinction between proxy solicitation and proxy validation cannot
be dismissed offhand. The right of a stockholder to vote by proxy is generally established
by the

Corporation Code,[41] but it is the SRC which specifically regulates the form and use of
proxies, more particularly the procedure of proxy solicitation, primarily through Section
20.[42] AIRR-SRC Rule 20 defines the terms solicit and solicitation:
The terms solicit and solicitation include:
A.
any request for a proxy whether or not accompanied by or included in a form of
proxy
B.
any request to execute or not to execute, or to revoke, a proxy; or
C.
the furnishing of a form of proxy or other communication to security holders under
circumstance reasonably calculated to result in the procurement, withholding or revocation
of a proxy.

It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former
involves the securing and submission of proxies, while the latter concerns the validation of
such secured and submitted proxies. GSIS raises the sensible point that there was no
election yet at the time it filed its petition with the SEC, hence no proper election contest or
controversy yet over which the regular courts may have jurisdiction. And the point ties its
cause of action to alleged irregularities in the proxy solicitation procedure, a process that
precedes either the validation of proxies or the annual meeting itself.
Under Section 20.1, the solicitation of proxies must be in accordance with rules and
regulations issued by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1,
the SEC has the discretion to make such investigations as it deems necessary to determine
whether any person has violated any rule issued by it, such as AIRR-SRC Rule 4. The
investigatory power of the SEC established by Section 53.1 is central to its regulatory

authority, most crucial to the public interest especially as it may pertain to corporations
with publicly traded shares. For that reason, we are not keen on pursuing private
respondents insistence that the GSIS complaint be viewed as rooted in an intra-corporate
controversy solely within the jurisdiction of the trial courts to decide. It is possible that an
intra-corporate controversy may animate a disgruntled shareholder to complain to the SEC
a corporations violations of SEC rules and regulations, but that motive alone should not be
sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since
such powers are exercisable on a motu proprio basis.
At the same time, Meralco raises the substantial point that nothing in the SRC empowers
the SEC to annul or invalidate improper proxies issued in contravention of Section 20. It
cites that the penalties defined by the SEC itself for violation of Section 20 or AIRR-SRC
Rule 20 are limited to a reprimand/warning for the first offense, and pecuniary fines for
succeeding offenses.[43] Indeed, if the SEC does not have the power to invalidate proxies
solicited in violation of its promulgated rules, serious questions may be raised whether it
has the power to adjudicate claims of violation in the first place, since the relief it may
extend does not directly redress the cause of action of the complainant seeking the
exclusion of the proxies.
There is an interesting point, which neither party raises, and it concerns Section 6(g) of
Presidential Decree No. 902-A, which states:
SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
xxx
(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements
for absent stockholders or members;
xxx
As promulgated then, the provision would confer on the SEC the power to adjudicate
controversies relating not only to proxy solicitation, but also to proxy validation. Should
the proposition hold true up to the present, the position of GSIS would have merit,
especially since Section 6 of Presidential Decree No. 902-A was not expressly repealed or
abrogated by the SRC.[44]
Yet a closer reading of the provision indicates that such power of the SEC then was
incidental or ancillary to the exercise of such jurisdiction. Note that Section 6 is
immediately preceded by Section 5, which originally conferred on the SEC original and
exclusive jurisdiction to hear and decide cases involving controversies in the election or
appointments of directors, trustees, officers or managers of such corporations, partnerships
or associations. The cases referred to in Section 5 were transferred from the jurisdiction of
the SEC to the regular courts with the passage of the SRC, specifically Section 5.2. Thus,
the SECs power to pass upon the validity of proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its abrogated jurisdictional powers.

Based on the foregoing, it is evident that the linchpin in deciding the question is whether or
not the cause of action of GSIS before the SEC is intimately tied to an election controversy,
as defined under Section 5(c) of Presidential Decree No. 902-A. To answer that, we need to
properly ascertain the scope of the power of trial courts to resolve controversies in
corporate elections.
B.
Shares of stock in corporations may be divided into voting shares and non-voting shares,
which are generally issued as preferred or redeemable shares.[45] Voting rights are
exercised during regular or special meetings of stockholders; regular meetings to be held
annually on a fixed date, while special meetings may be held at any time necessary or as
provided in the by-laws, upon due notice.[46] The Corporation Code provides for a whole
range of matters which can be voted upon by stockholders, including a limited set on which
even non-voting stockholders are entitled to vote on.[47] On any of these matters which
may be voted upon by stockholders, the proxy device is generally available.[48]

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the
jurisdiction of the regular trial courts with respect to election-related controversies is
specifically confined to controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships, or associations. Evidently, the
jurisdiction of the regular courts over so-called election contests or controversies under
Section 5(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which stockholders are
authorized to participate under Section 24 of the Corporation Code.[49]
This qualification allows for a useful distinction that gives due effect to the statutory right
of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts
over election contests or controversies. The power of the SEC to investigate violations of
its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters
unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A.
However, when proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular courts over such
controversies in the election of corporate directors must be seen as intended to confine to
one body the adjudication of all related claims and controversy arising from the election of
such directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim Rules
broadly defines the term election contest as encompassing all plausible incidents arising

from the election of corporate directors, including: (1) any controversy or dispute involving
title or claim to any elective office in a stock or nonstock corporation, (2) the validation of
proxies, (3) the manner and validity of elections and (4) the qualifications of candidates,
including the proclamation of winners. If all matters anteceding the holding of such
election which affect its manner and conduct, such as the proxy solicitation process, are
deemed within the original and exclusive jurisdiction of the SEC, then the prospect of
overlapping and competing jurisdictions between that body and the regular courts becomes
frighteningly real. From the language of Section 5(c) of Presidential Decree No. 902-A, it
is indubitable that controversies as to the qualification of voting shares, or the validity of
votes cast in favor of a candidate for election to the board of directors are properly
cognizable and adjudicable by the regular courts exercising original and exclusive
jurisdiction over election cases. Questions relating to the proper solicitation of proxies used
in such election are indisputably related to such issues, yet if the position of GSIS were to
be upheld, they would be resolved by the SEC and not the regular courts, even if they fall
within controversies in the election of directors.
The Court recognizes that GSISs position flirts with the abhorrent evil of split jurisdiction,
[50] allowing as it does both the SEC and the regular courts to assert jurisdiction over the
same controversies surrounding an election contest. Should the argument of GSIS be
sustained, we would be perpetually confronted with the spectacle of election controversies
being heard and adjudicated by both the SEC and the regular courts, made possible through
a mere allegation that the anteceding proxy solicitation process was errant, but the
competing cases filed with one objective in mind to affect the outcome of the election of
the board of directors. There is no definitive statutory provision that expressly mandates so
untidy a framework, and we are disinclined to construe the SRC in such a manner as to
pave the way for the splitting of jurisdiction.
Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or
investigatory power of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive
rule on jurisdiction, expressly granting as it does original and exclusive jurisdiction first to
the SEC, and now to the regular courts. The fact that the jurisdiction of the regular courts
under Section 5(c) is confined to the voting on election of officers, and not on all matters
which may be voted upon by stockholders, elucidates that the power of the SEC to regulate
proxies remains extant and could very well be exercised when stockholders vote on matters
other than the election of directors.

That the proxy challenge raised by GSIS relates to the election of the directors of Meralco
is undisputed. The controversy was engendered by the looming annual meeting, during
which the stockholders of Meralco were to elect the directors of the corporation. GSIS very
well knew of that fact. On 17 March 2008, the Meralco board of directors adopted a board
resolution stating:

RESOLVED that the board of directors of the Manila Electric Company (MERALCO)
delegate, as it hereby delegates to the Nomination & Governance Committee the authority
to approve and adopt appropriate rules on: (1) nomination of candidates for election to the
board of directors; (2) appreciation of ballots during the election of members of the board
of directors; and (3) validation of proxies for regular or special meetings of the
stockholders.[51]
In addition, the Information Statement/Proxy form filed by First Philippine Holdings
Corporation with the SEC pursuant to Section 20 of the SRC, states:
REASON FOR SOLICITATION OF VOTES
The Solicitor is soliciting proxies from stockholders of the Company for the purpose of
electing the directors named under the subject headed Directors in this Statement as well as
to vote the matters in the agenda of the meeting as provided for in the Information
Statement of the Company. All of the nominees are current directors of the Company.[52]
Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the
solicitation or validation of proxies bore no relation at all to the scheduled election of the
board of directors of Meralco during the annual meeting. GSIS very well knew that the
controversy falls within the contemplation of an election controversy properly within the
jurisdiction of the regular courts. Otherwise, it would have never filed its original petition
with the RTC of Pasay. GSIS may have withdrawn its petition with the RTC on a new
assessment made in good faith that the controversy falls within the jurisdiction of the SEC,
yet the reality is that the reassessment is precisely wrong as a matter of law.
IV.
The lack of jurisdiction of the SEC over the subject matter of GSISs petition necessarily
invalidates the CDO and SDO issued by that body. However, especially with respect to the
CDO, there is need for this Court to squarely rule on the question pertaining to its validity,
if only for jurisprudential value and for the guidance of the SEC.
To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with the
SEC on 26 May 2008. The CDO, six (6) pages in all with three (3) pages devoted to the
tenability of granting the injunctive relief, was issued on the very same day, 26 May 2008,
without notice or hearing. The CDO bore the signature of Commissioner Jesus Martinez,
identified therein as Officer-in-Charge, and nobody elses.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential
Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:
xxx
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
xxx
[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged or is
about to engage in any act or practice constituting a violation of any provision of this Code,
any rule, regulation or order thereunder, or any rule of an Exchange, registered securities
association, clearing agency or other self-regulatory organization, it may issue an order to
such person to desist from committing such act or practice: Provided, however, That the
Commission shall not charge any person with violation of the rules of an Exchange or other
self regulatory organization unless it appears to the Commission that such Exchange or
other self-regulatory organization is unable or unwilling to take action against such person.
After finding that such person has engaged in any such act or practice and that there is a
reasonable likelihood of continuing, further or future violations by such person, the
Commission may issue ex-parte a cease and desist order for a maximum period of ten (10)
days, enjoining the violation and compelling compliance with such provision. The
Commission may transmit such evidence as may be available concerning any violation of
any provision of this Code, or any rule, regulation or order thereunder, to the Department
of Justice, which may institute the appropriate criminal proceedings under this Code.
SEC. 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or
verification, motu proprio, or upon verified complaint by any aggrieved party, may issue a
cease and desist order without the necessity of a prior hearing if in its judgment the act or
practice, unless restrained, will operate as a fraud on investors or is otherwise likely to
cause grave or irreparable injury or prejudice to the investing public.

The provisions of the SRC relevant to the issuance of a CDO are as follows:
64.2. Until the Commission issues a cease and desist order, the fact that an investigation
has been initiated or that a complaint has been filed, including the contents of the
complaint, shall be confidential. Upon issuance of a cease and desist order, the

Commission shall make public such order and a copy thereof shall be immediately
furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5)
days from receipt of the order, file a formal request for a lifting thereof. Said request shall
be set for hearing by the Commission not later than fifteen (15) days from its filing and the
resolution thereof shall be made not later than ten (10) days from the termination of the
hearing. If the Commission fails to resolve the request within the time herein prescribed,
the cease and desist order shall automatically be lifted.

There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated
by Section 5(i), is predicated on a necessity to prevent fraud or injury to the investing
public. No other requisite or detail is tied to this CDO authorized under Section 5(i).
The second basis, found in Section 53.3, involves a determination by the SEC that any
person has engaged or is about to engage in any act or practice constituting a violation of
any provision of this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency or other self-regulatory
organization. The provision additionally requires a finding that there is a reasonable
likelihood of continuing [or engaging in] further or future violations by such person. The
maximum duration of the CDO issued under Section 53.3 is ten (10) days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a
determination of an act or practice, which unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the
investing public. Section 64.1 plainly provides three segregate instances upon which the
SEC may issue the CDO under this provision: (1) after proper investigation or verification,
(2) motu proprio, or (3) upon verified complaint by any aggrieved party. While no lifetime
is expressly specified for the CDO under Section 64, the respondent to the CDO may file a
formal request for the lifting thereof, which the SEC must hear within fifteen (15) days
from filing and decide within ten (10) days from the hearing.
It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both
require a common finding of a need to prevent fraud or injury to the investing public. At
the same time, no mention is made whether the CDO defined under Section 5(i) may be
issued ex-parte, while the CDO under Section 64.1 requires grave and irreparable injury,
language absent in Section 5(i). Notwithstanding the similarities between Section 5(i) and
Section 64.1, it remains clear that the CDO issued under Section 53.3 is a distinct creation
from that under Section 64.

The Court of Appeals cited the CDO as having been issued in violation of the constitutional
provision on due process, which requires both prior notice and prior hearing.[53] Yet
interestingly, the CDO as contemplated in Section 53.3 or in Section 64, may be issued exparte (under Section 53.3) or without necessity of hearing (under Section 64.1). Nothing in
these provisions impose a requisite hearing before the CDO may be issued thereunder.
Nonetheless, there are identifiable requisite actions on the part of the SEC that must be
undertaken before the CDO may be issued either under Section 53.3 or Section 64. In the
case of Section 53.3, the SEC must make two findings: (1) that such person has engaged in
any such act or practice, and (2) that there is a reasonable likelihood of continuing, (or
engaging in) further or future violations by such person. In the case of Section 64, the SEC
must adjudge that the act, unless restrained, will operate as a fraud on investors or is
otherwise likely to cause grave or irreparable injury or prejudice to the investing public.
Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section
5.1, Section 53.3 or Section 64 of the SRC. The CDO actually refers and cites all three
provisions, yet it is apparent that a singular CDO could not be founded on Section 5.1,
Section 53.3 and Section 64 collectively. At the very least, the CDO under Section 53.3 and
under Section 64 have their respective requisites and terms.
GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it
was seeking the CDO under Section 5.1, Section 53.3, or Section 64. Considering that
injunctive relief generally avails upon the showing of a clear legal right to such relief, the
inability or unwillingness to lay bare the precise statutory basis for the prayer for injunction
is an obvious impediment to a successful
application. Nonetheless, the error of the SEC in granting the CDO without stating which
kind of CDO it was issuing is more unpardonable, as it is an act that contravenes due
process of law.
We have particularly required, in administrative proceedings, that the body or tribunal in all
controversial questions, render its decision in such a manner that the parties to the
proceeding can know the various issues involved, and the reason for the decision rendered.
[54] This requirement is vital, as its fulfillment would afford the adverse party the
opportunity to interpose a reasoned and intelligent appeal that is responsive to the grounds
cited against it. The CDO extended by the SEC fails to provide the needed reasonable
clarity of the rationale behind its issuance.
The subject CDO first refers to Section 64, citing its provisions, then stating: [p]rescinding
from the aforequoted, there can be no doubt whatsoever that the Commission is in fact
mandated to take up, if expeditiously, any verified complaint praying for the provisional
remedy of a cease and desist order.[55] The CDO then discusses the nature of the right of
GSIS to obtain the CDO, as well as the urgent and paramount necessity to prevent serious

damage because the stockholders meeting is scheduled on May 28, 2008 x x x Had the
CDO stopped there, the unequivocal impression would have been that the order is based on
Section 64.
But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full,
ratiocinating that under these provisions, the SEC had the power to issue cease and desist
orders to prevent fraud or injury to the public and such other measures necessary to carry
out the Commissions role as regulator.[56] Immediately thence, the CDO cites Section 53.3
as providing that whenever it shall appear to the Commission that nay person has engaged
or is about to engage in any act or practice constituting a violation of any provision, any
rule, regulation or order thereunder, the Commission may issue ex-parte a cease and desist
order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance therewith.[57]
The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the
impression that it is grounded on all three provisions, and that may very well have been the
intention of the SEC. Assuming that is so, it is legally impermissible for the SEC to have
utilized both Section 53.3 and Section 64 as basis for the CDO at the same time. The CDO
under Section 53.3 is premised on distinctly different requisites than the CDO under
Section 64. Even more crucially, the lifetime of the CDO under Section 53.3 is confined to
a definite span of ten (10) days, which is not the case with the CDO under Section 64. This
CDO under Section 64 may be the object of a formal request for lifting within five (5) days
from its issuance, a remedy not expressly afforded to the CDO under Section 53.3.
Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have an
intelligent or adequate basis to respond to the same. Such respondent would not know
whether the CDO would have a determinate lifespan of ten (10) days, as in Section 53.3, or
would necessitate a formal request for lifting within five (5) days, as required under
Section 64.1. This lack of clarity is to the obvious prejudice of the respondent, and is in
clear defiance of the constitutional right to due process of law. Indeed, the veritable mlange
that the assailed CDO is, with its jumbled mixture of premises and conclusions, the
antithesis of due process.
Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity
would have been offered on what Section of the SRC it is based. However, the CDO is
precisely silent as to its lifetime, thereby precluding much needed clarification. In view of
the statutory differences among the three CDOs under the SRC, it is essential that the SEC,
in issuing such injunctive relief, identify the exact provision of the SRC on which the CDO
is founded. Only by doing so could the adversely affected party be able to properly
evaluate whatever his responses under the law.

To make matters worse for the SEC, the fact that the CDO was signed, much less
apparently deliberated upon, by only by one commissioner likewise renders the order
fatally infirm.

The SEC is a collegial body composed of a Chairperson and four (4) Commissioners.[58]
In order to constitute a quorum to conduct business, the presence of at least three (3)
Commissioners is required.[59] In the leading case of GMCR v. Bell,[60] we definitively
explained the nature of a collegial body, and how the act of one member of such body, even
if the head, could not be considered as that of the entire body itself. Thus:
We hereby declare that the NTC is a collegial body requiring a majority vote out of the
three members of the commission in order to validly decide a case or any incident therein.
Corollarily, the vote alone of the chairman of the commission, as in this case, the vote of
Commissioner Kintanar, absent the required concurring vote coming from the rest of the
membership of the commission to at least arrive at a majority decision, is not sufficient to
legally render an NTC order, resolution or decision.
Simply put, Commissioner Kintanar is not the National Telecommunications Commission.
He alone does not speak for and in behalf of the NTC. The NTC acts through a three-man
body, and the three members of the commission each has one vote to cast in every
deliberation concerning a case or any incident therein that is subject to the jurisdiction of
the NTC. When we consider the historical milieu in which the NTC evolved into the quasijudicial agency it is now under Executive Order No. 146 which organized the NTC as a
three-man commission and expose the illegality of all memorandum circulars negating the
collegial nature of the NTC under Executive Order No. 146, we are left with only one
logical conclusion: the NTC is a collegial body and was a collegial body even during the
time when it was acting as a one-man regime.[61]

We can adopt a virtually word-for-word observation with respect to former Commissioner


Martinez and the SEC. Simply put, Commissioner Martinez is not the SEC. He alone does
not speak for and in behalf of the SEC. The SEC acts through a five-person body, and the
five members of the commission each has one vote to cast in every deliberation concerning
a case or any incident therein that is subject to the jurisdiction of the SEC.

GSIS attempts to defend former Commissioner Martinezs action, but its argument is
without merit. It cites SEC Order No. 169, Series of 2008, whereby Martinez was
designated as Officer-in-Charge of the Commission for the duration of the official travel of
the Chairperson to Paris, France, to attend the 33rd Annual Conference of the [IOSCO]
from May 26-30, 2008.[62] As officer-in-charge (OIC), Martinez was authorized to sign all
documents and papers and perform all other acts and deeds as may be necessary in the dayto-day operation of the Commission.
It is clear that Martinez was designated as OIC because of the official travel of only one
member, Chairperson Fe Barin. Martinez was not commissioned to act as the SEC itself. At
most, he was to act in place of Chairperson Barin in the exercise of her duties as
Chairperson of the SEC. Under Section 4.3 of the SRC, the Chairperson is the chief
executive officer of the SEC, and thus empowered to execute and administer the policies,
decisions, orders and resolutions approved by the Commission, as well as to have the

jurisdiction to review actual cases or controversies. If it has not been clear to the SEC
before, it should be clear now that its power to issue a CDO can not, under the SRC, be
delegated to an individual commissioner.
V.
In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-11CA constitute sufficient basis to nullify the assailed decision of the Court of Appeals, still it
remains clear that the reliefs GSIS seeks of this Court have no basis in law.
Notwithstanding the black mark that stains the appellate courts decision, the first paragraph
of its fallo, to the extent that it dismissed the complaint of GSIS with the SEC for lack of
jurisdiction and consequently nullified the CDO and SDO, defies unbiased scrutiny and
deserves affirmation.
A.

general executive direction and supervision of the work and operation of the Commission.
[63] It is in relation to the exercise of these duties of the Chairperson, and not to the
functions of the Commission, that Martinez was authorized to sign all documents and
papers and perform all other acts and deeds as may be necessary in the day-to-day
operation of the Commission.

GSIS likewise cites, as authority for Martinezs unilateral issuance of the CDO, Section 4.6
of the SRC, which states that the SEC may, for purposes of efficiency, delegate any of its
functions to any department or office of the Commission, an individual Commissioner or
staff member of the Commission except its review or appellate authority and its power to
adopt, alter and supplement any rule or regulation. Reliance on this provision is
inappropriate. First, there is no convincing demonstration that the SEC had delegated to
Martinez the authority to issue the CDO. The SEC Order designating Martinez as OIC only
authorized him to exercise the functions of the absent Chairperson, and not of the
Commission. If the Order is read as enabling Martinez to issue the CDO in behalf of the
Commission, it would be akin to conceding that the SEC Chairperson, acting alone, can
issue the CDO in behalf of the SEC itself. That again contravenes our holding in GMCR v.
Bell.

In addition, it is clear under Section 4.6 that the ability to delegate functions to a single
commissioner does not extend to the exercise of the review or appellate authority of the
SEC. The issuance of the CDO is an act of the SEC itself done in the exercise of its original

In its dispositive portion, the Court of Appeals likewise pronounced that the complaint filed
by GSIS with the SEC should be barred from being considered as an election contest in the
RTC, given that the fifteen (15) day prescriptive period to file an election contest with the
RTC, under Section 3, Rule 6 of the Interim Rules, had already run its course.[64] Yet no
such relief was requested by private respondents in their petition for certiorari filed with the
Court of Appeals[65]. Without disputing the legal predicates surrounding this
pronouncement, we note that its tenor, if not the text, unduly suggests an unwholesome preemptive strike. Given our observations in A.M. No. 08-8-11-CA of the undue interest
exhibited by the author of the appellate court decision, such declaration is best deleted.
Nonetheless, we do trust that any court or tribunal that may be confronted with that premise
adverted to by the Court of Appeals would know how to properly treat the same.
B.
Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.
Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of
GSIS[66] is unique among government owned or controlled corporations with original
charter in that it allocates a role for its internal legal counsel that is in conjunction with or
complementary to the Office of the Government Corporate Counsel (OGCC), which is the
statutory legal counsel for GOCCs. Section 47 of GSIS charter reads:

SEC. 47. Legal Counsel.The Government Corporate Counsel shall be the legal adviser and
consultant of GSIS, but GSIS may assign to the Office of the Government Corporate

10

Counsel (OGCC) cases for legal action or trial, issues for legal opinions, preparation and
review of contracts/agreements and others, as GSIS may decide or determine from time to
time: Provided, however, That the present legal services group in GSIS shall serve as its inhouse legal counsel.

WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the
petitioner to bring forth the suit.

The GSIS may, subject to approval by the proper court, deputize any personnel of the legal
service group to act as special sheriff in the enforcement of writs and processes issued by
the court, quasi-judicial agencies or administrative bodies in cases involving GSIS.[67]

The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second
and third paragraphs of the fallo of the assailed decision dated 23 July 2008 of the Court of
Appeals, including subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the second
paragraph, are hereby DELETED.

The designation of the OGCC as the legal counsel for GOCCs is set forth by statute,
initially by Rep. Act No. 3838, then reiterated by the Administrative Code of 1987.[68]
Given that the designation is statutory in nature, there is no impediment for Congress to
impose a different role for the OGCC with respect to particular GOCCs it may charter.
Congress appears to have done so with respect to GSIS, designating the OGCC as a legal
adviser and consultant, rather than as counsel to GSIS. Further, the law clearly vests unto
GSIS the discretion, rather than the duty, to assign cases to the OGCC for legal action,
while designating the present legal services group of GSIS as in-house legal counsel. This
situates GSIS differently from the Land Bank of the Philippines, whose own in-house
lawyers have persistently argued before this Court to no avail on their alleged right

to file petitions before us instead of the OGCC.[69] Nothing in the Land Bank charter[70]
vested it with the discretion to choose when to assign
cases to the OGCC, notwithstanding the establishment of its own Legal Department.[71]
Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of
GSIS even if it performs such a role for other GOCCs. To bind Congress to perform in that
manner would be akin to elevating the OGCCs statutory role to irrepealable status, and it is
basic that Congress is barred from passing irrepealable laws.[72]
C.
We close by acknowledging that the surrounding circumstances behind these petitions are
unfortunate, given the events as narrated in A.M. No. 08-8-11-CA. While due punishment
has been meted on the errant magistrates, the corporate world may very well be reminded
that the members of the judiciary are not to be viewed or treated as
mere pawns or puppets in the internecine fights businessmen and their associates wage
against other businessmen in the quest for corporate dominance. In the end, the petitions
did afford this Court to clarify consequential points of law, points rooted in principles
which will endure long after the names of the participants in these cases have been
forgotten.

No pronouncements as to costs.
SO ORDERED.
YU v YUKAYGUAN
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court,
which seeks to reverse and set aside the Resolutions dated 18 July 2006[2] and 19 April
2007[3] of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents
motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006,
reconsidering its Decision[4] dated 15 February 2006; and remanding the case to the
Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect,
reversing the Decision[5] dated 10 November 2004 of the RTC which dismissed
respondents Complaint in SRC Case No. 022-CEB. Herein petitioners Motion for
Reconsideration of the Resolution dated 18 July 2006 was denied by the appellate court in
the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu
(Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S.
Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald
Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc.
(Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware
and industrial supply and equipment business.

11

On 15 October 2002, respondents filed against petitioners a verified Complaint for


Accounting, Inspection of Corporate Books and Damages through Embezzlement and
Falsification of Corporate Records and Accounts[6] before the RTC of Cebu. The said
Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf
of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background
of the Complaint was stated in the attached Affidavit executed by respondent Joseph.
According to respondents,[7] Winchester, Inc. was established and incorporated on 12
September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares
of stock worth P100,000.00.[8] Petitioner Anthony paid for the said shares of stock with
respondent Josephs money, thus, making the former a mere trustee of the shares for the
latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in
Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,[9] Siao So Lan, and John
S. Yu.[10] Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares
of stock in Winchester, Inc., still in petitioner Anthonys name.
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its
incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the
corporation.[11] Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500
shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners
Rosita and Jason.[12]
Respondents further averred that although respondent Joseph appeared as the Secretary and
Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled and
ran the said corporation as if it were their own family business. Petitioner Rosita handled
the money market placements of the corporation to the exclusion of respondent Joseph, the
designated Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds
and properties of Winchester, Inc. by understating the sales, charging their personal and
family expenses to the said corporation, and withdrawing stocks for their personal use
without paying for the same. Respondents attached to the Complaint various receipts[13] to
prove the personal and family expenses charged by petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200
shares of stock in petitioner Anthonys name. Respondents also prayed that petitioners be
ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch
Clerk of Court of the RTC for respondents inspection; (2) render an accounting of all the
funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and
family expenses which petitioners charged to Winchester, Inc., as well as the properties of
the corporation which petitioners withheld without payment; and (4) pay respondents
attorneys fees and litigation expenses. In the meantime, respondents sought the
appointment of a Management Committee and the freezing of all corporate funds by the
trial court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,[14]


attached to which was petitioner Anthonys Affidavit.[15] Petitioners vehemently denied the
allegation that petitioner Anthony was a mere trustee for respondent Joseph of the 1,000
shares of stock in Winchester, Inc. in petitioner Anthonys name. For the incorporation of
Winchester, Inc., petitioner Anthony contributed P25,000.00 paid-up capital, representing
25% of the total par value of the 1,000 shares he subscribed to, the said amount being paid
out of petitioner Anthonys personal savings and petitioners Anthony and Rositas conjugal
funds. Winchester, Inc. was being co-managed by petitioners and respondents, and the
attached receipts, allegedly evidencing petitioners use of corporate funds for personal and
family expenses, were in fact signed and approved by respondent Joseph.
By way of special and affirmative defenses, petitioners contended in their Answer with
Compulsory Counterclaim that respondents had no cause of action against them.
Respondents Complaint was purely intended for harassment. It should be dismissed under
Section 1(j), Rule 16[16] of the Rules of Court for failure to comply with conditions
precedent before its filing. First, there was no allegation in respondents Complaint that
earnest efforts were exerted to settle the dispute between the parties. Second, since
respondents Complaint purportedly constituted a derivative suit, it noticeably failed to
allege that respondents exerted effort to exhaust all available remedies in the Articles of
Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And
third, given that respondents Complaint was also for inspection of corporate books, it
lacked the allegation that respondents made a previous demand upon petitioners to inspect
the corporate books but petitioners refused. Prayed for by petitioners, in addition to the
dismissal of respondents Complaint, was payment of moral and exemplary damages,
attorneys fees, litigation expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a Management
Committee was commenced. Respondent Joseph submitted therein, as his direct testimony,
the same Affidavit that he executed, which was attached to the respondents Complaint. On
4 November 2002, respondent Joseph was cross-examined by the counsel for petitioners.
Thereafter, the continuation of the hearing was set for 29 November 2002, in order for
petitioners to adduce evidence in support of their opposition to the application for the
appointment of a Management Committee.[17]
During the hearing on 29 November 2002, the parties manifested before the RTC that there
was an ongoing mediation between them, and so the hearing on the appointment of a
Management Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to a division
of the stocks in trade,[18] the real properties, and the other assets of Winchester, Inc. In
partial implementation of the afore-mentioned amicable settlement, the stocks in trade and
real properties in the name of Winchester, Inc. were equally distributed among petitioners

12

and respondents. As a result, the stockholders and members of the Board of Directors of
Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution[19] dissolving the
corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.[20]
On 25 June 2004, petitioners filed a Manifestation[21] informing the RTC of the existence
of their amicable settlement with respondents. Respondents, however, made their own
manifestation before the RTC that they were repudiating said settlement, in view of the
failure of the parties thereto to divide the remaining assets of Winchester, Inc.
Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.[22]
On 26 August 2004, instead of holding a formal pre-trial conference and resuming the
hearing on the application for the appointment of a Management Committee, petitioners
and respondents agreed that the RTC may already render a judgment based on the
pleadings. In accordance with the agreement of the parties, the RTC issued, on even date,
an Order[23] which stated:

ORDER
During the pre-trial conference held on August 26, 2004, counsels of the parties
manifested, agreed and suggested that a judgment may be rendered by the Court in this
case based on the pleadings, affidavits, and other evidences on record, or to be submitted
by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate
Controversies. The suggestion of counsels was approved by the Court.
Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their
respective memoranda within a non-extendible period of twenty (20) days from notice
hereof. Thereafter, the instant case will be deemed submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge

Petitioners and respondents duly filed their respective Memoranda,[24] discussing the
arguments already set forth in the pleadings they had previously submitted to the RTC.
Respondents, though, attached to their Memorandum a Supplemental Affidavit[25] of
respondent Joseph, containing assertions that refuted the allegations in petitioner Anthonys
Affidavit, which was earlier submitted with petitioners Answer with Compulsory
Counterclaim. Respondents also appended to their Memorandum additional documentary
evidence,[26] consisting of original and duplicate cash invoices and cash disbursement
receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were
understating sales and charging their personal expenses to the corporate funds.
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC
Case No. 022-CEB. The dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby
renders judgment in this case DISMISSING the complaint filed by the [herein
respondents].
The Court also hereby dismisses the [herein petitioners] counterclaim because it has not
been indubitably shown that the filing by the [respondents] of the latters complaint was
done in bad faith and with malice.[27]

The RTC declared that respondents failed to show that they had complied with the essential
requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

As to respondents prayer for the inspection of corporate books and records, the RTC
adjudged that they had likewise failed to comply with the requisites entitling them to the
same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate

13

Controversies requires that the complaint for inspection of corporate books or records must
state that:
(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or
records and/or to be furnished with financial statements under Sections 74 and 75 of the
Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be furnished with
financial statements made by the plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for
such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is
unjustified and illegal, stating the law and jurisprudence in support thereof.

x x x [T]his Court sees that the instant petition would still fail taking into consideration all
the pleadings and evidence of the parties except the supplemental affidavit of [herein
respondent] Joseph and its corresponding annexes appended in [respondents] memorandum
before the Court a quo. The Court a quo have (sic) outrightly dismissed the complaint for
its failure to comply with the mandatory provisions of the Interim Rules of Procedure for
Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and
Rule 7, Section 2 thereof, which reads as follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;

The RTC further noted that respondent Joseph was the corporate secretary of Winchester,
Inc. and, as such, he was supposed to be the custodian of the corporate books and records;
therefore, a court order for respondents inspection of the same was no longer necessary.
The RTC similarly denied respondents demand for accounting as it was clear that
Winchester, Inc. had been engaging the services of an audit firm. Respondent Joseph
himself described the audit firm as competent and independent, and believed that the
audited financial statements the said audit firm prepared were true, faithful, and correct.
Finding the claims of the parties for damages against each other to be unsubstantiated, the
RTC thereby dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals via a
Petition for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No.
00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10
December 2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case, together with the
applicable laws and jurisprudence, WE see no reason or justification for granting the
present appeal.

xxxx
RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action. x x x
xxxx
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires.
xxxx
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint In addition to the requirements in section 4, Rule 2 of these Rules, the
complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiffs right of inspection of corporate
orders or records and/or to be furnished with financial statements under Section 74 and 75
of the Corporation Code of the Philippines;

xxxx
(2) A demand for inspection and copying of books [and/or] to be furnished with financial
statements made by the plaintiffs upon defendant;

14

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given
for such refusal, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is
unjustified and illegal, stating the law and jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents] have not complied with the
above quoted provisions. [Respondents] should be mindful that in filing their complaint
which, as admitted by them, is a derivative suit, should have first exhausted all available
remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules
governing the corporation. The contention of [respondent Joseph] that he had indeed made
several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not
tantamount to exhaustion of remedies. What the law requires is to bring the grievance to
the Board of Directors or Stockholders for the latter to take the opportunity to settle
whatever problem in its regular meeting or special meeting called for that purpose which
[respondents] failed to do. x x x The requirements laid down by the Interim Rules of
Procedure for Intra-Corporate Controversies are mandatory which cannot be dispensed
with by any stockholder of a corporation before filing a derivative suit.[28] (Emphasis
ours.)

The Court of Appeals likewise sustained the refusal by the RTC to consider respondent
Josephs Supplemental Affidavit and other additional evidence, which respondents belatedly
submitted with their Memorandum to the said trial court. The appellate court ratiocinated
that:
With regard to the claim of [herein respondents] that the supplemental affidavit of
[respondent] Joseph and its annexes appended to their memorandum should have been
taken into consideration by the Court a quo to support the reliefs prayed [for] in their
complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic)
inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial conference
conducted on August 26, 2004, the parties through their respective counsels had come up
with an agreement that the lower court would render judgment based on the pleadings and
evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim
Rules of Procedure for Intra-Corporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. If, after submission of the pre-trial briefs, the court
determines that, upon consideration of the pleadings, the affidavits and other evidence

submitted by the parties, a judgment may be rendered, the court may order the parties to
file simultaneously their respective memoranda within a non-extendible period of twenty
(20) days from receipt of the order. Thereafter, the court shall render judgment, either full
or otherwise, not later than ninety (90) days from the expiration of the period to file the
memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents which were submitted only
upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial
briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted
pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:
SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal
knowledge, shall set forth such facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify on the matters stated therein. The
affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the
appropriate pleading; Provided, however, that affidavits, documentary and other evidence
not so submitted may be attached to the pre-trial brief required under these Rules.
Affidavits and other evidence not so submitted shall not be admitted in evidence, except in
the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed
prima facie hostile if he fails or refuses to execute an affidavit after a written request
therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than
five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its annexes
falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, the party making an
allegation in a civil case has the burden of proving it by preponderance of evidence.
Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That
is, appellants must adduce evidence that has greater weight or is more convincing that (sic)
which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal
of the complaint but the [respondents] themselves for their lackadaisical attitude in setting
forth and appending their defences belatedly. To admit them would be a denial of due
process for the opposite party which this Court cannot allow.[29]

15

Ultimately, the Court of Appeals decreed:


WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the
assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu
City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost
against the [herein respondents].[30]

Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a


Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for
Reconsideration,[31] invoking the following grounds:
(1)
The [herein respondents] have sufficiently exhausted all remedies before filing
the present action; and
(2)
[The] Honorable Court erred in holding that the supplemental affidavit and its
annexes is (sic) inadmissible because the rules and the lower court expressly allowed the
submission of the same in its order dated August 26, 2004 x x x.[32]

In a Resolution[33] dated 8 March 2006, the Court of Appeals granted respondents Motion
to Set for Oral Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution[34] setting forth the events that
transpired during the oral arguments, which took place on 30 March 2006. Counsels for the
parties manifested before the appellate court that they were submitting respondents Motion
for Reconsideration for resolution. Justice Magpale, however, still called on the parties to
talk about the possible settlement of the case considering their familial relationship.
Independent of the resolution of respondents Motion for Reconsideration, the parties were
agreeable to pursue a settlement for the dissolution of the corporation, which they had
actually already started.
In a Resolution[35] dated 11 April 2006, the Court of Appeals ordered the parties to submit,
within 10 days from notice, their intended amicable settlement, since the same would
undeniably affect the resolution of respondents pending Motion for Reconsideration. If the
said period should lapse without the parties submitting an amicable settlement, then they
were directed by the appellate court to file within 10 days thereafter their position papers
instead.

On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,[36]
stating that the parties did not reach an amicable settlement. Respondents informed the
appellate court that prior to the filing with the Securities and Exchange Commission (SEC)
of a petition for dissolution of Winchester, Inc., the parties already divided the stocks in
trade and the real assets of the corporation among themselves. Respondents posited,
though, that the afore-mentioned distribution of the assets of Winchester, Inc. among the
parties was null and void, as it violated the last paragraph of Section 122 of the Corporation
Code, which provides that, [e]xcept by a decrease of capital stock and as otherwise allowed
by the Corporation Code, no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities. At the same time,
however, respondents brought to the attention of the Court of Appeals that the parties did
eventually file with the SEC a petition for dissolution of Winchester, Inc., which the SEC
approved.[37]
Respondents no longer discussed in their Position Paper the grounds they previously
invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15
February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead
argued that the RTC Decision in question was null and void as it did not clearly state the
facts and the law on which it was based. Respondents sought the remand of the case to the
RTC for further proceedings on their derivative suit and completion of the dissolution of
Winchester, Inc., including the legalization of the prior partial distribution among the
parties of the assets of said corporation.
Petitioners filed their Position Paper[38] on 23 May 2006, wherein they accused
respondents of attempting to incorporate extraneous matters into the latters Motion for
Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was not
the dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the
RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting
respondents Motion for Reconsideration. The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis--vis the issues raised by
the [herein respondents] motion for reconsideration and in view of the formal dissolution of
the corporation which leaves unresolved up to the present the settlement of the properties
and assets which are now in danger of dissipation due to the unending litigation, this Court
finds the need to remand the instant case to the lower court (commercial court) as the
proper forum for the adjudication, disposition, conveyance and distribution of said
properties and assets between and amongst its stockholders as final settlement pursuant to
Sec. 122 of the Corporation Code after payment of all its debts and liabilities as provided
for under the same proviso. This is in accord with the pronouncement of the Supreme Court
in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and
which WE quote, viz:

16

the corporation continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and for enabling it to settle
and close its affairs, culminating in the disposition and distribution of its remaining assets.
It may, during the three-year term, appoint a trustee or a receiver who may act beyond that
period. The termination of the life of a juridical entity does not by itself cause the
extinction or diminution of the rights and liabilities of such entity x x x nor those of its
owners and creditors. If the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within that period, the board
of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation. Still in the absence of a board of
directors or trustees, those having any pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the corporation, acting for and in its behalf,
might make proper representation with the Securities and Exchange Commission, which
has primary and sufficiently broad jurisdiction in matters of this nature, for working out a
final settlement of the corporate concerns.
In the absence of a trustee or board of director in the case at bar for purposes above
mentioned, the lower court under Republic Act No. [8799] (otherwise known as the
Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer
of Cases from the Securities and Exchange Commission to the Regional Trial Courts)
which took effect on October 1, 2001, is the proper forum for working out the final
settlement of the corporate concern.[39]

Hence, the Court of Appeals ruled:


WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The
order dated February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED
to the lower court to take the necessary proceedings in resolving with deliberate dispatch
any and all corporate concerns towards final settlement.[40]

Petitioners filed a Motion for Reconsideration[41] of the foregoing Resolution, but it was
denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE
CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE
NULL AND VOID[.]

II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT
JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED
IN REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED
IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS
FOR THE [RESPONDENTS] MOTION FOR RECONSIDERATION. (sic) INASMUCH
AS [THE] REASON CITED WAS A NON-ISSUE IN THE CASE.

IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT
VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.[42]

The crux of petitioners contention is that the Court of Appeals committed grievous error in
reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters,
which had not been previously raised in respondents Complaint before the RTC, or in their
Petition for Review and Motion for Reconsideration before the appellate court; i.e., the
adjudication, disposition, conveyance, and distribution of the properties and assets of
Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of
the parties. The fact that the parties were able to agree before the Court of Appeals to
submit for resolution respondents Motion for Reconsideration of the 15 February 2006
Decision of the same court, independently of any intended settlement between the parties
as regards the dissolution of the corporation and distribution of its assets, only proves the
distinction and independence of these matters from one another. Petitioners also contend
that the assailed Resolution dated 18 July 2006 of the Court of Appeals, granting
respondents Motion for Reconsideration, failed to clearly and distinctly state the facts and
the law on which it was based. Remanding the case to the RTC, petitioners maintain, will
violate the very essence of the summary nature of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation,
and revert the case to square one.
The Court finds the instant Petition meritorious.

17

To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative
suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel
petitioners to account for and reimburse to the said corporation the corporate assets and
funds which the latter allegedly misappropriated for their personal benefit. During the
pendency of the proceedings before the court a quo, the parties were able to reach an
amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among
themselves. This amicable settlement was already partially implemented by the parties,
when respondents repudiated the same, for which reason the RTC proceeded with the case
on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing
respondents Complaint for failure to comply with essential pre-requisites before they could
avail themselves of the remedies under the Interim Rules of Procedure Governing IntraCorporate Controversies; and for inadequate substantiation of respondents allegations in
said Complaint after consideration of the pleadings and evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the
findings of the RTC that respondents did not abide by the requirements for a derivative suit,
nor were they able to prove their case by a preponderance of evidence. Respondents filed a
Motion for Reconsideration of said judgment of the appellate court, insisting that they were
able to meet all the conditions for filing a derivative suit. Pending resolution of respondents
Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach
an amicable settlement of their dispute, but the parties were unable to do so. The parties
were not able to submit to the appellate court, within the given period, any amicable
settlement; and filed, instead, their Position Papers. This effectively meant that the parties
opted to submit respondents Motion for Reconsideration of the 15 February 2006 Decision
of the Court of Appeals, and petitioners opposition to the same, for resolution by the
appellate court on the merits.
It was at this point that the case took an unexpected turn.
In accordance with respondents allegation in their Position Paper that the parties
subsequently filed with the SEC, and the SEC already approved, a petition for dissolution
of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the
corporate concerns between the parties regarding Winchester, Inc. could be resolved
towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court
of Appeals converted the derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. Nonetheless, an individual stockholder is permitted
to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to
protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue,
or are the ones to be sued, or hold the control of the corporation. In such actions, the suing

stockholder is regarded as a nominal party, with the corporation as the real party in interest.
A derivative action is a suit by a shareholder to enforce a corporate cause of action. The
corporation is a necessary party to the suit. And the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a corporation has a defense
to an action against it and is not asserting it, a stockholder may intervene and defend on
behalf of the corporation.[43] By virtue of Republic Act No. 8799, otherwise known as the
Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative
suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M.
No. 00-11-03-SC promulgated on 21 November 2000.
In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is
specifically governed by Section 122 of the Corporation Code, which reads:
SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal interest
vests in the trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the


process of settling the affairs of said corporation, which consists of adjusting the debts and
claims, that is, of collecting all that is due the corporation, the settlement and adjustment of

18

claims against it and the payment of its just debts.[44] More particularly, it entails the
following:
Winding up the affairs of the corporation means the collection of all assets, the payment of
all its creditors, and the distribution of the remaining assets, if any among the stockholders
thereof in accordance with their contracts, or if there be no special contract, on the basis of
their respective interests. The manner of liquidation or winding up may be provided for in
the corporate by-laws and this would prevail unless it is inconsistent with law.[45]
It may be undertaken by the corporation itself, through its Board of Directors; or by
trustees to whom all corporate assets are conveyed for liquidation; or by a receiver
appointed by the SEC upon its decree dissolving the corporation.[46]
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation
proceedings. They are neither part of each other nor the necessary consequence of the
other. There is totally no justification for the Court of Appeals to convert what was
supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of
Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement, in which they
agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said
corporation, it must be pointed out that respondents themselves repudiated said amicable
settlement before the RTC, even after the same had been partially implemented; and moved
that their case be set for pre-trial. Attempts to again amicably settle the dispute between the
parties before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for the final
settlement of corporate concerns was solely grounded on respondents allegation in its
Position Paper that the parties had already filed before the SEC, and the SEC approved, the
petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of
evidence on record to prove said allegation. Respondents failed to submit copies of such
petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It
is a basic rule in evidence that each party must prove his affirmative allegation. Since it
was respondents who alleged the voluntary dissolution of Winchester, Inc., respondents
must, therefore, prove it.[47] This respondents failed to do.
Even assuming arguendo that the parties did submit a petition for the dissolution of
Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still
without jurisdiction to order the final settlement by the RTC of the remaining corporate
concerns. It must be remembered that the Complaint filed by respondents before the RTC
essentially prayed for the accounting and reimbursement by petitioners of the corporate
funds and assets which they purportedly misappropriated for their personal use; surrender
by the petitioners of the corporate books for the inspection of respondents; and payment by

petitioners to respondents of damages. There was nothing in respondents Complaint which


sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution
of Winchester, Inc. could not have resulted in the conversion of respondents derivative suit
to a proceeding for the liquidation of said corporation, but only in the dismissal of the
derivative suit based on either compromise agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court
of Appeals already went beyond the issues raised in respondents Motion for
Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February
2006 Decision, the dismissal by the RTC of respondents Complaint due to respondents
failure to comply with the requirements for a derivative suit and submit evidence to support
their allegations, the Court of Appeals unduly concentrated on respondents unsubstantiated
allegation that Winchester, Inc. was already dissolved and speciously ordered the remand
of the case to the RTC for proceedings so vitally different from that originally instituted by
respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the merits of
respondents Motion for Reconsideration of the 15 February 2006 Decision of the Court of
Appeals, for the sake of finally putting an end to the case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently
exhausted all remedies before filing the derivative suit; and (2) respondent Josephs
Supplemental Affidavit and its annexes should have been taken into consideration, since
the submission thereof was allowed by the rules of procedure, as well as by the RTC in its
Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by respondents of all remedies before
filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of
Appeals in its Decision dated 16 February 2006.
The Court has recognized that a stockholders right to institute a derivative suit is not based
on any express provision of the Corporation Code, or even the Securities Regulation Code,
but is impliedly recognized when the said laws make corporate directors or officers liable
for damages suffered by the corporation and its stockholders for violation of their fiduciary
duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate
assets because of a special injury to him for which he is otherwise without redress. In
effect, the suit is an action for specific performance of an obligation owed by the
corporation to the stockholders to assist its rights of action when the corporation has been
put in default by the wrongful refusal of the directors or management to make suitable
measures for its protection. The basis of a stockholders suit is always one in equity.
However, it cannot prosper without first complying with the legal requisites for its
institution.[48]

19

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate


Controversies lays down the following requirements which a stockholder must comply
with in filing a derivative suit:
Sec. 1. Derivative action. A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

A perusal of respondents Complaint before the RTC would reveal that the same did not
allege with particularity that respondents exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing
Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in
respondent Josephs Affidavit, which was attached to respondents Complaint. Respondent
Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner
Anthony to settle their differences, but the latter would not listen. Respondents additionally
claimed that taking further remedies within the corporation would have been idle
ceremony, considering that Winchester, Inc. was a family corporation and it was impossible
to expect petitioners to take action against themselves who were the ones accused of
wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies are simple and do not leave room for statutory construction. The
second paragraph thereof requires that the stockholder filing a derivative suit should have
exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the
relief he desires; and to allege such fact with particularity in the complaint. The obvious
intent behind the rule is to make the derivative suit the final recourse of the stockholder,
after all other remedies to obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to
petitioner Anthony regarding their dispute hardly constitutes all reasonable efforts to
exhaust all remedies available. Respondents did not refer to or mention at all any other
remedy under the articles of incorporation or by-laws of Winchester, Inc., available for
dispute resolution among stockholders, which respondents unsuccessfully availed
themselves of. And the Court is not prepared to conclude that the articles of incorporation
and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse themselves
from complying with the second requirement under Section 1, Rule 8 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient,
compared to the seriousness of respondents accusations of fraud, misappropriation, and
falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a
family corporation should not in any way exempt respondents from complying with the
clear requirements and formalities of the rules for filing a derivative suit. There is nothing
in the pertinent laws or rules supporting the distinction between, and the difference in the
requirements for, family corporations vis--vis other types of corporations, in the institution
by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section 1,
Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the
respondents Complaint failed to allege, explicitly or otherwise, the fact that there were no
appraisal rights available for the acts of petitioners complained of, as well as a categorical
statement that the suit was not a nuisance or a harassment suit.
As to respondents second ground in their Motion for Reconsideration, the Court agrees
with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent
Josephs Supplemental Affidavit and additional evidence were inadmissible since they were
only appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear
that:
Sec. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal
knowledge, shall set forth such facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify on the matters stated therein. The
affidavits shall be in question and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the
appropriate pleading, Provided, however, that affidavits, documentary and other evidence
not so submitted may be attached to the pre-trial brief required under these Rules.
Affidavits and other evidence not so submitted shall not be admitted in evidence, except in
the following cases:

20

(1)
Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a written
request therefor;
(2)
and

If the failure to submit the evidence is for meritorious and compelling reasons;

(3)

Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than
five (5) days prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of
witnesses and other documentary evidence to the appropriate pleading, which generally
should mean the complaint for the plaintiff and the answer for the respondent. Affidavits
and documentary evidence not so submitted must already be attached to the respective pretrial briefs of the parties. That the parties should have already identified and submitted to
the trial court the affidavits of their witnesses and documentary evidence by the time of
pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies require that the following matters should already
be set forth in the parties pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. Within five (5) days after the period for
availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof,
whichever comes later, the court shall issue and serve an order immediately setting the case
for pre-trial conference, and directing the parties to submit their respective pre-trial briefs.
The parties shall file with the court and furnish each other copies of their respective pretrial brief in such manner as to ensure its receipt by the court and the other party at least
five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the following:
xxxx
(4) Documents not specifically denied under oath by either or both parties;
xxxx

(7) Names of witnesses to be presented and the summary of their testimony as contained in
their affidavits supporting their positions on each of the issues;
(8) All other pieces of evidence, whether documentary or otherwise and their respective
purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing IntraCorporate Controversies,[49] it is the duty of the court to ensure during the pre-trial
conference that the parties consider in detail, among other things, objections to the
admissibility of testimonial, documentary, and other evidence, as well as objections to the
form or substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be
attached to a partys pre-trial brief, at the very last instance, so that the opposite party is
given the opportunity to object to the form and substance, or the admissibility thereof. This
is, of course, to prevent unfair surprises and/or to avoid the granting of any undue
advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC,
even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
Sec. 4. Judgment before pre-trial. If after submission of the pre-trial briefs, the court
determines that, upon consideration of the pleadings, the affidavits and other evidence
submitted by the parties, a judgment may be rendered, the court may order the parties to
file simultaneously their respective memoranda within a non-extendible period of twenty
(20) days from receipt of the order. Thereafter, the court shall render judgment, either full
or otherwise, not later than ninety (90) days from the expiration of the period to file the
memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination
that it can render judgment before pre-trial, that the parties had submitted their pre-trial
briefs and the court took into consideration the pleadings, affidavits and other evidence
submitted by the parties. Hence, cases wherein the court can render judgment prior to pretrial, do not depart from or constitute an exception to the requisite that affidavits of
witnesses and documentary evidence should be submitted, at the latest, with the parties pretrial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies parties are required to file their
memoranda simultaneously, the same would mean that a party would no longer have any
opportunity to dispute or rebut any new affidavit or evidence attached by the other party to

21

its memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul
the former partys constitutional right to due process.
In the instant case, therefore, respondent Josephs Supplemental Affidavit and the additional
documentary evidence, appended by respondents only to their Memorandum submitted to
the RTC, were correctly adjudged as inadmissible by the Court of Appeals in its 15
February 2006 Decision for having been belatedly submitted. Respondents neither alleged
nor proved that the documents in question fall under any of the three exceptions to the
requirement that affidavits and documentary evidence should be attached to the appropriate
pleading or pre-trial brief of the party, which is particularly recognized under Section 8,
Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of
Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April
2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET
ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby
AFFIRMED. No costs.
SO ORDERED.
KORUGA v ARCENAS
DECISION
NACHURA, J.:

Before this Court are two petitions that originated from a Complaint filed by Ana Maria A.
Koruga (Koruga) before the Regional Trial Court (RTC) of Makati City against the Board
of Directors of Banco Filipino and the Members of the Monetary Board of the Bangko
Sentral ng Pilipinas (BSP) for violation of the Corporation Code, for inspection of records
of a corporation by a stockholder, for receivership, and for the creation of a management
committee.
G.R. No. 168332
The first is a Petition for Certiorari under Rule 65 of the Rules of Court, docketed as G.R.
No. 168332, praying for the annulment of the Court of Appeals (CA) Resolution[1] in CAG.R. SP No. 88422 dated April 18, 2005 granting the prayer for a Writ of Preliminary
Injunction of therein petitioners Teodoro O. Arcenas, Jr., Albert C. Aguirre, Cesar S.
Paguio, and Francisco A. Rivera (Arcenas, et al.).

Koruga is a minority stockholder of Banco Filipino Savings and Mortgage Bank. On


August 20, 2003, she filed a complaint before the Makati RTC which was raffled to Branch
138, presided over by Judge Sixto Marella, Jr.[2] Korugas complaint alleged:
10. 1 Violation of Sections 31 to 34 of the Corporation Code (Code) which prohibit selfdealing and conflicts of interest of directors and officers, thus:
(a)
For engaging in unsafe, unsound, and fraudulent banking practices that have
jeopardized the welfare of the Bank, its shareholders, who includes among others, the
Petitioner, and depositors. (sic)
(b)
For granting and approving loans and/or loaned sums of money to six (6)
dummy borrower corporations (Borrower Corporations) which, at the time of loan
approval, had no financial capacity to justify the loans. (sic)
(c)
For approving and accepting a dacion en pago, or payment of loans with
property instead of cash, resulting to a diminished future cumulative interest income by the
Bank and a decline in its liquidity position. (sic)
(d)
For knowingly giving favorable treatment to the Borrower Corporations in
which some or most of them have interests, i.e. interlocking directors/officers thereof,
interlocking ownerships. (sic)
(e)
For employing their respective offices and functions as the Banks officers and
directors, or omitting to perform their functions and duties, with negligence, unfaithfulness
or abuse of confidence of fiduciary duty, misappropriated or misapplied or ratified by
inaction the misappropriation or misappropriations, of (sic) almost P1.6 Billion Pesos (sic)
constituting the Banks funds placed under their trust and administration, by unlawfully
releasing loans to the Borrower Corporations or refusing or failing to impugn these,
knowing before the loans were released or thereafter that the Banks cash resources would
be dissipated thereby, to the prejudice of the Petitioner, other Banco Filipino depositors,
and the public.
10.2 Right of a stockholder to inspect the records of a corporation (including financial
statements) under Sections 74 and 75 of the Code, as implemented by the Interim Rules;
(a)
Unlawful refusal to allow the Petitioner from inspecting or otherwise
accessing the corporate records of the bank despite repeated demand in writing, where she
is a stockholder. (sic)
10.3 Receivership and Creation of a Management Committee pursuant to:
(a)

Rule 59 of the 1997 Rules of Civil Procedure (Rules);

22

(b)

Section 5.2 of R.A. No. 8799;

(c)

Rule 1, Section 1(a)(1) of the Interim Rules;

(d)

Rule 1, Section 1(a)(2) of the Interim Rules;

(e)

Rule 7 of the Interim Rules;

(f)

Rule 9 of the Interim Rules; and

(g)

The General Banking Law of 2000 and the New Central Bank Act.[3]

On September 12, 2003, Arcenas, et al. filed their Answer raising, among others, the trial
courts lack of jurisdiction to take cognizance of the case. They also filed a Manifestation
and Motion seeking the dismissal of the case on the following grounds: (a) lack of
jurisdiction over the subject matter; (b) lack of jurisdiction over the persons of the
defendants; (c) forum-shopping; and (d) for being a nuisance/harassment suit. They then
moved that the trial court rule on their affirmative defenses, dismiss the intra-corporate
case, and set the case for preliminary hearing.
In an Order dated October 18, 2004, the trial court denied the Manifestation and Motion,
ruling thus:
The result of the procedure sought by defendants Arcenas, et al. (sic) is for the Court to
conduct a preliminary hearing on the affirmative defenses raised by them in their Answer.
This [is] proscribed by the Interim Rules of Procedure on Intracorporate (sic) Controversies
because when a preliminary hearing is conducted it is as if a Motion to Dismiss was filed
(Rule 16, Section 6, 1997 Rules of Civil Procedure). A Motion to Dismiss is a prohibited
pleading under the Interim Rules, for which reason, no favorable consideration can be
given to the Manifestation and Motion of defendants, Arcenas, et al.
The Court finds no merit to (sic) the claim that the instant case is a nuisance or harassment
suit.
WHEREFORE, the Court defers resolution of the affirmative defenses raised by the
defendants Arcenas, et al.[4]

Arcenas, et al. moved for reconsideration[5] but, on January 18, 2005, the RTC denied the
motion.[6] This prompted Arcenas, et al. to file before the CA a Petition for Certiorari and
Prohibition under Rule 65 of the Rules of Court with a prayer for the issuance of a writ of
preliminary injunction and a temporary retraining order (TRO).[7]
On February 9, 2005, the CA issued a 60-day TRO enjoining Judge Marella from
conducting further proceedings in the case.[8]
On February 22, 2005, the RTC issued a Notice of Pre-trial[9] setting the case for pre-trial
on June 2 and 9, 2005. Arcenas, et al. filed a Manifestation and Motion[10] before the CA,
reiterating their application for a writ of preliminary injunction. Thus, on April 18, 2005,
the CA issued the assailed Resolution, which reads in part:
(C)onsidering that the Temporary Restraining Order issued by this Court on February 9,
2005 expired on April 10, 2005, it is necessary that a writ of preliminary injunction be
issued in order not to render ineffectual whatever final resolution this Court may render in
this case, after the petitioners shall have posted a bond in the amount of FIVE HUNDRED
THOUSAND (P500,000.00) PESOS.
SO ORDERED.[11]

Dissatisfied, Koruga filed this Petition for Certiorari under Rule 65 of the Rules of Court.
Koruga alleged that the CA effectively gave due course to Arcenas, et al.s petition when it
issued a writ of preliminary injunction without factual or legal basis, either in the April 18,
2005 Resolution itself or in the records of the case. She prayed that this Court restrain the
CA from implementing the writ of preliminary injunction and, after due proceedings, make
the injunction against the assailed CA Resolution permanent.[12]
In their Comment, Arcenas, et al. raised several procedural and substantive issues. They
alleged that the Verification and Certification against Forum-Shopping attached to the
Petition was not executed in the manner prescribed by Philippine law since, as admitted by
Korugas counsel himself, the same was only a facsimile.
They also averred that Koruga had admitted in the Petition that she never asked for
reconsideration of the CAs April 18, 2005 Resolution, contending that the Petition did not
raise pure questions of law as to constitute an exception to the requirement of filing a
Motion for Reconsideration before a Petition for Certiorari is filed.
They, likewise, alleged that the Petition may have already been rendered moot and
academic by the July 20, 2005 CA Decision,[13] which denied their Petition, and held that

23

the RTC did not commit grave abuse of discretion in issuing the assailed orders, and thus
ordered the RTC to proceed with the trial of the case.
Meanwhile, on March 13, 2006, this Court issued a Resolution granting the prayer for a
TRO and enjoining the Presiding Judge of Makati RTC, Branch 138, from proceeding with
the hearing of the case upon the filing by Arcenas, et al. of a P50,000.00 bond. Koruga filed
a motion to lift the TRO, which this Court denied on July 5, 2006.
On the other hand, respondents Dr. Conrado P. Banzon and Gen. Ramon Montao also filed
their Comment on Korugas Petition, raising substantially the same arguments as Arcenas,
et al.
G.R. No. 169053
G.R. No. 169053 is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, with prayer for the issuance of a TRO and a writ of preliminary injunction filed by
Arcenas, et al.
In their Petition, Arcenas, et al. asked the Court to set aside the Decision[14] dated July 20,
2005 of the CA in CA-G.R. SP No. 88422, which denied their petition, having found no
grave abuse of discretion on the part of the Makati RTC. The CA said that the RTC Orders
were interlocutory in nature and, thus, may be assailed by certiorari or prohibition only
when it is shown that the court acted without or in excess of jurisdiction or with grave
abuse of discretion. It added that the Supreme Court frowns upon resort to remedial
measures against interlocutory orders.
Arcenas, et al. anchored their prayer on the following grounds: that, in their Answer before
the RTC, they had raised the issue of failure of the court to acquire jurisdiction over them
due to improper service of summons; that the Koruga action is a nuisance or harassment
suit; that there is another case involving the same parties for the same cause pending before
the Monetary Board of the BSP, and this constituted forum-shopping; and that jurisdiction
over the subject matter of the case is vested by law in the BSP.[15]
Arcenas, et al. assign the following errors:
I.
THE COURT OF APPEALS, IN FINDING NO GRAVE ABUSE OF
DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL TRIAL COURT
OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS, FAILED TO
CONSIDER AND MERELY GLOSSED OVER THE MORE TRANSCENDENT ISSUES
OF THE LACK OF JURISDICTION ON THE PART OF SAID PUBLIC RESPONDENT
OVER THE SUBJECT MATTER OF THE CASE BEFORE IT, LITIS PENDENTIA AND
FORUM SHOPPING, AND THE CASE BELOW BEING A NUISANCE OR

HARASSMENT SUIT, EITHER ONE AND ALL OF WHICH GOES/GO TO RENDER


THE ISSUANCE BY PUBLIC RESPONDENT OF THE ASSAILED ORDERS A GRAVE
ABUSE OF DISCRETION.
II.
THE FINDING OF THE COURT OF APPEALS OF NO GRAVE ABUSE OF
DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL TRIAL COURT
OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS, IS NOT IN
ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT.[16]

Meanwhile, in a Manifestation and Motion filed on August 31, 2005, Koruga prayed for,
among others, the consolidation of her Petition with the Petition for Review on Certiorari
under Rule 45 filed by Arcenas, et al., docketed as G.R. No. 169053. The motion was
granted by this Court in a Resolution dated September 26, 2005.
Our Ruling
Initially, we will discuss the procedural issue.
Arcenas, et al. argue that Korugas petition should be dismissed for its defective Verification
and Certification Against Forum-Shopping, since only a facsimile of the same was attached
to the Petition. They also claim that the Verification and Certification Against ForumShopping, allegedly executed in Seattle, Washington, was not authenticated in the manner
prescribed by Philippine law and not certified by the Philippine Consulate in the United
States.
This contention deserves scant consideration.
On the last page of the Petition in G.R. No. 168332, Korugas counsel executed an
Undertaking, which reads as follows:
In view of that fact that the Petitioner is currently in the United States, undersigned counsel
is attaching a facsimile copy of the Verification and Certification Against Forum-Shopping
duly signed by the Petitioner and notarized by Stephanie N. Goggin, a Notary Public for
the Sate (sic) of Washington. Upon arrival of the original copy of the Verification and
Certification as certified by the Office of the Philippine Consul, the undersigned counsel
shall immediately provide duplicate copies thereof to the Honorable Court.[17]

24

Thus, in a Compliance[18] filed with the Court on September 5, 2005, petitioner submitted
the original copy of the duly notarized and authenticated Verification and Certification
Against Forum-Shopping she had executed.[19] This Court noted and considered the
Compliance satisfactory in its Resolution dated November 16, 2005. There is, therefore, no
need to further belabor this issue.
We now discuss the substantive issues in this case.
First, we resolve the prayer to nullify the CAs April 18, 2005 Resolution.
We hold that the Petition in G.R. No. 168332 has become moot and academic. The writ of
preliminary injunction being questioned had effectively been dissolved by the CAs July 20,
2005 Decision. The dispositive portion of the Decision reads in part:
The case is REMANDED to the court a quo for further proceedings and to resolve with
deliberate dispatch the intra-corporate controversies and determine whether there was
actually a valid service of summons. If, after hearing, such service is found to have been
improper, then new summons should be served forthwith.[20]

It is clear that the acts complained of pertain to the conduct of Banco Filipinos banking
business. A bank, as defined in the General Banking Law,[21] refers to an entity engaged in
the lending of funds obtained in the form of deposits.[22] The banking business is properly
subject to reasonable regulation under the police power of the state because of its nature
and relation to the fiscal affairs of the people and the revenues of the state. Banks are
affected with public interest because they receive funds from the general public in the form
of deposits. It is the Governments responsibility to see to it that the financial interests of
those who deal with banks and banking institutions, as depositors or otherwise, are
protected. In this country, that task is delegated to the BSP, which pursuant to its Charter, is
authorized to administer the monetary, banking, and credit system of the Philippines. It is
further authorized to take the necessary steps against any banking institution if its
continued operation would cause prejudice to its depositors, creditors and the general
public as well.[23]
The law vests in the BSP the supervision over operations and activities of banks. The New
Central Bank Act provides:

Accordingly, there is no necessity to restrain the implementation of the writ of preliminary


injunction issued by the CA on April 18, 2005, since it no longer exists.

Section 25. Supervision and Examination. - The Bangko Sentral shall have supervision
over, and conduct periodic or special examinations of, banking institutions and quasibanks, including their subsidiaries and affiliates engaged in allied activities.[24]

However, this Court finds that the CA erred in upholding the jurisdiction of, and remanding
the case to, the RTC.

Specifically, the BSPs supervisory and regulatory powers include:

The resolution of these petitions rests mainly on the determination of one fundamental
issue: Which body has jurisdiction over the Koruga Complaint, the RTC or the BSP?
We hold that it is the BSP that has jurisdiction over the case.
A reexamination of the Complaint is in order.
Korugas Complaint charged defendants with violation of Sections 31 to 34 of the
Corporation Code, prohibiting self-dealing and conflict of interest of directors and officers;
invoked her right to inspect the corporations records under Sections 74 and 75 of the
Corporation Code; and prayed for Receivership and Creation of a Management Committee,
pursuant to Rule 59 of the Rules of Civil Procedure, the Securities Regulation Code, the
Interim Rules of Procedure Governing Intra-Corporate Controversies, the General Banking
Law of 2000, and the New Central Bank Act. She accused the directors and officers of
Banco Filipino of engaging in unsafe, unsound, and fraudulent banking practices, more
particularly, acts that violate the prohibition on self-dealing.

4.1 The issuance of rules of conduct or the establishment of standards of operation for
uniform application to all institutions or functions covered, taking into consideration the
distinctive character of the operations of institutions and the substantive similarities of
specific functions to which such rules, modes or standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and regulations if the
circumstances so warrant as determined by the Monetary Board;
4.3 Overseeing to ascertain that laws and Regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the last date of
examination to determine whether an institution is conducting its business on a safe or
sound basis: Provided, That the deficiencies/irregularities found by or discovered by an
audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or

25

4.6 Enforcing prompt corrective action.[25]

Koruga alleges that the dispute in the trial court involves the manner with which the
Directors (sic) have handled the Banks affairs, specifically the fraudulent loans and dacion
en pago authorized by the Directors in favor of several dummy corporations known to have
close ties and are indirectly controlled by the Directors.[26] Her allegations, then, call for
the examination of the allegedly questionable loans. Whether these loans are covered by
the prohibition on self-dealing is a matter for the BSP to determine. These are not ordinary
intra-corporate matters; rather, they involve banking activities which are, by law, regulated
and supervised by the BSP. As the Court has previously held:
It is well-settled in both law and jurisprudence that the Central Monetary Authority,
through the Monetary Board, is vested with exclusive authority to assess, evaluate and
determine the condition of any bank, and finding such condition to be one of insolvency, or
that its continuance in business would involve a probable loss to its depositors or creditors,
forbid bank or non-bank financial institution to do business in the Philippines; and shall
designate an official of the BSP or other competent person as receiver to immediately take
charge of its assets and liabilities.[27]

Correlatively, the General Banking Law of 2000 specifically deals with loans contracted by
bank directors or officers, thus:
SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their
Related Interests. No director or officer of any bank shall, directly or indirectly, for himself
or as the representative or agent of others, borrow from such bank nor shall he become a
guarantor, indorser or surety for loans from such bank to others, or in any manner be an
obligor or incur any contractual liability to the bank except with the written approval of the
majority of all the directors of the bank, excluding the director concerned: Provided, That
such written approval shall not be required for loans, other credit accommodations and
advances granted to officers under a fringe benefit plan approved by the Bangko Sentral.
The required approval shall be entered upon the records of the bank and a copy of such
entry shall be transmitted forthwith to the appropriate supervising and examining
department of the Bangko Sentral.
Dealings of a bank with any of its directors, officers or stockholders and their related
interests shall be upon terms not less favorable to the bank than those offered to others.

After due notice to the board of directors of the bank, the office of any bank director or
officer who violates the provisions of this Section may be declared vacant and the director
or officer shall be subject to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit accommodations and
guarantees that may be extended, directly or indirectly, by a bank to its directors, officers,
stockholders and their related interests, as well as investments of such bank in enterprises
owned or controlled by said directors, officers, stockholders and their related interests.
However, the outstanding loans, credit accommodations and guarantees which a bank may
extend to each of its stockholders, directors, or officers and their related interests, shall be
limited to an amount equivalent to their respective unencumbered deposits and book value
of their paid-in capital contribution in the bank: Provided, however, That loans, credit
accommodations and guarantees secured by assets considered as non-risk by the Monetary
Board shall be excluded from such limit: Provided, further, That loans, credit
accommodations and advances to officers in the form of fringe benefits granted in
accordance with rules as may be prescribed by the Monetary Board shall not be subject to
the individual limit.
The Monetary Board shall define the term related interests.
The limit on loans, credit accommodations and guarantees prescribed herein shall not apply
to loans, credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.[28]

Furthermore, the authority to determine whether a bank is conducting business in an unsafe


or unsound manner is also vested in the Monetary Board. The General Banking Law of
2000 provides:
SECTION 56. Conducting Business in an Unsafe or Unsound Manner. In determining
whether a particular act or omission, which is not otherwise prohibited by any law, rule or
regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting
business in an unsafe or unsound manner for purposes of this Section, the Monetary Board
shall consider any of the following circumstances:
56.1. The act or omission has resulted or may result in material loss or damage, or
abnormal risk or danger to the safety, stability, liquidity or solvency of the institution;
56.2. The act or omission has resulted or may result in material loss or damage or abnormal
risk to the institution's depositors, creditors, investors, stockholders or to the Bangko
Sentral or to the public in general;

26

56.3. The act or omission has caused any undue injury, or has given any unwarranted
benefits, advantage or preference to the bank or any party in the discharge by the director
or officer of his duties and responsibilities through manifest partiality, evident bad faith or
gross inexcusable negligence; or
56.4. The act or omission involves entering into any contract or transaction manifestly and
grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the director
or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe
or unsound manner, the Monetary Board may, without prejudice to the administrative
sanctions provided in Section 37 of the New Central Bank Act, take action under Section
30 of the same Act and/or immediately exclude the erring bank from clearing, the
provisions of law to the contrary notwithstanding.

(d) suspension of interbank clearing privileges; and/or


(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively suspend
any director or officer of a bank or quasi-bank pending an investigation: Provided, That
should the case be not finally decided by the Bangko Sentral within a period of one
hundred twenty (120) days after the date of suspension, said director or officer shall be
reinstated in his position: Provided, further, That when the delay in the disposition of the
case is due to the fault, negligence or petition of the director or officer, the period of delay
shall not be counted in computing the period of suspension herein provided.
The above administrative sanctions need not be applied in the order of their severity.

Finally, the New Central Bank Act grants the Monetary Board the power to impose
administrative sanctions on the erring bank:
Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the
criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this
Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-bank, their
directors and/or officers, for any willful violation of its charter or by-laws, willful delay in
the submission of reports or publications thereof as required by law, rules and regulations;
any refusal to permit examination into the affairs of the institution; any willful making of a
false or misleading statement to the Board or the appropriate supervising and examining
department or its examiners; any willful failure or refusal to comply with, or violation of,
any banking law or any order, instruction or regulation issued by the Monetary Board, or
any order, instruction or ruling by the Governor; or any commission of irregularities, and/or
conducting business in an unsafe or unsound manner as may be determined by the
Monetary Board, the following administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in
no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into
consideration the attendant circumstances, such as the nature and gravity of the violation or
irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities;
(c) suspension of lending or foreign exchange operations or authority to accept new
deposits or make new investments;

Whether or not there is an administrative proceeding, if the institution and/or the directors
and/or officers concerned continue with or otherwise persist in the commission of the
indicated practice or violation, the Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned to cease and desist from the
indicated practice or violation, and may further order that immediate action be taken to
correct the conditions resulting from such practice or violation. The cease and desist order
shall be immediately effective upon service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a hearing before
the Monetary Board or any committee chaired by any Monetary Board member created for
the purpose, upon request made by the respondents within five (5) days from their receipt
of the order. If no such hearing is requested within said period, the order shall be final. If a
hearing is conducted, all issues shall be determined on the basis of records, after which the
Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose upon banking institutions,
for any failure to comply with the requirements of law, Monetary Board regulations and
policies, and/or instructions issued by the Monetary Board or by the Governor, fines not in
excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which
shall be final and executory until reversed, modified or lifted by the Monetary Board on
appeal.[29]
Koruga also accused Arcenas, et al. of violation of the Corporation Codes provisions on
self-dealing and conflict of interest. She invoked Section 31 of the Corporation Code,
which defines the liability of directors, trustees, or officers of a corporation for, among

27

others, acquiring any personal or pecuniary interest in conflict with their duty as directors
or trustees, and Section 32, which prescribes the conditions under which a contract of the
corporation with one or more of its directors or trustees the so-called self-dealing
directors[30] would be valid. She also alleged that Banco Filipinos directors violated
Sections 33 and 34 in approving the loans of corporations with interlocking ownerships,
i.e., owned, directed, or managed by close associates of Albert C. Aguirre.
Sections 31 to 34 of the Corporation Code provide:

Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire
any personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at the
option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at
least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or trustees involved is made at such

meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.
Section 33. Contracts between corporations with interlocking directors. - Except in cases of
fraud, and provided the contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall not be invalidated on
that ground alone: Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other corporation or corporations is merely
nominal, he shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he must account to the latter for all such profits
by refunding the same, unless his act has been ratified by a vote of the stockholders owning
or representing at least two-thirds (2/3) of the outstanding capital stock. This provision
shall be applicable, notwithstanding the fact that the director risked his own funds in the
venture.

Korugas invocation of the provisions of the Corporation Code is misplaced. In an earlier


case with similar antecedents, we ruled that:
The Corporation Code, however, is a general law applying to all types of corporations,
while the New Central Bank Act regulates specifically banks and other financial
institutions, including the dissolution and liquidation thereof. As between a general and
special law, the latter shall prevail generalia specialibus non derogant.[31]

Consequently, it is not the Interim Rules of Procedure on Intra-Corporate Controversies,


[32] or Rule 59 of the Rules of Civil Procedure on Receivership, that would apply to this
case. Instead, Sections 29 and 30 of the New Central Bank Act should be followed, viz.:
Section 29. Appointment of Conservator. - Whenever, on the basis of a report submitted by
the appropriate supervising or examining department, the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the interest of depositors and creditors, the
Monetary Board may appoint a conservator with such powers as the Monetary Board shall
deem necessary to take charge of the assets, liabilities, and the management thereof,

28

reorganize the management, collect all monies and debts due said institution, and exercise
all powers necessary to restore its viability. The conservator shall report and be responsible
to the Monetary Board and shall have the power to overrule or revoke the actions of the
previous management and board of directors of the bank or quasi-bank.
xxxx
The Monetary Board shall terminate the conservatorship when it is satisfied that the
institution can continue to operate on its own and the conservatorship is no longer
necessary. The conservatorship shall likewise be terminated should the Monetary Board, on
the basis of the report of the conservator or of its own findings, determine that the
continuance in business of the institution would involve probable loss to its depositors or
creditors, in which case the provisions of Section 30 shall apply.
Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the
head of the supervising or examining department, the Monetary Board finds that a bank or
quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;

majority of the capital stock within ten (10) days from receipt by the board of directors of
the institution of the order directing receivership, liquidation or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment of a
receiver under this section shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a precondition to the designation of a
receiver.[33]

On the strength of these provisions, it is the Monetary Board that exercises exclusive
jurisdiction over proceedings for receivership of banks.
Crystal clear in Section 30 is the provision that says the appointment of a receiver under
this section shall be vested exclusively with the Monetary Board. The term exclusively
connotes that only the Monetary Board can resolve the issue of whether a bank is to be
placed under receivership and, upon an affirmative finding, it also has authority to appoint
a receiver. This is further affirmed by the fact that the law allows the Monetary Board to
take action summarily and without need for prior hearing.

(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its
liabilities; or

And, as a clincher, the law explicitly provides that actions of the Monetary Board taken
under this section or under Section 29 of this Act shall be final and executory, and may not
be restrained or set aside by the court except on a petition for certiorari on the ground that
the action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction.

(c) cannot continue in business without involving probable losses to its depositors or
creditors; or

From the foregoing disquisition, there is no doubt that the RTC has no jurisdiction to hear
and decide a suit that seeks to place Banco Filipino under receivership.

(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking institution.

Koruga herself recognizes the BSPs power over the allegedly unlawful acts of Banco
Filipinos directors. The records of this case bear out that Koruga, through her legal counsel,
wrote the Monetary Board[34] on April 21, 2003 to bring to its attention the acts she had
enumerated in her complaint before the RTC. The letter reads in part:

xxxx
The actions of the Monetary Board taken under this section or under Section 29 of this Act
shall be final and executory, and may not be restrained or set aside by the court except on
petition for certiorari on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The
petition for certiorari may only be filed by the stockholders of record representing the

Banco Filipino and the current members of its Board of Directors should be placed under
investigation for violations of banking laws, the commission of irregularities, and for
conducting business in an unsafe or unsound manner. They should likewise be placed under
preventive suspension by virtue of the powers granted to the Monetary Board under
Section 37 of the Central Bank Act. These blatant violations of banking laws should not go
by without penalty. They have put Banco Filipino, its depositors and stockholders, and the
entire banking system (sic) in jeopardy.
xxxx

29

We urge you to look into the matter in your capacity as regulators. Our clients, a minority
stockholders, (sic) and many depositors of Banco Filipino are prejudiced by a failure to
regulate, and taxpayers are prejudiced by accommodations granted by the BSP to Banco
Filipino[35]
In a letter dated May 6, 2003, BSP Supervision and Examination Department III Director
Candon B. Guerrero referred Korugas letter to Arcenas for comment.[36] On June 6, 2003,
Banco Filipinos then Executive Vice President and Corporate Secretary Francisco A.
Rivera submitted the banks comments essentially arguing that Korugas accusations lacked
legal and factual bases.[37]
On the other hand, the BSP, in its Answer before the RTC, said that it had been looking into
Banco Filipinos activities. An October 2002 Report of Examination (ROE) prepared by the
Supervision and Examination Department (SED) noted certain dacion payments, out-ofthe-ordinary expenses, among other dealings. On July 24, 2003, the Monetary Board
passed Resolution No. 1034 furnishing Banco Filipino a copy of the ROE with instructions
for the bank to file its comment or explanation within 30 to 90 days under threat of being
fined or of being subjected to other remedial actions. The ROE, the BSP said, covers
substantially the same matters raised in Korugas complaint. At the time of the filing of
Korugas complaint on August 20, 2003, the period for Banco Filipino to submit its
explanation had not yet expired.[38]
Thus, the courts jurisdiction could only have been invoked after the Monetary Board had
taken action on the matter and only on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction.
Finally, there is one other reason why Korugas complaint before the RTC cannot prosper.
Given her own admission and the same is likewise supported by evidence that she is
merely a minority stockholder of Banco Filipino, she would not have the standing to
question the Monetary Boards action. Section 30 of the New Central Bank Act provides:
The petition for certiorari may only be filed by the stockholders of record representing the
majority of the capital stock within ten (10) days from receipt by the board of directors of
the institution of the order directing receivership, liquidation or conservatorship.

All the foregoing discussion yields the inevitable conclusion that the CA erred in upholding
the jurisdiction of, and remanding the case to, the RTC. Given that the RTC does not have
jurisdiction over the subject matter of the case, its refusal to dismiss the case on that ground
amounted to grave abuse of discretion.

WHEREFORE, the foregoing premises considered, the Petition in G.R. No. 168332 is
DISMISSED, while the Petition in G.R. No. 169053 is GRANTED. The Decision of the
Court of Appeals dated July 20, 2005 in CA-G.R. SP No. 88422 is hereby SET ASIDE. The
Temporary Restraining Order issued by this Court on March 13, 2006 is made
PERMANENT. Consequently, Civil Case No. 03-985, pending before the Regional Trial
Court of Makati City, is DISMISSED.
SO ORDERED.
HI-YIELD REALTY v CA
DECISION
QUISUMBING, J.:
This is a special civil action for certiorari seeking to nullify and set aside the Decision[1]
dated March 10, 2005 and Resolution[2] dated May 26, 2005 of the Court of Appeals in
CA-G.R. SP. No. 83919. The appellate court had dismissed the petition for certiorari and
prohibition filed by petitioner and denied its reconsideration.
The antecedent facts of the case are undisputed.
On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres &
Sons, Inc. (HTSI), filed a Petition for Annulment of Real Estate Mortgage and Foreclosure
Sale[3] over two parcels of land located in Marikina and Quezon City. The suit was filed
against Leonora, Ma. Theresa, Glenn and Stephanie, all surnamed Torres, the Register of
Deeds of Marikina and Quezon City, and petitioner Hi-Yield Realty, Inc. (Hi-Yield). It was
docketed as Civil Case No. 03-892 with Branch 148 of the Regional Trial Court (RTC) of
Makati City.
On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper
venue and payment of insufficient docket fees. The RTC denied said motion in an Order[4]
dated January 22, 2004. The trial court held that the case was, in nature, a real action in the
form of a derivative suit cognizable by a special commercial court pursuant to
Administrative Matter No. 00-11-03-SC.[5] Petitioner sought reconsideration, but its
motion was denied in an Order[6] dated April 27, 2004.
Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of
Appeals. In a Decision dated March 10, 2005, the appellate court agreed with the RTC that
the case was a derivative suit. It further ruled that the prayer for annulment of mortgage
and foreclosure proceedings was merely incidental to the main action. The dispositive
portion of said decision reads:
WHEREFORE, premises considered, this Petition is hereby DISMISSED. However, public
respondent is hereby DIRECTED to instruct his Clerk of Court to compute the proper
docket fees and thereafter, to order the private respondent to pay the same
IMMEDIATELY.
SO ORDERED.[7]
Petitioners motion for reconsideration[8] was denied in a Resolution dated May 26, 2005.

30

Hence, this petition which raises the following issues:


I.
WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS
DISCRETION IN NOT DISMISSING THE CASE AGAINST HI-YIELD FOR
IMPROPER VENUE DESPITE FINDINGS BY THE TRIAL COURT THAT THE
ACTION IS A REAL ACTION.
II.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING
THE COMPLAINT AS AGAINST HI-YIELD EVEN IF THE JOINDER OF PARTIES IN
THE COMPLAINT VIOLATED THE RULES ON VENUE.
III.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE ANNULMENT OF REAL ESTATE MORTGAGE AND FORECLOSURE SALE IN
THE COMPLAINT IS MERELY INCIDENTAL [TO] THE DERIVATIVE SUIT.[9]
The pivotal issues for resolution are as follows: (1) whether venue was properly laid; (2)
whether there was proper joinder of parties; and (3) whether the action to annul the real
estate mortgage and foreclosure sale is a mere incident of the derivative suit.
Petitioner imputes grave abuse of discretion on the Court of Appeals for not dismissing the
case against it even as the trial court found the same to be a real action. It explains that the
rule on venue under the Rules of Court prevails over the rule prescribing the venue for
intra-corporate controversies; hence, HTSI erred when it filed its suit only in Makati when
the lands subjects of the case are in Marikina and Quezon City. Further, petitioner argues
that the appellate court erred in ruling that the action is mainly a derivative suit and the
annulment of real estate mortgage and foreclosure sale is merely incidental thereto. It
points out that the caption of the case, substance of the allegations, and relief prayed for
revealed that the main thrust of the action is to recover the lands. Lastly, petitioner asserts
that it should be dropped as a party to the case for it has been wrongly impleaded as a nonstockholder defendant in the intra-corporate dispute.
On the other hand, respondents maintain that the action is primarily a derivative suit to
redress the alleged unauthorized acts of its corporate officers and major stockholders in
connection with the lands. They postulate that the nullification of the mortgage and
foreclosure sale would just be a logical consequence of a decision adverse to said officers
and stockholders.
After careful consideration, we are in agreement that the petition must be dismissed.
A petition for certiorari is proper if a tribunal, board or officer exercising judicial or quasijudicial functions acted without or in excess of jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction and there is no appeal, or any plain,
speedy and adequate remedy in the ordinary course of law.[10]
Petitioner sought a review of the trial courts Orders dated January 22, 2004 and April 27,
2004 via a petition for certiorari before the Court of Appeals. In rendering the assailed
decision and resolution, the Court of Appeals was acting under its concurrent jurisdiction to
entertain petitions for certiorari under paragraph 2,[11] Section 4 of Rule 65 of the Rules of
Court. Thus, if erroneous, the decision and resolution of the appellate court should properly
be assailed by means of a petition for review on certiorari under Rule 45 of the Rules of

Court. The distinction is clear: a petition for certiorari seeks to correct errors of jurisdiction
while a petition for review on certiorari seeks to correct errors of judgment committed by
the court a quo.[12] Indeed, this Court has often reminded members of the bench and bar
that a special civil action for certiorari under Rule 65 lies only when there is no appeal nor
plain, speedy and adequate remedy in the ordinary course of law.[13] In the case at hand,
petitioner impetuously filed a petition for certiorari before us when a petition for review
was available as a speedy and adequate remedy. Notably, petitioner filed the present
petition 58[14] days after it received a copy of the assailed resolution dated May 26, 2005.
To our mind, this belated action evidences petitioners effort to substitute for a lost appeal
this petition for certiorari.
For the extraordinary remedy of certiorari to lie by reason of grave abuse of discretion, the
abuse of discretion must be so patent and gross as to amount to an evasion of positive duty,
or a virtual refusal to perform the duty enjoined or to act in contemplation of law, or where
the power is exercised in an arbitrary and despotic manner by reason of passion and
personal hostility.[15] We find no grave abuse of discretion on the part of the appellate
court in this case.
Simply, the resolution of the issues posed by petitioner rests on a determination of the
nature of the petition filed by respondents in the RTC. Both the RTC and Court of Appeals
ruled that the action is in the form of a derivative suit although captioned as a petition for
annulment of real estate mortgage and foreclosure sale.
A derivative action is a suit by a shareholder to enforce a corporate cause of action.[16]
Under the Corporation Code, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. But an individual stockholder may be
permitted to institute a derivative suit on behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the
ones to be sued, or hold control of the corporation. In such actions, the corporation is the
real party-in-interest while the suing stockholder, on behalf of the corporation, is only a
nominal party.[17]
In the case of Filipinas Port Services, Inc. v. Go,[18] we enumerated the foregoing
requisites before a stockholder can file a derivative suit:
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;
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; 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.[19]
Even then, not every suit filed on behalf of the corporation is a derivative suit. For a
derivative suit to prosper, the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action on
behalf of the corporation and all other stockholders similarly situated who may wish to join
him in the suit.[20] The Court finds that Roberto had satisfied this requirement in
paragraph five (5) of his petition which reads:

31

5. Individual petitioner, being a minority stockholder, is instituting the instant proceeding


by way of a derivative suit to redress wrongs done to petitioner corporation and vindicate
corporate rights due to the mismanagement and abuses committed against it by its officers
and controlling stockholders, especially by respondent Leonora H. Torres (Leonora, for
brevity) who, without authority from the Board of Directors, arrogated upon herself the
power to bind petitioner corporation from incurring loan obligations and later allow
company properties to be foreclosed as hereinafter set forth;[21]
Further, while it is true that the complaining stockholder must satisfactorily show that he
has exhausted all means to redress his grievances within the corporation; such remedy is no
longer necessary where the corporation itself is under the complete control of the person
against whom the suit is being filed. The reason is obvious: a demand upon the board to
institute an action and prosecute the same effectively would have been useless and an
exercise in futility.[22]
Here, Roberto alleged in his petition that earnest efforts were made to reach a compromise
among family members/stockholders before he filed the case. He also maintained that
Leonora Torres held 55% of the outstanding shares while Ma. Theresa, Glenn and
Stephanie excluded him from the affairs of the corporation. Even more glaring was the fact
that from June 10, 1992, when the first mortgage deed was executed until July 23, 2002,
when the properties mortgaged were foreclosed, the Board of Directors of HTSI did
nothing to rectify the alleged unauthorized transactions of Leonora. Clearly, Roberto could
not expect relief from the board.
Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC[23]
otherwise known as the Interim Rules of Procedure Governing Intra-Corporate
Controversies under Republic Act No. 8799.[24] Section 1,[25] Rule 1 thereof expressly
lists derivative suits among the cases covered by it.
As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:
SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of the corporation,
partnership, or association concerned. Where the principal office of the corporation,
partnership or association is registered in the Securities and Exchange Commission as
Metro Manila, the action must be filed in the city or municipality where the head office is
located.
Thus, the Court of Appeals did not commit grave abuse of discretion when it found that
respondents correctly filed the derivative suit before the Makati RTC where HTSI had its
principal office.
There being no showing of any grave abuse of discretion on the part of the Court of
Appeals the other alleged errors will no longer be passed upon as mere errors of judgment
are not proper subjects of a petition for certiorari.
WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March 10,
2005 and the Resolution dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No.
83919 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

LEO-WEE v DE CASTRO
G.R. No. 176405

August 20, 2008

LEO WEE, petitioner,


vs.
GEORGE DE CASTRO (on his behalf and as attorney-in-fact of ANNIE DE
CASTRO and FELOMINA UBAN) and MARTINIANA DE CASTRO, respondents.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Revised
Rules of Court filed by petitioner Leo Wee, seeking the reversal and setting aside of the
Decision2 dated 19 September 2006 and the Resolution3 dated 25 January 2007 of the
Court of Appeals in CA-G.R. SP No. 90906. The appellate court, in its assailed Decision,
reversed the dismissal of Civil Case. No. 1990, an action for ejectment instituted by
respondent George de Castro, on his own behalf and on behalf of Annie de Castro,
Felomina de Castro Uban and Jesus de Castro4 against petitioner, by the Municipal Trial
Court (MTC) of Alaminos City, which was affirmed by the Regional Trial Court (RTC),
Branch 54, Alaminos City, Pangasinan; and, ruling in favor of the respondents, ordered the
petitioner to vacate the subject property. In its assailed Resolution dated 25 January 2007,
the Court of Appeals refused to reconsider its earlier Decision of 19 September 2006.
In their Complaint5 filed on 1 July 2002 with the MTC of Alaminos City, docketed as Civil
Case No. 1990, respondents alleged that they are the registered owners of the subject
property, a two-storey building erected on a parcel of land registered under Transfer
Certificate of Title (TCT) No. 16193 in the Registry of Deeds of Pangasinan, described and
bounded as follows:
A parcel of land (Lot 13033-D-2, Psd-01550-022319, being a portion of Lot 13033-D, Psd018529, LRC Rec. No. ____) situated in Pob., Alaminos City; bounded on the NW. along
line 1-2 by Lot 13035-D-1 of the subdivision plan; on the NE. along line 2-3 by Vericiano
St.; on the SE. along line 3-4 by Lot 13033-D-2 of the subdivision plan; on the SW. along
line 4-1 by Lot 575, Numeriano Rabago. It is coverd by TCT No. 16193 of the Register of
Deeds of Pangasinan (Alaminos City) and declared for taxation purposes per T.D. No.
2075, and assessed in the sum of P93,400.00.6
Respondents rented out the subject property to petitioner on a month to month basis for
P9,000.00 per month.7 Both parties agreed that effective 1 October 2001, the rental
payment shall be increased from P9,000.00 to P15,000.00. Petitioner, however, failed or
refused to pay the corresponding increase on rent when his rental obligation for the month
of 1 October 2001 became due. The rental dispute was brought to the Lupon

32

Tagapagpamayapa of Poblacion, Alaminos, Pangasinan, in an attempt to amicably settle the


matter but the parties failed to reach an agreement, resulting in the issuance by the
Barangay Lupon of a Certification to file action in court on 18 January 2002. On 10 June
2002, respondent George de Castro sent a letter to petitioner terminating their lease
agreement and demanding that the latter vacate and turn over the subject property to
respondents. Since petitioner stubbornly refused to comply with said demand letter,
respondent George de Castro, together with his siblings and co-respondents, Annie de
Castro, Felomina de Castro Uban and Jesus de Castro, filed the Complaint for ejectment
before the MTC.
It must be noted, at this point, that although the Complaint stated that it was being filed by
all of the respondents, the Verification and the Certificate of Non-Forum Shopping were
signed by respondent George de Castro alone. He would subsequently attach to his position
paper filed before the MTC on 28 October 2002 the Special Powers of Attorney (SPAs)
executed by his sisters Annie de Castro and Felomina de Castro Uban dated 7 February
2002 and 14 March 2002 respectively, authorizing him to institute the ejectment case
against petitioner.
Petitioner, on the other hand, countered that there was no agreement between the parties to
increase the monthly rentals and respondents' demand for an increase was exorbitant. The
agreed monthly rental was only for the amount of P9,000.00 and he was religiously paying
the same every month. Petitioner then argued that respondents failed to comply with the
jurisdictional requirement of conciliation before the Barangay Lupon prior to the filing of
Civil Case. No. 1990, meriting the dismissal of their Complaint therein. The Certification
to file action issued by the Barangay Lupon appended to the respondents' Complaint
merely referred to the issue of rental increase and not the matter of ejectment. Petitioner
asserted further that the MTC lacked jurisdiction over the ejectment suit, since respondents'
Complaint was devoid of any allegation that there was an "unlawful withholding" of the
subject property by the petitioner.8
During the Pre-Trial Conference9 held before the MTC, the parties stipulated that in May
2002, petitioner tendered to respondents the sum of P9,000.00 as rental payment for the
month of January 2002; petitioner paid rentals for the months of October 2001 to January
2002 but only in the amount of P9,000.00 per month; respondents, thru counsel, sent a
letter to petitioner on 10 June 2002 terminating their lease agreement which petitioner
ignored; and the Barangay Lupon did issue a Certification to file action after the parties
failed to reach an agreement before it.
After the submission of the parties of their respective Position Papers, the MTC, on 21
November 2002, rendered a Decision10 dismissing respondents' Complaint in Civil Case
No. 1990 for failure to comply with the prior conciliation requirement before the Barangay
Lupon. The decretal portion of the MTC Decision reads:

WHEREFORE, premised considered, judgment is hereby rendered ordering the dismissal


of this case. Costs against the [herein respondents].
On appeal, docketed as Civil Case No. A-2835, the RTC of Alaminos, Pangasinan, Branch
54, promulgated its Decision11 dated 27 June 2005 affirming the dismissal of respondents'
Complaint for ejectment after finding that the appealed MTC Decision was based on facts
and law on the matter. The RTC declared that since the original agreement entered into by
the parties was for petitioner to pay only the sum of P9.000.00 per month for the rent of the
subject property, and no concession was reached by the parties to increase such amount to
P15.000.00, petitioner cannot be faulted for paying only the originally agreed upon
monthly rentals. Adopting petitioner's position, the RTC declared that respondents' failure
to refer the matter to the Barangay court for conciliation process barred the ejectment case,
conciliation before the Lupon being a condition sine qua non in the filing of ejectment
suits. The RTC likewise agreed with petitioner in ruling that the allegation in the Complaint
was flawed, since respondents failed to allege that there was an "unlawful withholding" of
possession of the subject property, taking out Civil Case No. 1990 from the purview of an
action for unlawful detainer. Finally, the RTC decreed that respondents' Complaint failed to
comply with the rule that a co-owner could not maintain an action without joining all the
other co-owners. Thus, according to the dispositive portion of the RTC Decision:
WHEREFORE the appellate Court finds no cogent reason to disturb the findings of the
court a quo. The Decision dated November 21, 2002 appealed from is hereby AFFIRMED
IN TOTO.12
Undaunted, respondents filed a Petition for Review on Certiorari13 with the Court of
Appeals where it was docketed as CA-G.R. SP No. 90906. Respondents argued in their
Petition that the RTC gravely erred in ruling that their failure to comply with the
conciliation process was fatal to their Complaint, since it is only respondent George de
Castro who resides in Alaminos City, Pangasinan, while respondent Annie de Castro
resides in Pennsylvania, United States of America (USA); respondent Felomina de Castro
Uban, in California, USA; and respondent Jesus de Castro, now substituted by his wife,
Martiniana, resides in Manila. Respondents further claimed that the MTC was not divested
of jurisdiction over their Complaint for ejectment because of the mere absence therein of
the term "unlawful withholding" of their subject property, considering that they had
sufficiently alleged the same in their Complaint, albeit worded differently. Finally,
respondents posited that the fact that only respondent George de Castro signed the
Verification and the Certificate of Non-Forum Shopping attached to the Complaint was
irrelevant since the other respondents already executed Special Powers of Attorney (SPAs)
authorizing him to act as their attorney-in-fact in the institution of the ejectment suit against
the petitioner.
On 19 September 2006, the Court of Appeals rendered a Decision granting the respondents'
Petition and ordering petitioner to vacate the subject property and turn over the same to
respondents. The Court of Appeals decreed:

33

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed


Decision dated June 27, 2005 issued by the RTC of Alaminos City, Pangasinan, Branch 54,
is REVERSED and SET ASIDE. A new one is hereby rendered ordering [herein petitioner]
Leo Wee to SURRENDER and VACATE the leased premises in question as well as to pay
the sum of P15,000.00 per month reckoned from March, 2002 until he shall have actually
turned over the possession thereof to petitioners plus the rental arrearages of P30,000.00
representing unpaid increase in rent for the period from October, 2001 to February, 2002,
with legal interest at 6% per annum to be computed from June 7, 2002 until finality of this
decision and 12% thereafter until full payment thereof. Respondent is likewise hereby
ordered to pay petitioners the amount of P20,000.00 as and for attorney's fees and the costs
of suit.14
In a Resolution dated 25 January 2007, the appellate court denied the Motion for
Reconsideration interposed by petitioner for lack of merit.
Petitioner is now before this Court via the Petition at bar, making the following assignment
of errors:
I.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT
CONCILIATION PROCESS IS NOT A JURISDICTIONAL REQUIREMENT THAT
NON-COMPLIANCE THEREWITH DOES NOT AFFECT THE JURISDICTION IN
EJECTMENT CASE;
II.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE
SUFFICIENCY OF THE ALLEGATIONS IN THE COMPLAINT FOR EJECTMENT
DESPITE THE WANT OF ALLEGATION OF "UNLAWFUL WITHOLDING
PREMISES" (sic) QUESTIONED BY PETITIONER;
III.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE
FILING OF THE COMPLAINT OF RESPONDENT GEORGE DE CASTRO WITHOUT
JOINING ALL HIS OTHER CO-OWNERS OVER THE SUBJECT PROPERTY IS
PROPER;
IV.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING
SUPREME COURT CIRCULAR NO. 10 WHICH DIRECTS A PLEADER TO

INDICATE IN HIS PLEADINGS HIS OFFICIAL RECEIPT OF HIS PAYMENT OF HIS


IBP DUES.15
Petitioner avers that respondents failed to go through the conciliation process before the
Barangay Lupon, a jurisdictional defect that bars the legal action for ejectment. The
Certification to file action dated 18 January 2002 issued by the Barangay Lupon, appended
by the respondents to their Complaint in Civil Case No. 1990, is of no moment, for it
attested only that there was confrontation between the parties on the matter of rental
increase but not on unlawful detainer of the subject property by the petitioner. If it was the
intention of the respondents from the very beginning to eject petitioner from the subject
property, they should have brought up the alleged unlawful stay of the petitioner on the
subject property for conciliation before the Barangay Lupon.
The barangay justice system was established primarily as a means of easing up the
congestion of cases in the judicial courts. This could be accomplished through a proceeding
before the barangay courts which, according to the one who conceived of the system, the
late Chief Justice Fred Ruiz Castro, is essentially arbitration in character; and to make it
truly effective, it should also be compulsory. With this primary objective of the barangay
justice system in mind, it would be wholly in keeping with the underlying philosophy of
Presidential Decree No. 1508 (Katarungang Pambarangay Law), which would be better
served if an out-of-court settlement of the case is reached voluntarily by the parties.16 To
ensure this objective, Section 6 of Presidential Decree No. 1508 requires the parties to
undergo a conciliation process before the Lupon Chairman or the Pangkat ng
Tagapagkasundo as a precondition to filing a complaint in court subject to certain
exceptions. The said section has been declared compulsory in nature.17
Presidential Decree No. 1508 is now incorporated in Republic Act No. 7160 (The Local
Government Code), which took effect on 1 January 1992.
The pertinent provisions of the Local Government Code making conciliation a precondition
to the filing of complaints in court are reproduced below:
SEC. 412. Conciliation.- (a) Pre-condition to filing of complaint in court. - No complaint,
petition, action, or proceeding involving any matter within the authority of the lupon shall
be filed or instituted directly in court or any other government office for adjudication,
unless there has been a confrontation between the parties before the lupon chairman or the
pangkat, and that no conciliation or settlement has been reached as certified by the lupon
secretary or pangkat secretary as attested to by the lupon or pangkat chairman or unless the
settlement has been repudiated by the parties thereto.
(b) Where parties may go directly to court. - The parties may go directly to court in the
following instances:
(1) Where the accused is under detention;

34

CERTIFICATION TO FILE COMPLAINTS


(2) Where a person has otherwise been deprived of personal liberty calling for habeas
corpus proceedings;

This is to certify that:

(3) Where actions are coupled with provisional remedies such as preliminary injunction,
attachment, delivery of personal property, and support pendente lite; and

1. There was personal confrontation between parties before the barangay Lupon regarding
rental increase of a commercial building but conciliation failed;

(4) Where the action may otherwise be barred by the statute of limitations.

2. Therefore, the corresponding dispute of the above-entitled case may now be filed in
Court/Government Office.18 (Emphasis ours.)

(c) Conciliation among members of indigenous cultural communities. - The customs and
traditions of indigenous cultural communities shall be applied in settling disputes between
members of the cultural communities.
SEC. 408. Subject Matter for Amicable Settlement; Exception Thereto. - The lupon of each
barangay shall have authority to bring together the parties actually residing in the same city
or municipality for amicable settlement of all disputes except:

The question now to be resolved by this Court is whether the Certification dated 18 January
2002 issued by the Barangay Lupon stating that no settlement was reached by the parties
on the matter of rental increase sufficient to comply with the prior conciliation requirement
under the Katarungang Pambarangay Law to authorize the respondents to institute the
ejectment suit against petitioner.
The Court rules affirmatively.

(a) Where one party is the government or any subdivision or instrumentality thereof;
(b) Where one party is a public officer or employee, and the dispute relates to the
performance of his official functions;
(c) Offenses punishable by imprisonment exceeding one (1) year or a fine exceeding Five
thousand pesos (P5,000.00);
(d) Offenses where there is no private offended party;
(e) Where the dispute involves real properties located in different cities or municipalities
unless the parties thereto agree to submit their differences to amicable settlement by an
appropriate lupon;
(f) Disputes involving parties who actually reside in barangays of different cities or
municipalities, except where such barangay units adjoin each other and the parties thereto
agree to submit their differences to amicable settlement by an appropriate lupon;
(g) Such other classes of disputes which the President may determine in the interest of
justice or upon the recommendation of the Secretary of Justice.
There is no question that the parties to this case appeared before the Barangay Lupon for
conciliation proceedings. There is also no dispute that the only matter referred to the
Barangay Lupon for conciliation was the rental increase, and not the ejectment of petitioner
from the subject property. This is apparent from a perusal of the Certification to file action
in court issued by the Barangay Lupon on 18 January 2002, to wit:

While it is true that the Certification to file action dated 18 January 2002 of the Barangay
Lupon refers only to rental increase and not to the ejectment of petitioner from the subject
property, the submission of the same for conciliation before the Barangay Lupon
constitutes sufficient compliance with the provisions of the Katarungang Pambarangay
Law. Given the particular circumstances of the case at bar, the conciliation proceedings for
the amount of monthly rental should logically and reasonably include also the matter of the
possession of the property subject of the rental, the lease agreement, and the violation of
the terms thereof.
We now proceed to discuss the meat of the controversy.
The contract of lease between the parties did not stipulate a fixed period. Hence, the parties
agreed to the payment of rentals on a monthly basis. On this score, Article 1687 of the Civil
Code provides:
Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to
year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to
week, if the rent is weekly; and from day to day, if the rent is to be paid daily. However,
even though a monthly rent is paid, and no period for the lease has been set, the courts may
fix a longer term for the lease after the lessee has occupied the premises for over one year.
If the rent is weekly, the courts may likewise determine a longer period after the lessee has
been in possession for over six months. In case of daily rent, the courts may also fix a
longer period after the lessee has stayed in the place for over one month. (Emphasis
supplied.)

35

The rentals being paid monthly, the period of such lease is deemed terminated at the end of
each month. Thus, respondents have every right to demand the ejectment of petitioners at
the end of each month, the contract having expired by operation of law. Without a lease
contract, petitioner has no right of possession to the subject property and must vacate the
same. Respondents, thus, should be allowed to resort to an action for ejectment before the
MTC to recover possession of the subject property from petitioner.
Corollarily, petitioner's ejectment, in this case, is only the reasonable consequence of his
unrelenting refusal to comply with the respondents' demand for the payment of rental
increase agreed upon by both parties. Verily, the lessor's right to rescind the contract of
lease for non-payment of the demanded increased rental was recognized by this Court in
Chua v. Victorio19:
The right of rescission is statutorily recognized in reciprocal obligations, such as contracts
of lease. In addition to the general remedy of rescission granted under Article 1191 of the
Civil Code, there is an independent provision granting the remedy of rescission for breach
of any of the lessor or lessee's statutory obligations. Under Article 1659 of the Civil Code,
the aggrieved party may, at his option, ask for (1) the rescission of the contract; (2)
rescission and indemnification for damages; or (3) only indemnification for damages,
allowing the contract to remain in force.
Payment of the rent is one of a lessee's statutory obligations, and, upon non-payment by
petitioners of the increased rental in September 1994, the lessor acquired the right to avail
of any of the three remedies outlined above. (Emphasis supplied.)
Petitioner next argues that respondent George de Castro cannot maintain an action for
ejectment against petitioner, without joining all his co-owners.

In the more recent case of Carandang v. Heirs of De Guzman,21 this Court declared that a
co-owner is not even a necessary party to an action for ejectment, for complete relief can
be afforded even in his absence, thus:
In sum, in suits to recover properties, all co-owners are real parties in interest. However,
pursuant to Article 487 of the Civil Code and the relevant jurisprudence, any one of them
may bring an action, any kind of action for the recovery of co-owned properties. Therefore,
only one of the co-owners, namely the co-owner who filed the suit for the recovery of the
co-owned property, is an indispensable party thereto. The other co-owners are not
indispensable parties. They are not even necessary parties, for a complete relief can be
afforded in the suit even without their participation, since the suit is presumed to have been
filed for the benefit of all co-owners.
Moreover, respondents Annie de Castro and Felomina de Castro Uban each executed a
Special Power of Attorney, giving respondent George de Castro the authority to initiate
Civil Case No. 1990.
A power of attorney is an instrument in writing by which one person, as principal, appoints
another as his agent and confers upon him the authority to perform certain specified acts or
kinds of acts on behalf of the principal. The written authorization itself is the power of
attorney, and this is clearly indicated by the fact that it has also been called a "letter of
attorney."22
Even then, the Court views the SPAs as mere surplusage, such that the lack thereof does
not in any way affect the validity of the action for ejectment instituted by respondent
George de Castro. This also disposes of petitioner's contention that respondent George de
Castro lacked the authority to sign the Verification and the Certificate of Non-Forum
Shopping. As the Court ruled in Mendoza v. Coronel23:

Article 487 of the New Civil Code is explicit on this point:


ART. 487. Any one of the co-owners may bring an action in ejectment.
This article covers all kinds of action for the recovery of possession, i.e., forcible entry and
unlawful detainer (accion interdictal), recovery of possession (accion publiciana), and
recovery of ownership (accion de reivindicacion). As explained by the renowned civilist,
Professor Arturo M. Tolentino20:
A co-owner may bring such an action, without the necessity of joining all the other coowners as co-plaintiffs, because the suit is deemed to be instituted for the benefit of all. If
the action is for the benefit of the plaintiff alone, such that he claims possession for himself
and not for the co-ownership, the action will not prosper. (Emphasis added.)

We likewise hold that the execution of the certification against forum shopping by the
attorney-in-fact in the case at bar is not a violation of the requirement that the parties must
personally sign the same. The attorney-in-fact, who has authority to file, and who actually
filed the complaint as the representative of the plaintiff co-owner, pursuant to a Special
Power of Attorney, is a party to the ejectment suit. In fact, Section 1, Rule 70 of the Rules
of Court includes the representative of the owner in an ejectment suit as one of the parties
authorized to institute the proceedings. (Emphasis supplied.)
Failure by respondent George de Castro to attach the said SPAs to the Complaint is
innocuous, since it is undisputed that he was granted by his sisters the authority to file the
action for ejectment against petitioner prior to the institution of Civil Case No. 1990. The
SPAs in his favor were respectively executed by respondents Annie de Castro and Felomina
de Castro Uban on 7 February 2002 and 14 March 2002; while Civil Case No. 1990 was
filed by respondent George de Castro on his own behalf and on behalf of his siblings only

36

on 1 July 2002, or way after he was given by his siblings the authority to file said action.
The Court quotes with approval the following disquisition of the Court of Appeals:
Moreover, records show that [herein respondent] George de Castro was indeed authorized
by his sisters Annie de Castro and Felomina de Castro Uban, to prosecute the case in their
behalf as shown by the Special Power of Attorney dated February 7, 2002 and March 14,
2002. That these documents were appended only to [respondent George de Castro's]
position paper is of no moment considering that the authority conferred therein was given
prior to the institution of the complaint in July, 2002. x x x.24
Respondent deceased Jesus de Castro's failure to sign the Verification and Certificate of
Non-Forum Shopping may be excused since he already executed an Affidavit25 with
respondent George de Castro that he had personal knowledge of the filing of Civil Case
No. 1990. In Torres v. Specialized Packaging Development Corporation,26 the Court ruled
that the personal signing of the verification requirement was deemed substantially
complied with when, as in the instant case, two out of 25 real parties-in-interest, who
undoubtedly have sufficient knowledge and belief to swear to the truth of the allegations in
the petition, signed the verification attached to it.
In the same vein, this Court is not persuaded by petitioner's assertion that respondents'
failure to allege the jurisdictional fact that there was "unlawful withholding" of the subject
property was fatal to their cause of action.

property by petitioner, constitutive of unlawful detainer, although the exact words


"unlawful withholding" were not used. In an action for unlawful detainer, an allegation that
the defendant is unlawfully withholding possession from the plaintiff is deemed sufficient,
without necessarily employing the terminology of the law.30
Petitioner's averment that the Court of Appeals should have dismissed respondents' Petition
in light of the failure of their counsel to attach the Official Receipt of his updated payment
of Integrated Bar of the Philippines (IBP) dues is now moot and academic, since
respondents' counsel has already duly complied therewith. It must be stressed that judicial
cases do not come and go through the portals of a court of law by the mere mandate of
technicalities.31 Where a rigid application of the rules will result in a manifest failure or
miscarriage of justice, technicalities should be disregarded in order to resolve the case. 32
Finally, we agree in the ruling of the Court of Appeals that petitioner is liable for the
payment of back rentals, attorney's fees and cost of the suit. Respondents must be duly
indemnified for the loss of income from the subject property on account of petitioner's
refusal to vacate the leased premises.
WHEREFORE, premises considered, the instant Petition is DENIED. The Decision dated
19 September 2006 and Resolution dated 25 January 2007 of the Court of Appeals in CAG.R. SP No. 90906 are hereby AFFIRMED in toto. Costs against petitioner.
SO ORDERED.

It is apodictic that what determines the nature of an action as well as which court has
jurisdiction over it are the allegations in the complaint and the character of the relief
sought. In an unlawful detainer case, the defendant's possession was originally lawful but
ceased to be so upon the expiration of his right to possess. Hence, the phrase "unlawful
withholding" has been held to imply possession on the part of defendant, which was legal
in the beginning, having no other source than a contract, express or implied, and which
later expired as a right and is being withheld by defendant.27
In Barba v. Court of Appeals,28 the Court held that although the phrase "unlawfully
withholding" was not actually used by therein petitioner in her complaint, the Court held
that her allegations, nonetheless, amounted to an unlawful withholding of the subject
property by therein private respondents, because they continuously refused to vacate the
premises even after notice and demand.
In the Petition at bar, respondents alleged in their Complaint that they are the registered
owners of the subject property; the subject property was being occupied by the petitioner
pursuant to a monthly lease contract; petitioner refused to accede to respondents' demand
for rental increase; the respondents sent petitioner a letter terminating the lease agreement
and demanding that petitioner vacate and turn over the possession of the subject property to
respondents; and despite such demand, petitioner failed to surrender the subject property to
respondents.29 The Complaint sufficiently alleges the unlawful withholding of the subject

AQUINO v AURE
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari[2] under Rule 45 of the Revised
Rules of Court filed by petitioner Librada M. Aquino (Aquino), seeking the reversal and
the setting aside of the Decision[3] dated 17 October 2001 and the Resolution[4] dated 8
May 2002 of the Court of Appeals in CA-G.R. SP No. 63733. The appellate court, in its
assailed Decision and Resolution, reversed the Decision[5] of the Regional Trial Court
(RTC) of Quezon City, Branch 88, affirming the Decision[6] of the Metropolitan Trial
Court (MeTC) of Quezon City, Branch 32, which dismissed respondent Ernesto Aures
(Aure) complaint for ejectment on the ground, inter alia, of failure to comply with barangay
conciliation proceedings.
The subject of the present controversy is a parcel of land situated in Roxas District, Quezon
City, with an area of 449 square meters and covered by Transfer Certificate of Title (TCT)
No. 205447 registered with the Registry of Deeds of Quezon City (subject property).[7]

37

Aure and E.S. Aure Lending Investors, Inc. (Aure Lending) filed a Complaint for ejectment
against Aquino before the MeTC docketed as Civil Case No. 17450. In their Complaint,
Aure and Aure Lending alleged that they acquired the subject property from Aquino and
her husband Manuel (spouses Aquino) by virtue of a Deed of Sale[8] executed on 4 June
1996. Aure claimed that after the spouses Aquino received substantial consideration for the
sale of the subject property, they refused to vacate the same.[9]
In her Answer,[10] Aquino countered that the Complaint in Civil Case No. 17450 lacks
cause of action for Aure and Aure Lending do not have any legal right over the subject
property. Aquino admitted that there was a sale but such was governed by the
Memorandum of Agreement[11] (MOA) signed by Aure. As stated in the MOA, Aure shall
secure a loan from a bank or financial institution in his own name using the subject
property as collateral and turn over the proceeds thereof to the spouses Aquino. However,
even after Aure successfully secured a loan, the spouses Aquino did not receive the
proceeds thereon or benefited therefrom.
On 20 April 1999, the MeTC rendered a Decision in Civil Case No. 17450 in favor of
Aquino and dismissed the Complaint for ejectment of Aure and Aure Lending for noncompliance with the barangay conciliation process, among other grounds. The MeTC
observed that Aure and Aquino are residents of the same barangay but there is no showing
that any attempt has been made to settle the case amicably at the barangay level. The
MeTC further observed that Aure Lending was improperly included as plaintiff in Civil
Case No. 17450 for it did not stand to be injured or benefited by the suit. Finally, the MeTC
ruled that since the question of ownership was put in issue, the action was converted from a
mere detainer suit to one incapable of pecuniary estimation which properly rests within the
original exclusive jurisdiction of the RTC. The dispositive portion of the MeTC Decision
reads:
WHEREFORE, premises considered, let this case be, as it is, hereby ordered DISMISSED.
[Aquinos] counterclaim is likewise dismissed.[12]

On appeal, the RTC affirmed the dismissal of the Complaint on the same ground that the
dispute was not brought before the Barangay Council for conciliation before it was filed in
court. In a Decision dated 14 December 2000, the RTC stressed that the barangay
conciliation process is a conditio sine qua non for the filing of an ejectment complaint
involving residents of the same barangay, and failure to comply therewith constitutes
sufficient cause for the dismissal of the action. The RTC likewise validated the ruling of the
MeTC that the main issue involved in Civil Case No. 17450 is incapable of pecuniary
estimation and cognizable by the RTC. Hence, the RTC ruled:

WHEREFORE, finding no reversible error in the appealed judgment, it is hereby affirmed


in its entirety.[13]

Aures Motion for Reconsideration was denied by the RTC in an Order[14] dated 27
February 2001.
Undaunted, Aure appealed the adverse RTC Decision with the Court of Appeals arguing
that the lower court erred in dismissing his Complaint for lack of cause of action. Aure
asserted that misjoinder of parties was not a proper ground for dismissal of his Complaint
and that the MeTC should have only ordered the exclusion of Aure Lending as plaintiff
without prejudice to the continuation of the proceedings in Civil Case No. 17450 until the
final determination thereof. Aure further asseverated that mere allegation of ownership
should not divest the MeTC of jurisdiction over the ejectment suit since jurisdiction over
the subject matter is conferred by law and should not depend on the defenses and
objections raised by the parties. Finally, Aure contended that the MeTC erred in dismissing
his Complaint with prejudice on the ground of non-compliance with barangay conciliation
process. He was not given the opportunity to rectify the procedural defect by going through
the barangay mediation proceedings and, thereafter, refile the Complaint.[15]
On 17 October 2001, the Court of Appeals rendered a Decision, reversing the MeTC and
RTC Decisions and remanding the case to the MeTC for further proceedings and final
determination of the substantive rights of the parties. The appellate court declared that the
failure of Aure to subject the matter to barangay conciliation is not a jurisdictional flaw and
it will not affect the sufficiency of Aures Complaint since Aquino failed to seasonably raise
such issue in her Answer. The Court of Appeals further ruled that mere allegation of
ownership does not deprive the MeTC of jurisdiction over the ejectment case for
jurisdiction over the subject matter is conferred by law and is determined by the allegations
advanced by the plaintiff in his complaint. Hence, mere assertion of ownership by the
defendant in an ejectment case will not oust the MeTC of its summary jurisdiction over the
same. The decretal part of the Court of Appeals Decision reads:
WHEREFORE, premises considered, the petition is hereby GRANTED - and the decisions
of the trial courts below REVERSED and SET ASIDE. Let the records be remanded back
to the court a quo for further proceedings for an eventual decision of the substantive rights
of the disputants.[16]

In a Resolution dated 8 May 2002, the Court of Appeals denied the Motion for
Reconsideration interposed by Aquino for it was merely a rehash of the arguments set forth
in her previous pleadings which were already considered and passed upon by the appellate
court in its assailed Decision.

38

Aquino is now before this Court via the Petition at bar raising the following issues:
I.
WHETHER OR NOT NON-COMPLIANCE WITH THE BARANGAY CONCILIATION
PROCEEDINGS IS A JURISDICTIONAL DEFECT THAT WARRANTS THE
DISMISSAL OF THE COMPLAINT.
II.
WHETHER OR NOT ALLEGATION OF OWNERSHIP OUSTS THE MeTC OF ITS
JURISDICTION OVER AN EJECTMENT CASE.

secretary or pangkat secretary as attested to by the lupon chairman or pangkat chairman or


unless the settlement has been repudiated by the parties thereto.
(b) Where parties may go directly to court. The parties may go directly to court in the
following instances:
(1) Where the accused is under detention;
(2) Where a person has otherwise been deprived of personal liberty calling for habeas
corpus proceedings;
(3) Where actions are coupled with provisional remedies such as preliminary injunction,
attachment, delivery of personal property, and support pendente lite; and

The barangay justice system was established primarily as a means of easing up the
congestion of cases in the judicial courts. This could be accomplished through a proceeding
before the barangay courts which, according to the conceptor of the system, the late Chief
Justice Fred Ruiz Castro, is essentially arbitration in character, and to make it truly
effective, it should also be compulsory. With this primary objective of the barangay justice
system in mind, it would be wholly in keeping with the underlying philosophy of
Presidential Decree No. 1508, otherwise known as the Katarungang Pambarangay Law, and
the policy behind it would be better served if an out-of-court settlement of the case is
reached voluntarily by the parties.[17]

(4) Where the action may otherwise be barred by the statute of limitations.
(c) Conciliation among members of indigenous cultural communities. The customs and
traditions of indigenous cultural communities shall be applied in settling disputes between
members of the cultural communities.
SEC. 408. Subject Matter for Amicable Settlement; Exception Therein. The lupon of each
barangay shall have authority to bring together the parties actually residing in the same city
or municipality for amicable settlement of all disputes except:

The primordial objective of Presidential Decree No. 1508 is to reduce the number of court
litigations and prevent the deterioration of the quality of justice which has been brought by
the indiscriminate filing of cases in the courts.[18] To ensure this objective, Section 6 of
Presidential Decree No. 1508[19] requires the parties to undergo a conciliation process
before the Lupon Chairman or the Pangkat ng Tagapagkasundo as a precondition to filing a
complaint in court subject to certain exceptions[20] which are inapplicable to this case. The
said section has been declared compulsory in nature.[21]

(b) Where one party is a public officer or employee, and the dispute relates to the
performance of his official functions;

Presidential Decree No. 1508 is now incorporated in Republic Act No. 7160, otherwise
known as The Local Government Code, which took effect on 1 January 1992.

(e) Where the dispute involves real properties located in different cities or municipalities
unless the parties thereto agree to submit their differences to amicable settlement by an
appropriate lupon;

The pertinent provisions of the Local Government Code making conciliation a precondition
to filing of complaints in court, read:
SEC. 412. Conciliation.- (a) Pre-condition to filing of complaint in court. No complaint,
petition, action, or proceeding involving any matter within the authority of the lupon shall
be filed or instituted directly in court or any other government office for adjudication,
unless there has been a confrontation between the parties before the lupon chairman or the
pangkat, and that no conciliation or settlement has been reached as certified by the lupon

(a) Where one party is the government or any subdivision or instrumentality thereof;

(c) Offenses punishable by imprisonment exceeding one (1) year or a fine exceeding Five
thousand pesos (P5,000.00);
(d) Offenses where there is no private offended party;

(f) Disputes involving parties who actually reside in barangays of different cities or
municipalities, except where such barangay units adjoin each other and the parties thereto
agree to submit their differences to amicable settlement by an appropriate lupon;
(g) Such other classes of disputes which the President may determine in the interest of
justice or upon the recommendation of the Secretary of Justice.

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There is no dispute herein that the present case was never referred to the Barangay Lupon
for conciliation before Aure and Aure Lending instituted Civil Case No. 17450. In fact, no
allegation of such barangay conciliation proceedings was made in Aure and Aure Lendings
Complaint before the MeTC. The only issue to be resolved is whether non-recourse to the
barangay conciliation process is a jurisdictional flaw that warrants the dismissal of the
ejectment suit filed with the MeTC.
Aquino posits that failure to resort to barangay conciliation makes the action for ejectment
premature and, hence, dismissible. She likewise avers that this objection was timely raised
during the pre-trial and even subsequently in her Position Paper submitted to the MeTC.
We do not agree.
It is true that the precise technical effect of failure to comply with the requirement of
Section 412 of the Local Government Code on barangay conciliation (previously contained
in Section 5 of Presidential Decree No. 1508) is much the same effect produced by nonexhaustion of administrative remedies -- the complaint becomes afflicted with the vice of
pre-maturity; and the controversy there alleged is not ripe for judicial determination. The
complaint becomes vulnerable to a motion to dismiss.[22] Nevertheless, the conciliation
process is not a jurisdictional requirement, so that non-compliance therewith cannot affect
the jurisdiction which the court has otherwise acquired over the subject matter or over the
person of the defendant.[23]
As enunciated in the landmark case of Royales v. Intermediate Appellate Court[24]:

In the case at bar, we similarly find that Aquino cannot be allowed to attack the jurisdiction
of the MeTC over Civil Case No. 17450 after having submitted herself voluntarily thereto.
We have scrupulously examined Aquinos Answer before the MeTC in Civil Case No.
17450 and there is utter lack of any objection on her part to any deficiency in the complaint
which could oust the MeTC of its jurisdcition.
We thus quote with approval the disquisition of the Court of Appeals:
Moreover, the Court takes note that the defendant [Aquino] herself did not raise in defense
the aforesaid lack of conciliation proceedings in her answer, which raises the exclusive
affirmative defense of simulation. By this acquiescence, defendant [Aquino] is deemed to
have waived such objection. As held in a case of similar circumstances, the failure of a
defendant [Aquino] in an ejectment suit to specifically allege the fact that there was no
compliance with the barangay conciliation procedure constitutes a waiver of that defense. x
x x.[25]

By Aquinos failure to seasonably object to the deficiency in the Complaint, she is deemed
to have already acquiesced or waived any defect attendant thereto. Consequently, Aquino
cannot thereafter move for the dismissal of the ejectment suit for Aure and Aure Lendings
failure to resort to the barangay conciliation process, since she is already precluded from
doing so. The fact that Aquino raised such objection during the pre-trial and in her Position
Paper is of no moment, for the issue of non-recourse to barangay mediation proceedings
should be impleaded in her Answer.
As provided under Section 1, Rule 9 of the 1997 Rules of Civil Procedure:

Ordinarily, non-compliance with the condition precedent prescribed by P.D. 1508 could
affect the sufficiency of the plaintiff's cause of action and make his complaint vulnerable to
dismissal on ground of lack of cause of action or prematurity; but the same would not
prevent a court of competent jurisdiction from exercising its power of adjudication over the
case before it, where the defendants, as in this case, failed to object to such exercise of
jurisdiction in their answer and even during the entire proceedings a quo.
While petitioners could have prevented the trial court from exercising jurisdiction over the
case by seasonably taking exception thereto, they instead invoked the very same
jurisdiction by filing an answer and seeking affirmative relief from it. What is more, they
participated in the trial of the case by cross-examining respondent Planas. Upon this
premise, petitioners cannot now be allowed belatedly to adopt an inconsistent posture by
attacking the jurisdiction of the court to which they had submitted themselves voluntarily. x
x x (Emphasis supplied.)

Sec. 1. Defenses and objections not pleaded. Defenses and objections not pleaded either in
a motion to dismiss or in the answer are deemed waived. However, when it appears from
the pleadings or the evidence on record that the court has no jurisdiction over the subject
matter, that there is another action pending between the same parties for the same cause, or
that the action is barred by a prior judgment or by statute of limitations, the court shall
dismiss the claim. (Emphasis supplied.)

While the aforequoted provision applies to a pleading (specifically, an Answer) or a motion


to dismiss, a similar or identical rule is provided for all other motions in Section 8 of Rule
15 of the same Rule which states:
Sec. 8. Omnibus Motion. - Subject to the provisions of Section 1 of Rule 9, a motion
attacking a pleading, order, judgment, or proceeding shall include all objections then
available, and all objections not so included shall be deemed waived.

40

The spirit that surrounds the foregoing statutory norm is to require the party filing a
pleading or motion to raise all available exceptions for relief during the single opportunity
so that single or multiple objections may be avoided.[26] It is clear and categorical in
Section 1, Rule 9 of the Revised Rules of Court that failure to raise defenses and objections
in a motion to dismiss or in an answer is deemed a waiver thereof; and basic is the rule in
statutory construction that when the law is clear and free from any doubt or ambiguity,
there is no room for construction or interpretation.[27] As has been our consistent ruling,
where the law speaks in clear and categorical language, there is no occasion for
interpretation; there is only room for application.[28] Thus, although Aquinos defense of
non-compliance with Presidential Decree No. 1508 is meritorious, procedurally, such
defense is no longer available for failure to plead the same in the Answer as required by the
omnibus motion rule.
Neither could the MeTC dismiss Civil Case No. 17450 motu proprio. The 1997 Rules of
Civil Procedure provide only three instances when the court may motu proprio dismiss the
claim, and that is when the pleadings or evidence on the record show that (1) the court has
no jurisdiction over the subject matter; (2) there is another cause of action pending between
the same parties for the same cause; or (3) where the action is barred by a prior judgment or
by a statute of limitations. Thus, it is clear that a court may not motu proprio dismiss a case
on the ground of failure to comply with the requirement for barangay conciliation, this
ground not being among those mentioned for the dismissal by the trial court of a case on its
own initiative.
Aquino further argues that the issue of possession in the instant case cannot be resolved by
the MeTC without first adjudicating the question of ownership, since the Deed of Sale
vesting Aure with the legal right over the subject property is simulated.
Again, we do not agree. Jurisdiction in ejectment cases is determined by the allegations
pleaded in the complaint. As long as these allegations demonstrate a cause of action either
for forcible entry or for unlawful detainer, the court acquires jurisdiction over the subject
matter. This principle holds, even if the facts proved during the trial do not support the
cause of action thus alleged, in which instance the court -- after acquiring jurisdiction -may resolve to dismiss the action for insufficiency of evidence.
The necessary allegations in a Complaint for ejectment are set forth in Section 1, Rule 70
of the Rules of Court, which reads:
SECTION 1. Who may institute proceedings, and when. Subject to the provisions of the
next succeeding section, a person deprived of the possession of any land or building by
force, intimidation, threat, strategy, or stealth, or a lessor, vendor, vendee, or other person
against whom the possession of any land or building is unlawfully withheld after the
expiration or termination of the right to hold possession, by virtue of any contract, express
or implied, or the legal representatives or assigns of any such lessor, vendor, vendee, or

other person may at any time within one (1) year after such unlawful deprivation or
withholding of possession, bring an action in the proper Municipal Trial Court against the
person or persons unlawfully withholding or depriving of possession, or any person or
persons claiming under them, for the restitution of such possession, together with damages
and costs.
In the case at bar, the Complaint filed by Aure and Aure Lending on 2 April 1997, alleged
as follows:
2. [Aure and Aure Lending] became the owners of a house and lot located at No. 37 Salazar
Street corner Encarnacion Street, B.F. Homes, Quezon City by virtue of a deed of absolute
sale executed by [the spouses Aquino] in favor of [Aure and Aure Lending] although
registered in the name of x x x Ernesto S. Aure; title to the said property had already been
issued in the name of [Aure] as shown by a transfer Certificate of Title , a copy of which is
hereto attached and made an integral part hereof as Annex A;
3. However, despite the sale thus transferring ownership of the subject premises to [Aure
and Aure Lending] as above-stated and consequently terminating [Aquinos] right of
possession over the subject property, [Aquino] together with her family, is continuously
occupying the subject premises notwithstanding several demands made by [Aure and Aure
Lending] against [Aquino] and all persons claiming right under her to vacate the subject
premises and surrender possession thereof to [Aure and Aure Lending] causing damage and
prejudice to [Aure and Aure Lending] and making [Aquinos] occupancy together with
those actually occupying the subject premises claiming right under her, illegal.[29]

It can be inferred from the foregoing that Aure, together with Aure Lending, sought the
possession of the subject property which was never surrendered by Aquino after the
perfection of the Deed of Sale, which gives rise to a cause of action for an ejectment suit
cognizable by the MeTC. Aures assertion of possession over the subject property is based
on his ownership thereof as evidenced by TCT No. 156802 bearing his name. That Aquino
impugned the validity of Aures title over the subject property and claimed that the Deed of
Sale was simulated should not divest the MeTC of jurisdiction over the ejectment case.[30]
As extensively discussed by the eminent jurist Florenz D. Regalado in Refugia v. Court of
Appeals[31]:
As the law on forcible entry and unlawful detainer cases now stands, even where the
defendant raises the question of ownership in his pleadings and the question of possession
cannot be resolved without deciding the issue of ownership, the Metropolitan Trial Courts,
Municipal Trial Courts, and Municipal Circuit Trial Courts nevertheless have the
undoubted competence to resolve the issue of ownership albeit only to determine the issue
of possession.

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x x x. The law, as revised, now provides instead that when the question of possession
cannot be resolved without deciding the issue of ownership, the issue of ownership shall be
resolved only to determine the issue of possession. On its face, the new Rule on Summary
Procedure was extended to include within the jurisdiction of the inferior courts ejectment
cases which likewise involve the issue of ownership. This does not mean, however, that
blanket authority to adjudicate the issue of ownership in ejectment suits has been thus
conferred on the inferior courts.
At the outset, it must here be stressed that the resolution of this particular issue concerns
and applies only to forcible entry and unlawful detainer cases where the issue of possession
is intimately intertwined with the issue of ownership. It finds no proper application where it
is otherwise, that is, where ownership is not in issue, or where the principal and main issue
raised in the allegations of the complaint as well as the relief prayed for make out not a
case for ejectment but one for recovery of ownership.

Apropos thereto, this Court ruled in Hilario v. Court of Appeals[32]:

parties involving title to the land. The foregoing doctrine is a necessary consequence of the
nature of forcible entry and unlawful detainer cases where the only issue to be settled is the
physical or material possession over the real property, that is, possession de facto and not
possession de jure.

In other words, inferior courts are now conditionally vested with adjudicatory power over
the issue of title or ownership raised by the parties in an ejectment suit. These courts shall
resolve the question of ownership raised as an incident in an ejectment case where a
determination thereof is necessary for a proper and complete adjudication of the issue of
possession.[33]
WHEREFORE, premises considered, the instant Petition is DENIED. The Court of
Appeals Decision dated 17 October 2001 and its Resolution dated 8 May 2002 in CA-G.R.
SP No. 63733 are hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.

Thus, an adjudication made therein regarding the issue of ownership should be regarded as
merely provisional and, therefore, would not bar or prejudice an action between the same

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