Republic Planters Bank vs.

Agana Case Digest

Republic Planters Bank vs. Agana
[GR 51765, 3 March 1997]
Facts: On 18 September 1961, the Robes-Francisco Realty & Development Corporation (RFRDC)
secured a loan from the Republic Planters Bank in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued to RFRDC through its officers then,
Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling
to the full amount of the loan, which is P120,000.00, the Bank lent such amount partially in the form
of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400
shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said
stock certificates were in the name of Adalia F. Robes and Carlos F. Robes, who subsequently,
however, endorsed his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions: "The Preferred Stock shall have
the following rights, preferences, qualifications and limitations, to wit: 1. Of the right to receive a
quarterly dividend of 1%, cumulative and participating. xxx 2. That such preferred shares may be
redeemed, by the system of drawing lots, at any time after 2 years from the date of issue at the
option of the Corporation." On 31 January 1979, RFRDC and Robes proceeded against the Bank
and filed a complaint anchored on their alleged rights to collect dividends under the preferred shares
in question and to have the bank redeem the same under the terms and conditions of the stock
certificates. The bank filed a Motion to Dismiss 3 private respondents' Complaint on the following
grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the
action was unenforceable under substantive law; and (3) that the action was barred by the statute of
limitations and/or laches. The bank's Motion to Dismiss was denied by the trial court in an order
dated 16 March 1979. The bank then filed its Answer on 2 May 1979. Thereafter, the trial court gave
the parties 10 days from 30 July 1979 to submit their respective memoranda after the submission of
which the case would be deemed submitted for resolution. On 7 September 1979, the trial court
rendered the decision in favor of RFRDC and Robes; ordering the bank to pay RFRDC and Robes
the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until
full payment. The bank filed the petition for certiorari with the Supreme Court, essentially on pure
questions of law.
Issue:
1.
Whether the bank can be compelled to redeem the preferred shares issued to RFRDC and
Robes.
2.
Whether RFRDC and Robes are entitled to the payment of certain rate of interest on the
stocks as a matter of right without necessity of a prior declaration of dividend.
Held:
1. While the stock certificate does allow redemption, the option to do so was clearly vested in the
bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the
terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be construed as having a
mandatory effect. The redemption of said shares cannot be allowed. The Central Bank made a
finding that the Bank has been suffering from chronic reserve deficiency, and that such finding
resulted in a directive, issued on 31 January 1973 by then Gov. G. S. Licaros of the Central Bank, to
the President and Acting Chairman of the Board of the bank prohibiting the latter from redeeming
any preferred share, on the ground that said redemption would reduce the assets of the Bank to the
prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just

and valid reason. The directive issued by the Central Bank Governor was obviously meant to
preserve the status quo, and to prevent the financial ruin of a banking institution that would have
resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking
industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate
entity, may thus be considered as an exercise of police power.
2. Both Section 16 of the Corporation Law and Section 43 of the present Corporation Code prohibit
the issuance of any stock dividend without the approval of stockholders, representing not less than
two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a
matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the
corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is
legal only when construed as requiring payment of interest as dividends from net earnings or surplus
only. In compelling the bank to redeem the shares and to pay the corresponding dividends, the Trial
committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the
terms and conditions specified in the stock certificate, as well as the clear mandate of the law.

Tale of Two Golf Clubs

Posted on May 20, 2009 by Hector M. de Leon Jr. Posted in Civil Law, Commercial Law

Two recent decisions of the Supreme Court underscore the need for country clubs to
strictly follow notice requirements in connection with the sale of a delinquent members
shares in a public auction.
In Valley Golf & Country Club, Inc. vs. Rosa O. Vda. Caram, G.R. No. 158805, April 16,
2009, the Supreme Court invalidated the sale based on the finding that Valley Golf sent
the notice of sale to the member (instead of sending it to his estate), notwithstanding
that Valley Golf knew that the member has died. In Calatagan Golf Club, Inc.
vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009, the Supreme Court invalidated
the sale based on the finding that Calatagan sent the notice of sale to the members
P.O. box, notwithstanding that Calatagan knew that the P.O. box has been closed.
Valley Golf
In Valley Golf, Valley Golf sold the golf membership share (the Golf Share) of
Congressman Caram at a public auction sometime June 1987 after Caram allegedly stop
paying his monthly dues beginning January 1980 and after Valley Golf allegedly sent 5
letters to Caram concerning his delinquent account during the period January 1986 to
May 1987.
As it turned out, Caram died on 6 October 1986. His wife initiated intestate proceedings
before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle her husbands
estate. Unaware of the pending controversy over the Golf Share, the Caram family and
the RTC included the Golf Share as part of Carams estate. The RTC approved a project

of partition of Carams estate on 29 August 1989. The Golf Share was adjudicated to the
wife, who paid the corresponding estate tax due, including that on the golf Share.
It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the
sale of the Golf Share following their inquiry with Valley Golf about the Golf Share. After
a series of correspondence, the Caram heirs were subsequently informed, in a letter
dated 15 October 1990, that they were entitled to the refund ofP11,066.52 out of the
proceeds of the sale of the Golf Share, which amount had been in the custody of Valley
Golf since 11 June 1987.
Carams wife filed an action for reconveyance of the Golf Share with damages before
the Securities and Exchange Commission (SEC) against Valley Golf. On 15 November
1996, SEC Hearing Officer Elpidio S. Salgado rendered a decision in favor of the wife,
ordering Valley Golf to convey ownership of the Golf Share, or in the alternative. to issue
one fully paid share of stock of Valley Golf of the same class as the Golf Share to the
wife. Damages totaling P90,000.00 were also awarded to the wife.
The SEC hearing officer ruled that under Section 67, paragraph 2 of the Corporation
Code, a share stock could only be deemed delinquent and sold in an extrajudicial sale at
public auction only upon the failure of the stockholder to pay the unpaid subscription or
balance for the share. However, the section could not have applied in Carams case
since he had fully paid for the Golf Share and he had been assessed not for the share
itself but for his delinquent club dues. Proceeding from the foregoing premises, the SEC
hearing officer concluded that the auction sale had no basis in law and was thus a
nullity. The SEC en banc and the Court of Appeals affirmed the hearing officers
decision.
On appeal to the Supreme Court, the central issue raised was: May a country club seize
and dispose of the membership share of a fully-paid member on account of its unpaid
membership to the country club when it is authorized to do so under the corporate bylaws but not by the Articles of Incorporation?
The Supreme Court ruled that there is a specific provision under Title XI on Non-Stock
Corporations of the Corporation Code dealing with thetermination of membership in a
non-stock corporation such Valley Golf. Section 91 of the Corporation Code provides:
SEC. 91. Termination of membership.Membership shall be terminated in the manner
and for the causes provided in the articles of incorporation or the by-laws. Termination
of membe rship shall have the effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise provided in the articles of incorporation
or the by-laws. (Emphasis supplied)
On the basis of Section 91, the Supreme Court ruled that the right of a non-stock
corporation such as Valley Golf to expel a member through the forfeiture of the Golf
Share may be established in the by-laws alone, as is the situation in this case.
However, the Supreme Court proceed to declare the sale as invalid. The Supreme Court

found that Valley Golf acted in bad faith when it sent the final notice to Caram under the
pretense they believed him to be still alive, when in fact they had very well known that
he had already died. The Court stated:
Whatever the reason Caram was unable to respond to the earlier notices, the fact
remains that at the time of the final notice, Valley Golf knew that Caram, having died
and gone, would not be able to settle the obligation himself, yet they persisted in
sending him notice to provide a color of regularity to the resulting sale.
That reason alone, evocative as it is of the absence of substantial justice in the sale of
the Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the
Court of Appeals.
Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into
operation Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil
Code. These provisions enunciate a general obligation under law for every person to act
fairly and in good faith towards one another. Non-stock corporations and its officers are
not exempt from that obligation.

Calatagan
A similar fate fell on Calatagan Golf Club, which sold the golf share of Clemente
sometime January 1993 after Clemente allegedly stop paying its membership
dues. Clemente learned of the sale of his share only in November of 1997. He filed a
claim with the SEC seeking the restoration of his shareholding in Calatagan with
damages.
On 15 November 2000, the SEC rendered a decision dismissing Clementes complaint.
Citing Section 69 of the Corporation Code which provides that the sale of shares at an
auction sale can only be questioned within six (6) months from the date of sale, the SEC
concluded that Clementes claim, filed four (4) years after the sale, had already
prescribed. The SEC further held that Calatagan had complied with all the requirements
for a valid sale of the subject share, Clemente having failed to inform Calatagan that the
address he had earlier supplied was no longer his address. Clemente, the SEC ruled, had
acted in bad faith in assuming as he claimed that his non-payment of monthly dues
would merely render his share inactive.
The Supreme Court ruled that Clementes action for recovery of share has not
prescribed, citing Article 1140 of the Civil Code which provides that an action to recover
movables shall prescribe in eight (8) years. The Supreme Court also found the sale of
the golf share was void:
Ultimately, the petition must fail because Calatagan had failed to duly observe both the
spirit and letter of its own by-laws. The by-law provisions was clearly conceived to afford

due notice to the delinquent member of the impending sale, and not just to provide an
intricate faade that would facilitate Calatagans sale of the share. But then, the bad
faith on Calatagans part is palpable. As found by the Court of Appeals, Calatagan very
well knew that Clementes postal box to which it sent its previous letters had already
been closed, yet it persisted in sending that final letter to the same postal box. What
for? Just for the exercise, it appears, as it had known very well that the letter would
never actually reach Clemente.
It is noteworthy that Clemente in his membership application had provided his
residential address along with his residence and office telephone numbers. Nothing in
Section 32 of Calatagans By-Laws requires that the final notice prior to the sale be
made solely through the members mailing address. Clemente cites our aphorism-like
pronouncement in Rizal Commercial Banking Corporation v. Court of Appeals that [a]
simple telephone call and an ounce of good faith x x x could have prevented this
present controversy. That memorable observation is quite apt in this case.
Calatagans bad faith and failure to observe its own By-Laws had resulted not merely in
the loss of Clementes privilege to play golf at its golf course and avail of its amenities,
but also in significant pecuniary damage to him. For that loss, the only blame that could
be thrown Clementes way was his failure to notify Calatagan of the closure of the P.O.
Box. That lapse, if we uphold Calatagan would cost Clemente a lot. But, in the first
place, does he deserve answerability for failing to notify the club of the closure of the
postal box? Indeed, knowing as he did that Calatagan was in possession of his home
address as well as residence and office telephone numbers, he had every reason to
assume that the club would not be at a loss should it need to contact him. In addition,
according to Clemente, he was not even aware of the closure of the postal box, the
maintenance of which was not his responsibility but his employer Phimcos.
The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21
of the Civil Code under the Chapter on Human Relations. These provisions, which the
Court of Appeals did apply, enunciate a general obligation under law for every person to
act fairly and in good faith towards one another. A non-stock corporation
like Calatagan is not exempt from that obligation in its treatment of its members. The
obligation of a corporation to treat every person honestly and in good faith extends
even to its shareholders or members, even if the latter find themselves contractually
bound to perform certain obligations to the corporation. A certificate of stock cannot be
a charter of dehumanization.
Two things to note:
1. Unlike the by-laws of Valley Golf, the by-laws of Calatagan contained what the
Supreme Court described as a clear and comprehensive procedure to govern the
payment of monthly dues, the declaration of a member as delinquent, and the
constitution of a lien on the shares and its eventual public sale to answer for the
members debts.

2. In Calatagan, the Supreme Court did not appear to have seen any issue with the bylaws provision that states that The club shall have a first lien on every share of stock to
secure debts of the members to the Club. On the other hand, in Valley Golf, the
Supreme Court appears to say (in an obiter) that a lien can be created only if there was
a pledge or chattel mortgage executed by the owner of the golf share. The Supreme
Court stated: Caram had not signed any document that manifests his agreement to
constitute his Golf Share as security in favor of Valley Golf to answer for his obligations
to the club. There is no document we can assess that it is substantially compliant with
the form of chattel mortgages under Section 5 of Act No. 1508. The by-laws could not
suffice for that purpose since it is not designed as a bilateral contract
between Caram and Valley Golf, or a vehicle by which Caram expressed his consent to
constitute his Golf Share as security for his account with Valley Golf.

TURNER vs. LORENZO SHIPPING

Stockholders Right of Appraisal
The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the
right of appraisal, as follows:
1)

2)

3)

4)

5)

The appraisal right is exercised by any stockholder who has voted against the proposed corporate action
by making a written demand on the corporation within 30 days after the date on which the vote was taken
for the payment of the fair value of his shares. The failure to make the demand within the period is
deemed a waiver of the appraisal right.
If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a
period of 60 days from the date the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of
the majority of the appraisers shall be final, and the corporation shall pay their award within 30 days after
the award is made. Upon payment by the corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his or her shares to the corporation.
All rights accruing to the withdrawing stockholders shares, including voting and dividend rights, shall be
suspended from the time of demand for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the shares by the corporation, except the
right of such stockholder to receive payment of the fair value of the shares.
Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to
the corporation the certificates of stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this
Title X of the Corporation Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the
transferee.
If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation
Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in trust for the payment of corporate
creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the
right to assume that the board of directors will not use the assets of the corporation to purchase its own
stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of
assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate
funds and assets to the prejudice of creditors is null and void.

Corporate Law Case Digest: San Juan

Structural V. CA (1998)
G.R. No. 129459 September 29, 1998
Lessons Applicable: Definition of a Close Corporation (Corporate Law)

FACTS:

February 14 1989: San Juan Structural and Steel Fabricators, Inc.'s (San
Juan) entered into an agreement with Motorich Sales Corporation (Motorich) for the
transfer to it of a parcel of land containing an area of 414 square meters

San Juan paid the down payment of P100,000, the balance to be paid on or
before March 2, 1989

March 1, 1989: Mr. Andres T. Co, president of San Juan, wrote a letter course
through Motorich's broker requesting for a computation of the balance to be paid

Linda Aduca, who wrote the computation of the balance

March 2, 1989: San Juan was ready with the amount corresponding to the
balance, covered by Metrobank Cashier's Check, payable to Motorich

they were supposed to meet in the office of San Juan but Motorich's

treasurer, Nenita Lee Gruenberg, did not appear

Motorich refused to execute the Transfer of Rights/Deed of Assignment

which is necessary to transfer the certificate of title

ACL Development Corp. (ACL) is impleaded as a necessary party

since Transfer Certificate of Title No. (362909) 2876 is still in its name

JNM Realty & Development Corp. (JNM) is impleaded as a

necessary party in view of the fact that it is the transferor of right in favor of
Motorich

April 6, 1989: ACL and Motorich entered into a Deed of Absolute

Sale

the Registry of Deeds of Quezon City issued a new title in

the name of Motorich Sales Corporation, represented by Nenita Lee Gruenberg and
Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571

as a result of Nenita Lee Gruenberg and Motorich's bad faith

in refusing to execute a formal Transfer of Rights/Deed of Assignment, San Juan
suffered moral and nominal damages of P500,000 and exemplary damages of
P100,000.00 and P100,000 attorneys fees

San Juan lost the opportunity to construct a residential

building in the sum of P100,000.00 Pesos

CA affirmed RTC for dismissing

San Juan argues that the veil of corporate fiction of Motorich should be pierced
because it is a close corporation.

Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all

or almost all or 99.866% to be accurate, of the subscribed capital stock" of

Motorich, San Juan argues that Gruenberg needed no authorization from the board
to enter into the subject contract.

being solely owned by the Spouses Gruenberg, the company can treated

as a close corporation which can be bound by the acts of its principal stockholder
who needs no specific authority

ISSUE: W/N Motorich is a close corp. which does not need to be bound by its principal
SH

HELD: NO. petition is hereby DENIED

Gruenberg, treasurer of Motorich, and Andres Co signed the contract but

that cannot bind Motorich, because it never authorized or ratified such sale or even
the receipt of the earnest money

A corporation is a juridical person separate and distinct from its

stockholders or members

San Juan failed to prove otherwise

The document is a hand-written one, not a corporate receipt, and it

bears only Nenita Gruenberg's signature

GR: acts of corporate officers within the scope of their authority are binding on
the corporation. But when these officers exceed their authority, their actions "cannot
bind the corporation, unless it has ratified such acts or is estopped from disclaiming
them.

statutorily granted privilege of a corporate veil may be used only for legitimate
purposes

utilized as a shield to commit fraud, illegality or inequity; defeat public

convenience; confuse legitimate issues; or serve as a mere alter ego or business

conduit of a person or an instrumentality, agency or adjunct of another corporation none here

Sec. 96. Definition and Applicability of Title. A close corporation, within the meaning
of this Code, is one whose articles of incorporation provide that: (1) All of the
corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); (2)
All of the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall be deemed not a close corporation when at least twothirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code. . . . .

The articles of incorporation of Motorich Sales Corporation does not contain any
provision stated in Sec. 96

mere ownership by a single stockholder or by another corporation of all or capital

stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personalities

A narrow distribution of ownership does not, by itself, make a close corporation

Even if veil is peice it will then be a sale of conjugal property which Nenita alone
could not have effected

Gruenberg did not represent herself as authorized by Respondent Motorich

despite the receipt issued by the former specifically indicating that she was signing
on behalf of Motorich

The amount paid as "earnest money" was not proven to have redounded to the
benefit of Motorich

it was deposited with the account of Aren Commercial c/o Motorich

Andres Co being a President of San Juan for more than 10 years cannot feign
ignorance of the scope of the authority of a corporate treasurer

However, Nenita Gruenberg should be ordered to return to petitioner the amount

she received as earnest money, as "no one shall enrich himself at the expense of
another.

RUBY INDUSTRIAL CORPORATION and BENHAR INTERNATIONAL, INC. petitioners,

vs.
COURT OF APPEALS, MIGUEL LIM, ALLIED LEASING and FINANCE CORPORATION, and THE
MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, respondents.

PUNO, J.:
Petitioners seek the reversal of the Court of Appeals Decision, 1 setting aside the Orders of the
Securities and Exchange Commission (SEC), dated July 30, 1993 and October 15, 1993, which
approved the Revised Rehabilitation Plan of Ruby Industrial Corporation (RUBY) and appointed
Benhar International, Inc. (BENHAR) as member of RUBY's Management Committee.
The facts: Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass
manufacturing, while petitioner Benhar International, Inc. (BENHAR) is a domestic corporation
engaged in importation and sale of vehicle spare parts. BENHAR is wholly-owned by the Yu family
and headed by Henry Yu who is also a director and majority stockholder of RUBY.
In 1983, RUBY suffered severe liquidity problems. Thus, on December 13, 1983, it filed a Petition for
Suspension of Payments with the Securities and Exchange Commission (SEC). 2
On December 20, 1983, the SEC issued an Order 3 declaring RUBY under suspension of payments.
Pending hearing of its petition, the SEC enjoined RUBY from disposing its property, except insofar
as necessary in its ordinary operations. It also enjoined RUBY from making payments outside of the
necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel 4 created a management committee 5 for RUBY to: (1)
undertake the management of RUBY; (2) take custody of and control over all existing assets and
liabilities of RUBY; (3) evaluate RUBY's existing assets and liabilities, earnings and operations; (4)
determine the best way to salvage and protect the interest of its investors and creditors; and (5)
study, review and evaluate the proposed rehabilitation plan for RUBY. 6

Subsequently, at RUBY's special stockholders meeting, its majority stockholders led by Yu Kim
Giang presented the BENHAR/RUBY Rehabilitation Plan to be submitted to SEC. Under the plan,
BENHAR shall lend its P60 million credit line in China Bank to RUBY, payable within ten (10) years.
Moreover, BENHAR shall purchase the credits of RUBY's creditors and mortgage RUBY's properties
to obtain credit facilities for RUBY. 7 Upon approval of the rehabilitation plan, BENHAR shall control
and manage RUBY'S operations. For its service, BENHAR shall receive a management fee
equivalent to 7.5% of RUBY's net sales. 8
Some 40% of the stockholders opposed the BENHAR/RUBY Plan, including private respondent
MIGUEL LIM, a minority shareholder of RUBY. Private respondent Allied Leasing and Finance
Corporation, the biggest unsecured creditor of RUBY and chairman of the management committee,
also objected to the plan as it would transfer RUBY's assets beyond the reach and to the prejudice
of its unsecured creditors. Despite the oppositions, the majority stockholders still submitted the
BENHAR/RUBY Plan to the SEC for approval.
Upon the other hand, RUBY's minority stockholders, represented by private respondent Lim,
submitted their own rehabilitation plan (the ALTERNATIVE PLAN) to the SEC where they proposed
to: (1) pay all RUBY'S creditors without securing any bank loan; (2) run and operate RUBY without
charging management fees; (3) buy-out the majority shares or sell their shares to the majority
stockholders; (4) rehabilitate RUBY's two plants; and (5) secure a loan at 25% interest, as against
the 28% interest charged in the loan under the BENHAR/RUBY Plan. 9
Both plans were endorsed by the SEC to RUBY's management committee for evaluation.
On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. 10 The minority
stockholders, thru private respondent Lim, appealed the approval to the SEC en banc. On November
15, 1988, the SEC en banc temporarily enjoined the implementation of the BENHAR/RUBY Plan. On
December 20, 1988, after the expiration of the TRO, the SEC en banc granted the writ of preliminary
injunction against the enforcement of the BENHAR/RUBY Plan. 11
Thereafter, BENHAR and Henry Yu, later joined by RUBY and Yu Kim Clang, appealed to the Court
of Appeals (CA-G.R. SP No. 16798) questioning the issuance of the writ. Their appeal was denied. 12
BENHAR and company elevated the matter to this Court. In a minute Resolution, 13 dated February
28, 1990, we denied the petition and upheld the injunction against the implementation of the
BENHAR/RUBY Plan.
However, it appears that before the SEC Hearing Panel approved the BENHAR/RUBY Plan on
October 28, 1988, BENHAR had already implemented part of the plan by paying off Far East Bank &
Trust Company (FEBTC), one of RUBY's secured creditors. Thus, by May 30, 1988, FEBTC had
already executed a deed of assignment of credit and mortgage rights in favor of BENHAR.
Moreover, despite the SEC en banc's TRO and injunction, BENHAR still paid RUBY's other secured
creditors who, in turn, assigned their credits in favor of BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance Corporation, and private
respondent Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite the
parties thereto in contempt for willful violation of the December 20, 1983 SEC Order enjoining RUBY
from disposing its properties and making payments pending the hearing of its petition for suspension
of payments. Private respondents Lim and Allied Leasing charged that in paying off FEBTC's credits,
FEBTC was given undue preference over the other creditors of RUBY.

Acting on private respondents' motions, the SEC Hearing Panel nullified the deeds of assignment
executed by RUBY's creditors in favor of BENHAR and declared the parties thereto guilty of indirect
contempt. 14
Petitioners appealed to the SEC en banc. Their appeal was denied. 15 It was ruled that, pending
approval of the BENHAR/RUBY plan, BENHAR had no authority to pay off FEBTC, one of RUBY's
creditors. In prematurely implementing the BENHAR/RUBY plan, BENHAR defied the SEC Order
declaring RUBY under suspension of payments and directing the management committee to
preserve its assets.
Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang, appealed to the Court of
Appeals (CA-G.R. SP No. 18310). On August 29,
1990, the Court of Appeals affirmed the SEC ruling nullifying the deeds of assignment. 16 It also
declared that its decision is final and executory as to RUBY and Yu Kim Giang for their failure to file
their pleadings within the reglementary period. This Court affirmed the Court of Appeals' decision in
G.R. No. 96675. 17
Earlier, on May 29, 1990, after the SEC en banc enjoined the implementation of BENHAR/RUBY
Plan, RUBY filed with the SEC en banc an ex-parte petition to create a new management committee
and to approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised
plan, BENHAR shall receive P34.068 Million of the P60.437 Million credit facility to be extended to
RUBY, as reimbursement for BENHAR's payment to some of RUBY's creditors.
The SEC en banc directed RUBY to submit the Revised BENHAR/RUBY Plan to its creditors for
comment and approval. The petition for the creation of a new management committee was
remanded for further proceedings to the SEC Hearing Panel. The Alternative Plan of RUBY's
minority stockholders was also forwarded to the hearing panel for evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the Revised
BENHAR/RUBY Plan and the creation of a new management committee. Instead, they endorsed the
minority stockholders' Alternative Plan.
At the hearing of the petition for the creation of a new management committee, three (3) members of
the original management committee 18 opposed the Revised BENHAR/RUBY Plan on the following
grounds:
(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a total stranger, to
RUBY as BENHAR would become the biggest creditor of RUBY;
(2) the revised plan would put RUBY's assets beyond the reach of the unsecured creditors and the
minority stockholders; and,
(3) the revised plan was not approved by RUBY's stockholders in a meeting called for the purpose.
However, on September 18, 1991, despite the objections of over 90% of RUBY's creditors and three
(3) members of the management committee, the SEC Hearing Panel approved the revised plan and
dissolved the existing management committee. It also created a new management committee and
appointed BENHAR as one of its members. 19 In addition to the powers originally conferred to the
management committee under P.D. No. 902-A, the new management committee was tasked to
oversee the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

Consequently, the original management committee, Lim, and the Allied Leasing Corporation
appealed to the SEC en banc. On July 30, 1993, the SEC En Banc affirmed the approval of the
Revised BENHAR/RUBY Plan and the creation of a new management committee. 20 To avoid any
group from controlling the management of RUBY, the SEC appointed SEC lawyers Ruben C. Ladia
and Teresita R. Siao as additional members of the new management committee. Further, it declared
that BENHAR's membership in the new management committee is subject to the condition that
BENHAR will extend its credit facilities to RUBY without using the latter's assets as security or
collateral.
Private respondents Lim, Allied Leasing Corporation and the original management committee moved
for reconsideration. Petitioners, on the other hand, asked the SEC to reconsider the portion of its
Order prohibiting BENHAR from utilizing RUBY's assets as collateral.
On October 15, 1993, the SEC denied private respondents' motions for reconsideration. However, it
granted petitioners' motion and allowed BENHAR to use RUBY's assets as collateral for loans,
subject to the approval of the majority of all the members of the new management committee. 21
On appeal by private respondents, the Court of Appeals set aside 22 SEC's approval of the Revised
BENHAR/RUBY plan and remanded the case to the SEC for further proceedings. It ruled that the
revised plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of
assignment executed by RUBY's creditors in favor of BENHAR. Under the revised plan, BENHAR
was to receive P34.068 Million of the P60.437 Million credit facility to be extended to RUBY, as
settlement for its advance payment to RUBY's seven (7) secured creditors. In effect, the payments
made by BENHAR under the void Deeds of Assignment were recognized as payable to BENHAR
under the revised plan. Petitioners' motion for reconsideration was denied. 23
Hence, this petition where petitioners aver that:
I. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR, GRAVELY
ABUSED ITS DISCRETION AND EXCEEDED ITS JURISDICTION WHEN IT WENT
AGAINST THE FACTS AS FOUND BY THE SEC AND, THEREAFTER,
SUBSTITUTED ITS JUDGMENT FOR THAT OF THE SEC.
II. THE COURT OF APPEALS COMMITTED AN ERROR REVIEWABLE ON
APPEAL AND ALSO A PROPER SUBJECT OF CERTIORARI WHEN IT ALLOWED
PRIVATE RESPONDENTS TO FILE SEPARATE PETITIONS PREPARED BY
LAWYERS REPRESENTING THEMSELVES AS BELONGING TO DIFFERENT LAW
FIRMS.
We find no merit in the petition.
Petitioners first contend that, in reversing the SEC's approval of the Revised BENHAR/RUBY Plan,
the Court of Appeals exceeded its jurisdiction and disregarded the SEC's expertise in resolving
corporate controversies.
The settled doctrine is that factual findings of an administrative agency are accorded respect and, at
times, finality for they have acquired the expertise inasmuch as their jurisdiction is confined to
specific matters. 24 Nonetheless, these doctrines do not apply when the board or official has gone
beyond his statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and
without regard to his duty or with grave abuse of discretion.25 In Leongson vs. Court of Appeals, 26 we
held: "once the actuation of the administrative official or administrative board or agency is tainted by

a failure to abide by the command of the law, then it is incumbent on the courts of justice to set
matters right, with this Tribunal having the last say on the matter."
We hold that the SEC acted arbitrarily when it approved the Revised BENHAR/RUBY Plan. As found
by the Court of Appeals, the plan contained provisions which circumvented its final decision 27 in CAG.R. SP No. 18310, nullifying the deeds of assignment of credits and mortgages executed by
RUBY's creditors in favor of BENHAR, as well as this Court's resolution in G.R. No. 96675, affirming
said Court of Appeals' decision. Specifically, the Revised BENHAR/RUBY Plan considered as valid
the advance payments made by BENHAR in favor of some of RUBY'S creditors. The nullity of
BENHAR's unauthorized dealings with RUBY's creditors is settled. The deeds of assignment
between BENHAR and RUBY's creditors had been categorically declared void by the SEC Hearing
Panel in two (2) orders issued on January 12, 1989 and March 15, 1989. 28 The dispositive portion of
the Order, dated January 12, 1989, held:
WHEREFORE, the motion for reconsideration of the Order dated October 7, 1988,
insofar as it relates to the motion of Allied Leasing and Finance Corporation to cite for
contempt and to annul deed of assignment is hereby GRANTED. . . . The Deed of
Assignment of Receivables and Mortgages, Rights, Credits and Interest Without
Recourse having been executed in violation of the Order dated December 20, 1988
is hereby declared NULL and VOID.
SO ORDERED.
The dispositive portion of the Order dated March 15, 1989, similarly provided:
WHEREFORE, Mr. Yu Kim Giang and others are hereby found guilty of indirect
contempt and a penalty of P500.00 each is hereby imposed on them. The Deed of
Assignment of Receivables and Mortgages, Rights, Credits and Interest Without
Recourse, in favor of Benhar International, Inc., by Florence Danon, Philippine Bank
of Communication, Philippine Commercial International Bank, Philippine Trust
Company and PCI Leasing and Finance Incorporated, having been executed in
violation of the Order dated December 20, 1988 are hereby declared NULL and
VOID.
These orders were upheld by the SEC en banc 29 and the Court of Appeals. 30 In CA-GR SP
No. 18310, the Court of Appeals ruled as follows:
xxx xxx xxx
1) . . . when the Deed of Assignment was executed on May 30, 1988 by and between
Ruby Industrial Corp., Benhar International Inc., and FEBTC, the Rehabilitation Plan
proposed by petitioner Ruby Industrial Corp. for Benhar International Inc. to assume
all petitioner's obligation has not been approved by the SEC. The Rehabilitation Plan
was not approved until October 28, 1988. There was a willful and blatant violation of
the SEC order dated December 1983 on the part of petitioner Ruby Industrial Corp.,
represented by Yu Kim Giang, by Benhar International Inc., represented by Henry Yu
and by FEBTC . . . .
2) The magnitude and coverage of the transactions involved were such that Yu Kim
Giang and the other signatories cannot feign ignorance or pretend lack of knowledge
thereto in view of the fact that they were all signatories to the transaction and privy to
all the negotiations leading to the questioned transactions. In executing the Deeds of

Assignments, the petitioners totally disregarded the mandate contained in the SEC
order not to dispose the properties of Ruby Industrial Corp. in any manner
whatsoever pending the approval of the Rehabilitation Plan and rendered illusory the
SEC efforts to rehabilitate the petitioner corporation to the best interests of all the
creditors.
3) The assignments were made without prior approval of the Management
Committee created by the SEC in an Order dated August 10, 1984. Under Section 6,
par. d, sub. par. (2) of P.D. 902-A as amended by P.D. 1799, the Management
Committee, rehabilitation receiver, board or body shall have the power to take
custody and control over all existing assets of such entities under management
notwithstanding any provision of law, articles of incorporation or by-law to the
contrary. The SEC therefore has the power and authority, through a Management
Committee composed of petitioner's creditors or through itself directly, to declare all
assignment of assets of the petitioner Corporation declared under suspension of
payments, null and void, and to conserve the same in order to effect a fair, equitable
and meaningful rehabilitation of the insolvent corporation.
4) . . . . The acts for which petitioners were held in indirect contempt by the SEC
arose from the failure or willful refusal by petitioners to obey the lawful order of the
SEC not to dispose of any of its properties in any manner whatsoever without
authority or approval of the SEC. The execution of the Deeds of Assignment tend to
defeat or obstruct the administration of justice. Such acts are offenses against the
SEC because they are calculated to embarrass, hinder and obstruct the tribunal in
the administration of justice or lessen its authority.
In view of the foregoing conclusion which has now been reached, it is not necessary
to discuss at length or to determine other questions which are presented on record. It
is sufficient to say that the facts as established by the evidence on records warrant a
finding that petitioners are guilty of indirect contempt. The Order of the SEC is
hereby AFFIRMED. This petition is DISMISSED with costs against the petitioners.
SO ORDERED. (emphasis ours)
Petitioners insist that the Court of Appeals did not make a categorical statement in the dispositive
portion of its decision in CA-G.R. SP No. 18310 that it was nullifying the deeds of assignment in
favor of BENHAR. Allegedly, it merely stated that it is affirming the decision of the SEC. Petitioners
cite Olac vs. Court of Appeals 31 where we held that the dispositive portion or the fallo constitutes the
court's resolution in a given case, while the discussion in the body of the decision merely expresses
the court's opinion.
The contention has no merit. The principle laid down in Olac applies only when there is a conflict
between the dispositive part (fallo) and the opinion of the court contained in the decision. Hence, in
the execution of the court's judgment, the fallo should be considered as the final disposition of the
case before it. Such conflict does not exist in the Court of Appeals' decision in CA-G.R. SP No.
18310. It is crystal clear that what the Court of Appeals affirmed in CA-GR SP No. 18310 was the
nullity of the deeds of assignment in favor of BENHAR. In a minute resolution in G.R. No. 96675, we
even sustained the Court of Appeals' decision in CA-GR SP No. 18310. 32
In any event, petitioners actively participated in the proceedings before the SEC and the Court of
Appeals when private respondents sought the nullification of the subject deeds. Petitioners are,
therefore, estopped from questioning anew the validity of the deeds of assignment executed by

RUBY 's creditors in favor of BENHAR. Petitioners should know that it is not for a party to participate
in the proceedings, submit his case for decision, accept the judgment if it is favorable to him but
attack it for any reason when it is adverse. 33
Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised
BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of assignment. However,
to justify its approval of the plan and the appointment of BENHAR to the new management
committee, it gave the lame excuse that BENHAR became RUBY's creditor for having paid RUBY's
debts. We quote the relevant portion of the SEC's ruling, thus:
Anent the contention that BENHAR should not take an active participation in the
management of petitioner corporation, the same deserves scant consideration.
While the Deeds of Assignment executed by creditors of Ruby in favor of Benhar
were all declared null and void, the Revised Rehabilitation plan, as herein approved
by the Commission, shows that Benhar will assign its credit lines/loan proceeds or
will act as financier whereby it re-lends the contracted loan to Ruby thereby
converting Benhar as a creditor of the petitioner corporation once the Rehabilitation
Plan is implemented. In fact, as of March 31, 1990, it appears that Benhar had made
some advance payments to some creditors of Ruby further strengthening its status
as a creditor. We cannot, therefore, see any reason why Benhar should not sit in the
management team to oversee the implementation of the Plan.
For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave undue
preference to BENHAR. The records, indeed, show that BENHAR's offer to lend its credit facility in
favor of RUBY is conditioned upon the payment of the amount it advanced to RUBY's creditors, thus:
FUND SOURCING
xxx xxx xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be executed by
Benhar in favor of Ruby, under pre-arrangement with China Banking Corporation or
by any other creditor-banks, and upon payment by Ruby of such amount already
advanced by Benhar.
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be
extended to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. 34 When a
distressed company is placed under rehabilitation, the appointment of a management committee
follows to avoid collusion between the previous management and creditors it might favor, to the
prejudice of the other creditors. All assets of a corporation under rehabilitation receivership are held
in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment, execution or otherwise. As between the
creditors, the key phrase is equality in equity. Once the corporation threatened by bankruptcy is
taken over by a receiver, all the creditors ought to stand on equal footing. Not any one of them
should be paid ahead of the others. This is precisely the reason for suspending all pending claims
against the corporation under receivership.35

Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare
parts with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in
the amount of sixty to eighty millions pesos to RUBY. It is to be noted that BENHAR is not a lending
or financing corporation and lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its Articles of Incorporation. Significantly,
Henry Yu, a director and a majority stockholder of RUBY is, at the same time, a stockholder of
BENHAR, a corporation owned and controlled by his family. These circumstances render the deals
between BENHAR and RUBY highly irregular.
To justify its appointment in the new management committee and to dispute that it will become a
creditor of RUBY only on account of the proposed assignment of its credit facility to RUBY, BENHAR
avers that as early as December 27, 1988, it already lent one million pesos (P1,000,000.00) to
RUBY for the latter's working capital.
The submission deserves scant consideration. To start with, this argument was raised by BENHAR
for the first time in its motion for reconsideration before the Court of Appeals. The settled rule is that
issues not raised in the court a quo cannot be raised for the first time on appeal in this case, in a
motion for reconsideration for being offensive to the basic rules of fair play, justice and due
process. 36
Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR was
not listed as one of RUBY's creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only
served as a conduit of RUBY. As aptly stated in the challenged Court of Appeals decision: 37
Benhar's role in the Revised Benhar/Ruby Plan, as envisioned by the majority
stockholders, is to contract the loan for Ruby and, serving the role of a financier,
relend the same to Ruby. Benhar is merely extending its credit line facility with China
Bank, under which the bank agrees to advance funds to the company should the
need arise. This is unlikely a loan in which the entire amount is made available to the
borrower so that it can be used and programmed for the benefit of the company's
financial and operational needs. Thus, it is actually China Bank which will be the
source of the funds to be relent to Ruby. Benhar will not shell out a single centavo of
its own funds. It is the assets of Ruby which will be mortgaged in favor of Benhar.
Benhar's participation will only make the rehabilitation plan more costly and, because
of the mortgage of its (Ruby's) assets to a new creditor, will create a situation which
is worse than the present. . . . .
We need not say more.
On the second issue, petitioners charge that private respondents are guilty of forum-shopping. It
appears that the three (3) private respondents filed separate petitions before the Court of Appeals
upon receipt of the adverse ruling of the SEC en banc. Private respondent Miguel Lim commenced
CA-G. R. SP No. 32404, thru its counsel Romulo Mabanta Beunaventura Sayoc and De los Angeles.
For their part, private respondent Allied Leasing and the original management committee of RUBY,
represented by Attorney Waiter T. Young, commenced CA-G.R. SP No. 32483 and CA-G.R. SP No.
32469, respectively. In CA-G. R. SP No. 32483, Atty. Young signed for and in behalf of the law firm
Ocampo Quiroz Pesayco and Associates, while in CA-G.R. SP No. 32469, Atty. Young signed for the
law firm Quiroz and Young. In both petitions, he used the same business address Allied Bank
Center, 6754 Ayala Avenue, Makati City.
We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. vs. Court of
Appeals, 38 we ruled:

The private respondents can be considered to have engaged in forum shopping if all
of them, acting as one group, filed identical special civil actions in the Court of
Appeals and in this Court. There must be identity of parties or interests represented,
rights asserted and relief sought in different tribunals. In the case at bar, two groups
of private respondents appear to have acted independently of each other when they
sought relief from the appellate court. Both group sought relief from the same
tribunal.
It would not matter even if there are several divisions in the Court of Appeals. The
adverse party can always ask for the consolidation of the two cases. . . .
In the case at bar, private respondents represent different groups with different interests the
minority stockholders' group, represented by private respondent Lim; the unsecured creditors group,
Allied Leasing & Finance Corporation; and the old management group. Each group has distinct
rights to protect. In line with our ruling in Ramos , the cases filed by private respondents should be
consolidated. In fact, BENHAR and RUBY did just that in their urgent motions filed on December
1, 1993 and December 6, 1993, respectively, they prayed for the consolidation of the cases before
the Court of Appeals.
IN VIEW OF THE FOREGOING, the instant petition is DISMISSED for lack of merit. The Court of
Appeals' Decision, dated March 31, 1995, and its Resolution, dated March 12, 1996, in CA-G.R. SP
Nos. 32404, 42469 and 32483 are AFFIRMED. The case is remanded to the Securities and
Exchange Commission for further proceedings. Costs against petitioners.

Guy v. CA (Court of Appeals) Digest

Guy v. CA
502 SCRA 151
G.R. No. 163707 September 15, 2006
Ponente: Ynares-Santiago, J.:

Facts:
1. The special proceeding case concerns the settlement of the estate of
Sima Wei (a.k.a. Rufina Guy Susim). Private-respondents Karen and
Kamille alleged that they are the acknowledged illegitimate children of
Sima Wei who died intestate. The minors were represented by their
mother Remedios Oanes who filed a petition for the issuance of letters of
administration before the RTC of Makati City.

2. Petitioner who is one of the children of the deceased with his surviving
spouse, filed for the dismissal of the petition alleging that his father left
no debts hence, his estate may be settled without the issuance of letters
administration. The other heirs filed a joint motion to dismiss alleging that
the certification of non-forum shopping should have been signed by
Remedios and not by counsel.

3. Petitioners further alleged that the claim has been paid and waived by
reason of a Release of Claim or waiver stating that in exchange for
financial and educational assistance from the petitioner, Remedios and
her minor children discharged the estate of the decedent from any and all
liabilities.

4. The lower court denied the joint motion to dismiss as well as the
supplemental motion ruling that the mother is not the duly constituted
guardian of the minors hence, she could not have validly signed the
waiver. It also rejected the petitioner's objections to the certificate of
non-forum shopping. The Court of Appeals affirmed the orders of the
lower court. Hence, this petition.

Issue: Whether or not a guardian can validly repudiate the

inheritance the wards

RULING: No, repudiation amounts to alienation of property and parents

and guardians must necessarily obtain judicial approval. repudiation of
inheritance must pass the court's scrutiny in order to protect the best
interest of the ward. Not having been authorized by the court, the release
or waiver is therefore void. Moreover, the private-respondents could not
have waived their supposed right as they have yet to prove their status as
illegitimate children of the decedent. It would be inconsistent to rule that
they have waived a right which, according to the petitioner, the latter do
not have.

As to the jurisdiction of the court to determine the heirs

The court is not precluded to receive evidence to determine the filiation of

the claimants even if the original petition is for the issuance of letters
administration. Its jurisdiction extends to matters collateral and incidental
to the settlement of the estate, with the determination of heirship
included. As held in previous decision, two causes of action may be
brought together in one complaint, one a claim for recognition, and the
other to claim inheritance. (Briz v. Briz)
NESTOR CHING and ANDREW WELLINGTON, Petitioners,
vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG
CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R.
SUAREZ, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of
the Decision dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No. 81441, which
affirmed the Order dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City
in Civil Case No. 03-001 dismissing the Complaint filed by herein petitioners.
1

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint with the
RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI)
against the said country club and its Board of Directors and officers under the provisions of
Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation Code. The
Subic Bay Golfers and Shareholders Incorporated (SBGSI), a corporation composed of shareholders
of the defendant corporation, was also named as plaintiff. The officers impleaded as defendants
were the following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu; (2) its treasurer, Hu Tsung
Chieh alias Jack Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu
Tsung Tzu. The case was docketed as Civil Case No. 03-001. The complaint alleged that the
defendant corporation sold shares to plaintiffs at US$22,000.00 per share, presenting to them the
Articles of Incorporation which contained the following provision:
3

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the
Club at the time of its dissolution or liquidation.
4

However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the
Securities and Exchange Commission (SEC), wherein the above provision was changed as follows:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. In accordance with the Lease and Development Agreement by and between
Subic Bay Metropolitan Authority and The Universal International Group of Taiwan, where the golf
courseand clubhouse component thereof was assigned to the Club, the shareholders shall not have
proprietary rights or interests over the properties of the Club. x x x. (Emphasis supplied.)
5

Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above
amendment which allegedly makes the shares non-proprietary, as it takes away the rightof the
shareholders to participate in the pro-rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from suspending their
rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors
and officers of the corporation did not call any stockholders meeting from the time of the
incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation.
Neither did the defendant directors and officers furnish the stockholders with the financial statements
of the corporation nor the financial report of the operation of the corporation in violation of Section 75
of the Corporation Code. Petitioners also claim that on August 15, 1997, SBGCCI presented to the
SEC an amendment to the By-Laws of the corporation suspending the voting rights of the
shareholders except for the five founders shares. Said amendment was allegedly passed without
any stockholders meeting or notices to the stockholders in violation of Section 48 of the Corporation
Code.
The Complaint furthermore enumerated several instances of fraud in the management of the
corporation allegedly committed by the Board of Directors and officers of the corporation,
particularly:
a. The Board of Directors and the officers of the corporation did not indicate in its financial
report for the year 1999 the amount of P235,584,000.00 collected from the subscription of
409 shareholders who paid U.S.$22,000.00 for one (1) share of stock at the then prevailing
rate of P26.18 to a dollar. The stockholders were not informed how these funds were spent
or its whereabouts.
b. The Corporation has been collecting green fees from the patrons of the golf course at an
average sum of P1,600.00 per eighteen (18) holes but the income is not reported in their
yearly report. The yearly report for the year 1999 contains the report of the Independent
Public Accountant who stated that the company was incorporated on April 1, 1996 but has
not yet started its regular business operation. The golf course has been in operation since
1997 and as such has collected green fees from non-members and foreigners who played
golf in the club. There is no financial report as to the income derived from these sources.
c. There is reliable information that the Defendant Corporation has not paid its rentals to the
Subic Bay Metropolitan Authority which up to the present is estimated to be not less than one
(1) million U.S. Dollars. Furthermore, the electric billings of the corporation [have] not been
paid which amounts also to several millions of pesos.

d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and
presently the club is operating without any valid contract with SBMA. The defendant was
ordered by the Supreme Court to yield the possession, the operation and the management
of the golf course to SBMA. Up to now the defendants [have] defied this Order.
e. That the value of the shares of stock of the corporation has drastically declined from its
issued value of U.S.$22,000.00 to only Two Hundred Thousand Pesos, (P200,000.00)
Philippine Currency. The shareholders [have] lost in terms ofinvestment the sum estimated to
be more than two hundred thousand pesos.This loss is due to the fact that the Club is
mismanaged and the golf course is poorly maintained. Other amenities of the Club has (sic)
not yet been constructed and are not existing despite the lapse of morethan five (5) years
from the time the stocks were offered for sale to the public. The cause of the decrease in
value of the sharesof stocks is the fraudulent mismanagement of the club.
6

Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the
corporation, petitioners prayed in their Complaint for the following:
WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining
order be issued enjoining the defendants from acting as Officers and Board of Directors of the
Corporation. After hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as
Board of Directors and Officers of the Corporation. In the meantime a Receiver be appointed by the
Court to act as such until a duly constituted Board of Directors and Officers of the Corporation be
elected and qualified.
That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand
Pesos each representing the decrease in value of their shares of stocks plus the sum
of P100,000.00 as legal expense and attorneys fees, as well as appearance fee of P4,000.00 per
hearing.
7

In their Answer, respondents specifically denied the allegations of the Complaint and essentially
averred that:
(a) The subscriptions of the 409 shareholders were paid to Universal International Group
Development Corporation (UIGDC), the majority shareholder of SBGCCI, from whom
plaintiffs and other shareholders bought their shares;
8

(b) Contrary to the allegations in the Complaint, said subscriptions were reflected
inSBGCCIs balance sheets for the fiscal years 1998 and 1999;
9

(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their
shares were purchased after the amendment of the Articles of Incorporation and such
amendment was publicly known to all members prior and subsequent to the said
amendment;
10

(d) Shareholders meetingshad been held and the corporate acts complained of were
approved at shareholders meetings;
11

(e) Financial statements of SBGCCI had always been presented to shareholders justifiably
requesting copies;
12

(f) Green fees collected were reported in SBGCCIs audited financial statements;

13

(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to
operate under a valid contract with the SBMA; and
14

(h) SBGCCIs Board of Directors was not guilty of any mismanagement and in fact the value
of members shares have increased.
15

Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was
authorized by SBGSI to file the Complaint on the said corporations behalf; (b) to comply with the
requisites for filing a derivative suit and an action for receivership; and (c) to justify their prayer for
injunctive relief since the Complaint may be considered a nuisance or harassment suit under Section
1(b), Rule1 of the Interim Rules of Procedure for Intra-Corporate Controversies. Thus, they prayed
for the dismissal of the Complaint.
16

On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is
a derivative suit, explaining thus:
The Court finds that this case is intended not only for the benefit of the two petitioners. This is
apparentfrom the caption of the case which reads Nestor Ching, Andrew Wellington and the Subic
Bay Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners. This is also
shown in the allegations of the petition[.] x x x.
On the bases of these allegations of the petition, the Court finds that the case is a derivative suit.
Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and
members may bring an action in the name of the corporation or association provided that he (the
minority stockholder) exerted all reasonable efforts and allege[d] the same with particularity in the
complaint to exhaust of (sic) all remedies available under the articles of incorporation, by-laws or
rules governing the corporation or partnership to obtain the reliefs he desires. An examination of the
petition does not show any allegation that the petitioners applied for redress to the Board of
Directors of respondent corporation there being no demand, oralor written on the respondents to
address their complaints. Neither did the petitioners appl[y] for redress to the stockholders of the
respondent corporation and ma[k]e an effort to obtain action by the stockholders as a whole.
Petitioners should have asked the Board of Directors of the respondent corporation and/or its
stockholders to hold a meeting for the taking up of the petitioners rights in this petition.
17

The RTC held that petitioners failed to exhaust their remedies within the respondent corporation
itself. The RTC further observed that petitioners Ching and Wellington were not authorized by their
co-petitioner Subic Bay Golfers and Shareholders Inc. to filethe Complaint, and therefore had no
personality to file the same on behalf ofthe said shareholders corporation. According to the RTC, the
shareholdings of petitioners comprised of two shares out of the 409 alleged outstanding shares or
0.24% is an indication that the action is a nuisance or harassment suit which may be dismissed

either motu proprio or upon motion in accordance with Section 1(b) of the Interim Rules of Procedure
for Intra-Corporate Controversies.
18

Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed
as CA-G.R. CV No. 81441. On October 27, 2005, the Court of Appeals rendered the assailed
Decision affirming that of the RTC.
Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint
they filed with the RTC was not a derivative suit. They claim that they filed the suit in their own right
as stockholders against the officers and Board of Directors of the corporation under Section 5(a) of
Presidential DecreeNo. 902-A, which provides:
Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, members of
associations or organizations registered with the Commission.
According to petitioners, the above provision (which should be read in relation to Section 5.2 of the
Securities Regulation Code which transfers jurisdiction over such cases to the RTC) allows any
stockholder to file a complaint against the Board of Directors for employing devices or schemes
amounting to fraud and misrepresentation which is detrimental to the interest of the public and/or the
stockholders.
In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it
should nevertheless reverse the RTCs dismissal thereof on the ground of failure to exhaust
remedies within the corporation. Petitioners cite Republic Bank v. Cuaderno wherein the Court
allowed the derivative suit even without the exhaustion of said remedies as it was futile to do so
since the Board ofDirectors were all members of the same family. Petitioners also point out that in
Cuadernothis Court held that the fact that therein petitioners had only one share of stock does not
justify the denial of the relief prayed for.
19

To refute the lower courts ruling that there had been non-exhaustion of intra-corporate remedies on
petitioners part, they claim that they filed in Court a case for Injunction docketed as Civil Case No.
103-0-01, to restrain the corporation from suspending their rights to use all the facilities of the club,
on the ground that the club cannot collect membership fees until they have completed the amenities
as advertised when the shares of stock were sold to them. They allegedly asked the Club to produce
the minutes of the meeting of the Board of Directors allowing the amendments of the Articles of
Incorporation and By-Laws. Petitioners likewise assail the dismissal of the Complaint for being a
harassment ornuisance suit before the presentation of evidence. They claim that the evidence they
were supposed to present will show that the members of the Board of Directors are not qualified
managers of a golf course.

We find the petition unmeritorious.

At the outset, it should be noted thatthe Complaint in question appears to have been filed only by the
two petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in the
respondent corporation SBGCCI. While the caption of the Complaint also names the "Subic Bay
Golfers and Shareholders Inc. for and in behalf of all its members," petitioners did not attach any
authorization from said alleged corporation or its members to file the Complaint. Thus, the Complaint
is deemed filed only by petitioners and not by SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine that
the nature of an action, as well as which court or body has jurisdiction over it, isdetermined based on
the allegations contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is
entitled to recover upon all or some of the claims asserted therein.
20

We have also held that the body rather than the title of the complaint determines the nature of an
action.
21

In Cua, Jr. v. Tan, the Court previously elaborated on the distinctions among a derivative suit,
anindividual suit, and a representative or class suit:
22

A derivative suit must be differentiated from individual and representative or class suits, thus:
"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors
or other persons may be classified intoindividual suits, class suits, and derivative suits. Where a
stockholder or member is denied the right of inspection, his suit would be individual because the
wrong is done to him personally and not to the other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where preferred stockholders rights are violated, a
class or representative suitwill be proper for the protection of all stockholders belonging to the same
group. But where the acts complained of constitute a wrong to the corporation itself, the cause of
action belongs to the corporation and not to the individual stockholder or member. Although in most
every case of wrong to the corporation, each stockholder is necessarily affected because the value
of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual
cause of action since the corporation is a person distinct and separate from him, and can and should
itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but
there would be multiplicity of suits as well as a violation of the priority rights of creditors.
Furthermore,there is the difficulty of determining the amount of damages that should be paid to each
individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the former
are vested by law with the right to decide whether or notthe corporation should sue, and they will
never be willing to sue themselves. The corporation would thus be helpless to seek remedy.
Because of the frequent occurrence of such a situation, the common law gradually recognized the
right of a stockholder to sue on behalf of a corporation in what eventually became known as a
"derivative suit." It has been proven to be an effective remedy of the minority against the abuses of
management. Thus, an individual stockholder is permitted to institute a derivative suit on behalf of

the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue orare the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest."
xxxx
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz.:
"As the Supreme Court has explained: "A shareholders derivative suit seeks to recover for the
benefit of the corporation and its whole body of shareholders when injury is caused to the
corporation that may not otherwise be redressed because of failureof the corporation to act. Thus,
the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the
corporation, or to the whole body of its stock and property without any severance or distribution
among individual holders, or it seeks to recover assets for the corporation or to prevent the
dissipation of its assets. x x x. In contrast, "a directaction [is one] filed by the shareholder individually
(or on behalf of a classof shareholders to which he or she belongs) for injury to his or her interestas
a shareholder. x x x. [T]he two actions are mutually exclusive: i.e., the right of action and recovery
belongs to either the shareholders (direct action) *651 or the corporation(derivative action)." x x x.
Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other
shareholder of the corporation negligently managed the business, resulting in its total failure. x x x.
The appellate court concluded that the plaintiff could not maintain the suit as a direct action:
"Because the gravamen of the complaint is injury to the whole body of its stockholders, it was for the
corporation to institute and maintain a remedial action. x x x. A derivative action would have been
appropriate if its responsible officials had refused or failed to act." x x x. The court wenton to note
that the damages shown at trial were the loss of corporate profits. x x x. Since "[s]hareholders own
neither the property nor the earnings of the corporation," any damages that the plaintiff alleged that
resulted from such loss of corporate profits "were incidental to the injury to the corporation."
(Citations omitted.)
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and
Board of Directors of the corporation, the appointment of a receiver, and the prayer for damages in
the amount of the decrease in the value of the sharesof stock, clearly show that the Complaint was
filed to curb the alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners do
not accrue to a single shareholder or a class of shareholders but to the corporation itself.
However, as minority stockholders, petitioners do not have any statutory right to override the
business judgments of SBGCCIs officers and Board of Directors on the ground of the latters alleged
lackof qualification to manage a golf course. Contraryto the arguments of petitioners, Presidential
Decree No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE
COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE
ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT, does not grant minority
stockholders a cause of action against waste and diversion by the Board of Directors, but merely
identifies the jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It is

settled that a stockholders right to institute a derivative suit is not based on any express provisionof
the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
23

At this point, we should take note that while there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners
do not pray for the rescission of their subscription or seekto avail of their appraisal rights. Instead,
they ask that defendants be enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners only possible cause of action as minority stockholders against the
actions of the Board of Directors is the common law right to file a derivative suit. The legal standing
of minority stockholders to bring derivative suits is not a statutory right, there being no provision in
the Corporation Code or related statutes authorizing the same, but is instead a product of
jurisprudence based on equity. However, a derivative suit cannot prosper without first complying with
the legal requisites for its institution.
24

Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies

imposes the following requirements for derivative suits:
(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.
The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same should not have been
dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of
petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has
held that it is enough that a member or a minority of stockholders file a derivative suit for and in
behalf of a corporation.
25

With regard, however, to the second requisite, we find that petitioners failed to state with particularity
in the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under
the articles of incorporation, by-laws, and laws or rules governing the corporation to obtain the relief
they desire. The Complaint contained no allegation whatsoever of any effort to avail of intracorporate remedies. Indeed, even if petitioners thought it was futile to exhaust intra-corporate
remedies, they should have stated the same in the Complaint and specified the reasons for such
opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance

with the Interim Rules. The requirement of this allegation in the Complaint is not a useless formality
which may be disregarded at will. We ruled in Yu v. Yukayguan :
26

1wphi1

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph
thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts
to exhaust all remedies availableunder the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires; and to allege such fact with
particularityin the complaint. The obvious intent behind the rule is to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain the relief sought had failed.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 81441 which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City
dismissing the Complaint filed thereon by herein petitioners is AFFIRMED.
SO ORDERED.