commercial law cases.docx

8/10/2019 COmmercial Law Cases.docx

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FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines) and MERCURIO RIVERA,petitioners, vs. COURT OF APPEALS,CARLOS EJERCITO, in substitution of DEMETRIO DEMETRIA, and JOSE JANOLO, respondents.

Same; Same; Same; Central Bank Law (R.A. 265); Section 28-A of R.A. 265 merely gives the conservator power to revoke contracts that are,

under existing law, deemed to be defectivethe conservator merely takes the place of a banks board of directors, and what the said board cannot do,

the conservator cannot do either.Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that are, under existing

law, deemed to be defectivei.e., void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a banks board of

directors. What the said board cannot dosuch as repudiating a contract validly entered into under the doctrine of implied authoritythe conservatorcannot do either. Ineluctably, his power is not unilateral and he cannot simply repudiate valid obligations of the Bank. His authority would be only to

bring court actions to assail such contractsas he has already done so in the instant case. A contrary understanding of the law would simply not be

permitted by the Constitution. Neither by common sense. To rule otherwise would be to enable a failing bank to become solvent, at the expense of

third parties, by simply getting the conservator to unilaterally revoke all previous dealings which had one way or another come to be considered

unfavorable to the Bank, yielding nothing to perfected contractual rights nor vested interests of the third parties who had dealt with the Bank. [First

Philippine International Bank vs. Court of Appeals, 252 SCRA 259(1996)]

The Parties

Petitioner First Philippine International Bank (formerly Producers Bank of the Philippines; petitioner Bank, for brevity) is a banking institution organized

and existing under the laws of the Republic of the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal age and was, at all

times material to this case, Head Manager of the Property Management Department of the petitioner Bank.

Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and is the assignee of original plaintiffs-appellees Demetrio Demetria and

Jose Janolo.

Respondent Court of Appeals is the court which issued the Decision and Resolution sought to be set aside through this petition.

The Facts

(1) In the course of its banking operations, the defendant Producer Bank of the Philippines acquired six parcels of land with a total area of 101

hectares located at Don Jose, Sta. Rosa, Laguna, and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. The property used to be

owned by BYME Investment and Development Corporation which had them mortgaged with the bank as collateral fora loan. The original plaintiffs,

Demetrio Demetria and Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that purpose.

(2) In the early part of August 1987 said plaintiffs, upon the suggestion of BYME Investments legal counsel, Jose Fajardo, met with defendant Mercurio

Rivera, Manager of the Property Management Department of the defendant bank. The meeting was held pursuant to plaintiffs plan to buy the property

(TSN of Jan. 16, 1990, pp. 7-10). After the meeting, plaintiff Janolo, following the advice of defendant Rivera, made a formal purchase offer to the bank

through a letter dated August 30, 1987.

(3) On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply by letter .

(4)OnSeptember 17, 1987, plaintiff Janolo, responding to Riveras aforequoted reply .

(5) There was no reply to Janolosforegoing letter of September 17, 1987. What took place was a meeting on September 28, 1987 between the

plaintiffs and Luis Co, the Senior Vice-President of defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting. Two days later, or

on September 30, 1987, plaintiff Janolo sent to the bank, through Rivera.

(6) OnOctober 12, 1987, the conservator of the bank (which has been placed under conservatorship by the Central Bank since 1984) was replaced by

an Acting Conservator in the person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant Rivera wrote plaintiff Demetria.

(7) What thereafter transpired was a series of demands by the plaintiffs for compliance by the bank with what plaintiff cons idered as a perfected

contract of sale, which demands were in one form or another refused by the bank. As detailed by the trial court in its decision, on November 17, 1987,

plaintiffs through a letter to defendant Rivera (Exhibit G) tendered payment of the amount of P5.5 million pursuant to (our) perfected sale

agreement. Defendants refused to receive both the payment and the letter. Instead, the parcels of land involved in the transaction were advertised by

the bank for sale to any interested buyer (Exhs. H and H -1). Plaintiffs demanded the execution by the bank of the documents on what was

considered as a perfected agreement.

(8) Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing letter and stated, in its communication of December 2,

1987 (Exh. I), that said letter has been referred x x x to the office of our Conservator for proper disposition. However, no response came from the

Acting Conservator. On December 14, 1987, the plaintiffs made a second tender of payment (Exhs. L and L -1), this time through the Acting

Conservator, defendant Encarnacion.

(9) The foregoing letter drew no response for more than four months. Then, onMay 3, 1988, plaintiff, through counsel, made a final demand for

compliance by the bank with its obligations under the considered perfected contract of sale (Exhibit N). As recounted by the trial court (Original

Record, p. 656), in a reply letter dated May 12, 1988 (Annex 4 of defendants answer to amended complaint), the defendants through Acting

Conservator Encarnacion repudiated the authority of defendant Rivera and claimed that his dealings with the plaintiffs, particularly his counter-offer of


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P5.5 Million are unauthorized or illegal. On that basis, the defendants justified the refusal of the tenders of payment and the non-compliance with the

obligations under what the plaintiffs considered to be a perfected contract of sale.

(10) OnMay 16, 1988, plaintiffs filed a suit for specific performance with damages against the bank, its Manager Rivera and Acting Conservator

Encarnacion. The basis of the suit was that the transaction had with the bank resulted in a perfected contract of sale. The defendants took the position

that there was no such perfected sale because the defendant Rivera is not authorized to sell the property, and that there was no meeting of the minds

as to the price.

On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip Salazar Hernandez and Gatmaitan, filed a motion to intervene in the trial

court, alleging that as owner of 80% of the Banks outstanding shares of stock, he had a substantial interest in resisting the complaint. On July 8, 1991,

the trial court issued an order denying the motion to intervene on the ground that it was filed after trial had already been concluded. It also denied a

motion for reconsideration filed thereafter. From the trial courts decision, the Bank, petitioner Rivera and conservator Encarnacion appealed to the

Court of Appeals which subsequently affirmed with modification the said judgment. Henry Co did not appeal the denial of his motion for intervention.

In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place of Demetria and Janolo, in view of the

assignment of the latters rights in the matterin litigation to said private respondent.

On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and several other stockholders of the Bank, through

counsel Angara Abello Concepcion Regala and Cruz, filed an action (her eafter, the Second Case) -purportedly a derivative suit - with the Regional

Trial Court of Makati, Branch 134, docketed as Civil Case No. 92-1606, against Encarnacion, Demetria and Janolo to declare any perfected sale of the

property as unenforceable and to stop Ejercito from enforcing or implementing the sale.[4]

In his answer, Janolo argued that the Second Case was

barred by litis pendentiaby virtue of the case then pending in the Court of Appeals. During the pre-trial conference in the Second Case, plaintiffs filed a

Motion for Leave of Court to Dismiss the Case Without Prejudice. Private respondent opposed this motion on the ground, among others, that plaintiffsact of forum shopping justifies the dismissal of both cases, with prejudice. [5]

Private respondent, in his memorandum, averred that this motion is still

pending in the Makati RTC.

In their Petition[6]

and Memorandum,[7]

petitioners summarized their position as follows:

I.

The Court of Appeals erred in declaring that a contract of sale was perfected between Ejercito (in substitution of Demetria and Janolo)

and the bank.

II.

The Court of Appeals erred in declar ing the existence of an enforceable contract of sale between the parties.

III. The Court of Appeals erred in declaring that the conservator does not have the power to overrule or revoke acts of previous

management.

IV. The findings and conclusions of the Court ofAppeals do not conform to the evidence on record.

On the other hand, private respondents prayed for dismissal of the instant suit on the ground[8]

that:

I. Petitioners have engaged in forum shopping.

II. The factual findings and conclusions of the Court of Appeals are supported by the evidence on record and may no longer be

questioned in this case.

III.

The Court of Appeals correctly held that there was a perfectedcontract between Demetria and Janolo (substituted by respondent

Ejercito) and the bank.

IV. The Court of Appeals has correctly held that the conservator, apart from being estopped from repudiating the agency and the

contract, has no authority to revoke the contract of sale.

The Issues

From the foregoing positions of the parties, the issues in this case may be summed up as follows:

1) Was there forum-shopping on the part of petitioner Bank?

2) Was there a perfected contract of sale between the parties?

3) Assuming there was, was the said contract enforceable under the statute of frauds?

4) Did the bank conservator have the unilateral power to repudiate the authority of the bank officers and/or to revoke the said contract?

5) Did the respondent Court commit any reversible error in its findings of facts?

The Fourth Issue: May the Conservator Revokethe Perfected and Enforceable Contract?

It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of the Philippines during the time that the

negotiation and perfection of the contract of sale took place. Petitioners energetically contended that the conservator has the power to revoke or

overrule actions of the management or the board of directors of a bank, under Section 28-A of Republic Act No. 265 (otherwise known as the Central

Bank Act) as follows:

Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a

non-bank financial intermediary performing quasi - banking functions is in a state of continuing inability or unwillingness to maintain a state of liquidity

deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator to take charge of the assets,
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liabilities, and the management of that institution, collect all monies and debts due said institution and exercise all powers necessary to preserve the

assets of the institution, reorganize the management thereof, and restore its viability. He shall have the power to overrule or revoke the actions of the

previous management and board of directors of the bank or non-bank financial intermediary performing quasi-banking functions, any provision of law

to the contrary notwithstanding, and such other powers as the Monetary Board shall deem necessary.

In the first place, this issue of the Conservators alleged authority to revoke or repudiate the perfected contract of sale w as raised for the first

time in this Petition - as this was not litigated in the trial court or Court of Appeals. As already stated earlier, issues not raised and/or ventilated in the

trial court, let alone in the Court of Appeals, cannot be raised for the first time on appeal as it would be offensive to th e basic rules of fair play, justiceand due process.[43]

In the second place, there is absolutely no evidence that the Conservator, at the time the contract was perfected, actually repudiated or

overruled said contract of sale. The Banks acting conservator at the time, Rodolfo Romey, never objected to the sale of the property to Demetria and

Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who took over from Romey after the sale was perfected

on September 30, 1987 (Annex V, petition) which unilaterally repudiated - not the contract - but the authority of Rivera to make a binding offer - and

which unarguably came months after the perfection of the contract.

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to the conservator of a bank, it must be pointed out

that such powers must be related to the (preservation of) the assets of the bank, (the reorganiz ation of) the management thereof and (the restoration

of) its viability. Such powers, enormous and extensive as they are, cannot extend to the post-factorepudiation of perfected transactions, otherwise

they would infringe against the non-impairment clause of the Constitution.[44]

If the legislature itself cannot revoke an existing valid contract, how can it

delegate such non-existent powers to the conservator under Section 28-A of said law?

Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that are, under existing law, deemed to be defective -

i.e., void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a banks board of directors. What the said board

cannot do - such as repudiating a contract validly entered into under the doctrine of implied authority - the conservator cannot do either. Ineluctably,his power is not unilateral and he cannot simply repudiate valid obligations of the Bank. His authority would be only to bring court actions to assail such

contracts - as he has already done so in the instant case. A contrary understanding of the law would simply not be permitted by the Constitution.

Neither by common sense. To rule otherwise would be to enable a failing bank to become solvent, at the expense of third parties, by simply getting theconservator to unilaterally revoke all previous dealings which had one way or another come to be considered unfavorable to the Bank, yielding nothing

to perfected contractual rights nor vested interests of the third parties who had dealt with the Bank.
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THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, petitioners,vs.

COURT OF APPEALS and TRIUMPH SAVINGS BANK, respondents.

Central Bank Act; Section 29, R.A 265; The Central Bank through Monetary Board is vested exclusive authority to assess, evaluate and

determine condition of any bank; Effects.Under Sec. 29 of R.A. 265, the Central Bank, 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 probable loss to its depositors or creditors, forbid the bank or non-bank financial institution to do business in the Philippines; and shalldesignate an official of the CB or other competent person as receiver to immediately take charge of its assets and liabilities. [Central Bank of the

Philippines vs. Court of Appeals, 220 SCRA 536(1993)]

BELLOSILLO,J.:

May a Monetary Board resolution placing a private bank under receivership be annulled on the ground of lack of prior notice and hearing?

This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No. 07867 entitled "The Central Bank of the Philippines and Ramon V.

Tiaoqui vs. Hon. Jose C. de Guzman and Triumph Savings Bank," promulgated 26 September 1986, which affirmed the twin orders of the Regional Trial

Court of Quezon City issued 11 November 19851

denying herein petitioners' motion to dismiss Civil Case No. Q-45139, and directing petitioner Ramon

V. Tiaoqui to restore the private management of Triumph Savings Bank (TSB) to its elected board of directors and officers, subject to Central Bank

comptrollership.2

The antecedent facts:

Based on examination reports submitted by the Supervision and Examination Sector (SES), Department II, of the Central Bank (CB) "that the financial

condition of TSB is one of insolvency and its continuance in business would involve probable loss to its depositors and creditors,"3

the Monetary Board

(MB) issued on 31 May 1985 Resolution No. 596 ordering the closure of TSB, forbidding it from doing business in the Philippines, placing it under

receivership, and appointing Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3 June 1985.4

On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-45139, against Central Bank and

Ramon V. Tiaoqui to annul MB Resolution No. 596, with prayer for injunction, challenging in the process the constitutionality of Sec. 29 of R.A. 269,

otherwise known as "The Central Bank Act," as amended, insofar as it authorizes the Central Bank to take over a banking institution even if it is not

charged with violation of any law or regulation, much less found guilty thereof.5

On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB Resolution No. 596 "until further orders", thus prompting them

to move for the quashal of the restraining order (TRO) on the ground that it did not comply with said Sec. 29, i.e., that TSB failed to show convincing

proof of arbitrariness and bad faith on the part of petitioners;' and, that TSB failed to post the requisite bond in favor of Central Bank.

On 19 July 1985, acting on the motion to quash the restraining order, the trial court granted the relief sought and denied the application of TSB for

injunction. Thereafter, Triumph Savings Bank filed with Us a petition for certiorariunder Rule 65 of the Rules of Court6

dated 25 July 1985 seeking to

enjoin the continued implementation of the questioned MB resolution.

Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to dismiss the complaint before the RTC for failure to state a cause of

action, i.e., it did not allege ultimate facts showing that theaction was plainly arbitrary and made in bad faith, which are the only grounds for the

annulment of Monetary Board resolutions placing a bank under conservatorship, and that TSB was without legal capacity to sue except through its

receiver.7

On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver Ramon V. Tiaoqui to restore TSB to its private management. On 11

November 1985, the RTC in separate orders denied petitioners' motion to dismiss and ordered receiver Tiaoqui to restore the management of TSB to its

elected board of directors and officers, subject to CB comptrollership.

Since the orders of the trial court rendered moot the petition for certiorarithen pending before this Court, Central Bank and Tiaoqui moved on 2

December 1985 for the dismissal of G.R. No. 71465 which We granted on 18 December 1985.8

Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the Court of Appeals on a petition for certiorariand prohibition under

Rule 65.9

On 26 September 1986, the appellate court, upheld the orders of the trial court thus

Petitioners' motion to dismiss was premised on two grounds, namely, that the complaint failed to state a cause of action and that

the Triumph Savings Bank was without capacity to sue except through its appointed receiver.


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Concerning the first ground, petitioners themselves admit that the Monetary Board resolution placing the Triumph Savings Bank

under the receivership of the officials of the Central Bank was done without prior hearing, that is, without first hearing the side of

the bank. They further admit that said resolution can be the subject of judicial review and may be set aside should it be found

that the same was issued with arbitrariness and in bad faith.

The charge of lack of due process in the complaint may be taken as constitutive of allegations of arbitrariness and bad faith. This

is not of course to be taken as meaning that there must be previous hearing before the Monetary Board may exercise its powers

under Section 29 of its Charter. Rather, judicial review of such action not being foreclosed, it would be best should privaterespondent be given the chance to show and prove arbitrariness and bad faith in the issuance of the questioned resolution,

especially so in the light of the statement of private respondent that neither the bank itself nor its officials were even informed of

any charge of violating banking laws.

In regard to lack of capacity to sue on the part of Triumph Savings Bank, we view such argument as being specious, for if we get

the drift of petitioners' argument, they mean to convey the impression that only the CB appointed receiver himself may question

the CB resolution appointing him as such. This may be asking for the impossible, for it cannot be expected that the master, the

CB, will allow the receiver it has appointed to question that very appointment. Should the argument of petitioners be given

circulation, then judicial review of actions of the CB would be effectively checked and foreclosed to the very bank officials who

may feel, as in the case at bar, that the CB action ousting them from the bank deserves to be set aside.

On the questioned restoration order, this Court must say that it finds nothing whimsical, despotic, capricious, or arbitrary in its

issuance, said action only being in line and congruent to the action of the Supreme Court in the Banco Filipino Case (G.R. No.

70054) where management of the bank was restored to its duly elected directors and officers, but subject to the Central Bank

comptrollership.10

On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed this petition under Rule 45 of the Rules of Court praying that the

decision of the Court of Appeals in CA-G.R. SP No. 07867 be set aside, and that the civil case pending before the RTC of Quezon City, Civil Case No.

Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred

(1) in affirming that an insolvent bank that had been summarily closed by the Monetary Board should be restored to its private

management supposedly because such summary closure was "arbitrary and in bad faith" and a denial of "due process";

(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a complaint to annul a Monetary Board

receivership resolution under Sec. 29 of R.A. 265 "may be taken as . . allegations of arbitrariness and bad faith"; and

(3) in holding that the owners and former officers of an insolvent bank may still act or sue in the name and corporate capacity of

such bank, even after it had been ordered closed and placed under receivership.11

The respondents, on the other hand, allege inter aliathat in the Banco Filipino case,12

We held that CB violated the rule on administrative due process

laid down inAng Tibay vs. CIR (69 Phil. 635) and Eastern Telecom Corp. vs. Dans, Jr. (137 SCRA 628) which requires that prior notice and hearing be

afforded to all parties in administrative proceedings. Since MB Resolution No. 596 was adopted without TSB being previously notified and heard,

according to respondents, the same is void for want of due process; consequently, the bank's management should be restored to its board of directors

and officers.13

Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases involving bank closures should not be required since

in all probability a hearing would not only cause unnecessary delay but also provide bank "insiders" and stockholders the opportunity to further

dissipate the bank's resources, create liabilities for the bank up to the insured amount of P40,000.00, and even destroy evidence of fraud or irregularity

in the bank's operations to the prejudice of its depositors and creditors.14Petitioners further argue that the legislative intent of Sec. 29 is to repose in

the Monetary Board exclusive power to determine the existence of statutory grounds for the closure and liquidation of banks, having the required

expertise and specialized competence to do so.

The first issue raised before Us is whether absence of prior notice and hearing may be considered acts of arbitrariness and bad faith sufficient to annul aMonetary Board resolution enjoining a bank from doing business and placing it under receivership. Otherwise stated, is absence of prior notice and

hearing constitutive of acts of arbitrariness and bad faith?

Under Sec. 29 of R.A. 265,15

the Central Bank, 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 probable loss to its

depositors or creditors, forbid the bank or non-bank financial institution to do business in the Philippines; and shall designate an official of the CB or

other competent person as receiver to immediately take charge of its assets and liabilities. The fourth paragraph,16

which was then in effect at the time

the action was commenced, allows the filing of a case to set aside the actions of the Monetary Board which are tainted with arbitrariness and bad faith.


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Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and hearing before a bank may be directed to stop operations

and placed under receivership. When par. 4 (now par. 5, as amended by E.O. 289) provides for the filing of a case within ten (10) days after the receiver

takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. Plainly, the legislature could not

have intended to authorize "no prior notice and hearing" in the closure of the bank and at the same time allow a suit to annul it on the basis of absence

thereof.

In the early case of Rural Bank of Lucena, Inc. v. Arca [1965],17

We held that a previous hearing is nowhere required in Sec. 29 nor does the

constitutional requirement of due process demand that the correctness of the Monetary Board's resolution to stop operation and proceed toliquidation be first adjudged before making the resolution effective. It is enough that a subsequent judicial review be provided.

Even in Banco Filipino,18

We reiterated that Sec. 29 of R.A. 265 does not require a previous hearing before the Monetary Board can implement itsresolution closing a bank, since its action is subject to judicial scrutiny as provided by law.

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial institution placed under receivership of the opportunity to

be heard and present evidence on arbitrariness and bad faith because within ten (10) days from the date the receiver takes charge of the assets of the

bank, resort to judicial review may be had by filing an appropriate pleading with the court. Respondent TSB did in fact avail of this remedy by filing a

complaint with the RTC of Quezon City on the 8th day following the takeover by the receiver of the bank's assets on 3 June 1985.

This "close now and hear later" scheme is grounded on practical and legal considerations to prevent unwarranted dissipation of the bank's assets and as

a valid exercise of police power to protect the depositors, creditors, stockholders and the general public.

In Rural Bank of Buhi, Inc.v. Court of Appeals,

19

We stated that

. . . due process does not necessarily require a prior hearing; a hearing or an opportunity to be heard may be subsequentto the

closure. One can just imagine the dire consequences of a prior hearing: bank runs would be the order of the day, resulting in

panic and hysteria. In the process, fortunes may be wiped out and disillusionment will run the gamut of the entire banking

community.

We stressed in Central Bank of the Philippines v. Court of Appeals20

that

. . . 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 (9 CJS 32). Banks are affected with public interest because they receive funds

from the general public in the form of deposits. Due to the nature of their transactions and functions, a fiduciary relationship is created

between the banking institutions and their depositors. Therefore, banks are under the obligation to treat with meticulous care and utmost

fidelity the accounts of those who have reposed their trust and confidence in them (Simex International [Manila], Inc., v. Court of Appeals,

183 SCRA 360 [1990]).

It is then the Government's responsibility to see to it that the financial interests of those who deal with the banks and banking institutions, as

depositors or otherwise, are protected. In this country, that task is delegated to the Central Bank which, pursuant to its Charter (R.A. 265, as

amended), is authorized to administer the monetary, banking and credit system of the Philippines. Under both the 1973 and 1987

Constitutions, the Central Bank is tasked with providing policy direction in the areas of money, banking and credit; corollarily, it shall have

supervision over the operations of banks (Sec. 14, Art. XV, 1973 Constitution, and Sec. 20, Art. XII, 1987 Constitution). Under its charter, the

CB 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. This power has been expressly recognized by this Court. In Philippine Veterans Bank

Employees Union-NUBE v. Philippine Veterans Banks (189 SCRA 14 [1990], this Court held that:

. . . [u]nless adequate and determined efforts are taken by the government against distressed and mismanaged banks, public faith

in the banking system is certain to deteriorate to the prejudice of the national economy itself, not to mention the losses su ffered

by the bank depositors, creditors, and stockholders, who all deserve the protection of the government. The government cannot

simply cross its arms while the assets of a bank are being depleted through mismanagement or irregularities. It is the duty of the

Central Bank in such an event to step in and salvage the remaining resources of the bank so that they may not continue to bedissipated or plundered by those entrusted with their management.

Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a situation where the procedural rights invoked by private

respondent would take precedence over the substantive interests of depositors, creditors and stockholders over the assets of the bank.

Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run and drain its assets in days or even hours leading to

insolvency even if the bank be actually solvent. The procedure prescribed in Sec. 29 is truly designed to protect the interest of all concerned, i.e., the

depositors, creditors and stockholders, the bank itself, and the general public, and the summary closure pales in comparison to the protection afforded

public interest. At any rate, the bank is given full opportunity to prove arbitrarinessand bad faith in placing the bank under receivership, in which event,

the resolution may be properly nullified and the receivership lifted as the trial court may determine.


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The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual circumstances therein which are not attendant in the

present case. We ruled in Banco Filipino that the closure of the bank was arbitrary and attendant with grave abuse of discretion, not because of the

absence of prior notice and hearing, but that the Monetary Board had no sufficient basis to arrive at a sound conclusion of insolvency to justify the

closure. In other words, the arbitrariness, bad faith and abuse of discretion were determined only after the bank was placed under conservatorship and

evidence thereon was received by the trial court. As this Court found in that case, the Valenzuela, Aurellano and Tiaoqui Reports contained unfounded

assumptions and deductions which did not reflect the true financial condition of the bank. For instance, the subtraction of an uncertain amount as

valuation reserve from the assets of the bank would merely result in its net worth or the unimpaired capital and surplus; it did not reflect the total

financial condition of Banco Filipino.

Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total liabilities. Consequently, on the basis thereof, the

Monetary Board had no valid reason to liquidate the bank; perhaps it could have merely ordered its reorganization or rehabilitation, if need be. Clearly,

there was in that case a manifest arbitrariness, abuse of discretion and bad faith in the closure of Banco Filipino by the Monetary Board. But, this is not

the case before Us. For here, what is being raised as arbitrary by private respondent is the denial of prior notice and hearing by the Monetary Board, a

matter long settled in this jurisdiction, and not the arbitrariness which the conclusions of the Supervision and Examination Sector (SES), Department II,

of the Central Bank were reached.

Once again We refer to Rural Bank of Buhi, Inc.v. Court of Appeals,21

and reiterate Our pronouncement therein that

. . . the law is explicit as to the conditions prerequisite to the action of the Monetary Board to forbid the institution to do business in the

Philippines and to appoint a receiver to immediately take charge of the bank's assets and liabilities. They are: (a) an examination made by

the examining department of the Central Bank; (b) report by said department to the Monetary Board; and (c)prima facieshowing that its

continuance in business would involve probable loss to its depositors or creditors.

In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented; hence, We rule that Sec. 29 of R.A. 265 is a sound

legislation promulgated in accordance with the Constitution in the exercise of police power of the state. Consequently, the absence of notice and

hearing is not a valid ground to annul a Monetary Board resolution placing a bank under receivership. The absence of prior notice and hearing cannot

be deemed acts of arbitrariness and bad faith. Thus, an MB resolution placing a bank under receivership, or conservatorship for that matter, may only

be annulled after a determination has been made by the trial court that its issuance was tainted with arbitrariness and bad faith. Until such

determination is made, the status quo shall be maintained, i.e., the bank shall continue to be under receivership.

As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank is, to echo the respondent appellate court, "asking for

the impossible, for it cannot be expected that the master, the CB, will allow the receiver it has appointed to question that very appointment."

Consequently, only stockholders of a bank could file an action for annulment of a Monetary Board resolution placing the bank under receivership and

prohibiting it from continuing operations.22

In Central Bank v. Court of Appeals,23We explained the purpose of the law

. . . in requiring that only the stockholders of record representing the majority of the capital stock may bring the action to set aside a

resolution to place a bank under conservatorship is to ensure that it be not frustrated or defeated by the incumbent Board of Directors or

officers who may immediately resort to court action to prevent its implementation or enforcement. It is presumed that such a resolution is

directed principally against acts of said Directors and officers which place the bank in a state of continuing inability to maintain a condition of

liquidity adequate to protect the interest of depositors and creditors. Indirectly, it is likewise intended to protect and safeguard the rights

and interests of the stockholders. Common sense and public policy dictate then that the authority to decide on whether to contest the

resolution should be lodged with the stockholders owning a majority of the shares for they are expected to be more objective in determining

whether the resolution is plainly arbitrary and issued in bad faith.

It is observed that the complaint in this case was filed on 11 June 1985 or two (2) years prior to 25 July 1987 when E.O. 289 was issued, to be effective

sixty (60) days after its approval (Sec. 5). The implication is that before E.O

. 289, any party in interest could institute court proceedings to question a Monetary Board resolution placing a bank under receivership. Consequently,

since the instant complaint was filed by parties representing themselves to be officers of respondent Bank (Officer-in-Charge and Vice President), the

case before the trial court should now take its natural course. However, after the effectivity of E.O. 289, the procedure stated therein should be

followed and observed.

PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867 isAFFIRMED, except insofar as it upholds the Order of the trial court

of 11 November 1985 directing petitioner RAMON V. TIAOQUI to restore the management of TRIUMPH SAVINGS BANK to its elected Board of Directors

and Officers, which is hereby SET ASIDE.

Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to determine whether the issuance of Resolution No. 596

of the Monetary Board was tainted with arbitrariness and bad faith and to decide the case accordingly.

SO ORDERED.


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ANTHONY S. YU, ROSITA G. YU and JASON G. YU, petitioners, vs. JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and

JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC., respondents. [Yu vs. Yukayguan, 589 SCRA

588(2009)]

Corporation Law; Derivative Suits; Words and Phrases; While 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, an individual stockholder is permitted to institute a derivative suit on behalf of t he 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; A derivative action is a suit by a shareholder to enforce a corporate cause of action.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. 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.

Same; Same; Dissolution of Corporations; Liquidation; Words and Phrases; Following the voluntary or involuntary dissolution of a corporation,

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

the corporation, the settlement and adjustment of claims against it and the payment of its just debts.Following the voluntary or involuntary

dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is,

of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts. 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. 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.

Same; Same; Same; Same; A derivative suit is fundamentally distinct and independent from liquidation proceedingsthey are neither part of each

other nor the necessary consequence of the other.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.

Same; Same; A stockholders right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securi ties

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.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.

Same; Same; Interim Rules of Procedure Governing Intra-Corporate Controversies; Requisites for Filing of Derivative Suits.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 underthe 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.

Same; Same; The obvious intent behind the rule requiring the stockholder filing a derivative suit to first exert 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 is

to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.The wordings of

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory

construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all

remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the


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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.

Same; Same; The fact that Winchester, Inc. is a family corporation does not in any way exempt a stockholder from complying with the clear

requirements and formalities of the rules for filing a derivative suitthere 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.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.

Same; Same; Pleadings and Practice; A partys Supplemental Affidavit and additional evidence are where they were only appende d to his Memorandum

before the Regional Trial Court (RTC)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.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: x x x 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 thecomplaint for the plaintiff and the answer for the respondent. Affidavits and documentary evidence not so submitted must already be attached to the

respective pre-trial briefs of the parties.

Same; Same; Same; Cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that

affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties pre-trial briefs.True, the parties in the present

case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure

Governing Intra-Corporate Controversies: Sec. 4. Judgment before pre-trial.If after submission of the pre-trial briefs, the court determines that, upon

consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the

parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the

court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda. Even then,

the afore-quoted provision still requires, before the court makes a determination that it can render judgment before pre-trial, that the parties had

submitted their pre-trial briefs and the court took into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases

wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses and

documentary evidence should be submitted, at the latest, with the parties pre-trial briefs. Taking further into account that under Section 4, Rule 4 of

the Interim Rules of Procedure Governing Intra-Corporate Controversies parties are required to file their memoranda simultaneously, the same wouldmean that a party would no longer have any opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its

memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul the former partys constitutional right to due process. *Yu vs.

Yukayguan, 589 SCRA 588(2009)]

D E C I S I O N

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 dated18 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).
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Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan

(Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).

Petitioner Anthony is the older half-brother of respondent Joseph.

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a domestic corporation

engaged in the operation of a general hardware and industrial supply and equipment business.

On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate Books and Damages

through Embezzlement and Falsification of Corporate Records and Accounts[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 Anthony s

name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch Clerk

of Court of the RTC for respondents inspection; (2) render an accounting of all the funds of Winchester, Inc. which petition ers 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
http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn15http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn15http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn15http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn15http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/177549.htm#_ftn6


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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 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 withthe 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
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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.

x x x x

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 thiscase DISMISSINGthe 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 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;
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(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and

jurisprudence in support thereof.

The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was supposed to be the

custodian of the corporate books and records; therefore, a court order for respondents inspection of the same was no longer necessary. The RTC

similarly denied respondents demand for accounting as it was clear that Winchester, Inc. had been engaging the services of an audit firm. Respondent

Joseph himself described the audit firm as competent and independent, and believed that the audited financial statements the said audit firm prepared

were true, faithful, and correct.

Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the same.

Respondents challenged the foregoing RTC Decision before the Court of Appeals viaa 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.

x x x x

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 Courta quo. The Court a quohave (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 2COMMENCEMENT OF ACTION AND PLEADINGS

Sec. 4. Complaint.The complaint shall state or contain:

x x x x

(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;

x x x x

RULE 8DERIVATIVE SUITS

Sec. 1. Derivative action.x x x

x x x x

(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.

x x x x

RULE 7INSPECTION OF CORPORATE BOOKS AND RECORDS


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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;

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

plaintiffs upon defendant;

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any;

and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the

law and jurisprudence in support thereof.

x x x x

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 [hereinpetitioner Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the law requires is to bringthe 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 downby the Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which cannot be dispensed with by anystockholder 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 oth er 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, ajudgment 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.

x x x x

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 personalknowledge, 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 evidencenot 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 presumedprima faciehostile 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
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(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 proofnever parts. That is, appellants must adduce evidence that has greater weight or is more convincing that (sic) which is offered to

oppose it. In the case at bar, no one should be blamed for the dismissal of the complaint but the [respondents] themselves for

their lackadaisical attitude in setting forth and appending their defences belatedly. To admit them would be a denial of due

process for the opposite party which this Court cannot allow.[29]

Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSINGthe instant petition and the assailed Decision of the RegionalTrial Court (RTC), 7

thJudicial 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 Reconsiderat ion

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]

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