Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. Nos. 177857-58               January 24, 2012

PHILIPPINE COCONUT, PRODUCERS FEDERATION, INC. (COCOFED), MANUEL V. DEL ROSARIO, DOMINGO P. ESPINA, SALVADOR P. BALLARES, JOSELITO A. MORALEDA, PAZ M. YASON, VICENTE A. CADIZ, CESARIA DE LUNA TITULAR, and RAYMUNDO C. DE VILLA, Petitioners, vs.REPUBLIC OF THE PHILIPPINES, Respondent,WIGBERTO E. TAÑADA, OSCAR F. SANTOS, SURIGAO DEL SUR FEDERATION OF AGRICULTURAL COOPERATIVES (SUFAC) and MORO FARMERS ASSOCIATION OF ZAMBOANGA DEL SUR (MOFAZS), represented by ROMEO C. ROYANDOYAN, Intervenors.

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G.R. No. 178193

DANILO S. URSUA, Petitioner, vs.REPUBLIC OF THE PHILIPPINES, Respondent,

D E C I S I O N

VELASCO, JR., J.:

The Case

Cast against a similar backdrop, these consolidated petitions for review under Rule 45 of the Rules of Court assail and seek to

annul certain issuances of the Sandiganbayan in its Civil Case No. 0033-A entitled, "Republic of the Philippines, Plaintiff, v. Eduardo M. Cojuangco, Jr., et al., Defendants, COCOFED, et al., BALLARES, et al., Class Action Movants," and Civil Case No. 0033-F entitled, "Republic of the Philippines, Plaintiff, v. Eduardo M. Cojuangco, Jr., et al., Defendants." Civil Case (CC) Nos. 0033-A and 0033-F are the results of the splitting into eight (8) amended complaints of CC No. 0033 entitled, "Republic of the Philippines v. Eduardo Cojuangco, Jr., et al.," a suit for recovery of ill-gotten wealth commenced by the Presidential Commission on Good Government (PCGG), for the Republic of the Philippines (Republic), against Ferdinand E. Marcos and several individuals, among them, Ma. Clara Lobregat (Lobregat) and petitioner Danilo S. Ursua (Ursua). Lobregat and Ursua occupied, at one time or another, directorial or top management positions in either the Philippine Coconut Producers Federation, Inc. (COCOFED) or the Philippine Coconut Authority (PCA), or both.1 Each of the eight (8) subdivided complaints correspondingly impleaded as defendants only the alleged participants in the transaction/s subject of the suit, or who are averred as owner/s of the assets involved.

The original complaint, CC No. 0033, as later amended to make the allegations more specific, is described in Republic v. Sandiganbayan2 (one of several ill-gotten suits of the same title disposed of by the Court) as revolving around the provisional take over by the PCGG of COCOFED, Cocomark, and Coconut Investment Company and their assets and the sequestration of shares of stock in United Coconut Planters Bank (UCPB) allegedly owned by, among others, over a million coconut farmers, and the six (6) Coconut Industry Investment Fund (CIIF) corporations,3 referred to in some pleadings as CIIF oil mills and the fourteen (14) CIIF holding companies4 (hereafter collectively called "CIIF companies"), so-called for having been either organized, acquired and/or funded as UCPB subsidiaries with the use of the CIIF levy. The basic complaint also contained allegations about the alleged misuse of the coconut

levy funds to buy out the majority of the outstanding shares of stock of San Miguel Corporation (SMC).

More particularly, in G.R. Nos. 177857-58, class action petitioners COCOFED and a group of purported coconut farmers and COCOFED members (hereinafter "COCOFED et al." collectively)5 seek the reversal of the following judgments and resolutions of the anti-graft court insofar as these issuances are adverse to their interests:

1) Partial Summary Judgment6 dated July 11, 2003, as reiterated in a resolution7 of December 28, 2004, denying COCOFED’s motion for reconsideration, and the May 11, 2007 resolution denying COCOFED’s motion to set case for trial and declaring the partial summary judgment final and appealable,8 all issued in Civil Case No. 0033-A; and

2) Partial Summary Judgment9 dated May 7, 2004, as also reiterated in a resolution10 of December 28, 2004, and the May 11, 2007 resolution11 issued in Civil Case No. 0033-F. The December 28, 2004 resolution denied COCOFED’s Class Action Omnibus Motion therein praying to dismiss CC Case No. 0033-F on jurisdictional ground and alternatively, reconsideration and to set case for trial. The May 11, 2007 resolution declared the judgment final and appealable.

For convenience, the partial summary judgment (PSJ) rendered on July 11, 2003 in CC No. 0033-A shall hereinafter be referred to as PSJ-A, and that issued on May 7, 2004 in CC 0033-F, as PSJ-F. PSJ-A and PSJ-F basically granted the Republic’s separate motions for summary judgment.

On June 5, 2007, the court a quo issued a Resolution in CC No. 0033-A, which modified PSJ-A by ruling that no further trial is needed on the issue of ownership of the subject properties. Likewise, on May 11, 2007, the said court issued a Resolution in CC No. 0033-F amending PSJ-F in like manner.

On the other hand, petitioner Ursua, in G.R. No. 178193, limits his petition for review on PSJ-A to the extent that it negates his claims over shares of stock in UCPB.

Tañada, et al. have intervened12 in G.R. Nos. 177857-58 in support of the government’s case.

Another petition was filed and docketed as G.R. No. 180705. It involves questions relating to Eduardo M. Cojuangco, Jr.’s (Cojuangco, Jr.’s) ownership of the UCPB shares, which he allegedly received as option shares, and which is one of the issues raised in PSJ-A.13 G.R. No. 180705 was consolidated with G.R. Nos. 177857-58 and 178193. On September 28, 2011, respondent Republic filed a Motion to Resolve G.R. Nos. 177857-58 and 178193.14 On January 17, 2012, the Court issued a Resolution deconsolidating G.R. Nos. 177857-58 and 178193 from G.R. No. 180705. This Decision is therefore separate and distinct from the decision to be rendered in G.R. No. 180705.

The Facts

The relevant facts, as culled from the records and as gathered from Decisions of the Court in a batch of coco levy and illegal wealth cases, are:

In 1971, Republic Act No. (R.A.) 6260 was enacted creating the Coconut Investment Company (CIC) to administer the Coconut Investment Fund (CIF), which, under Section 815 thereof, was to be sourced from a PhP 0.55 levy on the sale of every 100 kg. of copra. Of the PhP 0.55 levy of which the copra seller was, or ought to be, issued COCOFUND receipts, PhP 0.02 was placed at the disposition of COCOFED, the national association of coconut producers declared by the Philippine Coconut Administration (PHILCOA, now PCA16 ) as having the largest membership.17

The declaration of martial law in September 1972 saw the issuance of several presidential decrees ("P.Ds.") purportedly designed to improve the coconut industry through the collection and use of the coconut levy fund. While coming generally from impositions on the first sale of copra, the coconut levy fund came under various names, the different establishing laws and the stated ostensible purpose for the exaction explaining the differing denominations. Charged with the duty of collecting and administering the Fund was PCA.18 Like COCOFED with which it had a legal linkage,19 the PCA, by statutory provisions scattered in different coco levy decrees, had its share of the coco levy.20

The following were some of the issuances on the coco levy, its collection and utilization, how the proceeds of the levy will be managed and by whom, and the purpose it was supposed to serve:

1. P.D. No. 276 established the Coconut Consumers Stabilization Fund (CCSF) and declared the proceeds of the CCSF levy as trust fund,21 to be utilized to subsidize the sale of coconut-based products, thus stabilizing the price of edible oil.22

2. P.D. No. 582 created the Coconut Industry Development Fund (CIDF) to finance the operation of a hybrid coconut seed farm.

3. Then came P.D. No. 755 providing under its Section 1 the following:

It is hereby declared that the policy of the State is to provide readily available credit facilities to the coconut farmers at a preferential rates; that this policy can be expeditiously and efficiently realized by the implementation of the "Agreement for the Acquisition of a Commercial Bank for the benefit of Coconut Farmers" executed by the [PCA]…; and that the [PCA] is hereby authorized to distribute,

for free, the shares of stock of the bank it acquired to the coconut farmers….

Towards achieving the policy thus declared, P.D. No. 755, under its Section 2, authorized PCA to utilize the CCSF and the CIDF collections to acquire a commercial bank and deposit the CCSF levy collections in said bank, interest free, the deposit withdrawable only when the bank has attained a certain level of sufficiency in its equity capital. The same section also decreed that all levies PCA is authorized to collect shall not be considered as special and/or fiduciary funds or form part of the general funds of the government within the contemplation of P.D. No. 711.23

4. P.D. No. 961 codified the various laws relating to the development of coconut/palm oil industries.

5. The relevant provisions of P.D. No. 961, as later amended by P.D. No. 1468 (Revised Coconut Industry Code), read:

ARTICLE IIILevies

Section 1. Coconut Consumers Stabilization Fund Levy. — The [PCA] is hereby empowered to impose and collect … the Coconut Consumers Stabilization Fund Levy ….

….

Section 5. Exemption. — The [CCSF] and the [CIDF] as well as all disbursements as herein authorized, shall not be construed … as special and/or fiduciary funds, or as part of the general funds of the national government within the contemplation of PD 711; … the intention being that said Fund and the disbursements thereof as herein authorized

for the benefit of the coconut farmers shall be owned by them in their private capacities: …. (Emphasis supplied.)

6. Letter of Instructions No. (LOI) 926, Series of 1979, made reference to the creation, out of other coco levy funds, of the Coconut Industry Investment Fund (CIIF) in P.D. No. 1468 and entrusted a portion of the CIIF levy to UCPB for investment, on behalf of coconut farmers, in oil mills and other private corporations, with the following equity ownership structure:24

Section 2. Organization of the Cooperative Endeavor. – The [UCPB], in its capacity as the investment arm of the coconut farmers thru the [CIIF] … is hereby directed to invest, on behalf of the coconut farmers, such portion of the CIIF … in private corporations … under the following guidelines:

a) The coconut farmers shall own or control at least … (50%) of the outstanding voting capital stock of the private corporation [acquired] thru the CIIF and/or corporation owned or controlled by the farmers thru the CIIF …. (Words in bracket added.)

Through the years, a part of the coconut levy funds went directly or indirectly to various projects and/or was converted into different assets or investments.25 Of particular relevance to this case was their use to acquire the First United Bank (FUB), later renamed UCPB, and the acquisition by UCPB, through the CIIF companies, of a large block of SMC shares. 26

Apropos the intended acquisition of a commercial bank for the purpose stated earlier, it would appear that FUB was the bank of choice which the Pedro Cojuangco group (collectively, "Pedro Cojuangco") had control of. The plan, then, was for PCA to buy all of Pedro Cojuangco’s shares in FUB. However, as later events unfolded, a simple direct sale from the seller (Pedro) to PCA did not ensue as it was made to appear that Cojuangco, Jr. had the exclusive option to acquire the former’s FUB controlling interests. Emerging from this elaborate, circuitous arrangement were two deeds; the first, simply denominated as Agreement,27 dated May 1975,28 entered into by and between Cojuangco, Jr.,

for and in his behalf and in behalf of "certain other buyers," and Pedro Cojuangco, purportedly accorded Cojuangco, Jr. the option to buy 72.2% of FUB’s outstanding capital stock, or 137,866 shares (the "option shares," for brevity), at PhP 200 per share.

The second but related contract, dated May 25, 1975, was denominated as Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines.29

It had PCA,30 for itself and for the benefit of the coconut farmers, purchase from Cojuangco, Jr. the shares of stock subject of the First Agreement for PhP 200 per share. As additional consideration for PCA’s buy-out of what Cojuangco, Jr. would later claim to be his exclusive and personal option,31 it was stipulated that, from PCA, Cojuangco, Jr. shall receive equity in FUB amounting to 10%, or 7.22%, of the 72.2%, or fully paid shares.

Apart from the aforementioned 72.2%, PCA purchased from other FUB shareholders 6,534 shares.

While the 64.98% portion of the option shares (72.2% – 7.22% = 64.98%) ostensibly pertained to the farmers, the corresponding stock certificates supposedly representing the farmers’ equity were in the name of and delivered to PCA.32 There were, however, shares forming part of the aforesaid 64.98% portion, which ended up in the hands of non-farmers.33 The remaining 27.8% of the FUB capital stock were not covered by any of the agreements.

Under paragraph 8 of the second agreement, PCA agreed to expeditiously distribute the FUB shares purchased to such "coconut farmers holding registered COCOFUND receipts" on equitable basis.

As found by the Sandiganbayan, the PCA appropriated, out of its own fund, an amount for the purchase of the said 72.2% equity, albeit it would later reimburse itself from the coconut levy fund.34

As of June 30, 1975, the list of FUB stockholders shows PCA with 129,955 shares.35

Shortly after the execution of the PCA – Cojuangco, Jr. Agreement, President Marcos issued, on July 29, 1975, P.D. No. 755 directing, as earlier narrated, PCA to use the CCSF and CIDF to acquire a commercial bank to provide coco farmers with "readily available credit facilities at preferential rate," and PCA "to distribute, for free," the bank shares to coconut farmers.

Then came the 1986 EDSA event. One of the priorities of then President Corazon C. Aquino’s revolutionary government was the recovery of ill-gotten wealth reportedly amassed by the Marcos family and close relatives, their nominees and associates. Apropos thereto, she issued Executive Order Nos. (E.Os.) 1, 2 and 14, as amended by E.O. 14-A, all Series of 1986. E.O. 1 created the PCGG and provided it with the tools and processes it may avail of in the recovery efforts;36 E.O. No. 2 asserted that the ill-gotten assets and properties come in the form of shares of stocks, etc.; while E.O. No. 14 conferred on the Sandiganbayan exclusive and original jurisdiction over ill-gotten wealth cases, with the proviso that "technical rules of procedure and evidence shall not be applied strictly" to the civil cases filed under the E.O. Pursuant to these issuances, the PCGG issued numerous orders of sequestration, among which were those handed out, as earlier mentioned, against shares of stock in UCPB purportedly owned by or registered in the names of (a) more than a million coconut farmers and (b) the CIIF companies, including the SMC shares held by the CIIF companies. On July 31, 1987, the PCGG instituted before the Sandiganbayan a recovery suit docketed thereat as CC No. 0033.

After the filing and subsequent amendments of the complaint in CC 0033, Lobregat, COCOFED et al., and Ballares et al., purportedly representing over a million coconut farmers, sought and were allowed to intervene.37 Meanwhile, the following incidents/events transpired:

1. On the postulate, inter alia, that its coco-farmer members own at least 51% of the outstanding capital stock of UCPB, the CIIF companies, etc., COCOFED et al., on November 29, 1989, filed Class Action Omnibus Motion praying for the lifting of the orders of sequestration referred to above and for a chance to present evidence to prove the coconut farmers’ ownership of the UCPB and CIIF shares. The plea to present evidence was denied;

2. Later, the Republic moved for and secured approval of a motion for separate trial which paved the way for the subdivision of the causes of action in CC 0033, each detailing how the assets subject thereof were acquired and the key roles the principal played;

3. Civil Case 0033, pursuant to an order of the Sandiganbayan would be subdivided into eight complaints, docketed as CC 0033-A to CC 0033-H.38

Lobregat, Ballares et al., COCOFED, et al., on the strength of their authority to intervene in CC 0033, continued to participate in CC 0033-A where one of the issues raised was the misuse of the names/identities of the over a million coconut farmers;39

4. On February 23, 2001, Lobregat, COCOFED, Ballares et al., filed a Class Action Omnibus Motion to enjoin the PCGG from voting the sequestered UCPB shares and the SMC shares registered in the names of the CIIF companies. The Sandiganbayan, by Order of February 28, 2001, granted the motion, sending the Republic to come to this Court on certiorari, docketed as G.R. Nos. 147062-64, to annul said order; and

5. By Decision of December 14, 2001, in G.R. Nos. 147062-64 (Republic v. COCOFED), 40 the Court declared the coco levy funds as prima facie public funds.

And purchased as the sequestered UCPB shares were by such funds, beneficial ownership thereon and the corollary voting rights prima facie pertain, according to the Court, to the government.

The instant proceedings revolve around CC 0033-A (Re: Anomalous Purchase and Use of [FUB] now [UCPB])41 and CC 0033-F (Re: Acquisition of San Miguel Corporation Shares of Stock), the first case pivoting mainly on the series of transactions culminating in the alleged anomalous purchase of 72.2% of FUB’s outstanding capital stock and the transfer by PCA of a portion thereof to private individuals. COCOFED, et al. and Ballares, et al. participated in CC No. 0033-A as class action movants.

Petitioners COCOFED et al.42 and Ursua43 narrate in their petitions how the farmers’ UCPB shares in question ended up in the possession of those as hereunder indicated:

1) The farmers’ UCPB shares were originally registered in the name of PCA for the eventual free distribution thereof to and registration in the individual names of the coconut farmers in accordance with PD 755 and the IRR that PCA shall issue;

2) Pursuant to the stock distribution procedures set out in PCA Administrative Order No. 1, s. of 1975, (PCA AO 1),44 farmers who had paid to the CIF under RA 6260 and registered their COCOFUND (CIF) receipts with PCA were given their corresponding UCPB stock certificates. As of June 1976, the cut-off date for the extended registration, only 16 million worth of COCOFUND receipts were registered, leaving over 50 million shares undistributed;

3) PCA would later pass Res. 074-78, s. of 1978, to allocate the 50 million undistributed shares to (a) farmers who were already recipients thereof and (b) qualified

farmers to be identified by COCOFED after a national census.

4) As of May 1981, some 15.6 million shares were still held by and registered in the name of COCOFED "in behalf of coconut farmers" for distribution immediately after the completion of the national census, to all those determined by the PCA to be bonafide coconut farmers, but who have not received the bank shares;45 and

5) Prior to June 1986, a large number of coconut farmers opted to sell all/part of their UCPB shares below their par value. This prompted the UCPB Board to authorize the CIIF companies to buy these shares. Some 40.34 million common voting shares of UCPB ended up with these CIIF companies albeit initially registered in the name of UCPB.

On the other hand, the subject of CC 0033-F are two (2) blocks of SMC shares of stock, the first referring to shares purchased through and registered in the name of the CIIF holding companies. The purported ownership of the second block of SMC shares is for the nonce irrelevant to the disposition of this case. During the time material, the CIIF block of SMC shares represented 27% of the outstanding capital stock of SMC.

Civil Case No. 0033-A

After the pre-trial, but before the Republic, as plaintiff a quo, could present, as it committed to, a list of UCPB stockholders as of February 25, 1986,46 among other evidence, COCOFED, et al., on the premise that the sequestered farmers’ UCPB shares are not unlawfully acquired assets, filed in April 2001 their Class Action Motion for a Separate Summary Judgment. In it, they prayed for a judgment dismissing the complaint in CC 0033-A, for the reason that the over than a million unimpleaded coconut farmers own the UCPB shares. In March 2002, they filed Class Action Motion for Partial Separate Trial on the issue of whether

said UCPB shares have legitimately become the private property of the million coconut farmers.

Correlatively, the Republic, on the strength of the December 14, 2001 ruling in Republic v. COCOFED47 and on the argument, among others, that the claim of COCOFED and Ballares et al. over the subject UCPB shares is based solely on the supposed COCOFUND receipts issued for payment of the R.A. 6260 CIF levy, filed a Motion for Partial Summary Judgment [RE: COCOFED, et al. and Ballares, et al.] dated April 22, 2002, praying that a summary judgment be rendered declaring:

a. That Section 2 of [PD] 755, Section 5, Article III of P.D. 961 and Section 5, Article III of P.D. No. 1468 are unconstitutional;

b. That … (CIF) payments under … (R.A.) No. 6260 are not valid and legal bases for ownership claims over UCPB shares; and

c. That COCOFED, et al., and Ballares, et al. have not legally and validly obtained title over the subject UCPB shares.

After an exchange of pleadings, the Republic filed its sur-rejoinder praying that it be conclusively held to be the true and absolute owner of the coconut levy funds and the UCPB shares acquired therefrom.48

A joint hearing on the separate motions for summary judgment to determine what material facts exist with or without controversy followed.49 By Order50 of March 11, 2003, the Sandiganbayan detailed, based on this Court’s ruling in related cases, the parties’ manifestations made in open court and the pleadings and evidence on record, the facts it found to be without substantial controversy, together with the admissions and/or extent of the admission made by the parties respecting relevant facts, as follows:

As culled from the exhaustive discussions and manifestations of the parties in open court of their respective pleadings and evidence on record, the facts which exist without any substantial controversy are set forth hereunder, together with the admissions and/or the extent or scope of the admissions made by the parties relating to the relevant facts:

1. The late President Ferdinand E. Marcos was President … for two terms . . . and, during the second term, … declared Martial Law through Proclamation No. 1081 dated September 21, 1972.

2. On January 17, 1973, [he] issued Proclamation No. 1102 announcing the ratification of the 1973 Constitution.

3. From January 17, 1973 to April 7, 1981, [he] . . .exercised the powers and prerogative of President under the 1935 Constitution and the powers and prerogative of President . . . the 1973 Constitution.

[He] …promulgated various [P.D.s], among which were P.D. No. 232, P.D. No. 276, P.D. No. 414, P.D. No. 755, P.D. No. 961 and P.D. No. 1468.

4. On April 17, 1981, amendments to the 1973 Constitution were effected and, on June 30, 1981, [he], after being elected President, "reassumed the title and exercised the powers of the President until 25 February 1986."

5. Defendants Maria Clara Lobregat and Jose R. Eleazar, Jr. were [PCA] Directors … during the period 1970 to 1986….

6. Plaintiff admits the existence of the following agreements which are attached as Annexes "A" and "B" to the Opposition dated October 10, 2002 of defendant Eduardo M. Cojuangco, Jr. to the above-cited Motion for Partial Summary Judgment:

a) "Agreement made and entered into this ______ day of May, 1975 at Makati, Rizal, Philippines, by and between:

PEDRO COJUANGCO, Filipino, x x x, for and in his own behalf and in behalf of certain other stockholders of First United Bank listed in Annex "A" attached hereto (hereinafter collectively called the SELLERS);

– and –

EDUARDO COJUANGCO, JR., Filipino, x x x, represented in this act by his duly authorized attorney-in-fact, EDGARDO J. ANGARA, for and in his own behalf and in behalf of certain other buyers, (hereinafter collectively called the BUYERS)";

WITNESSETH: That

WHEREAS, the SELLERS own of record and beneficially a total of 137,866 shares of stock, with a par value of P100.00 each, of the common stock of the First United Bank (the "Bank"), a commercial banking corporation existing under the laws of the Philippines;

WHEREAS, the BUYERS desire to purchase, and the SELLERS are willing to sell, the aforementioned shares of stock totaling 137,866 shares (hereinafter called the "Contract Shares") owned by the SELLERS due to their special relationship to EDUARDO COJUANGCO, JR.;

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein contained, the parties agree as follows:

1. Sale and Purchase of Contract Shares

Subject to the terms and conditions of this Agreement, the SELLERS hereby sell, assign, transfer and convey unto the BUYERS, and the

BUYERS hereby purchase and acquire, the Contract Shares free and clear of all liens and encumbrances thereon.

2. Contract Price

The purchase price per share of the Contract Shares payable by the BUYERS is P200.00 or an aggregate price of P27,573,200.00 (the "Contract Price").

3. Delivery of, and payment for, stock certificates

Upon the execution of this Agreement, (i) the SELLERS shall deliver to the BUYERS the stock certificates representing the Contract Shares, free and clear of all liens, encumbrances, obligations, liabilities and other burdens in favor of the Bank or third parties, duly endorsed in blank or with stock powers sufficient to transfer the shares to bearer; and (ii) BUYERS shall deliver to the SELLERS P27,511,295.50 representing the Contract Price less the amount of stock transfer taxes payable by the SELLERS, which the BUYERS undertake to remit to the appropriate authorities. (Emphasis added.)

4. Representation and Warranties of Sellers

The SELLERS respectively and independently of each other represent and warrant that:

(a) The SELLERS are the lawful owners of, with good marketable title to, the Contract Shares and that (i) the certificates to be delivered pursuant thereto have been validly issued and are fully paid and no-assessable; (ii) the Contract Shares are free and clear of all liens, encumbrances,

obligations, liabilities and other burdens in favor of the Bank or third parties…

This representation shall survive the execution and delivery of this Agreement and the consummation or transfer hereby contemplated.

(b) The execution, delivery and performance of this Agreement by the SELLERS does not conflict with or constitute any breach of any provision in any agreement to which they are a party or by which they may be bound.

(c) They have complied with the condition set forth in Article X of the Amended Articles of Incorporation of the Bank.

5. Representation of BUYERS ….

6. Implementation

The parties hereto hereby agree to execute or cause to be executed such documents and instruments as may be required in order to carry out the intent and purpose of this Agreement.

7. Notices ….

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands at the place and on the date first above written.

PEDRO COJUANGCO(on his own behalf and in

behalf of the other Sellers

listed in Annex "A"

EDUARDO COJUANGCO, JR.

(on his own behalf and in behalf

of the other Buyers)

hereof)(SELLERS)

(BUYERS)

By:

EDGARDO J. ANGARAAttorney-in-Fact

x x x           x x x          x x x

b) "Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines, made and entered into this 25th day of May 1975 at Makati, Rizal, Philippines, by and between:

EDUARDO M. COJUANGCO, JR., x x x, hereinafter referred to as the SELLER;

– and –

PHILIPPINE COCONUT AUTHORITY, a public corporation created by Presidential Decree No. 232, as amended, for itself and for the benefit of the coconut farmers of the Philippines, (hereinafter called the BUYER)"

WITNESSETH: That

WHEREAS, on May 17, 1975, the Philippine Coconut Producers Federation ("PCPF"), through its Board of Directors, expressed the desire of the coconut farmers to own a commercial bank which will be an effective instrument to solve the perennial credit problems and, for that purpose, passed a resolution requesting the PCA to negotiate with the SELLER for the transfer to the coconut farmers of the SELLER’s option to buy the First United Bank (the "Bank") under such terms and conditions as BUYER may deem to be in the best interest of the coconut farmers and instructed Mrs. Maria Clara Lobregat to convey such request to the BUYER;

WHEREAS, the PCPF further instructed Mrs. Maria Clara Lobregat to make representations with the BUYER to utilize its funds to finance the purchase of the Bank;

WHEREAS, the SELLER has the exclusive and personal option to buy 144,400 shares (the "Option Shares") of the Bank, constituting 72.2% of the present outstanding shares of stock of the Bank, at the price of P200.00 per share, which option only the SELLER can validly exercise;

WHEREAS, in response to the representations made by the coconut farmers, the BUYER has requested the SELLER to exercise his personal option for the benefit of the coconut farmers;

WHEREAS, the SELLER is willing to transfer the Option Shares to the BUYER at a price equal to his option price of P200 per share;

WHEREAS, recognizing that ownership by the coconut farmers of a commercial bank is a permanent solution to their perennial credit problems, that it will accelerate the growth and development of the coconut industry and that the policy of the state which the BUYER is required to implement is to achieve vertical integration thereof so that coconut farmers will become participants in, and beneficiaries of, the request of PCPF that it acquire a commercial bank to be owned by the coconut farmers and, appropriated, for that purpose, the sum of P150 Million to enable the farmers to buy the Bank and capitalize the Bank to such an extension as to be in a position to adopt a credit policy for the coconut farmers at preferential rates;

WHEREAS, x x x the BUYER is willing to subscribe to additional shares ("Subscribed Shares") and place the Bank in a more favorable financial position to extend loans and credit facilities to coconut farmers at preferential rates;

NOW, THEREFORE, for and in consideration of the foregoing premises and the other terms and conditions hereinafter

contained, the parties hereby declare and affirm that their principal contractual intent is (1) to ensure that the coconut farmers own at least 60% of the outstanding capital stock of the Bank; and (2) that the SELLER shall receive compensation for exercising his personal and exclusive option to acquire the Option Shares, for transferring such shares to the coconut farmers at the option price of P200 per share, and for performing the management services required of him hereunder.

1. To ensure that the transfer to the coconut farmers of the Option Shares is effected with the least possible delay and to provide for the faithful performance of the obligations of the parties hereunder, the parties hereby appoint the Philippine National Bank as their escrow agent (the "Escrow Agent").

Upon execution of this Agreement, the BUYER shall deposit with the Escrow Agent such amount as may be necessary to implement the terms of this Agreement….

2. As promptly as practicable after execution of this Agreement, the SELLER shall exercise his option to acquire the Option Share and SELLER shall immediately thereafter deliver and turn over to the Escrow Agent such stock certificates as are herein provided to be received from the existing stockholders of the Bank by virtue of the exercise on the aforementioned option….

3. To ensure the stability of the Bank and continuity of management and credit policies to be adopted for the benefit of the coconut farmers, the parties undertake to cause the stockholders and the Board of Directors of the Bank to authorize and approve a management contract between the Bank and the SELLER under the following terms:

(a) The management contract shall be for a period of five (5) years, renewable for another five (5)

years by mutual agreement of the SELLER and the Bank;

(b) The SELLER shall be elected President and shall hold office at the pleasure of the Board of Directors. While serving in such capacity, he shall be entitled to such salaries and emoluments as the Board of Directors may determine;

(c) The SELLER shall recruit and develop a professional management team to manage and operate the Bank under the control and supervision of the Board of Directors of the Bank;

(d) The BUYER undertakes to cause three (3) persons designated by the SELLER to be elected to the Board of Directors of the Bank;

(e) The SELLER shall receive no compensation for managing the Bank, other than such salaries or emoluments to which he may be entitled by virtue of the discharge of his function and duties as President, provided … and

(f) The management contract may be assigned to a management company owned and controlled by the SELLER.

4. As compensation for exercising his personal and exclusive option to acquire the Option Shares and for transferring such shares to the coconut farmers, as well as for performing the management services required of him, SELLER shall receive equity in the Bank amounting, in the aggregate, to 95,304 fully paid shares in accordance with the procedure set forth in paragraph 6 below;

5. In order to comply with the Central Bank program for increased capitalization of banks and to ensure that the

Bank will be in a more favorable financial position to attain its objective to extend to the coconut farmers loans and credit facilities, the BUYER undertakes to subscribe to shares with an aggregate par value of P80,864,000 (the "Subscribed Shares"). The obligation of the BUYER with respect to the Subscribed Shares shall be as follows:

(a) The BUYER undertakes to subscribe, for the benefit of the coconut farmers, to shares with an aggregate par value of P15,884,000 from the present authorized but unissued shares of the Bank; and

(b) The BUYER undertakes to subscribe, for the benefit of the coconut farmers, to shares with an aggregate par value of P64,980,000 from the increased capital stock of the Bank, which subscriptions shall be deemed made upon the approval by the stockholders of the increase of the authorized capital stock of the Bank from P50 Million to P140 Million.

The parties undertake to declare stock dividends of P8 Million out of the present authorized but unissued capital stock of P30 Million.

6. To carry into effect the agreement of the parties that the SELLER shall receive as his compensation 95,304 shares:

(a) ….

(b) With respect to the Subscribed Shares, the BUYER undertakes, in order to prevent the dilution of SELLER’s equity position, that it shall cede over to the SELLER 64,980 fully-paid shares out of the Subscribed Shares. Such undertaking shall be complied with in the following manner: ….

7. The parties further undertake that the Board of Directors and management of the Bank shall establish and implement a loan policy for the Bank of making available for loans at preferential rates of interest to the coconut farmers ….

8. The BUYER shall expeditiously distribute from time to time the shares of the Bank, that shall be held by it for the benefit of the coconut farmers of the Philippines under the provisions of this Agreement, to such, coconut farmers holding registered COCOFUND receipts on such equitable basis as may be determine by the BUYER in its sound discretion.

9. ….

10. To ensure that not only existing but future coconut farmers shall be participants in and beneficiaries of the credit policies, and shall be entitled to the benefit of loans and credit facilities to be extended by the Bank to coconut farmers at preferential rates, the shares held by the coconut farmers shall not be entitled to pre-emptive rights with respect to the unissued portion of the authorized capital stock or any increase thereof.

11. After the parties shall have acquired two-thirds (2/3) of the outstanding shares of the Bank, the parties shall call a special stockholders’ meeting of the Bank:

(a) To classify the present authorized capital stock of P50,000,000 divided into 500,000 shares, with a par value of P100.00 per share into: 361,000 Class A shares, with an aggregate par value of P36,100,000 and 139,000 Class B shares, with an aggregate par value of P13,900,000. All of the Option Shares constituting 72.2% of the outstanding shares, shall be classified as Class A shares and the balance of the outstanding shares,

constituting 27.8% of the outstanding shares, as Class B shares;

(b) To amend the articles of incorporation of the Bank to effect the following changes:

(i) change of corporate name to First United Coconut Bank;

(ii) replace the present provision restricting the transferability of the shares with a limitation on ownership by any individual or entity to not more than 10% of the outstanding shares of the Bank;

(iii) provide that the holders of Class A shares shall not be entitled to pre-emptive rights with respect to the unissued portion of the authorized capital stock or any increase thereof; and

(iv) provide that the holders of Class B shares shall be absolutely entitled to pre-emptive rights, with respect to the unissued portion of Class B shares comprising part of the authorized capital stock or any increase thereof, to subscribe to Class B shares in proportion t the subscriptions of Class A shares, and to pay for their subscriptions to Class B shares within a period of five (5) years from the call of the Board of Directors.

(c) To increase the authorized capital stock of the Bank from P50 Million to P140 Million….;

(d) To declare a stock dividend of P8 Million payable to the SELLER, the BUYER and other stockholders of the Bank out of the present

authorized but unissued capital stock of P30 Million;

(e) To amend the by-laws of the Bank accordingly; and

(f) To authorize and approve the management contract provided in paragraph 2 above.

The parties agree that they shall vote their shares and take all the necessary corporate action in order to carry into effect the foregoing provisions of this paragraph 11 ….

12. It is the contemplation of the parties that the Bank shall achieve a financial and equity position to be able to lend to the coconut farmers at preferential rates.

In order to achieve such objective, the parties shall cause the Bank to adopt a policy of reinvestment, by way of stock dividends, of such percentage of the profits of the Bank as may be necessary.

13. The parties agree to execute or cause to be executed such documents and instruments as may be required in order to carry out the intent and purpose of this Agreement.

IN WITNESS WHEREOF, …

PHILIPPINE COCONUT AUTHORITY(BUYER)

By:

EDUARDO COJUANGCO, JR. MARIA CLARA L. LOBREGAT(SELLER)

x x x           x x x          x x x

7. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the … (PCA) was the "other buyers" represented by …. Cojuangco, Jr. in the May 1975 Agreement entered into between Pedro Cojuangco (on his own behalf and in behalf of other sellers listed in Annex "A" of the agreement) and … Cojuangco, Jr. (on his own behalf and in behalf of the other buyers). Defendant Cojuangco insists he was the "only buyer" under the aforesaid Agreement.

8. …..

9. Defendants Lobregat, et al., and COCOFED, et al., and Ballares, et al. admit that in addition to the 137,866 FUB shares of Pedro Cojuangco, et al. covered by the Agreement, other FUB stockholders sold their shares to PCA such that the total number of FUB shares purchased by PCA … increased from 137,866 shares to 144,400 shares, the OPTION SHARES referred to in the Agreement of May 25, 1975. Defendant Cojuangco did not make said admission as to the said 6,534 shares in excess of the 137,866 shares covered by the Agreement with Pedro Cojuangco.

10. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the Agreement, described in Section 1 of Presidential Decree (P.D.) No. 755 dated July 29, 1975 as the "Agreement for the Acquisition of a Commercial Bank for the Benefit of Coconut Farmers" executed by the Philippine Coconut Authority" and incorporated in Section 1 of P.D. No. 755 by reference, refers to the "AGREEMENT FOR THE ACQUISITION OF A COMMERCIAL BANK FOR THE BENEFIT OF THE COCONUT FARMERS OF THE PHILIPPINES" dated May 25, 1975 between defendant Eduardo M. Cojuangco, Jr. and the [PCA] (Annex "B" for defendant Cojuangco’s OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT [RE: EDUARDO M. COJUANGCO, JR.] dated September 18, 2002).

Plaintiff refused to make the same admission.

11. … the Court takes judicial notice that P.D. No. 755 was published [in] … volume 71 of the Official Gazette but the text of the agreement … was not so published with P.D. No. 755.

12. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the PCA used public funds, … in the total amount of P150 million, to purchase the FUB shares amounting to 72.2% of the authorized capital stock of the FUB, although the PCA was later reimbursed from the coconut levy funds and that the PCA subscription in the increased capitalization of the FUB, which was later renamed the … (UCPB), came from the said coconut levy funds….

13. Pursuant to the May 25, 1975 Agreement, out of the 72.2% shares of the authorized and the increased capital stock of the FUB (later UCPB), entirely paid for by PCA, 64.98% of the shares were placed in the name of the "PCA for the benefit of the coconut farmers" and 7,22% were given to defendant Cojuangco. The remaining 27.8% shares of stock in the FUB which later became the UCPB were not covered by the two (2) agreements referred to in item no. 6, par. (a) and (b) above.

"There were shares forming part of the aforementioned 64.98% which were later sold or transferred to non-coconut farmers.

14. Under the May 27, 1975 Agreement, defendant Cojuangco’s equity in the FUB (now UCPB) was ten percent (10%) of the shares of stock acquired by the PCA for the benefit of the coconut farmers.

15. That the fully paid 95.304 shares of the FUB, later the UCPB, acquired by defendant … Cojuangco, Jr. pursuant to the May 25, 1975 Agreement were paid for by the PCA in accordance with the terms and conditions provided in the said Agreement.

16. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the affidavits of the coconut farmers (specifically, Exhibit "1-Farmer" to "70-Farmer") uniformly state that:

a. they are coconut farmers who sold coconut products;

b. in the sale thereof, they received COCOFUND receipts pursuant to R.A. No. 6260;

c. they registered the said COCOFUND receipts; and

d. by virtue thereof, and under R.A. No. 6260, P.D. Nos. 755, 961 and 1468, they are allegedly entitled to the subject UCPB shares.

but subject to the following qualifications:

a. there were other coconut farmers who received UCPB shares although they did not present said COCOFUND receipt because the PCA distributed the unclaimed UCPB shares not only to those who already received their UCPB shares in exchange for their COCOFUND receipts but also to the coconut farmers determined by a national census conducted pursuant to PCA administrative issuances;

b. [t]here were other affidavits executed by Lobregat, Eleazar, Ballares and Aldeguer relative to the said distribution of the unclaimed UCPB shares; and

c. the coconut farmers claim the UCPB shares by virtue of their compliance not only with the laws mentioned in item (d) above but also with the relevant issuances of the PCA such as, PCA Administrative Order No. 1, dated August 20, 1975 (Exh. "298-Farmer"); PCA Resolution No. 033-78 dated February 16, 1978….

The plaintiff did not make any admission as to the foregoing qualifications.

17. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. claim that the UCPB shares in question have legitimately become the private properties of the 1,405,366 coconut farmers solely on the basis of their having acquired said shares in compliance with R.A. No. 6260, P.D. Nos. 755, 961 and 1468 and the administrative issuances of the PCA cited above.

18. …..

On July 11, 2003, the Sandiganbayan issued the assailed PSJ-A finding for the Republic, the judgment accentuated by (a) the observation that COCOFED has all along manifested as representing over a million coconut farmers and (b) a declaration on the issue of ownership of UCPB shares and the unconstitutionality of certain provisions of P.D. No. 755 and its implementing regulations. On the matter of ownership in particular, the anti-graft court declared that the 64.98% sequestered "Farmers’ UCPB shares," plus other shares paid by PCA are "conclusively" owned by the Republic. In its pertinent parts, PSJ-A, resolving the separate motions for summary judgment in seriatim with separate dispositive portions for each, reads:

WHEREFORE, in view of the foregoing, we rule as follows:

x x x           x x x          x x x

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY JUDGMENT dated April 11, 2001 filed by Defendant Maria Clara L. Lobregat, COCOFED, et al., and Ballares, et al.

The Class Action Motion for Separate Summary Judgment dated April 11, 2001 filed by defendant Maria

Clara L. Lobregat, COCOFED, et al. and Ballares, et al., is hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COCOFED, ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed by Plaintiff.

1. a. Section 1 of P.D. No. 755, taken in relation to Section 2 of the same P.D., is unconstitutional: (i) for having allowed the use of the CCSF to benefit directly private interest by the outright and unconditional grant of absolute ownership of the FUB/UCPB shares paid for by PCA entirely with the CCSF to the undefined "coconut farmers", which negated or circumvented the national policy or public purpose declared by P.D. No. 755 to accelerate the growth and development of the coconut industry and achieve its vertical integration; and (ii) for having unduly delegated legislative power to the PCA.

b. The implementing regulations issued by PCA, namely, Administrative Order No. 1, Series of 1975 and Resolution No. 074-78 are likewise invalid for their failure to see to it that the distribution of shares serve exclusively or at least primarily or directly the aforementioned public purpose or national policy declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not be considered special and/or fiduciary funds nor part of the general funds of the national government and similar provisions of Sec. 5, Art. III, P.D. No. 961 and Sec. 5, Art. III, P.D. No. 1468 contravene the provisions of the Constitution, particularly, Art. IX (D), Sec. 2; and Article VI, Sec. 29 (3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and validly obtained title of ownership over the subject UCPB shares by virtue of P.D. No. 755, the Agreement dated May 25, 1975 between the PCA and defendant Cojuangco, and PCA implementing rules, namely, Adm. Order No. 1, s. 1975 and Resolution No. 074-78.

4. The so-called "Farmers’ UCPB shares" covered by 64.98% of the UCPB shares of stock, which formed part of the 72.2% of the shares of stock of the former FUB and now of the UCPB, the entire consideration of which was charged by PCA to the CCSF, are hereby declared conclusively owned by, the Plaintiff Republic of the Philippines.

C. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: EDUARDO M. COJUANGCO, JR.) dated September 18, 2002 filed by Plaintiff.

1. Sec. 1 of P.D. No. 755 did not validate the Agreement between PCA and defendant Eduardo M. Cojuangco, Jr. dated May 25, 1975 nor did it give the Agreement the binding force of a law because of the non-publication of the said Agreement.

2. Regarding the questioned transfer of the shares of stock of FUB (later UCPB) by PCA to defendant Cojuangco or the so-called "Cojuangco UCPB shares" which cost the PCA more than Ten Million Pesos in CCSF in 1975, we declare, that the transfer of the following FUB/UCPB shares to defendant Eduardo M. Cojuangco, Jr. was not supported by valuable consideration, and therefore null and void:

a. The 14,400 shares from the "Option Shares";

b. Additional Bank Shares Subscribed and Paid by PCA, consisting of:

1. Fifteen Thousand Eight Hundred Eighty-Four (15,884) shares out of the authorized but unissued shares of the bank, subscribed and paid by PCA;

2. Sixty Four Thousand Nine Hundred Eighty (64,980) shares of the increased capital stock subscribed and paid by PCA; and

3. Stock dividends declared pursuant to paragraph 5 and paragraph 11 (iv) (d) of the Agreement.

3. The above-mentioned shares of stock of the FUB/UCPB transferred to defendant Cojuangco are hereby declared conclusively owned by the Republic of the Philippines.

4. The UCPB shares of stock of the alleged fronts, nominees and dummies of defendant Eduardo M. Cojuangco, Jr. which form part of the 72.2% shares of the FUB/UCPB paid for by the PCA with public funds later charged to the coconut levy funds, particularly the CCSF, belong to the plaintiff Republic of the Philippines as their true and beneficial owner.

Let trial of this Civil Case proceed with respect to the issues which have not been disposed of in this Partial Summary Judgment. For this purpose, the plaintiff’s Motion Ad Cautelam to Present Additional Evidence dated March 28, 2001 is hereby GRANTED.

From PSJ-A, Lobregat moved for reconsideration which COCOFED, et al. and Ballares, et al. adopted. All these motions were denied in the extended assailed Resolution51 of December 28, 2004.

Civil Case No. 0033-F

Here, the Republic, after filing its pre-trial brief, interposed a Motion for Judgment on the Pleadings and/or for [PSJ] (Re: Defendants CIIF Companies, 14 Holding Companies and COCOFED, et al.) praying that, in light of the parties’ submissions and the supervening ruling in Republic v. COCOFED52 which left certain facts beyond question, a judgment issue:

1) Declaring Section 5 of Article III of P.D. No. 961 (Coconut Industry Code) and Section 5 of Article III of P.D. No. 1468 (Revised Coconut Industry Code) to be unconstitutional;

2) Declaring that CIF payments under RA No. 6260 are not valid and legal bases for ownership claims over the CIIF companies and, ultimately, the CIIF block of SMC shares; and

3) Ordering the reconveyance of the CIIF companies, the 14 holding companies, and the 27% CIIF block of San Miguel Corporation shares of stocks in favor of the government and declaring the ownership thereof to belong to the government in trust for all the coconut farmers.

At this juncture, it may be stated that, vis-à-vis CC 0033-F, Gabay Foundation, Inc. sought but was denied leave to intervene. But petitioners COCOFED, et al. moved and were allowed to intervene53 on the basis of their claim that COCOFED members beneficially own the block of SMC shares held by the CIIF companies, at least 51% of whose capitol stock such members own. The claim, as the OSG explained, arose from

the interplay of the following: (a) COCOFED et al.’s alleged majority ownership of the CIIF companies under Sections 954 and 1055 of P.D. No. 1468, and (b) their alleged entitlement to shares in the CIIF companies by virtue of their supposed registration of COCOFUND receipts allegedly issued to COCOFED members upon payment of the R.A. 6260 CIF levy.56

Just as in CC No. 0033-A, the Sandiganbayan also conducted a hearing in CC No. 0033-F to determine facts that appeared without substantial controversy as culled from the records and, by Order57 of February 23, 2004, outlined those facts.

On May 7, 2004, the Sandiganbayan, in light of its ruling in CC No. 0033-A and disposing of the issue on ownership of the CIIF oil and holding companies and their entire block of subject SMC shares, issued the assailed PSJ-F also finding for the Republic, the fallo of which pertinently reading:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed et al.) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, namely:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALLING 33,133,266 SHARES AS OF 1983 … ARE DECLARED OWNED BY THE GOVERNMENT IN TRUST FOR ALL THE COCONUT FARMERS GOVERNMENT AND ORDERDED RECONVEYED TO THE GOVERNMENT.58 (Emphasis and capitalization in the original; underscoring added.)

Let the trial of this Civil Case proceed with respect to the issues which have not been disposed of in this Partial Summary

Judgment, including the determination of whether the CIIF Block of SMC Shares adjudged to be owned by the Government represents 27% of the issued and outstanding capital stock of SMC according to plaintiff or to 31.3% of said capital stock according to COCOFED, et al and Ballares, et al.

SO ORDERED.

Expressly covered by the declaration and the reconveyance directive are "all dividends declared, paid and issued thereon as well as any increments thereto arising from, but not limited to, exercise of pre-emptive rights."

On May 26, 2004, COCOFED et al., filed an omnibus motion (to dismiss for lack of subject matter jurisdiction or alternatively for reconsideration and to set case for trial), but this motion was denied per the Sandiganbayan’s Resolution59 of December 28, 2004.

On May 11, 2007, in CC 0033-A, the Sandiganbayan issued a Resolution60 denying Lobregat’s and COCOFED’s separate motions to set the case for trial/hearing, noting that there is no longer any point in proceeding to trial when the issue of their claim of ownership of the sequestered UCPB shares and related sub-issues have already been resolved in PSJ-A.

For ease of reference, PSJ-A and PSJ-F each originally decreed trial or further hearing on issues yet to be disposed of. However, the Resolution61 issued on June 5, 2007 in CC 0033-A and the Resolution62 of May 11, 2007 rendered in CC 0033-F effectively modified the underlying partial summary judgments by deleting that portions on the necessity of further trial on the issue of ownership of (1) the sequestered UCPB shares, (2) the CIIF block of SMC shares and (3) the CIIF companies. As the anti-graft court stressed in both resolutions, the said issue of ownership has been finally resolved in the corresponding PSJs.63

Hence, the instant petitions.

The Issues

COCOFED et al., in G.R. Nos. 177857-58, impute reversible error on the Sandiganbayan for (a) assuming jurisdiction over CC Nos. 0033-A and 0033-F despite the Republic’s failure to establish below the jurisdictional facts, i.e., that the sequestered assets sought to be recovered are ill-gotten in the context of E.O. Nos. 1, 2, 14 and 14-A; (b) declaring certain provisions of coco levy issuances unconstitutional; and (c) denying the petitioners’ plea to prove that the sequestered assets belong to coconut farmers. Specifically, petitioners aver:

I. The Sandiganbayan gravely erred … when it refused to acknowledge that it did not have subject matter jurisdiction over the ill-gotten wealth cases because the respondent Republic failed to prove, and did not even attempt to prove, the jurisdictional fact that the sequestered assets constitute ill-gotten wealth of former President Marcos and Cojuangco. Being without subject matter jurisdiction over the ill-gotten wealth cases, a defect previously pointed out and repeatedly assailed by COCOFED, et al., the assailed PSJs and the assailed Resolutions are all null and void.

A. Insofar as the ill-gotten wealth cases are concerned, the Sandiganbayan’s subject matter jurisdiction is limited to the recovery of "ill-gotten wealth" as defined in Eos 1, 2, 14 and 14-A. Consistent with that jurisdiction, the subdivided complaints in the ill-gotten wealth cases expressly alleged that the sequestered assets constitutes "ill-gotten wealth" of former President Marcos and Cojuangco, having been filed pursuant to, and in connection with, Eos 1, 2, 14 and 14-A, the Sandiganbayan gravely erred, if not exceeded its jurisdiction, when it refused to require the respondent Republic to prove the aforesaid jurisdictional fact.

B. …. Having no evidence on record to prove the said jurisdictional fact, the Sandiganbayan gravely erred, if not grossly exceeded its statutory jurisdiction, when it

rendered the assailed PSJs instead of dismissing the ill-gotten wealth cases….

C. Under Section 1 of Rule 9 of the Rules of Court, lack of jurisdiction over the subject matter may be raised at any stage of the proceedings…. In any event, in pursuing its intervention in the ill-gotten wealth cases, COCOFED, et al precisely questioned the Sandiganbayan’s subject matter jurisdiction, asserted that the jurisdictional fact does not exist, moved to dismiss the ill-gotten wealth cases and even prayed that the writs of sequestration over the sequestered assets be lifted. In concluding that those actions constitute an "invocation" of its jurisdiction, the Sandiganbayan clearly acted whimsically, capriciously and in grave abuse of its discretion.

II. Through the assailed PSJs and the assailed Resolutions, the Sandiganbayan declared certain provisions of the coconut levy laws as well as certain administrative issuances of the PCA as unconstitutional. In doing so, the Sandiganbayan erroneously employed, if not grossly abused, its power of judicial review….

A. … the Sandiganbayan gravely erred, if not brazenly exceeded its statutory jurisdiction and abused the judicial powers, when it concluded that the public purpose of certain coconut levy laws was not evident, when it thereupon formulated its own public policies and purposes for the coconut levy laws and at the same time disregarded the national policies specifically prescribed therein.

B. In ruling that "it is not clear or evident how the means employed by the [coconut levy] laws" would "serve the avowed purpose of the law" or "can serve a public purpose", the Sandiganbayan erroneously examined, determined and evaluated the wisdom of such laws, a constitutional power within the exclusive province of the legislative department.

C. The Sandiganbayan gravely erred in declaring Section 1 of PD 755, PCA [AO] 1 and PCA Resolution No. 074-78 constitutionally infirm by reason of alleged but unproven and unsubstantiated flaws in their implementation.

D. The Sandiganbayan gravely erred in concluding that Section 1 of PD 755 constitutes an undue delegation of legislative power insofar as it authorizes the PCA to promulgate rules and regulations governing the distribution of the UCPB shares to the coconut farmers. Rather, taken in their proper context, Section 1 of PD 755 was complete in itself, [and] prescribed sufficient standards that circumscribed the discretion of the PCA….

More importantly, this Honorable Court has, on three (3) separate occasions, rejected respondent Republic’s motion to declare the coconut levy laws unconstitutional. The Sandiganbayan gravely erred, if not acted in excess of its jurisdiction, when it ignored the settled doctrines of law of the case and/or stare decisis and granted respondent Republic’s fourth attempt to declare the coconut levy laws unconstitutional, despite fact that such declaration of unconstitutionality was not necessary to resolve the ultimate issue of ownership involved in the ill-gotten wealth cases.

III. In rendering the assailed PSJs and thereafter refusing to proceed to trial on the merits, on the mere say-so of the respondent Republic, the Sandiganbayan committed gross and irreversible error, gravely abused its judicial discretion and flagrantly exceeded its jurisdiction as it effectively sanctioned the taking of COCOFED, et al.’s property by the respondent Republic without due process of law and through retroactive application of the declaration of unconstitutionality of the coconut levy laws, an act that is not only illegal and violative of the settled Operative Fact Doctrine but, more importantly, inequitable to the coconut farmers whose only possible mistake, offense or misfortune was to follow the law.

A. ….

1. In the course of the almost twenty (20) years that the ill-gotten wealth cases were pending, COCOFED, et al. repeatedly asked to be allowed to present evidence to prove that the true, actual and beneficial owners of the sequestered assets are the coconut farmers and not Cojuangco, an alleged "crony" of former President Marcos. The Sandiganbayan grievously erred and clearly abused its judicial discretion when it repeatedly and continuously denied COCOFED, et al. the opportunity to present their evidence to disprove the baseless allegations of the Ill-Gotten Wealth Cases that the sequestered assets constitute ill-gotten wealth of Cojuangco and of former President Marcos, an error that undeniably and illegally deprived COCOFED, et al of their constitutional right to be heard.

2. The Sandiganbayan erroneously concluded that the Assailed PSJs and Assailed Resolutions settled the ultimate issue of ownership of the Sequestered Assets and, more importantly, resolved all factual and legal issues involved in the ill-gotten wealth cases. Rather, as there are triable issues still to be resolved, it was incumbent upon the Sandiganbayan to receive evidence thereon and conduct trial on the merits.

3. Having expressly ordered the parties to proceed to trial and thereafter decreeing that trial is unnecessary as the Assailed PSJs were "final" and "appealable" judgments, the Sandiganbayan acted whimsically, capriciously and contrary to the Rules of Court, treated the parties in the ill-gotten wealth cases unfairly, disobeyed the dictate of this Honorable Court and, worse, violated COCOFED,

et al’s right to due process and equal protection of the laws.

B. The Sandiganbayan gravely erred if not grossly abused its discretion when it repeatedly disregarded, and outrightly refused to recognize, the operative facts that existed as well as the rights that vested from the time the coconut levy laws were enacted until their declaration of unconstitutionality in the assailed PSJs. As a result, the assailed PSJs constitute a proscribed retroactive application of the declaration of unconstitutionality, a taking of private property, and an impairment of vested rights of ownership, all without due process of law.64 Otherwise stated, the assailed PSJs and the assailed Resolutions effectively penalized the coconut farmers whose only possible mistake, offense or misfortune was to follow the laws that were then legal, valid and constitutional.

IV. The voluminous records of these ill-gotten wealth cases readily reveal the various dilatory tactics respondent Republic resorted to…. As a result, despite the lapse of almost twenty (20) years of litigation, the respondent Republic has not been required to, and has not even attempted to prove, the bases of its perjurious claim that the sequestered assets constitute ill-gotten wealth of former President Marcos and his crony, Cojuangco. In tolerating respondent Republic’s antics for almost twenty (20) years…, the Sandiganbayan so glaringly departed from procedure and thereby flagrantly violated COCOFED, et al.’s right to speedy trial.

In G.R. No. 178193, petitioner Ursua virtually imputes to the Sandiganbayan the same errors attributed to it by petitioners in G.R. Nos. 177857-58.65 He replicates as follows:

I

The Sandiganbayan decided in a manner not in accord with the Rules of Court and settled jurisprudence in rendering the questioned PSJ as final and appealable thereafter taking the sequestered assets from their owners or record without presentation of any evidence, thus, the questioned PSJ and the questioned Resolutions are all null and void.

A. The Sandiganbayan’s jurisdiction insofar as the ill-gotten wealth cases are concerned, is limited to the recovery of "ill-gotten wealth" as defined in Executive Orders No. 1, 2, 14 and 14-A.

B. The Sandiganbayan should have decided to dismiss the case or continue to receive evidence instead of ruling against the constitutionality of some coconut levy laws and PCA issuances because it could decide on other grounds available to it.

II

The Sandiganbayan gravely erred when it declared PD. 755, Section 1 and 2, Section 5, Article 1 of PD 961, and Section 5 of Art. III of PD 1468 as well as administrative issuances of the PCA as unconstitutional in effect, it abused it power of judicial review….

A. The Sandiganbayan gravely erred in concluding that the purpose of PD 755 Section 1 and 2, Section 5, Article 1 of PD 961, and Section 5 of Art. III of PD 1468 is not evident. It then proceeded to formulated its own purpose thereby intruding into the wisdom of the legislature in enacting [t]he law.

B. The Sandiganbayan gravely erred in declaring Section 1 of PD 755, PCA [AO] No. 1 and PCA Resolution No. 074-78 unconstitutional due to alleged flaws in their implementation.

C. The Sandiganbayan gravely erred in concluding that Section 1 of PD No. 755 constitutes an undue delegation of legislative power insofar as it authorizes the PCA to promulgate rules and regulations governing the distribution of the UCPB shares to the coconut farmers. Section 1 of PD 755 was complete in itself, prescribed sufficient standards that circumscribed the discretion of the PCA and merely authorized the PCA to fill matters of detail an execution through promulgated rules and regulations.

III

The coconut levy laws, insofar as they allowed the PCA to promulgate rules and regulations governing the distribution of the UCPB to the coconut farmers, do not constitute an undue delegation of legislative power as they were complete in themselves and prescribed sufficient standards that circumscribed the discretion of the PCA.

IV

Assuming ex-gratia argumenti that the coconut levy laws are unconstitutional, still, the owners thereof cannot be deprived of their property without due process of law considering that they have in good faith acquired vested rights over the sequestered assets.

In sum, the instant petitions seek to question the decisions of the Sandiganbayan in both CC Nos. 0033-A and 0033-F, along with the preliminary issues of objection. We shall address at the outset, (1) the common preliminary questions, including jurisdictional issue, followed by (2) the common primary contentious issues (i.e. constitutional questions), and (3) the issues particular to each case.

The Court’s Ruling

IThe Sandiganbayan has jurisdiction over the subject

matter ofthe subdivided amended complaints.

The primary issue, as petitioners COCOFED, et al. and Ursua put forward, boils down to the Sandiganbayan’s alleged lack of jurisdiction over the subject matter of the amended complaints. Petitioners maintain that the jurisdictional facts necessary to acquire jurisdiction over the subject matter in CC No. 0033-A have yet to be established. In fine, the Republic, so petitioners claim, has failed to prove the ill-gotten nature of the sequestered coconut farmers’ UCPB shares. Accordingly, the controversy is removed from the subject matter jurisdiction of the Sandiganbayan and necessarily any decision rendered on the merits, such as PSJ-A and PSJ-F, is void.

To petitioners, it behooves the Republic to prove the jurisdictional facts warranting the Sandiganbayan’s continued exercise of jurisdiction over ill-gotten wealth cases. Citing Manila Electric Company [Meralco] v. Ortañez,66 petitioners argue that the jurisdiction of an adjudicatory tribunal exercising limited jurisdiction, like the Sandiganbayan, "depends upon the facts of the case as proved at the trial and not merely upon the allegation in the complaint."67 Cited too is PCGG v. Nepumuceno,68 where the Court held:

The determinations made by the PCGG at the time of issuing sequestration … orders cannot be considered as final determinations; that the properties or entities sequestered or taken-over in fact constitute "ill-gotten wealth" according to [E.O.] No. 1 is a question which can be finally determined only by a court – the Sandiganbayan. The PCGG has the burden of proving before the Sandiganbayan that the assets it has sequestered or business entity it has provisionally taken-over constitutes "ill-gotten wealth" within the meaning of [E.O.] No. 1 and Article No. XVIII (26) of the 1987 Constitution.

Petitioners’ above posture is without merit.

Justice Florenz D. Regalado explicates subject matter jurisdiction:

16. Basic … is the doctrine that the jurisdiction of a court over the subject-matter of an action is conferred only by the Constitution or the law and that the Rules of Court yield to substantive law, in this case, the Judiciary Act and B.P. Blg. 129, both as amended, and of which jurisdiction is only a part. Jurisdiction … cannot be acquired through, or waived, enlarged or diminished by, any act or omission of the parties; neither can it be conferred by the acquiescence of the court…. Jurisdiction must exist as a matter of law…. Consequently, questions of jurisdiction may be raised for the first time on appeal even if such issue was not raised in the lower court….

17. Nevertheless, in some case, the principle of estoppel by laches has been availed … to bar attacks on jurisdiction….69

It is, therefore, clear that jurisdiction over the subject matter is conferred by law. In turn, the question on whether a given suit comes within the pale of a statutory conferment is determined by the allegations in the complaint, regardless of whether or not the plaintiff will be entitled at the end to recover upon all or some of the claims asserted therein.70 We said as much in Magay v. Estiandan:71

[J]urisdiction over the subject matter is determined by the allegations of the complaint, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein-a matter that can be resolved only after and as a result of the trial. Nor may the jurisdiction of the court be made to depend upon the defenses set up in the answer or upon the motion to dismiss, for, were we to be governed by such rule, the question of jurisdiction could depend almost entirely upon the defendant.

Of the same tenor was what the Court wrote in Allied Domecq Philippines, Inc. v. Villon:72

Jurisdiction over the subject matter is the power to hear and determine the general class to which the proceedings in question belong. Jurisdiction over the subject matter is conferred by law and not by the consent or acquiescence of any or all of the parties or by erroneous belief of the court that it exists. Basic is the rule that jurisdiction over the subject matter is determined by the cause or causes of action as alleged in the complaint.

The material averments in subdivided CC No. 0033-A and CC No. 0033-F included the following:

12. Defendant Eduardo Cojuangco, Jr served as a public officer during the Marcos administration….

13. Defendant Eduardo Cojuangco, Jr., taking advantage of his association, influence and connection, acting in unlawful concert with the [Marcoses] and the individual defendants, embarked upon devices, schemes and stratagems, including the use of defendant corporations as fronts, to unjustly enrich themselves as the expense of the Plaintiff and the Filipino people, such as when he –

a) manipulated, beginning the year 1975 with the active collaboration of Defendants …, Marai Clara Lobregat, Danilo Ursua [etc.], the purchase by the … (PCA) of 72.2% of the outstanding capital stock of the … (FUB) which was subsequently converted into a universal bank named … (UCPB) through the use of … (CCSF) … in a manner contrary to law and to the specific purposes for which said coconut levy funds were imposed and collected under P.D. 276 and under anomalous and sinister designs and circumstances, to wit:

(i) Defendant Eduardo Cojuangco, Jr. coveted the coconut levy funds as a cheap, lucrative and risk-free source of funds with which to exercise his private option to buy the controlling interest in FUB….

(ii) to legitimize a posteriori his highly anomalous and irregular use and diversion of government funds to advance his own private and commercial interests … Defendant Eduardo Cojuangco, Jr. caused the issuance … of PD 755 (a) declaring that the coconut levy funds shall not be considered special and fiduciary and trust funds … conveniently repealing for that purpose a series of previous decrees … establishing the character of the coconut levy funds as special, fiduciary, trust and governments; (b) confirming the agreement between …Cojuangco and PCA on the purchase of FUB by incorporating by reference said private commercial agreement in PD 755;

(iii) ….

(iv) To perpetuate his opportunity … to build his economic empire, … Cojuangco caused the issuance of an unconstitutional decree (PD 1468) requiring the deposit of all coconut levy funds with UCPB interest free to the prejudice of the government and finally

(v) Having fully established himself as the undisputed "coconut king" with unlimited powers to deal with the coconut levy funds, the stage was now set for Defendant Eduardo Cojuangco, Jr. to launch his predatory forays into almost all aspects of Philippine activity namely …. oil mills.

(vi) In gross violation of their fiduciary positions and in contravention of the goal to create a bank for coconut farmers of the country, the capital stock of UCPB as of February 25, 1986 was actually held by the defendants, their lawyers, factotum and business associates, thereby finally gaining control of the UCPB by misusing the

names and identities of the so-called "more than one million coconut farmers."

(b) created and/or funded with the use of coconut levy funds various corporations, such as … (COCOFED) … with the active collaboration and participation of Defendants Juan Ponce Enrile, Maria Clara Lobregat … most of whom comprised the interlocking officers and directors of said companies; dissipated, misused and/or misappropriated a substantial part of said coco levy funds … FINALLY GAIN OWNERSHIP AND CONTROL OF THE UNITED COCONUT PLANTERS BANK BY MISUSING THE NAMES AND/OR IDENTIFIES OF THE SO-CALLLED "MORE THAN ONE MILLION COCONUT FARNMERS;

(c) misappropriated, misused and dissipated P840 million of the … (CIDF) levy funds deposited with the National Development Corporation (NIDC) as administrator –trustee of said funds and later with UCPB, of which Defendant Eduardo Cojuangco, Jr. was the Chief Executive Officer….

(d) established and caused to be funded with coconut levy fundfs, with the active collaboration of Defendants Ferdinand E. Marcos through the issuance of LOI 926 and of [other] defendants … the United Coconut Oil Mills, Inc., a corporation controlled by Defendant Eduardo Cojuangco, Jr. and bought sixteen (16) certain competing oil mills at exorbitant prices … then mothballed them….

x x x           x x x          x x x

(i) misused coconut levy funds to buy majority of the outstanding shares of stock of San Miguel Corporation….

x x x           x x x          x x x

14. Defendants Eduardo Cojuangco, Jr. … of the Angara Concepcion Cruz Regala and Abello law offices (ACCRA) plotted, devised, schemed, conspired and confederated with each other in setting up, through the use of the coconut levy funds the financial and corporate structures that led to the establishment of UCPB UNICOM [etc.] and more than twenty other coconut levy funded corporations including the acquisition of [SMC] shares and its institutionalization through presidential directives of the coconut monopoly….

x x x           x x x          x x x

16. The acts of Defendants, singly or collectively, and /or in unlawful concert with one another, constitute gross abuse of official position and authority, flagrant breach of public trust and fiduciary obligations, brazen abuse of right and power, unjust enrichment, violation of the Constitution and laws … to the grave and irreparable damage of the Plaintiff and the Filipino people.

CC No. 0033-F

12. Defendant Eduardo Cojuangco, Jr., served as a public officer during the Marcos administration….

13. Having fully established himself as the undisputed "coconut king" with unlimited powers to deal with the coconut levy funds, the stage was now set for … Cojuangco, Jr. to launch his predatory forays into almost all aspects of Philippine economic activity namely … oil mills ….

14. Defendant Eduardo Cojuangco, Jr., taking undue advantage of his association, influence, and connection, acting in unlawful concert with Defendants Ferdinand E. Marcos and Imelda R. Marcos, and the individual defendants, embarked upon devices, schemes and stratagems, including the use of defendant corporations as fronts, to unjustly enrich themselves at the expense of Plaintiff and the Filipino people….

(a) Having control over the coconut levy, Defendant Eduardo M. Cojuangco invested the funds in diverse activities, such as the various businesses SMC was engaged in….;

x x x           x x x          x x x

(c) Later that year [1983], Cojuangco also acquired the Soriano stocks through a series of complicated and secret agreements, a key feature of which was a "voting trust agreement" that stipulated that Andres, Jr. or his heir would proxy over the vote of the shares owned by Soriano and Cojuangco….

x x x           x x x          x x x

(g) All together, Cojuangco purchased 33 million shares of the SMC through the … 14 holding companies

x x x           x x x          x x x

3.1. The same fourteen companies were in turn owned by the … six (6) so-called CIIF Companies….

(h) Defendant Corporations are but "shell" corporations owned by interlocking shareholders who have previously admitted that they are just "nominee stockholders" who do not have any proprietary interest over the shares in their names…. [L]awyers of the Angara Abello Concepcion Regala & Cruz (ACCRA) Law offices, the previous counsel who incorporated said corporations, prove that they were merely nominee stockholders thereof.

(l) These companies, which ACCRA Law Offices organized for Defendant Cojuangco to be able to control more than 60% of SMC shares, were funded by institutions which depended upon the coconut levy such as the UCPB, UNICOM, … (COCOLIFE), among others.

Cojuangco and his ACCRA lawyers used the funds from 6 large coconut oil mills and 10 copra trading companies to borrow money from the UCPB and purchase these holding companies and the SMC stocks. Cojuangco used $ 150 million from the coconut levy, broken down as follows:

Amount Source Purpose

(in million)

$ 22.26 Oil Mills equity in holding

Companies

$ 65.6 Oil Mills loan to holding

Companies

$ 61.2 UCPB loan to holding

Companies [164]

The entire amount, therefore, came from the coconut levy, some passing through the Unicom Oil mills, others directly from the UCPB.

(m) With his entry into the said Company, it began to get favors from the Marcos government, significantly the lowering of the excise taxes … on beer, one of the main products of SMC.

15. Defendants … plotted, devised, schemed, conspired and confederated with each other in setting up, through the use of coconut levy funds, the financial and corporate framework and structures that led to the establishment of UCPB, [etc.], and more than twenty other coconut levy-funded corporations, including the acquisition of [SMC] shares and its

institutionalization through presidential directives of the coconut monopoly….

16. The acts of Defendants, singly or collectively, and/or in unlawful concert with one another, constitute gross abuse of official position and authority, flagrant breach of public trust and fiduciary obligations, brazen abuse of right and power, unjust enrichment, violation of the constitution and laws of the Republic of the Philippines, to the grave and irreparable damage of Plaintiff and the Filipino people.73

Judging from the allegations of the defendants’ illegal acts thereat made, it is fairly obvious that both CC Nos. 0033-A and CC 0033-F partake, in the context of EO Nos. 1, 2 and 14, series of 1986, the nature of ill-gotten wealth suits. Both deal with the recovery of sequestered shares, property or business enterprises claimed, as alleged in the corresponding basic complaints, to be ill-gotten assets of President Marcos, his cronies and nominees and acquired by taking undue advantage of relationships or influence and/or through or as a result of improper use, conversion or diversion of government funds or property. Recovery of these assets––determined as shall hereinafter be discussed as prima facie ill-gotten––falls within the unquestionable jurisdiction of the Sandiganbayan.74

P.D. No. 1606, as amended by R.A. 7975 and E.O. No. 14, Series of 1986, vests the Sandiganbayan with, among others, original jurisdiction over civil and criminal cases instituted pursuant to and in connection with E.O. Nos. 1, 2, 14 and 14-A. Correlatively, the PCGG Rules and Regulations defines the term "Ill-Gotten Wealth" as "any asset, property, business enterprise or material possession of persons within the purview of [E.O.] Nos. 1 and 2, acquired by them directly, or indirectly thru dummies, nominees, agents, subordinates and/or business associates by any of the following means or similar schemes":

(1) Through misappropriation, conversion, misuse or malversation of public funds or raids on the public treasury;

(2) ….;

(3) By the illegal or fraudulent conveyance or disposition of assets belonging to the government or any of its subdivisions, agencies or instrumentalities or government-owned or controlled corporations;

(4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation in any business enterprise or undertaking;

(5) Through the establishment of agricultural, industrial or commercial monopolies or other combination and/or by the issuance, promulgation and/or implementation of decrees and orders intended to benefit particular persons or special interests; and

(6) By taking undue advantage of official position, authority, relationship or influence for personal gain or benefit.75 (Emphasis supplied)

Section 2(a) of E.O. No. 1 charged the PCGG with the task of assisting the President in "[T]he recovery of all ill-gotten wealth accumulated by former … [President] Marcos, his immediate family, relatives, subordinates and close associates … including the takeover or sequestration of all business enterprises and entities owned or controlled by them, during his administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship." Complementing the aforesaid Section 2(a) is Section 1 of E.O. No. 2 decreeing the freezing of all assets "in which the [Marcoses] their close relatives, subordinates, business associates, dummies, agents or nominees have any interest or participation."

The Republic’s averments in the amended complaints, particularly those detailing the alleged wrongful acts of the defendants, sufficiently reveal that the subject matter thereof

comprises the recovery by the Government of ill-gotten wealth acquired by then President Marcos, his cronies or their associates and dummies through the unlawful, improper utilization or diversion of coconut levy funds aided by P.D. No. 755 and other sister decrees. President Marcos himself issued these decrees in a brazen bid to legalize what amounts to private taking of the said public funds.

Petitioners COCOFED et al. and Ursua, however, would insist that the Republic has failed to prove the jurisdiction facts: that the sequestered assets indeed constitute ill-gotten wealth as averred in the amended subdivided complaints.

This contention is incorrect.

There was no actual need for Republic, as plaintiff a quo, to adduce evidence to show that the Sandiganbayan has jurisdiction over the subject matter of the complaints as it leaned on the averments in the initiatory pleadings to make visible the jurisdiction of the Sandiganbayan over the ill-gotten wealth complaints. As previously discussed, a perusal of the allegations easily reveals the sufficiency of the statement of matters disclosing the claim of the government against the coco levy funds and the assets acquired directly or indirectly through said funds as ill-gotten wealth. Moreover, the Court finds no rule that directs the plaintiff to first prove the subject matter jurisdiction of the court before which the complaint is filed. Rather, such burden falls on the shoulders of defendant in the hearing of a motion to dismiss anchored on said ground or a preliminary hearing thereon when such ground is alleged in the answer.

COCOFED et al. and Ursua’s reliance on Manila Electric Company [Meralco] v. Ortanez76 is misplaced, there being a total factual dissimilarity between that and the case at bar. Meralco involved a labor dispute before the Court of Industrial Relations (CIR) requiring the interpretation of a collective bargaining agreement to determine which between a regular court and CIR has jurisdiction. There, it was held that in case of

doubt, the case may not be dismissed for failure to state a cause of action as jurisdiction of CIR is not merely based on the allegations of the complaint but must be proved during the trial of the case. The factual milieu of Meralco shows that the said procedural holding is peculiar to the CIR. Thus, it is not and could not be a precedent to the cases at bar.

Even PCGG v. Nepomuceno77 is not on all fours with the cases at bench, the issue therein being whether the regional trial court has jurisdiction over the PCGG and sequestered properties, vis-à-vis the present cases, which involve an issue concerning the Sandiganbayan’s jurisdiction. Like in Meralco, the holding in Nepomuceno is not determinative of the outcome of the cases at bar.

While the 1964 Meralco and the Nepomuceno cases are inapplicable, the Court’s ruling in Tijam v. Sibonhonoy78 is the leading case on estoppel relating to jurisdiction. In Tijam, the Court expressed displeasure on "the undesirable practice of a party submitting his case for decision and then accepting judgment, only if favorable, and then attacking it for lack of jurisdiction, when adverse."

Considering the antecedents of CC Nos. 0033-A and 0033-F, COCOFED, Lobregat, Ballares, et al. and Ursua are already precluded from assailing the jurisdiction of the Sandiganbayan. Remember that the COCOFED and the Lobregat group were not originally impleaded as defendants in CC No. 0033. They later asked and were allowed by the Sandiganbayan to intervene. If they really believe then that the Sandiganbayan is without jurisdiction over the subject matter of the complaint in question, then why intervene in the first place? They could have sat idly by and let the proceedings continue and would not have been affected by the outcome of the case as they can challenge the jurisdiction of the Sandiganbayan when the time for implementation of the flawed decision comes. More importantly, the decision in the case will have no effect on them since they were not impleaded as indispensable parties. After all, the joinder of all indispensable parties to a suit is not only

mandatory, but jurisdictional as well.79 By their intervention, which the Sandiganbayan allowed per its resolution dated September 30, 1991, COCOFED and Ursua have clearly manifested their desire to submit to the jurisdiction of the Sandiganbayan and seek relief from said court. Thereafter, they filed numerous pleadings in the subdivided complaints seeking relief and actively participated in numerous proceedings. Among the pleadings thus filed are the Oppositions to the Motion for Intervention interposed by the Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa sa Niyogan and Gabay ng Mundo sa Kaunlaran Foundation, Inc., a Class Action Omnibus Motion to enjoin the PCGG from voting the SMC shares dated February 23, 2001 (granted by Sandiganbayan) and the Class Action Motion for a Separate Summary Judgment dated April 11, 2001. By these acts, COCOFED et al. are now legally estopped from asserting the Sandiganbayn’s want of jurisdiction, if that be the case, over the subject matter of the complaint as they have voluntarily yielded to the jurisdiction of the Sandiganbayan. Estoppel has now barred the challenge on Sandiganbayan’s jurisdiction.

The ensuing excerpts from Macahilig v. Heirs of Magalit80 are instructive:

We cannot allow her to attack its jurisdiction simply because it rendered a Decision prejudicial to her position. Participation in all stages of a case before a trial court effectively estops a party from challenging its jurisdiction. One cannot belatedly reject or repudiate its decision after voluntarily submitting to its jurisdiction, just to secure affirmative relief against one’s opponent or after failing to obtain such relief. If, by deed or conduct, a party has induced another to act in a particular manner, estoppel effectively bars the former from adopting an inconsistent position, attitude or course of conduct that thereby causes loss or injury to the latter.

Lest it be overlooked, this Court has already decided that the sequestered shares are prima facie ill-gotten wealth rendering the issue of the validity of their sequestration and of the

jurisdiction of the Sandiganbayan over the case beyond doubt. In the case of COCOFED v. PCGG,81 We stated that:

It is of course not for this Court to pass upon the factual issues thus raised. That function pertains to the Sandiganbayan in the first instance. For purposes of this proceeding, all that the Court needs to determine is whether or not there is prima facie justification for the sequestration ordered by the PCGG. The Court is satisfied that there is. The cited incidents, given the public character of the coconut levy funds, place petitioners COCOFED and its leaders and officials, at least prima facie, squarely within the purview of Executive Orders Nos. 1, 2 and 14, as construed and applied in BASECO, to wit:

"1. that ill-gotten properties (were) amassed by the leaders and supporters of the previous regime;

"a. more particularly, that ‘(i)ll-gotten wealth was accumulated by … Marcos, his immediate family, relatives, subordinates and close associates, …. (and) business enterprises and entities (came to be) owned or controlled by them, during … (the Marcos) administration, directly or through nominees, by taking undue advantage of their public office and using their powers, authority, influence, connections or relationships’;

"b. otherwise stated, that ‘there are assets and properties purportedly pertaining to [the Marcoses], their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the Government …or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment ….;

x x x           x x x          x x x

2. The petitioners’ claim that the assets acquired with the coconut levy funds are privately owned by the coconut farmers is founded on certain provisions of law, to wit [Sec. 7, RA 6260 and Sec. 5, Art. III, PD 1468]… (Words in bracket added; italics in the original).

In their attempt to dismiss the amended complaints in question, petitioners asseverate that (1) the coconut farmers cannot be considered as "subordinates, close and/or business associates, dummies, agents and nominees" of Cojuangco, Jr. or the Marcoses, and (2) the sequestered shares were not illegally acquired nor acquired "through or as result of improper or illegal use or conversion of funds belonging to the Government." While not saying so explicitly, petitioners are doubtless conveying the idea that wealth, however acquired, would not be considered "ill-gotten" in the context of EO 1, 2 and 14, s. of 1986, absent proof that the recipient or end possessor thereof is outside the Marcos’ circle of friends, associates, cronies or nominees.

We are not convinced.

As may be noted, E.O. 1 and 2 advert to President Marcos, or his associates’ nominees. In its most common signification, the term "nominee" refers to one who is designated to act for another usually in a limited way; 82 a person in whose name a stock or bond certificate is registered but who is not the actual owner thereof is considered a nominee."83 Corpus Juris Secundum describes a nominee as one:

… designated to act for another as his representative in a rather limited sense. It has no connotation, however, other than that of acting for another, in representation of another or as the grantee of another. In its commonly accepted meaning the term connoted the delegation of authority to the nominee in a representative or nominal capacity only, and does not connote the transfer or assignment to the nominee of any property in, or ownership of, the rights of the person nominating him.84

So, the next question that comes to the fore is: would the term "nominee" include the more than one million coconut farmers alleged to be the recipients of the UCPB shares?

Guided by the foregoing definitions, the query must be answered in the affirmative if only to give life to those executive issuances aimed at ensuring the recovery of ill-gotten wealth. It is basic, almost elementary, that:

Laws must receive a sensible interpretation to promote the ends for which they are enacted. They should be so given reasonable and practical construction as will give life to them, if it can be done without doing violence to reason. Conversely, a law should not be so construed as to allow the doing of an act which is prohibited by law, not so interpreted as to afford an opportunity to defeat compliance with its terms, create an inconsistency, or contravene the plain words of the law. Interpretatio fienda est ut res magis valeat quam pereat or that interpretation as will give the thing efficacy is to be adopted.85

E.O. 1, 2, 14 and 14-A, it bears to stress, were issued precisely to effect the recovery of ill-gotten assets amassed by the Marcoses, their associates, subordinates and cronies, or through their nominees. Be that as it may, it stands to reason that persons listed as associated with the Marcoses86 refer to those in possession of such ill-gotten wealth but holding the same in behalf of the actual, albeit undisclosed owner, to prevent discovery and consequently recovery. Certainly, it is well-nigh inconceivable that ill-gotten assets would be distributed to and left in the hands of individuals or entities with obvious traceable connections to Mr. Marcos and his cronies. The Court can take, as it has in fact taken, judicial notice of schemes and machinations that have been put in place to keep ill-gotten assets under wraps. These would include the setting up of layers after layers of shell or dummy, but controlled, corporations87 or manipulated instruments calculated to confuse if not altogether mislead would-be investigators from recovering wealth deceitfully amassed at the expense of the people or simply the fruits thereof. Transferring the illegal assets to third

parties not readily perceived as Marcos cronies would be another. So it was that in PCGG v. Pena, the Court, describing the rule of Marcos as a "well entrenched plundering regime of twenty years," noted the magnitude of the past regime’s organized pillage and the ingenuity of the plunderers and pillagers with the assistance of experts and the best legal minds in the market.88

Hence, to give full effect to E.O. 1, 2 and 14, s. of 1986, the term "nominee," as used in the above issuances, must be taken to mean to include any person or group of persons, natural or juridical, in whose name government funds or assets were transferred to by Pres. Marcos, his cronies or his associates. To this characterization must include what the Sandiganbayan considered the "unidentified" coconut farmers, more than a million of faceless and nameless coconut farmers, the alleged beneficiaries of the distributed UCPB shares, who, under the terms of Sec. 10 of PCA A.O. No. 1, s. of 1975, were required, upon the delivery of their respective stock certificates, to execute an irrevocable proxy in favor of the Bank’s manager. There is thus ample truth to the observations - "[That] the PCA provided this condition only indicates that the PCA had no intention to constitute the coconut farmer UCPB stockholder as a bona fide stockholder;" that the 1.5 million registered farmer-stockholders were "mere nominal stockholders."89

From the foregoing, the challenge on the Sandiganbayan’s subject matter jurisdiction at bar must fail.

IIPetitioners COCOFED et al. were not

deprived of their right to be heard.

As a procedural issue, COCOFED, et al. and Ursua next contend that in the course of almost 20 years that the cases have been with the anti-graft court, they have repeatedly sought leave to adduce evidence (prior to respondent’s complete presentation of evidence) to prove the coco farmers’ actual and beneficial ownership of the sequestered shares. The

Sandiganbayan, however, had repeatedly and continuously disallowed such requests, thus depriving them of their constitutional right to be heard.

This contention is untenable, their demand to adduce evidence being disallowable on the ground of prematurity.

The records reveal that the Republic, after adducing its evidence in CC No. 0033-A, subsequently filed a Motion Ad Cautelam for Leave to Present Additional Evidence dated March 28, 2001. This motion remained unresolved at the time the Republic interposed its Motion for Partial Summary Judgment. The Sandiganbayan granted the later motion and accordingly rendered the Partial Summary Judgment, effectively preempting the presentation of evidence by the defendants in said case (herein petitioners COCOFED and Ursua).

Section 5, Rule 30 the Rules of Court clearly sets out the order of presenting evidence:

SEC. 5. Order of trial.—Subject to the provisions of section 2 of Rule 31, and unless the court for special reasons otherwise directs, the trial shall be limited to the issues stated in the pre-trial order and shall proceed as follows:

(a) The plaintiff shall adduce evidence in support of his complaint;

(b) The defendant shall then adduce evidence in support of his defense, counterclaim, cross-claim and third-party complaint;

x x x           x x x          x x x

(g) Upon admission of the evidence, the case shall be deemed submitted for decision, unless the court directs the parties to argue or to submit their respective memoranda or any further pleadings.

If several defendants or third-party defendants, and so forth. having separate defenses appear by different counsel, the court shall determine the relative order of presentation of their evidence. (Emphasis supplied.)

Evidently, for the orderly administration of justice, the plaintiff shall first adduce evidence in support of his complaint and after the formal offer of evidence and the ruling thereon, then comes the turn of defendant under Section 3 (b) to adduce evidence in support of his defense, counterclaim, cross-claim and third party complaint, if any. Deviation from such order of trial is purely discretionary upon the trial court, in this case, the Sandiganbayan, which cannot be questioned by the parties unless the vitiating element of grave abuse of discretion supervenes. Thus, the right of COCOFED to present evidence on the main case had not yet ripened. And the rendition of the partial summary judgments overtook their right to present evidence on their defenses.

It cannot be stressed enough that the Republic as well as herein petitioners were well within their rights to move, as they in fact separately did, for a partial summary judgment. Summary judgment may be allowed where, save for the amount of damages, there is, as shown by affidavits and like evidentiary documents, no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. A "genuine issue", as distinguished from one that is fictitious, contrived and set up in bad faith, means an issue of fact that calls for the presentation of evidence.90 Summary or accelerated judgment, therefore, is a procedural technique aimed at weeding out sham claims or defenses at an early stage of the litigation.91 Sections 1, 2 and 4 of Rule 35 of the Rules of Court on Summary Judgment, respectively provide:

SECTION 1. Summary judgment for claimant.—A party seeking to recover upon a claim, counterclaim, or cross-claim … may, at any time after the pleading in answer thereto has been served, move with supporting affidavits, depositions or admissions for a summary judgment in his favor upon all or any part thereof.

SEC. 2. Summary judgment for defending party.—A party against whom a claim, counterclaim or cross-claim is asserted … is sought may, at any time, move with supporting affidavits, depositions or admissions for a summary judgment in his favor as to all or any part thereof.

SEC. 4. Case not fully adjudicated on motion.—If on motion under this Rule, judgment is not rendered upon the whole case or for all the reliefs sought and a trial is necessary, the court at the hearing of the motion, by examining the pleadings and the evidence before it and by interrogating counsel shall ascertain what material facts exist without substantial controversy and what are actually and in good faith controverted. It shall thereupon make an order specifying the facts that appear without substantial controversy, including the extent to which the amount of damages or other relief is not in controversy, and directing such further proceedings in the action as are just. The facts so specified shall be deemed established, and the trial shall be conducted on the controverted facts accordingly.

Clearly, petitioner COCOFED’s right to be heard had not been violated by the mere issuance of PSJ-A and PSJ-F before they can adduce their evidence.

As it were, petitioners COCOFED et al. were able to present documentary evidence in conjunction with its "Class Action Omnibus Motion" dated February 23, 2001 where they appended around four hundred (400) documents including affidavits of alleged farmers. These petitioners manifested that said documents comprise their evidence to prove the farmers’ ownership of the UCPB shares, which were distributed in accordance with valid and existing laws.92

Lastly, COCOFED et al. even filed their own Motion for Separate Summary Judgment, an event reflective of their admission that there are no more factual issues left to be determined at the level of the Sandiganbayan. This act of filing a motion for summary judgment is a judicial admission against COCOFED under Section 26, Rule 130 which declares that the

"act, declaration or omission of a party as to a relevant fact may be given in evidence against him."

Viewed in this light, the Court has to reject petitioners’ self-serving allegations about being deprived the right to adduce evidence.

IIIThe right to speedy trial was not violated.

This brings to the fore the alleged violation of petitioners’ right to a speedy trial and speedy disposition of the case. In support of their contention, petitioners cite Licaros v. Sandiganbayan,93 where the Court dismissed the case pending before the Sandiganbayan for violation of the accused’s right to a speedy trial.

It must be clarified right off that the right to a speedy disposition of case and the accused’s right to a speedy trial are distinct, albeit kindred, guarantees, the most obvious difference being that a speedy disposition of cases, as provided in Article III, Section 16 of the Constitution, obtains regardless of the nature of the case:

Section 16. All persons shall have the right to a speedy disposition of their cases before all judicial, quasi-judicial, or administrative bodies.

In fine, the right to a speedy trial is available only to an accused and is a peculiarly criminal law concept, while the broader right to a speedy disposition of cases may be tapped in any proceedings conducted by state agencies. Thus, in Licaros the Court dismissed the criminal case against the accused due to the palpable transgression of his right to a speedy trial.

In the instant case, the appropriate right involved is the right to a speedy disposition of cases, the recovery of ill-gotten wealth being a civil suit.

Nonetheless, the Court has had the occasion to dismiss several cases owing to the infringement of a party’s right to a speedy disposition of cases.94 Dismissal of the case for violation of this right is the general rule. Bernat v. The Honorable Sandiganbayan (5th Division)95 expounds on the extent of the right to a speedy disposition of cases as follows:

Section 16 of Article III of the Constitution guarantees the right of all persons to a "speedy disposition of their cases." Nevertheless, this right is deemed violated only when the proceedings are attended by vexatious, capricious and oppressive delays. Moreover, the determination of whether the delays are of said nature is relative and cannot be based on a mere mathematical reckoning of time. Particular regard must be taken of the facts and circumstances peculiar to each case. As a guideline, the Court in Dela Peña v. Sandiganbayan mentioned certain factors that should be considered and balanced, namely: 1) length of delay; 2) reasons for the delay; 3) assertion or failure to assert such right by the accused; and 4) prejudice caused by the delay.

x x x           x x x          x x x

While this Court recognizes the right to speedy disposition quite distinctly from the right to a speedy trial, and although this Court has always zealously espoused protection from oppressive and vexatious delays not attributable to the party involved, at the same time, we hold that a party’s individual rights should not work against and preclude the people’s equally important right to public justice. In the instant case, three people died as a result of the crash of the airplane that the accused was flying. It appears to us that the delay in the disposition of the case prejudiced not just the accused but the people as well. Since the accused has completely failed to assert his right seasonably and inasmuch as the respondent judge was not in a position to dispose of the case on the merits… we hold it proper and equitable to give the parties fair opportunity to obtain … substantial justice in the premises.

The more recent case of Tello v. People96 laid stress to the restrictive dimension to the right to speedy disposition of cases, i.e., it is lost unless seasonably invoked:

In Bernat …, the Court denied petitioner’s claim of denial of his right to a speedy disposition of cases considering that [he] … chose to remain silent for eight years before complaining of the delay in the disposition of his case. The Court ruled that petitioner failed to seasonably assert his right and he merely sat and waited from the time his case was submitted for resolution. In this case, petitioner similarly failed to assert his right to a speedy disposition of his case…. He only invoked his right to a speedy disposition of cases after [his conviction]…. Petitioner’s silence may be considered as a waiver of his right.

An examination of the petitioners’ arguments and the cited indicia of delay would reveal the absence of any allegation that petitioners moved before the Sandiganbayan for the dismissal of the case on account of vexatious, capricious and oppressive delays that attended the proceedings. Following Tello, petitioners are deemed to have waived their right to a speedy disposition of the case. Moreover, delays, if any, prejudiced the Republic as well. What is more, the alleged breach of the right in question was not raised below. As a matter of settled jurisprudence, but subject to equally settled exception, an issue not raised before the trial court cannot be raised for the first time on appeal.97 The sporting idea forbidding one from pulling surprises underpins this rule. For these reasons, the instant case cannot be dismissed for the alleged violation of petitioners’ right to a speedy disposition of the case.

IV

Sections 1 and 2 of P.D. No. 755, Article III, Section 5 of P.D. No. 961 and Article III, Section 5 of P.D. No. 1468, are unconstitutional.

The Court may pass upon the constitutionality of P.D. Nos. 755, 961 and 1468.

Petitioners COCOFED et al. and Ursua uniformly scored the Sandiganbayan for abusing its power of judicial review and wrongly encroaching into the exclusive domain of Congress when it declared certain provisions of the coconut levy laws and PCA administrative issuances as unconstitutional.

We are not persuaded.

It is basic that courts will not delve into matters of constitutionality unless unavoidable, when the question of constitutionality is the very lis mota of the case, meaning, that the case cannot be legally resolved unless the constitutional issue raised is determined. This rule finds anchorage on the presumptive constitutionality of every enactment. Withal, to justify the nullification of a statute, there must be a clear and unequivocal breach of the Constitution. A doubtful or speculative infringement would simply not suffice.98

Just as basic is the precept that lower courts are not precluded from resolving, whenever warranted, constitutional questions, subject only to review by this Court.

To Us, the present controversy cannot be peremptorily resolved without going into the constitutionality of P.D. Nos. 755, 961 and 1468 in particular. For petitioners COCOFED et al. and Ballares et al. predicate their claim over the sequestered shares and necessarily their cause on laws and martial law issuances assailed by the Republic on constitutional grounds. Indeed, as aptly observed by the Solicitor General, this case is for the recovery of shares grounded on the invalidity of certain enactments, which in turn is rooted in the shares being public in character, purchased as they were by funds raised by the taxing and/or a mix of taxing and police powers of the state.99 As may be recalled, P.D. No. 755, under the policy-declaring provision, authorized the distribution of UCPB shares of stock free to coconut farmers. On the other hand, Section 2 of P.D. No. 755, hereunder quoted below, effectively authorized the PCA to utilize portions of the CCSF to pay the financial commitment of the farmers to acquire UCPB and to deposit portions of the

CCSF levies with UCPB interest free. And as there also provided, the CCSF, CIDF and like levies that PCA is authorized to collect shall be considered as non-special or fiduciary funds to be transferred to the general fund of the Government, meaning they shall be deemed private funds.

Section 2 of P.D. No. 755 reads:

Section 2. Financial Assistance. — To enable the coconut farmers to comply with their contractual obligations under the aforesaid Agreement, the [PCA] is hereby directed to draw and utilize the collections under the [CCSF] authorized to be levied by [PD] No. 232, as amended, to pay for the financial commitments of the coconut farmers under the said agreement and, except for [PCA’s] budgetary requirements …, all collections under the [CCSF] Levy and (50%) of the collections under the [CIDF] shall be deposited, interest free, with the said bank of the coconut farmers and such deposits shall not be withdrawn until the … the bank has sufficient equity capital …; and since the operations, and activities of the [PCA] are all in accord with the present social economic plans and programs of the Government, all collections and levies which the [PCA] is authorized to levy and collect such as but not limited to the [CCS Levy] and the [CIDF] … shall not be considered or construed, under any law or regulation, special and/or fiduciary funds and do not form part of the general funds of the national government within the contemplation of [P.D.] No. 711. (Emphasis supplied)

A similar provision can also be found in Article III, Section 5 of P.D. No. 961 and Article III, Section 5 of P.D. No. 1468, which We shall later discuss in turn:

P.D. No. 961

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the Coconut Industry Development Fund as well as all disbursements of said funds for the benefit of the coconut farmers as herein authorized shall not be construed or

interpreted, under any law or regulation, as special and/or fiduciary funds, or as part of the general funds of the national government within the contemplation of P.D. No. 711; nor as a subsidy, donation, levy, government funded investment, or government share within the contemplation of P.D. 898, the intention being that said Fund and the disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned by them in their own private capacities.100 (Emphasis Ours)

P.D. No. 1468

Section 5. Exemptions. The [CCSF] and the [CIDF] as well as all disbursement as herein authorized, shall not be construed or

interpreted, under nay law or regulation, as special and/or fiduciary funds, or as part of the general funds of the national

government within the contemplation of PD 711; nor as subsidy, donation, levy government funded investment, or government share within the contemplation of PD 898, the intention being

that said Fund and the disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned

by them in their private capacities….101 (Emphasis Ours.)

In other words, the relevant provisions of P.D. Nos. 755, as well as those of P.D. Nos. 961 and 1468, could have been the only plausible means by which close to a purported million and a half coconut farmers could have acquired the said shares of stock. It has, therefore, become necessary to determine the validity of the authorizing law, which made the stock transfer and acquisitions possible.

To reiterate, it is of crucial importance to determine the validity of P.D. Nos. 755, 961 and 1468 in light of the constitutional proscription against the use of special funds save for the purpose it was established. Otherwise, petitioners’ claim of legitimate private ownership over UCPB shares and indirectly over SMC shares held by UCPB’s subsidiaries will have no leg to stand on, P.D. No. 755 being the only law authorizing the distribution of the SMC and UCPB shares of stock to coconut

farmers, and with the aforementioned provisions actually stating and holding that the coco levy fund shall not be considered as a special – not even general – fund, but shall be owned by the farmers in their private capacities.102

The Sandiganbayan’s ensuing ratiocination on the need to pass upon constitutional issues the Republic raised below commends itself for concurrence:

This Court is convinced of the imperative need to pass upon the issues of constitutionality raised by Plaintiff. The issue of constitutionality of the provisions of P.D. No. 755 and the laws related thereto goes to the very core of Plaintiff’s causes of action and defenses thereto. It will serve the best interest of justice to define this early the legal framework within which this case shall be heard and tried, taking into account the admission of the parties and the established facts, particularly those relating to the main substance of the defense of Lobregat, COCOFED, et al. and Ballares, et al., which is anchored on the laws being assailed by Plaintiff on constitutional grounds.

x x x           x x x          x x x

The Court is also mindful that lower courts are admonished to observe a becoming modesty in examining constitutional questions, but that they are nonetheless not prevented from resolving the same whenever warranted, subject only to review by the highest tribunal (Ynot v. Intermediate Appellate Court).

x x x           x x x          x x x

It is true that, as a general rule, the question of constitutionality must be raised at the earliest opportunity. The Honorable Supreme Court … has clearly stated that the general rule

admits of exceptions, thus:

x x x           x x x          x x x

‘For courts will pass upon a constitutional question only when presented before it in bona fide cases for determination, and the fact that the question has not been raised before is not a valid reason for refusing to allow it to be raised later…. It has been held that the determination of a constitutional question is necessary whenever it is essential to the decision of the case … as where the right of a party is founded solely on a statute, the validity of which is attacked.’

In the case now before us, the allegations of the Subdivided Complaint are consistent with those in the subject Motion, and they sufficiently raise the issue of constitutionality of the provisions of laws in question. The Third Amended Complaint (Subdivided) states:

‘(ii) to legitimize a posteriori his highly anomalous and irregular use and diversion of government funds to advance his own private and commercial interests, … Cojuangco, Jr. caused the issuance … of PD 755 (a) declaring that the coconut levy funds shall not be considered special and fiduciary and trusts funds and do not form part of the general funds of the National Government, conveniently repealing for that purpose a series of coconut levy funds as special, fiduciary, trust and government funds….

x x x           x x x          x x x

‘(iv) To perpetuate his opportunity to deal with and make use the coconut levy funds to build his economic empire, Cojuangco, Jr. caused the issuance by Defendant Ferdinand E. Marcos of an unconstitutional decree (PD 1468) requiring the deposit of all coconut levy funds with UCPB, interest free, to the prejudice of the government.’

The above-quoted allegations in the Third Amended Complaint (Subdivided) already question the "legitimacy" of the exercise by former President Marcos of his legislative authority when he issued P.D. Nos. 755 and 1468. The provision of Sec. 5, Art. III of P.D. 961 is substantially similar to the provisions of the

aforesaid two [PDs]. P.D. No. 755 allegedly legitimized the "highly anomalous and irregular use and diversion of government funds to advance his [defendant Cojuangco’s] own private and commercial interest." The issuance of the said [PD] which has the force and effect of a law can only be assailed on constitutional grounds. The merits of the grounds adverted to in the allegations of the Third Amended Complaint (Subdivided) can only be resolved by this Court by testing the questioned [PDs], which are considered part of the laws of the land….

As early as June 20, 1989, this Court in its Resolution expressed this Court’s understanding of the import of the allegations of the complaint, as follows:

"It is likewise alleged in the Complaint that in order to legitimize the diversion of funds, defendant Ferdinand E. Marcos issued the Presidential Decrees referred to by the movants. This is then the core of Plaintiff’s complaint: that, insofar as the coconut levy is concerned, these decrees had been enacted as tools for the acquisition of ill-gotten wealth for specific favored individuals.

"Even if Plaintiff may not have said so effectively, the complaint in fact disputes the legitimacy, and, if one pleases, the constitutionality of such enactments….

"The issue is validly raised on the face of the complaint and defendants must respond to it."

Since … the question of constitutionality … may be raised even on appeal if the determination of such a question is essential to the decision of the case, we find more reason to resolve this constitutional question at this stage of the proceedings, where the defense is grounded solely on the very laws the constitutionality of which are being questioned and where the evidence of the defendants would seek mainly to prove their faithful and good faith compliance with the said laws and their implementing rules and regulations.103 (Emphasis added.)

The Court’s rulings in COCOFED v. PCGG and Republic v. Sandiganbayan, as law of the case, are speciously invoked .

To thwart the ruling on the constitutionality of P.D. Nos. 755, 961 and 1468, petitioners would sneak in the argument that the Court has, in three separate instances, upheld the validity, and thumbed down the Republic’s challenge to the constitutionality, of said laws imposing the different coconut levies and prescribing the uses of the fund collected. The separate actions of the Court, petitioners add, would conclude the Sandiganbayan on the issue of constitutionality of said issuances, following the law-of-the-case principle. Petitioners allege:

Otherwise stated, the decision of this Honorable Court in the COCOFED Case overruling the strict public fund theory espoused by the Respondent Republic, upholding the propriety of the laws imposing the collections of the different Coconut Levies and expressly allowing COCOFED, et al., to prove that the Sequestered Assets have legitimately become their private properties had become final and immutable.104

Petitioners are mistaken.

Yu v. Yu,105 as effectively reiterated in Vios v. Pantangco,106 defines and explains the ramifications of the law of the case principle as follows:

Law of the case has been defined as the opinion delivered on a former appeal. It is a term applied to an established rule that when an appellate court passes on a question and remands the case to the lower court for further proceedings, the question there settled becomes the law of the case upon subsequent appeal. It means that whatever is once irrevocably established as the controlling legal rule or decision between the same parties in the same case continues to be the law of the case, … so long as the facts on which such decision was predicated continue to be the facts of the case before the court.

Otherwise put, the principle means that questions of law that have been previously raised and disposed of in the proceedings shall be controlling in succeeding instances where the same legal question is raised, provided that the facts on which the legal issue was predicated continue to be the facts of the case before the court. Guided by this definition, the law of the case principle cannot provide petitioners any comfort. We shall explain why.

In the first instance, petitioners cite COCOFED v. PCGG.107 There, respondent PCGG questioned the validity of the coconut levy laws based on the limits of the state’s taxing and police power, as may be deduced from the ensuing observations of the Court:

…. Indeed, the Solicitor General suggests quite strongly that the laws operating or purporting to convert the coconut levy funds into private funds, are a transgression of the basic limitations for the licit exercise of the state's taxing and police powers, and that certain provisions of said laws are merely clever stratagems to keep away government audit in order to facilitate misappropriation of the funds in question.

The utilization and proper management of the coconut levy funds, [to acquire shares of stocks for coconut farmers and workers] raised as they were by the State’s police and taxing power are certainly the concern of the Government…. The coconut levy funds are clearly affected with public interest. Until it is demonstrated satisfactorily that they have legitimately become private funds, they must prima facie be accounted subject to measures prescribed in EO Nos. 1, 2, and 14 to prevent their concealment, dissipation, etc….108 [Words in bracket added.]

The issue, therefore, in COCOFED v. PCGG turns on the legality of the transfer of the shares of stock bought with the coconut levy funds to coconut farmers. This must be distinguished with the issues in the instant case of whether P.D. No. 755 violated Section 29, paragraph 3 of Article VI of the

1987 Constitution as well as to whether P.D. No. 755 constitutes undue delegation of legislative power. Clearly, the issues in both sets of cases are so different as to preclude the application of the law of the case rule.

The second and third instances that petitioners draw attention to refer to the rulings in Republic v. Sandiganbayan, where the Court by Resolution of December 13, 1994, as reiterated in another resolution dated March 26, 1996, resolved to deny the separate motions of the Republic to resolve legal questions on the character of the coconut levy funds, more particularly to declare as unconstitutional (a) coconut levies collected pursuant to various issuances as public funds and (b) Article III, Section 5 of P.D. No. 1468.

Prescinding from the foregoing considerations, petitioners would state: "Having filed at least three (3) motions … seeking, among others, to declare certain provisions of the Coconut Levy Laws unconstitutional and having been rebuffed all three times by this Court," the Republic - and necessarily Sandiganbayan – "should have followed as [they were] legally bound by this … Court’s prior determination" on that above issue of constitutionality under the doctrine of Law of the Case.

Petitioners are wrong. The Court merely declined to pass upon the constitutionality of the coconut levy laws or some of their provisions. It did not declare that the UCPB shares acquired with the use of coconut levy funds have legitimately become private.

The coconut levy funds are in the nature of taxes and can only be used for public purpose. Consequently, they cannot be used to purchase shares of stocks to be given for free to private individuals.

Indeed, We have hitherto discussed, the coconut levy was imposed in the exercise of the State’s inherent power of taxation. As We wrote in Republic v. COCOFED:109

Indeed, coconut levy funds partake of the nature of taxes, which, in general, are enforced proportional contributions from persons and properties, exacted by the State by virtue of its sovereignty for the support of government and for all public needs.

Based on its definition, a tax has three elements, namely: a) it is an enforced proportional contribution from persons and properties; b) it is imposed by the State by virtue of its sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall squarely into these elements for the following reasons:

(a) They were generated by virtue of statutory enactments imposed on the coconut farmers requiring the payment of prescribed amounts. Thus, PD No. 276, which created the Coconut Consumer[s] Stabilization Fund (CCSF), mandated the following:

"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in other coconut products, shall be imposed on every first sale, in accordance with the mechanics established under RA 6260, effective at the start of business hours on August 10, 1973.

"The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the Coconut Consumers Stabilization Fund, as a separate trust fund which shall not form part of the general fund of the government."

The coco levies were further clarified in amendatory laws, specifically PD No. 961 and PD No. 1468 – in this wise:

"The Authority (PCA) is hereby empowered to impose and collect a levy, to be known as the Coconut Consumers Stabilization Fund Levy, on every one hundred kilos of copra resecada, or its equivalent … delivered to, and/or purchased by, copra exporters, oil millers, desiccators and other end-users of

copra or its equivalent in other coconut products. The levy shall be paid by such copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products under such rules and regulations as the Authority may prescribe. Until otherwise prescribed by the Authority, the current levy being collected shall be continued."

Like other tax measures, they were not voluntary payments or donations by the people. They were enforced contributions exacted on pain of penal sanctions, as provided under PD No. 276:

"3. Any person or firm who violates any provision of this Decree or the rules and regulations promulgated thereunder, shall, in addition to penalties already prescribed under existing administrative and special law, pay a fine of not less than P2,500 or more than P10,000, or suffer cancellation of licenses to operate, or both, at the discretion of the Court."

Such penalties were later amended thus: ….

(b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative authorities of the State. Indeed, the CCSF was collected under PD No. 276…."

(c) They were clearly imposed for a public purpose. There is absolutely no question that they were collected to advance the government’s avowed policy of protecting the coconut industry. This Court takes judicial notice of the fact that the coconut industry is one of the great economic pillars of our nation, and coconuts and their byproducts occupy a leading position among the country’s export products….

Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the stabilization of a threatened industry, which is so affected with public interest as to be within the police power of the State….

Even if the money is allocated for a special purpose and raised by special means, it is still public in character…. In Cocofed v. PCGG, the Court observed that certain agencies or enterprises "were organized and financed with revenues derived from coconut levies imposed under a succession of law of the late dictatorship … with deposed Ferdinand Marcos and his cronies as the suspected authors and chief beneficiaries of the resulting coconut industry monopoly." The Court continued: "…. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. It is, therefore, the State’s concern to make it a strong and secure source not only of the livelihood of a significant segment of the population, but also of export earnings the sustained growth of which is one of the imperatives of economic stability.110 (Emphasis Ours)

We have ruled time and again that taxes are imposed only for a public purpose.111 "They cannot be used for purely private purposes or for the exclusive benefit of private persons."112 When a law imposes taxes or levies from the public, with the intent to give undue benefit or advantage to private persons, or the promotion of private enterprises, that law cannot be said to satisfy the requirement of public purpose.113 In Gaston v. Republic Planters Bank, the petitioning sugar producers, sugarcane planters and millers sought the distribution of the shares of stock of the Republic Planters Bank, alleging that they are the true beneficial owners thereof.114 In that case, the investment, i.e., the purchase of the said bank, was funded by the deduction of PhP 1.00 per picul from the sugar proceeds of the sugar producers pursuant to P.D. No. 388.115 In ruling against the petitioners, the Court held that to rule in their favor would contravene the general principle that revenues received from the imposition of taxes or levies "cannot be used for purely private purposes or for the exclusive benefit of private persons."116 The Court amply reasoned that the Stabilization Fund must "be utilized for the benefit of the entire sugar industry, and all its components, stabilization of the domestic market including foreign market, the industry being of vital importance to the country’s economy and to national interest."117

Similarly in this case, the coconut levy funds were sourced from forced exactions decreed under P.D. Nos. 232, 276 and 582, among others,118 with the end-goal of developing the entire coconut industry.119 Clearly, to hold therefore, even by law, that the revenues received from the imposition of the coconut levies be used purely for private purposes to be owned by private individuals in their private capacity and for their benefit, would contravene the rationale behind the imposition of taxes or levies.

Needless to stress, courts do not, as they cannot, allow by judicial fiat the conversion of special funds into a private fund for the benefit of private individuals. In the same vein, We cannot subscribe to the idea of what appears to be an indirect – if not exactly direct – conversion of special funds into private funds, i.e., by using special funds to purchase shares of stocks, which in turn would be distributed for free to private individuals. Even if these private individuals belong to, or are a part of the coconut industry, the free distribution of shares of stocks purchased with special public funds to them, nevertheless cannot be justified. The ratio in Gaston,120 as expressed below, applies mutatis mutandis to this case:

The stabilization fees in question are levied by the State … for a special purpose – that of "financing the growth and development of the sugar industry and all its components, stabilization of the domestic market including the foreign market." The fact that the State has taken possession of moneys pursuant to law is sufficient to constitute them as state funds even though they are held for a special purpose….

That the fees were collected from sugar producers,[etc.], and that the funds were channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fund for their benefit nor make them the beneficial owners of the shares so purchased. It is but rational that the fees be collected from them since it is also they who are benefited from the expenditure of the funds derived from it. ….121 (Emphasis Ours.)

In this case, the coconut levy funds were being exacted from copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products.122 Likewise so, the funds here were channeled to the purchase of the shares of stock in UCPB. Drawing a clear parallelism between Gaston and this case, the fact that the coconut levy funds were collected from the persons or entities in the coconut industry, among others, does not and cannot entitle them to be beneficial owners of the subject funds – or more bluntly, owners thereof in their private capacity. Parenthetically, the said private individuals cannot own the UCPB shares of stocks so purchased using the said special funds of the government.123

Coconut levy funds are special public funds of the government.

Plainly enough, the coconut levy funds are public funds. We have ruled in Republic v. COCOFED that the coconut levy funds are not only affected with public interest; they are prima facie public funds.124 In fact, this pronouncement that the levies are government funds was admitted and recognized by respondents, COCOFED, et al., in G.R. No. 147062-64.125 And more importantly, in the same decision, We clearly explained exactly what kind of government fund the coconut levies are. We were categorical in saying that coconut levies are treated as special funds by the very laws which created them:

Finally and tellingly, the very laws governing the coconut levies recognize their public character. Thus, the third Whereas clause of PD No. 276 treats them as special funds for a specific public purpose. Furthermore, PD No. 711 transferred to the general funds of the State all existing special and fiduciary funds including the CCSF. On the other hand, PD No. 1234 specifically declared the CCSF as a special fund for a special purpose, which should be treated as a special account in the National Treasury.126 (Emphasis Ours.)

If only to stress the point, P.D. No. 1234 expressly stated that coconut levies are special funds to be remitted to the Treasury

in the General Fund of the State, but treated as Special Accounts:

Section 1. All income and collections for Special or Fiduciary Funds authorized by law shall be remitted to the Treasury and treated as Special Accounts in the General Fund, including the following:

(a) [PCA] Development Fund, including all income derived therefrom under Sections 13 and 14 of [RA] No. 1145; Coconut Investments Fund under Section 8 of [RA] No. 6260, including earnings, profits, proceeds and interests derived therefrom; Coconut Consumers Stabilization Funds under Section 3-A of PD No. 232, as inserted by Section 3 of P.D. No. 232, as inserted by Section 2 of P.D. No. 583; and all other fees accruing to the [PCA] under the provisions of Section 19 of [RA] No. 1365, in accordance with Section 2 of P.D. No. 755 and all other income accruing to the [PCA] under existing laws.127 (Emphasis Ours)

Moreover, the Court, in Gaston, stated the observation that the character of a stabilization fund as a special fund "is emphasized by the fact that the funds are deposited in the Philippine National Bank [PNB] and not in the Philippine Treasury, moneys from which may be paid out only in pursuance of an appropriation made by law."128 Similarly in this case, Sec.1 (a) of P.D. No. 276 states that the proceeds from the coconut levy shall be deposited with the PNB, then a government bank, or any other government bank under the account of the CCSF, as a separate trust fund, which shall not form part of the government’s general fund.129 And even assuming arguendo that the coconut levy funds were transferred to the general fund pursuant to P.D. No. 1234, it was with the specific directive that the same be treated as special accounts in the general fund.130

The coconut levy funds can only be used for the special purpose and the balance thereof should revert back to the general fund. Consequently, their subsequent reclassification as

a private fund to be owned by private individuals in their private capacities under P.D. Nos. 755, 961 and 1468 are unconstitutional.

To recapitulate, Article VI, Section 29 (3) of the 1987 Constitution, restating a general principle on taxation, enjoins the disbursement of a special fund in accordance with the special purpose for which it was collected, the balance, if there be any, after the purpose has been fulfilled or is no longer forthcoming, to be transferred to the general funds of the government, thus:

Section 29(3)….

(3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. (Emphasis Ours)

Correlatively, Section 2 of P.D. No. 755 clearly states that:

Section 2. Financial Assistance. To enable the coconut farmers to comply with their contractual obligations under the aforesaid Agreement, the [PCA] is hereby directed to draw and utilize the collections under the Coconut Consumers Stabilization Fund [CCSF] authorized to be levied by [P.D.] 232, as amended, to pay for the financial commitments of the coconut farmers under the said agreement…. and the Coconut Industry Development Fund as prescribed by Presidential Decree No. 582 shall not be considered or construed, under any law or regulation, special and/or fiduciary funds and do not form part of the general funds of the national government within the contemplation of Presidential Decree No. 711. (Emphasis Ours)

Likewise, as discussed supra, Article III, Section 5 of both P.D. Nos. 961 and 1468 provides that the CCSF shall not be construed by any law as a special and/or trust fund, the stated

intention being that actual ownership of the said fund shall pertain to coconut farmers in their private capacities.131 Thus, in order to determine whether the relevant provisions of P.D. Nos. 755, 961 and 1468 complied with Article VI, Section 29 (3) of the 1987 Constitution, a look at the public policy or the purpose for which the CCSF levy was imposed is necessary.

The CCSF was established by virtue of P.D. No. 276 wherein it is stated that:

WHEREAS, an escalating crisis brought about by an abnormal situation in the world market for fats and oils has resulted in supply and price dislocations in the domestic market for coconut-based goods, and has created hardships for consumers thereof;

WHEREAS, the representatives of the coconut industry … have proposed the implementation of an industry-financed stabilization scheme which will permit socialized pricing of coconut-based commodities;

WHEREAS, it is the policy of the State to promote the welfare and economic well-being of the consuming public;

….

1. In addition to its powers granted under [P.D.] No. 232, the [PCA] is hereby authorized to formulate and immediately implement a stabilization scheme for coconut-based consumer goods, along the following general guidelines:

(a) ….The proceeds of the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the CCSF as a separate trust fund….

(b) The Fund shall be utilized to subsidize the sale of coconut-based products at prices set by the Price Control Council….:

….

As couched, P.D. No. 276 created and exacted the CCSF "to advance the government’s avowed policy of protecting the

coconut industry."132 Evidently, the CCSF was originally set up as a special fund to support consumer purchases of coconut products. To put it a bit differently, the protection of the entire

coconut industry, and even more importantly, for the consuming public provides the rationale for the creation of the coconut levy

fund. There can be no quibbling then that the foregoing provisions of P.D. No. 276 intended the fund created and set up therein not especially for the coconut farmers but for the entire coconut industry, albeit the improvement of the industry would

doubtless redound to the benefit of the farmers. Upon the foregoing perspective, the following provisions of P.D. Nos. 755,

961 and 1468 insofar as they declared, as the case may be, that: "[the coconut levy] fund and the disbursements thereof

[shall be] authorized for the benefit of the coconut farmers and shall be owned by them in their private capacities;"133 or the coconut levy fund shall not be construed by any law to be a

special and/or fiduciary fund, and do not therefore form part of the general fund of the national government later on;134 or the UCPB shares acquired using the coconut levy fund shall be

distributed to the coconut farmers for free,135 violated the special public purpose for which the CCSF was established.

In sum, not only were the challenged presidential issuances unconstitutional for decreeing the distribution of the shares of stock for free to the coconut farmers and, therefore, negating the public purpose declared by P.D. No. 276, i.e., to stabilize the price of edible oil136 and to protect the coconut industry.137 They likewise reclassified, nay treated, the coconut levy fund as private fund to be disbursed and/or invested for the benefit of private individuals in their private capacities, contrary to the original purpose for which the fund was created. To compound the situation, the offending provisions effectively removed the coconut levy fund away from the cavil of public funds which normally can be paid out only pursuant to an appropriation made by law.138 The conversion of public funds into private assets was illegally allowed, in fact mandated, by these provisions. Clearly therefore, the pertinent provisions of P.D.

Nos. 755, 961 and 1468 are unconstitutional for violating Article VI, Section 29 (3) of the Constitution. In this context, the distribution by PCA of the UCPB shares purchased by means of the coconut levy fund – a special fund of the government – to the coconut farmers, is therefore void.

We quote with approval the Sandiganbayan’s reasons for declaring the provisions of P.D. Nos. 755, 961 and 1468 as unconstitutional:

It is now settled, in view of the ruling in Republic v. COCOFED, et al., supra, that "Coconut levy funds are raised with the use of the police and taxing powers of the State;" that "they are levies imposed by the State for the benefit of the coconut industry and its farmers" and that "they were clearly imposed for a public purpose." This public purpose is explained in the said case, as follows:

…. c) They were clearly imposed for a public purpose. There is absolutely no question that they were colleted to advance the government’s avowed policy of protecting the coconut industry….

"Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the stabilization of a threatened industry, which is so affected with public interest as to be within the police power of the State, as held in Caltex Philippines v. COA and Osmeña v. Orbos.

x x x           x x x          x x x

The avowed public purpose for the disbursement of the CCSF is contained in the perambulatory clauses and Section 1 of P.D. No. 755. The imperativeness of enunciating the public purpose of the expenditure of funds raised through taxation is underscored in the case of Pascual v. The Secretary of Public Works and Communications, et al, supra, which held:

"As regards the legal feasibility of appropriating public funds for a private purpose the principle according to Ruling Case Law, is this:

‘It is a general rule that the legislature is without power to appropriate public revenue for anything but a public purpose … it is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax, and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare may be ultimately benefited by their promotion. Incidental advantage to the public or to the state, which results from the promotion of private interests and the prosperity of private enterprises or business, does not justify their aid by the use of public money.’ 25 R.L.C. pp. 398-400)

"The rule is set forth in Corpus Juris Secundum in the following language:

x x x           x x x          x x x

‘The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interests, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public….’ (81 C.J.S. p. 1147)

"Needless to say, this Court is fully in accord with the foregoing views…. Besides, reflecting as they do, the established jurisprudence in the United States, after whose constitutional system ours has been patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional law."

The gift of funds raised by the exercise of the taxing powers of the State which were converted into shares of stock in a private corporation, slated for free distribution to the coconut farmers, can only be accorded constitutional sanction if it will directly serve the public purpose declared by law….139

Section 1 of P.D. No. 755, as well as PCA Administrative Order No. 1, Series of 1975 (PCA AO 1), and Resolution No. 074-75, are invalid delegations of legislative power.

Petitioners argue that the anti-graft court erred in declaring Section 1 of PD 755, PCA Administrative Order No. 1 and PCA Resolution No. 074-78 constitutionally infirm by reason of alleged but unproven and unsubstantiated flaws in their implementation. Additionally, they explain that said court erred in concluding that Section 1 of PD No. 755 constitutes an undue delegation of legislative power insofar as it authorizes the PCA to promulgate rules and regulations governing the distribution of the UCPB shares to the farmers.

These propositions are meritless.

The assailed PSJ-A noted the operational distribution nightmare faced by PCA and the mode of distribution of UCPB shares set in motion by that agency left much room for diversion. Wrote the Sandiganbayan:

The actual distribution of the bank shares was admittedly an enormous operational problem which resulted in the failure of the intended beneficiaries to receive their shares of stocks in the bank, as shown by the rules and regulations, issued by the PCA, without adequate guidelines being provided to it by P.D. No. 755. PCA Administrative Order No. 1, Series of 1975 (August 20, 1975), "Rules and Regulations Governing the Distribution of Shares of Stock of the Bank Authorized to be Acquired Pursuant to PCA Board Resolution No. 246-75", quoted hereunder discloses how the undistributed shares of stocks due to anonymous coconut farmers or payors of the coconut levy fees were authorized to be distributed to existing shareholders of the Bank:

"Section 9. Fractional and Undistributed Shares – Fractional shares and shares which remain undistributed … shall be distributed to all the coconut farmers who have qualified and received equity in the Bank and shall be apportioned among

them, as far as practicable, in proportion to their equity in relation to the number of undistributed equity and such further rules and regulations as may hereafter be promulgated.’

The foregoing PCA issuance was further amended by Resolution No. 074-78, still citing the same problem of distribution of the bank shares….:

x x x           x x x          x x x

Thus, when 51,200,806 shares in the bank remained undistributed, the PCA deemed it proper to give a "bonanza" to coconut farmers who already got their bank shares, by giving them an additional share for each share owned by them and by converting their fractional shares into full shares. The rest of the shares were then transferred to a private organization, the COCOFED, for distribution to those determined to be "bona fide coconut farmers" who had "not received shares of stock of the Bank." ….

The PCA thus assumed, due to lack of adequate guidelines set by P.D. No. 755, that it had complete authority to define who are the coconut farmers and to decide as to who among the coconut farmers shall be given the gift of bank shares; how many shares shall be given to them, and what basis it shall use to determine the amount of shares to be distributed for free to the coconut farmers. In other words, P.D. No. 755 fails the completeness test which renders it constitutionally infirm.

Regarding the second requisite of standard, it is settled that legislative standard need not be expressed….

We observed, however, that the PCA [AO] No. 1, Series of 1975 and PCA Rules and Regulations 074-78, did not take into consideration the accomplishment of the public purpose or the national standard/policy of P.D. No. 755 which is directly to accelerate the development and growth of the coconut industry and as a consequence thereof, to make the coconut farmers "participants in and beneficiaries" of such growth and

development. The said PCA issuances did nothing more than provide guidelines as to whom the UCPB shares were to be distributed and how many bank shares shall be allotted to the beneficiaries. There was no mention of how the distributed shares shall be used to achieve exclusively or at least directly or primarily the aim or public purpose enunciated by P.D. No. 755. The numerical or quantitative distribution of shares contemplated by the PCA regulations which is a condition for the validly of said administrative issuances. There was a reversal of priorities. The narrow private interests prevailed over the laudable objectives of the law…. However, under the May 25, 1975 agreement implemented by the PCA issuances, the PCA acquired only 64.98% of the shares of the bank and even the shares covering the said 64.98% were later on transferred to non-coconut farmers."

The distribution for free of the shares of stock of the CIIF Companies is tainted with the above-mentioned constitutional infirmities of the PCA administrative issuances. In view of the foregoing, we cannot consider the provision of P.D. No. 961 and P.D. No. 1468 and the implementing regulations issued by the PCA as valid legal basis to hold that assets acquired with public funds have legitimately become private properties." 140 (Emphasis added.)

P.D. No. 755 involves an invalid delegation of legislative power, a concept discussed in Soriano v. Laguardia,141 citing the following excerpts from Edu v. Ericta:

It is a fundamental … that Congress may not delegate its legislative power…. What cannot be delegated is the authority … to make laws and to alter and repeal them; the test is the completeness of the statute in all its term and provisions when it leaves the hands of the legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope and definiteness of the measure enacted. The legislature does not abdicate its functions when it describes what job must be done, who is to do it, and what is the scope of his authority….

To avoid the taint of unlawful delegation, there must be a standard, which implies at the very least that the legislature itself determines matters of principle and lays down fundamental policy. Otherwise, the charge of complete abdication may be hard to repel. A standard thus defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. It is the criterion by which legislative purpose may be carried out. Thereafter, the executive or administrative office designated may in pursuance of the above guidelines promulgate supplemental rules and regulations.142 (Emphasis supplied)

Jurisprudence is consistent as regards the two tests, which must be complied with to determine the existence of a valid delegation of legislative power. In Abakada Guro Party List, et al. v. Purisima,143 We reiterated the discussion, to wit:

Two tests determine the validity of delegation of legislative power: (1) the completeness test and (2) the sufficient standard test. A law is complete when it sets forth therein the policy to be executed, carried out or implemented by the delegate. It lays down a sufficient standard when it provides adequate guidelines or limitations in the law to map out the boundaries of the delegate’s authority and prevent the delegation from running riot. To be sufficient, the standard must specify the limits of the delegate’s authority, announce the legislative policy and identify the conditions under which it is to be implemented.

In the instant case, the requisite standards or criteria are absent in P.D. No. 755. As may be noted, the decree authorizes the PCA to distribute to coconut farmers, for free, the shares of stocks of UCPB and to pay from the CCSF levy the financial commitments of the coconut farmers under the Agreement for the acquisition of such bank. Yet, the decree does not even state who are to be considered as coconut farmers. Would, say, one who plants a single coconut tree be already considered a coconut farmer and, therefore, entitled to own UCPB shares? If so, how many shares shall be given to him? The definition of a

coconut farmer and the basis as to the number of shares a farmer is entitled to receive for free are important variables to be determined by law and cannot be left to the discretion of the implementing agency.

Moreover, P.D. No. 755 did not identify or delineate any clear condition as to how the disposition of the UCPB shares or their conversion into private ownership will redound to the advancement of the national policy declared under it. To recall, P.D. No. 755 seeks to "accelerate the growth and development of the coconut industry and achieve a vertical integration thereof so that coconut farmers will become participants in, and beneficiaries of, such growth and development."144 The Sandiganbayan is correct in its observation and ruling that the said law gratuitously gave away public funds to private individuals, and converted them exclusively into private property without any restriction as to its use that would reflect the avowed national policy or public purpose. Conversely, the private individuals to whom the UCPB shares were transferred are free to dispose of them by sale or any other mode from the moment of their acquisition. In fact and true enough, the Sandiganbayan categorically stated in its Order dated March 11, 2003,145 that out of the 72.2% shares and increased capital stock of the FUB (later UCPB) allegedly covered by the May 25, 1975 Agreement,146 entirely paid for by PCA, 7.22% were given to Cojuangco and the remaining 64.98%, which were originally held by PCA for the benefit of the coconut farmers, were later sold or transferred to non-coconut farmers.147 Even the proposed rewording of the factual allegations of Lobregat, COCOFED, et al. and Ballares, et al., reveals that indeed, P.D. No. 755 did not provide for any guideline, standard, condition or restriction by which the said shares shall be distributed to the coconut farmers that would ensure that the same will be undertaken to accelerate the growth and development of the coconut industry pursuant to its national policy. The proposed rewording of admissions reads:

There were shares forming part of the aforementioned 64.98% which were, after their distribution, for free, to the coconut

farmers as required by P.D. No. 755, sold or transferred respectively by individual coconut farmers who were then the registered stockholders of those UCPB shares to non-coconut farmers.148

Clearly, P.D. No. 755, insofar as it grants PCA a veritable carte blanche to distribute to coconut farmers UCPB shares at the level it may determine, as well as the full disposition of such shares to private individuals in their private capacity without any conditions or restrictions that would advance the law’s national policy or public purpose, present a case of undue delegation of legislative power. As such, there is even no need to discuss the validity of the administrative orders and resolutions of PCA implementing P.D. No. 755. Water cannot rise higher than its source.

Even so, PCA AO 1 and PCA Resolution No. 078-74, are in themselves, infirm under the undue delegation of legislative powers. Particularly, Section 9 of PCA AO I provides:

SECTION 9. Fractional and Undistributed Shares – Fractional shares and shares which remain undistributed as a consequence of the failure of the coconut farmers to register their COCOFUND receipts or the destruction of the COCOFUND receipts or the registration of COCOFUND receipts in the name of an unqualified individual, after the final distribution is made on the basis of the consolidated IBM registration Report as of March 31, 1976 shall be distributed to all the coconut farmers who have qualified and received equity in the Bank and shall be appointed among them, as far as practicable, in proportion to their equity in relation to the number of undistributed equity and such further rules and regulations as may hereafter be promulgated.

The foregoing provision directs and authorizes the distribution of fractional and undistributed shares as a consequence of the failure of the coconut farmers with Coco Fund receipts to register them, even without a clear mandate or instruction on the same in any pertinent existing law. PCA Resolution No. 078-

74 had a similar provision, albeit providing more detailed information. The said Resolution identified 51,200,806 shares of the bank that remained undistributed and PCA devised its own rules as to how these undistributed and fractional shares shall be disposed of, notwithstanding the dearth as to the standards or parameters in the laws which it sought to implement.

Eventually, what happened was that, as correctly pointed out by the Sandiganbayan, the PCA gave a "bonanza" to supposed coconut farmers who already got their bank shares, by giving them extra shares according to the rules established – on its own – by the PCA under PCA AO 1 and Resolution No. 078-74. Because of the lack of adequate guidelines under P.D. No. 755 as to how the shares were supposed to be distributed to the coconut farmers, the PCA thus assumed that it could decide for itself how these shares will be distributed. This obviously paved the way to playing favorites, if not allowing outright shenanigans. In this regard, this poser raised in the Court’s February 16, 1993 Resolution in G.R. No. 96073 is as relevant then as it is now: "How is it that shares of stocks in such entities which was organized and financed by revenues derived from coconut levy funds which were imbued with public interest ended up in private hands who are not farmers or beneficiaries; and whether or not the holders of said stock, who in one way or another had had some part in the collection, administration, disbursement or other disposition of the coconut levy funds were qualified to acquire stock in the corporations formed and operated from these funds." 149

Likewise, the said PCA issuances did not take note of the national policy or public purpose for which the coconut levy funds were imposed under P.D. No. 755, i.e. the acceleration of the growth and development of the entire coconut industry, and the achievement of a vertical integration thereof that could make the coconut farmers participants in, and beneficiaries of, such growth and development.150 Instead, the PCA prioritized the coconut farmers themselves by fully disposing of the bank shares, totally disregarding the national policy for which the

funds were created. This is clearly an undue delegation of legislative powers.

With this pronouncement, there is hardly any need to establish that the sequestered assets are ill-gotten wealth. The documentary evidence, the P.D.s and Agreements, prove that the transfer of the shares to the more than one million of supposed coconut farmers was tainted with illegality.

Article III, Section 5 of P.D. No. 961 and Article III, Section 5 of P.D. No. 1468 violate Article IX (D) (2) of the 1987 Constitution.

Article III, Section 5 of P.D. No. 961 explicitly takes away the coconut levy funds from the coffer of the public funds, or, to be precise, privatized revenues derived from the coco levy. Particularly, the aforesaid Section 5 provides:

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the Coconut Industry Development fund as well as all disbursements of said funds for the benefit of the coconut farmers as herein authorized shall not be construed or interpreted, under any law or regulation, as special and/or fiduciary funds, or as part of the general funds of the national government within the contemplation of P.D. No. 711; nor as a subsidy, donation, levy, government funded investment, or government share within the contemplation of P.D. 898 the intention being that said Fund and the disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned in their own private capacity.151 (Emphasis Ours)

The same provision is carried over in Article III, Section 5 of P.D. No. 1468, the Revised Coconut Industry Code:

These identical provisions of P.D. Nos. 961 and 1468 likewise violate Article IX (D), Section 2(1) of the Constitution, defining the powers and functions of the Commission on Audit ("COA") as a constitutional commission:

Sec. 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries;.152 (Emphasis Ours)

A similar provision was likewise previously found in Article XII (D), Section 2 (1) of the 1973 Constitution, thus:

Section 2. The Commission on Audit shall have the following powers and functions:

(1) Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations; keep the general accounts of the government and, for such period as may be provided by law, preserve the vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations including those for the prevention of irregular, unnecessary, excessive, or extravagant expenditures or use of funds and property.153 (Emphasis Ours)

The Constitution, by express provision, vests the COA with the responsibility for State audit.154 As an independent supreme State auditor, its audit jurisdiction cannot be undermined by any law. Indeed, under Article IX (D), Section 3 of the 1987 Constitution, "[n]o law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the

Commission on Audit."155 Following the mandate of the COA and the parameters set forth by the foregoing provisions, it is clear that it has jurisdiction over the coconut levy funds, being special public funds. Conversely, the COA has the power, authority and duty to examine, audit and settle all accounts pertaining to the coconut levy funds and, consequently, to the UCPB shares purchased using the said funds. However, declaring the said funds as partaking the nature of private funds, ergo subject to private appropriation, removes them from the coffer of the public funds of the government, and consequently renders them impervious to the COA audit jurisdiction. Clearly, the pertinent provisions of P.D. Nos. 961 and 1468 divest the COA of its constitutionally-mandated function and undermine its constitutional independence.

The assailed purchase of UCPB shares of stocks using the coconut levy funds presents a classic example of an investment of public funds. The conversion of these special public funds into private funds by allowing private individuals to own them in their private capacities is something else. It effectively deprives the COA of its constitutionally-invested power to audit and settle such accounts. The conversion of the said shares purchased using special public funds into pure and exclusive private ownership has taken, or will completely take away the said funds from the boundaries with which the COA has jurisdiction. Obviously, the COA is without audit jurisdiction over the receipt or disbursement of private property. Accordingly, Article III, Section 5 of both P.D. Nos. 961 and 1468 must be struck down for being unconstitutional, be they assayed against Section 2(1), Article XII (D) of the 1973 Constitution or its counterpart provision in the 1987 Constitution.

The Court, however, takes note of the dispositive portion of PSJ-A, which states that:156

x x x           x x x          x x x

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not be considered special and/or fiduciary funds

nor part of the general funds of the national government and similar provisions of Sec. 3, Art. III, P.D. 961 and Sec. 5, Art. III,

P.D. 1468 contravene the provisions of the Constitution, particularly, Art. IX (D), Sec. 2; and Article VI, Sec. 29 (3).

(Emphasis Ours)

x x x           x x x          x x x

However, a careful reading of the discussion in PSJ-A reveals that it is Section 5 of Article III of P.D. No. 961 and not Section 3 of said decree, which is at issue, and which was therefore held to be contrary to the Constitution. The dispositive portion of the

said PSJ should therefore be corrected to reflect the proper provision that was declared as unconstitutional, which is Section

5 of Article III of P.D. No. 961 and not Section 3 thereof.

V

The CIIF Companies and the CIIF Block

of SMC shares are public funds/assets

From the foregoing discussions, it is fairly established that the coconut levy funds are special public funds. Consequently, any property purchased by means of the coconut levy funds should likewise be treated as public funds or public property, subject to burdens and restrictions attached by law to such property.

In this case, the 6 CIIF Oil Mills were acquired by the UCPB using coconut levy funds.157 On the other hand, the 14 CIIF holding companies are wholly owned subsidiaries of the CIIF Oil Mills.158 Conversely, these companies were acquired using or whose capitalization comes from the coconut levy funds. However, as in the case of UCPB, UCPB itself distributed a part of its investments in the CIIF oil mills to coconut farmers, and retained a part thereof as administrator.159 The portion distributed to the supposed coconut farmers followed the procedure outlined in PCA Resolution No. 033-78.160 And as the administrator of the CIIF holding companies, the UCPB

authorized the acquisition of the SMC shares.161 In fact, these companies were formed or organized solely for the purpose of holding the SMC shares.162 As found by the Sandiganbayan, the 14 CIIF holding companies used borrowed funds from the UCPB to acquire the SMC shares in the aggregate amount of P1.656 Billion.163

Since the CIIF companies and the CIIF block of SMC shares were acquired using coconut levy funds – funds, which have been established to be public in character – it goes without saying that these acquired corporations and assets ought to be regarded and treated as government assets. Being government properties, they are accordingly owned by the Government, for the coconut industry pursuant to currently existing laws.164

It may be conceded hypothetically, as COCOFED et al. urge, that the 14 CIIF holding companies acquired the SMC shares in question using advances from the CIIF companies and from UCPB loans. But there can be no gainsaying that the same advances and UCPB loans are public in character, constituting as they do assets of the 14 holding companies, which in turn are wholly-owned subsidiaries of the 6 CIIF Oil Mills. And these oil mills were organized, capitalized and/or financed using coconut levy funds. In net effect, the CIIF block of SMC shares are simply the fruits of the coconut levy funds acquired at the expense of the coconut industry. In Republic v. COCOFED,165 the en banc Court, speaking through Justice (later Chief Justice) Artemio Panganiban, stated: "Because the subject UCPB shares were acquired with government funds, the government becomes their prima facie beneficial and true owner." By parity of reasoning, the adverted block of SMC shares, acquired as they were with government funds, belong to the government as, at the very least, their beneficial and true owner.

We thus affirm the decision of the Sandiganbayan on this point. But as We have earlier discussed, reiterating our holding in Republic v. COCOFED, the State’s avowed policy or purpose in creating the coconut levy fund is for the development of the entire coconut industry, which is one of the major industries that

promotes sustained economic stability, and not merely the livelihood of a significant segment of the population.166 Accordingly, We sustain the ruling of the Sandiganbayan in CC No. 0033-F that the CIIF companies and the CIIF block of SMC shares are public funds necessary owned by the Government. We, however, modify the same in the following wise: These shares shall belong to the Government, which shall be used only for the benefit of the coconut farmers and for the development of the coconut industry.

Sandiganbayan did not err in ruling that

PCA (AO) No. 1, Series of 1975 and

PCA rules and regulations 074-78 did

not comply with the national standard

or policy of P.D. No. 755.

According to the petitioners, the Sandiganbayan has identified the national policy sought to be enhanced by and expressed under Section 1 in relation to Section 2 of P.D. No. 755. Yet, so petitioners argue, that court, with grave abuse of discretion, disregarded such policy and thereafter, ruled that Section 1 in relation to Section 2 of P.D. No. 755 is unconstitutional as the decree failed to promote the purpose for which it was enacted in the first place.

We are not persuaded. The relevant assailed portion of PSJ-A states:

We observe, however, that the PCA [AO] No. 1, Series of 1975 and PCA Rules and Regulations 074-78, did not take into consideration the accomplishment of the public purpose or the national standard/policy of P.D. No. 755 which is directly to accelerate the development and growth of the coconut industry and as a consequence thereof, to make the coconut farmers

"participants in and beneficiaries" of such growth and development.…

It is a basic legal precept that courts do not look into the wisdom of the laws passed. The principle of separation of powers demands this hands-off attitude from the judiciary. Saguiguit v. People167 teaches why:

… [W]hat the petitioner asks is for the Court to delve into the policy behind or wisdom of a statute, … which, under the doctrine of separation of powers, it cannot do,…. Even with the best of motives, the Court can only interpret and apply the law and cannot, despite doubts about its wisdom, amend or repeal it. Courts of justice have no right to encroach on the prerogatives of lawmakers, as long as it has not been shown that they have acted with grave abuse of discretion. And while the judiciary may interpret laws and evaluate them for constitutional soundness and to strike them down if they are proven to be infirm, this solemn power and duty do not include the discretion to correct by reading into the law what is not written therein.

We reproduce the policy-declaring provision of P.D. No. 755, thus:

Section 1. Declaration of National Policy. — It is hereby declared that the policy of the State is to provide readily available credit facilities to the coconut farmers at preferential rates; that this policy can be … efficiently realized by the implementation of the "Agreement for the Acquisition of a Commercial Bank for the benefit of the Coconut Farmers" executed by the [PCA], the terms of which "Agreement" are hereby incorporated by reference; and that the [PCA] is hereby authorized to distribute, for free, the shares of stock of the bank it acquired to the coconut farmers under such rules and regulations it may promulgate.

P.D. No. 755 having stated in no uncertain terms that the national policy of providing cheap credit facilities to coconut

farmers shall be achieved with the acquisition of a commercial bank, the Court is without discretion to rule on the wisdom of such an undertaking. It is abundantly clear, however, that the Sandiganbayan did not look into the policy behind, or the wisdom of, P.D. No. 755. In context, it did no more than to inquire whether the purpose defined in P.D. No. 755 and for which the coco levy fund was established would be carried out, obviously having in mind the (a) dictum that the power to tax should only be exercised for a public purpose and (b) command of Section 29, paragraph 3 of Article VI of the 1987 Constitution that:

(3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. (Emphasis supplied)

For the above reason, the above-assailed action of the Sandiganbayan was well within the scope of its sound discretion and mandate.

Moreover, petitioners impute on the anti-graft court the commission of grave abuse of discretion for going into the validity of and in declaring the coco levy laws as unconstitutional, when there were still factual issues to be resolved in a full blown trial as directed by this Court.168

Petitioners COCOFED and the farmer representatives miss the point. They acknowledged that their alleged ownership of the sequestered shares in UCPB and SMC is predicated on the coco levy decrees. Thus, the legality and propriety of their ownership of these valuable assets are directly related to and must be assayed against the constitutionality of those presidential decrees. This is a primordial issue, which must be determined to address the validity of the rest of petitioners’ claims of ownership. Verily, the Sandiganbayan did not commit grave abuse of discretion, a phrase which, in the abstract,

denotes the idea of capricious or whimsical exercise of judgment or the exercise of power in an arbitrary or despotic manner by reason of passion or personal hostility as to be equivalent to having acted without jurisdiction.169

The Operative Fact Doctrine does not apply

Petitioners assert that the Sandiganbayan’s refusal to recognize the vested rights purportedly created under the coconut levy laws constitutes taking of private property without due process of law. They reason out that to accord retroactive application to a declaration of unconstitutionality would be unfair inasmuch as such approach would penalize the farmers who merely obeyed then valid laws.

This contention is specious.

In Yap v. Thenamaris Ship’s Management,170 the Operative Fact Doctrine was discussed in that:

As a general rule, an unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is inoperative as if it has not been passed at all. The general rule is supported by Article 7 of the Civil Code, which provides:

Art. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary.

The doctrine of operative fact serves as an exception to the aforementioned general rule. In Planters Products, Inc. v. Fertiphil Corporation, we held:

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play. It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have

consequences which cannot always be ignored. The past cannot always be erased by a new judicial declaration.

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in double jeopardy or would put in limbo the acts done by a municipality in reliance upon a law creating it.171

In that case, this Court further held that the Operative Fact Doctrine will not be applied as an exception when to rule otherwise would be iniquitous and would send a wrong signal that an act may be justified when based on an unconstitutional provision of law.172

The Court had the following disquisition on the concept of the Operative Fact Doctrine in the case of Chavez v. National Housing Authority:173

The "operative fact" doctrine is embodied in De Agbayani v. Court of Appeals, wherein it is stated that a legislative or executive act, prior to its being declared as unconstitutional by the courts, is valid and must be complied with, thus:

As the new Civil Code puts it: "When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws of the Constitution." It is understandable why it should be so, the Constitution being supreme and paramount. Any legislative or executive act contrary to its terms cannot survive.

Such a view has support in logic and possesses the merit of simplicity. It may not however be sufficiently realistic. It does not admit of doubt that prior to the declaration of nullity such challenged legislative or executive act must have been in force and had to be complied with. This is so as until after the

judiciary, in an appropriate case, declares its invalidity, it is entitled to obedience and respect. Parties may have acted under it and may have changed their positions. What could be more fitting than that in a subsequent litigation regard be had to what has been done while such legislative or executive act was in operation and presumed to be valid in all respects. It is now accepted as a doctrine that prior to its being nullified, its existence as a fact must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is the governmental organ which has the final say on whether or not a legislative or executive measure is valid, a period of time may have elapsed before it can exercise the power of judicial review that may lead to a declaration of nullity. It would be to deprive the law of its quality of fairness and justice then, if there be no recognition of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: "The actual existence of a statute, prior to such a determination [of unconstitutionality], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects, with respect to particular relations, individual and corporate, and particular conduct, private and official." This language has been quoted with approval in a resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc. v. Flores. An even more recent instance is the opinion of Justice Zaldivar speaking for the Court in Fernandez v. Cuerva and Co. (Emphasis supplied.)

The principle was further explicated in the case of Rieta v. People of the Philippines, thus:

In similar situations in the past this Court had taken the pragmatic and realistic course set forth in Chicot County Drainage District vs. Baxter Bank to wit:

The courts below have proceeded on the theory that the Act of Congress, having been found to be unconstitutional, was not a

law; that it was inoperative, conferring no rights and imposing no duties, and hence affording no basis for the challenged decree…. It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to [the determination of its invalidity], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects –with respect to particular conduct, private and official. Questions of rights claimed to have become vested, of status, of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination. These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified.

Moreover, the Court ruled in Chavez that:

Furthermore, when petitioner filed the instant case against respondents on August 5, 2004, the JVAs were already terminated by virtue of the MOA between the NHA and RBI. The respondents had no reason to think that their agreements were unconstitutional or even questionable, as in fact, the concurrent acts of the executive department lent validity to the implementation of the Project. The SMDRP agreements have produced vested rights in favor of the slum dwellers, the buyers of reclaimed land who were issued titles over said land, and the agencies and investors who made investments in the project or who bought SMPPCs. These properties and rights cannot be disturbed or questioned after the passage of around ten (10) years from the start of the SMDRP implementation. Evidently, the "operative fact" principle has set in. The titles to the lands in the hands of the buyers can no longer be invalidated.174

In the case at bar, the Court rules that the dictates of justice, fairness and equity do not support the claim of the alleged farmer-owners that their ownership of the UCPB shares should be respected. Our reasons:

1. Said farmers or alleged claimants do not have any legal right to own the UCPB shares distributed to them. It was not successfully refuted that said claimants were issued receipts under R.A. 6260 for the payment of the levy that went into the Coconut Investment Fund (CIF) upon which shares in the "Coconut Investment Company" will be issued. The Court upholds the finding of the Sandiganbayan that said investment company is a different corporate entity from the United Coconut Planters Bank. This was in fact admitted by petitioners during the April 17, 2001 oral arguments in G.R. Nos. 147062-64.175

The payments under R.A. 6260 cannot be equated with the payments under P.D. No. 276, the first having been made as contributions to the Coconut Investment Fund while the payments under P.D. No. 276 constituted the Coconut Consumers Stabilization Fund ("CCSF"). R.A. 6260 reads:

Section 2. Declaration of Policy. It is hereby declared to be the national policy to accelerate the development of the coconut industry through the provision of adequate medium and long-term financing for capital investment in the industry, by instituting a Coconut Investment fund capitalized and administered by coconut farmers through a Coconut Investment Company.176

P.D. No. 276 provides:

1. In addition to its powers granted under Presidential Decree No. 232, the Philippine Coconut Authority is hereby authorized to formulate and immediately implement a stabilization scheme for coconut-based consumer goods, along the following general guidelines:

(a) ….

The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the Coconut Consumers Stabilization Fund, as a separate trust fund which shall not form part of the general fund of the government.

(b) The Fund shall be utilized to subsidize the sale of coconut-based products at prices set by the Price Control Council, under rules and regulations to be promulgated by the Philippine Consumers Stabilization Committee….177

The PCA, via Resolution No. 045-75 dated May 21, 1975, clarified the distinction between the CIF levy payments under R.A. 6260 and the CCSF levy paid pursuant to P.D. 276, thusly:

It must be remembered that the receipts issued under R.A. No. 6260 were to be registered in exchange for shares of stock in the Coconut Investment Company (CIC), which obviously is a different corporate entity from UCPB. This fact was admitted by petitioners during the April 17, 2001 oral arguments in G.R. Nos. 147062-64.

In fact, while the CIF levy payments claimed to have been paid by petitioners were meant for the CIC, the distribution of UCPB stock certificates to the coconut farmers, if at all, were meant for the payors of the CCSF in proportion to the coconut farmer’s CCSF contributions pursuant to PCA Resolution No. 045-75 dated May 21, 1975:

RESOLVED, FURTHER, That the amount of ONE HUNDRED FIFTY MILLION (P150,000,000.00) PESOS be appropriated and set aside from available funds of the PCA to be utilized in payment for the shares of stock of such existing commercial bank and that the Treasurer be instructed to disburse the said amount accordingly.

x x x           x x x          x x x

RESOLVED, FINALLY, That … be directed to organize a team which shall prepare a list of coconut farmers who have paid the levy and contributed to the [CCSF] and to prepare a stock distribution plan to the end that the aforesaid coconut farmers shall receive certificates of stock of such commercial bank in proportion to their contributions to the Fund.

Unfortunately, the said resolution was never complied with in the distribution of the so-called "farmers" UCPB shares.

The payments therefore under R.A. 6260 are not the same as those under P.D. No. 276. The amounts of CIF contributions under R.A. 6260 which were collected starting 1971 are undeniably different from the CCSF levy under P.D. No. 276, which were collected starting 1973. The two (2) groups of claimants differ not only in identity but also in the levy paid, the amount of produce and the time the government started the collection.

Thus, petitioners and the alleged farmers claiming them pursuant to R.A. 6260 do not have any legal basis to own the UCPB shares distributed to them, assuming for a moment the legal feasibility of transferring these shares paid from the R.A. 6260 levy to private individuals.

2. To grant all the UCPB shares to petitioners and its alleged members would be iniquitous and prejudicial to the remaining 4.6 million farmers who have not received any UCPB shares when in fact they also made payments to either the CIF or the CCSF but did not receive any receipt or who was not able to register their receipts or misplaced them.

Section 1 of P.D. No. 755 which was declared unconstitutional cannot be considered to be the legal basis for the transfer of the supposed private ownership of the UCPB shares to petitioners who allegedly paid the same under R.A. 6260. The Solicitor General is correct in concluding that such unauthorized grant to petitioners constitutes illegal deprivation of property without due process of law. Due process of law would mean that the

distribution of the UCPB shares should be made only to farmers who have paid the contribution to the CCSF pursuant to P.D. No. 276, and not to those who paid pursuant to R.A. 6260. What would have been the appropriate distribution scheme was violated by Section 1 of P.D. No. 755 when it required that the UCPB shares should be distributed to coconut farmers without distinction – in fact, giving the PCA limitless power and free hand, to determine who these farmers are, or would be.

We cannot sanction the award of the UCPB shares to petitioners who appear to represent only 1.4 million members without any legal basis to the extreme prejudice of the other 4.6 million coconut farmers (Executive Order No. 747 fixed the number of coconut farmers at 6 million in 1981). Indeed, petitioners constitute only a small percentage of the coconut farmers in the Philippines. Thus, the Sandiganbayan correctly declared that the UCPB shares are government assets in trust for the coconut farmers, which would be more beneficial to all the coconut farmers instead of a very few dubious claimants;

3. The Sandiganbayan made the finding that due to enormous operational problems and administrative complications, the intended beneficiaries of the UCPB shares were not able to receive the shares due to them. To reiterate what the anti-graft court said:

The actual distribution of the bank shares was admittedly an enormous operational problem which resulted in the failure of the intended beneficiaries to receive their shares of stocks in the bank, as shown by the rules and regulations, issued by the PCA, without adequate guidelines being provided to it by P.D. No. 755. PCA Administrative Order No. 1, Series of 1975 (August 20, 1975), "Rules and Regulations Governing the Distribution of Shares of Stock of the Bank Authorized to be Acquired Pursuant to PCA Board Resolution No. 246-75", quoted hereunder discloses how the undistributed shares of stocks due to anonymous coconut farmers or payors of the coconut levy fees were authorized to be distributed to existing shareholders of the Bank:

"Section 9. Fractional and Undistributed Shares – Fractional shares and shares which remain undistributed as a consequence of the failure of the coconut farmers to register their COCOFUND receipts or the destruction of the COCOFUND receipts or the registration of the COCOFUND receipts in the name of an unqualified individual, after the final distribution is made on the basis of the consolidated IBM registration Report as of March 31, 1976 shall be distributed to all the coconut farmers who have qualified and received equity in the Bank and shall be apportioned among them, as far as practicable, in proportion to their equity in relation to the number of undistributed equity and such further rules and regulations as may hereafter be promulgated.’

The foregoing PCA issuance was further amended by Resolution No. 074-78, still citing the same problem of distribution of the bank shares. This latter Resolution is quoted as follows:

RESOLUTION NO. 074-78

AMENDMENT OF ADMINISTRATIVE ORDER

NO. 1, SERIES OF 1975, GOVERNING THE

DISTRIBUTION OF SHARES

WHEREAS, pursuant to PCA Board Resolution No. 246-75, the total par value of the shares of stock of the Bank purchased by

the PCA for the benefit of the coconut farmers is P85,773,600.00 with a par value of P1.00 per share or

equivalent to 85,773.600 shares;

WHEREAS, out of the 85,773,600 shares, a total of 34,572,794 shares have already been distributed in accordance with Administrative Order No. 1, Series of 1975, to wit:

First Distribution - 12,573,059

Second Distribution - 10,841,409

Third Distribution - 11,158,326

34,572,794

"WHEREAS, there is, therefore, a total of 51,200,806 shares still available for distribution among the coconut farmers;

WHEREAS, it was determined by the PCA Board, in consonance with the policy of the state on the integration of the coconut industry, that the Bank shares must be widely distributed as possible among the coconut farmers, for which purpose a national census of coconut farmers was made through the Philippine Coconut Producers Federation (COCOFED);

WHEREAS, to implement such determination of the PCA Board, there is a need to accordingly amend Administrative Order No. 1, Series of 1975;

NOW, THEREFORE, BE IT RESOLVED, AS IT IS HEREBY RESOLVED, that the remaining 51,200,806 shares of stock of the Bank authorized to be acquired pursuant to the PCA Board Resolution No. 246-75 dated July 25, 1975 be distributed as follows:

(1) All the coconut farmers who have received their shares in the equity of the Bank on the basis of Section 8 of Administrative Order No. 1, Series of 1975, shall receive additional share for each share presently owned by them;

(2) Fractional shares shall be completed into full shares, and such full shares shall be distributed among the coconut farmers who qualified for the corresponding fractional shares;

(3) The balance of the shares, after deducting those to be distributed in accordance with (1) and (2) above, shall be transferred to COCOFED for distribution, immediately after

completion of the national census of coconut farmers prescribed under Resolution No. 033-78 of the PCA Board, to all those who are determined by the PCA Board to be bona fide coconut farmers and have not received shares of stock of the Bank. The shares shall be equally determined among them on the basis of per capita.

RESOLVED, FURTHER, That the rules and regulations under Administrative Order No. 1, Series of 1975, which are inconsistent with this Administrative Order be, as they are hereby, repealed and/or amended accordingly."

Thus, when 51,200,806 shares in the bank remained undistributed, the PCA deemed it proper to give a "bonanza" to coconut farmers who already got their bank shares, by giving them an additional share for each share owned by them and by converting their fractional shares into full shares. The rest of the shares were then transferred to a private organization, the COCOFED, for distribution to those determined to be "bona fide coconut farmers" who had "not received shares of stock of the Bank." The distribution to the latter was made on the basis of "per capita", meaning without regard to the COCOFUND receipts. The PCA considered itself free to disregard the said receipts in the distribution of the shares although they were considered by the May 25, 1975 Agreement between the PCA and defendant Cojuangco (par. [8] of said Agreement) and by Sections 1, 3, 4, 6 and 9, PCA Administrative Order No. 1, Series of 1975 as the basis for the distribution of shares.

The PCA thus assumed, due to lack of adequate guidelines set by P.D. No. 755, that it had complete authority to define who are the coconut farmers and to decide as to who among the coconut farmers shall be given the gift of bank shares; how many shares shall be given to them, and what basis it shall use to determine the amount of shares to be distributed for free to the coconut farmers. In other words, P.D. No. 755 fails the completeness test which renders it constitutionally infirm.

Due to numerous flaws in the distribution of the UCPB shares by PCA, it would be best for the interest of all coconut farmers to revert the ownership of the UCBP shares to the government for the entire coconut industry, which includes the farmers;

4. The Court also takes judicial cognizance of the fact that a number, if not all, of the coconut farmers who sold copra did not get the receipts for the payment of the coconut levy for the reason that the copra they produced were bought by traders or middlemen who in turn sold the same to the coconut mills. The reality on the ground is that it was these traders who got the receipts and the corresponding UCPB shares. In addition, some uninformed coconut farmers who actually got the COCOFUND receipts, not appreciating the importance and value of said receipts, have already sold said receipts to non-coconut farmers, thereby depriving them of the benefits under the coconut levy laws. Ergo, the coconut farmers are the ones who will not be benefited by the distribution of the UCPB shares contrary to the policy behind the coconut levy laws. The nullification of the distribution of the UCPB shares and their transfer to the government for the coconut industry will, therefore, ensure that the benefits to be deprived from the UCPB shares will actually accrue to the intended beneficiaries – the genuine coconut farmers.

From the foregoing, it is highly inappropriate to apply the operative fact doctrine to the UCPB shares. Public funds, which were supposedly given utmost safeguard, were haphazardly distributed to private individuals based on statutory provisions that are found to be constitutionally infirm on not only one but on a variety of grounds. Worse still, the recipients of the UCPB shares may not actually be the intended beneficiaries of said benefit. Clearly, applying the Operative Fact Doctrine would not only be iniquitous but would also serve injustice to the Government, to the coconut industry, and to the people, who, whether willingly or unwillingly, contributed to the public funds, and therefore expect that their Government would take utmost care of them and that they would be used no less, than for public purpose.

We clarify that PSJ-A is subject of another petition for review interposed by Eduardo Cojuangco, Jr., in G.R. No. 180705 entitled, Eduardo M. Cojuangco, Jr. v. Republic of the Philippines, which shall be decided separately by this Court. Said petition should accordingly not be affected by this Decision save for determinatively legal issues directly addressed herein.

WHEREFORE, the petitions in G.R. Nos. 177857-58 and 178793 are hereby DENIED. The Partial Summary Judgment dated July 11, 2003 in Civil Case No. 0033-A as reiterated with modification in Resolution dated June 5, 2007, as well as the Partial Summary Judgment dated May 7, 2004 in Civil Case No. 0033-F, which was effectively amended in Resolution dated May 11, 2007, are AFFIRMED with modification, only with respect to those issues subject of the petitions in G.R. Nos. 177857-58 and 178193. However, the issues raised in G.R. No. 180705 in relation to Partial Summary Judgment dated July 11, 2003 and Resolution dated June 5, 2007 in Civil Case No. 0033-A, shall be decided by this Court in a separate decision.

The Partial Summary Judgment in Civil Case No. 0033-A dated July 11, 2003, is hereby MODIFIED, and shall read as follows:

WHEREFORE, in view of the foregoing, We rule as follows:

SUMMARY OF THE COURT’S RULING.

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY JUDGMENT dated April 11, 2001 filed by Defendant Maria Clara L. Lobregat, COCOFED, et al., and Ballares, et al.

The Class Action Motion for Separate Summary Judgment dated April 11, 2001 filed by defendant Maria Clara L. Lobregat, COCOFED, et al. and Ballares, et al., is hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COCOFED, ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed by Plaintiff.

1. a. The portion of Section 1 of P.D. No. 755, which reads:

…and that the Philippine Coconut Authority is hereby authorized to distribute, for free, the shares of stock of the bank it acquired to the coconut farmers under such rules and regulations it may promulgate.

taken in relation to Section 2 of the same P.D., is unconstitutional: (i) for having allowed the use of the CCSF to benefit directly private interest by the outright and unconditional grant of absolute ownership of the FUB/UCPB shares paid for by PCA entirely with the CCSF to the undefined "coconut farmers", which negated or circumvented the national policy or public purpose declared by P.D. No. 755 to accelerate the growth and development of the coconut industry and achieve its vertical integration; and (ii) for having unduly delegated legislative power to the PCA.

b. The implementing regulations issued by PCA, namely, Administrative Order No. 1, Series of 1975 and Resolution No. 074-78 are likewise invalid for their failure to see to it that the distribution of shares serve exclusively or at least primarily or directly the aforementioned public purpose or national policy declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not be considered special and/or fiduciary funds nor part of the general funds of the national government and similar provisions of Sec. 5, Art. III, P.D. No. 961 and Sec. 5, Art. III, P.D. No. 1468 contravene the provisions of the Constitution, particularly, Art. IX (D), Sec. 2; and Article VI, Sec. 29 (3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and validly obtained title of ownership over the subject

UCPB shares by virtue of P.D. No. 755, the Agreement dated May 25, 1975 between the PCA and defendant Cojuangco, and PCA implementing rules, namely, Adm. Order No. 1, s. 1975 and Resolution No. 074-78.

4. The so-called "Farmers’ UCPB shares" covered by 64.98% of the UCPB shares of stock, which formed part of the 72.2% of the shares of stock of the former FUB and now of the UCPB, the entire consideration of which was charged by PCA to the CCSF, are hereby declared conclusively owned by, the Plaintiff Republic of the Philippines.

x x x           x x x          x x x

So ordered.

The Partial Summary Judgment in Civil Case No. 0033-F dated May 7, 2004, is hereby MODIFIED, and shall read as follows:

WHEREFORE, the Motion for Execution of Partial summary judgment (re: CIIF Block of Smc Shares of Stock) dated August 8, 2005 of the plaintiff is hereby denied for lack of merit. However, this Court orders the severance of this particular claim of Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now considered a separate final and appealable judgment with respect to the said CIIF Block of SMC shares of stock.1avvphi1

The Partial Summary Judgment rendered on May 7, 2004 is modified by deleting the last paragraph of the dispositive portion, which will now read, as follows:

Wherefore, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed, et al) filed by Plaintiff is hereby GRANTED. Accordingly, the CIIF Companies, namely:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

As well as the 14 Holding Companies, namely:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors; Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS WELL AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT TO BE USED ONLY FOR THE BENEFIT OF ALL COCONUT FARMERS AND FOR THE DEVELOPMENT OF THE COCONUT INDUSTRY, AND ORDERED RECONVEYED TO THE GOVERNMENT.

The Court affirms the Resolutions issued by the Sandiganbayan on June 5, 2007 in civil case no. 0033-A and ON May 11, 2007 in civil case No. 0033-F, that there is no more necessity of further trial with respect to the issue of ownership of (1) the sequestered UCPB shares, (2) the CIIF block of SMC shares, and (3) the CIIF companies. as they have finally been ADJUDICATED in the AFOREMENTIONED PARTIAL SUMMARY JUDGMENTS DATED jULY 11, 2003 AND mAY 7, 2004.

SO ORDERED.

Costs against petitioners COCOFED, et al. in G.R. Nos. 177857-58 and Danila S. Ursua in G.R. No. 178193.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 180705               November 27, 2012

EDUARDO M. COJUANGCO, JR., Petitioner, vs.REPUBLIC OF THE PHILIPPINES, Respondent.

D E C I S I O N

VELASCO, JR., J.:

The Case

Of the several coconut levy appealed cases that stemmed from certain issuances of the Sandiganbayan in its Civil Case No. 0033, the present recourse proves to be one of the most difficult.

In particular, the instant petition for review under Rule 45 of the Rules of Court assails and seeks to annul a portion of the Partial Summary Judgment dated July 11, 2003, as affirmed in a Resolution of December 28, 2004, both rendered by the Sandiganbayan in its Civil Case ("CC") No. 0033-A (the judgment shall hereinafter be referred to as "PSJ-A"), entitled "Republic of the Philippines, Plaintiff, v. Eduardo M. Cojuangco, Jr., et al., Defendants, COCOFED, et al., BALLARES, et al., Class Action Movants." CC No. 0033-A is the result of the splitting into eight (8) amended complaints of CC No. 0033 entitled, "Republic of the Philippines v. Eduardo Cojuangco, Jr., et al.," a suit for recovery of ill-gotten wealth commenced by the Presidential Commission on Good Government ("PCGG"), for the Republic of the Philippines ("Republic"), against Eduardo M. Cojuangco, Jr. ("Cojuangco") and several individuals, among them, Ferdinand E. Marcos, Maria Clara Lobregat ("Lobregat"), and Danilo S. Ursua ("Ursua"). Each of the eight (8) subdivided complaints, CC No. 0033-A to CC No. 0033-H, correspondingly impleaded as defendants only the alleged participants in the transaction/s subject of the suit, or who are averred as owner/s of the assets involved.

Apart from this recourse, We clarify right off that PSJ-A was challenged in two other separate but consolidated petitions for review, one commenced by COCOFED et al., docketed as G.R. Nos. 177857-58, and the other, interposed by Danilo S. Ursua, and docketed as G.R. No. 178193.

By Decision dated January 24, 2012, in the aforesaid G.R. Nos. 177857-58 (COCOFED et al. v. Republic) and G.R. No. 178193 (Ursua v. Republic) consolidated cases1 (hereinafter collectively referred to as "COCOFED v. Republic"), the Court addressed and resolved all key matters elevated to it in relation to PSJ-A, except for the issues raised in the instant petition which have not yet been resolved therein. In the same decision, We made clear that: (1) PSJ-A is subject of another petition for review interposed by Eduardo Cojuangco, Jr., in G.R. No. 180705, entitled Eduardo M. Cojuangco, Jr. v. Republic of the Philippines, which shall be decided separately by the Court,2 and (2) the issues raised in the instant petition should not be affected by the earlier decision "save for determinatively legal issues directly addressed therein."3

For a better perspective, the instant recourse seeks to reverse the Partial Summary Judgment4 of the anti-graft court dated July 11, 2003, as reiterated in a Resolution5 of December 28, 2004, denying COCOFED’s motion for reconsideration, and the May 11, 2007 Resolution6 denying

COCOFED’s motion to set case for trial and declaring the partial summary judgment final and appealable, all issued in PSJ-A. In our adverted January 24, 2012 Decision in COCOFED v. Republic, we affirmed with modification PSJ-A of the Sandiganbayan, and its Partial Summary Judgment in Civil Case No. 0033-F, dated May 7, 2004 (hereinafter referred to as "PSJ-F’).7

More specifically, We upheld the Sandiganbayan’s ruling that the coconut levy funds are special public funds of the Government. Consequently, We affirmed the Sandiganbayan’s

declaration that Sections 1 and 2 of Presidential Decree ("P.D.") 755, Section 3, Article III of P.D. 961 and Section 3, Article III of P.D. 1468, as well as the pertinent implementing regulations of the Philippine Coconut Authority ("PCA"), are unconstitutional for allowing the use and/or the distribution of properties acquired through the coconut levy funds to private individuals for their own direct benefit and absolute ownership. The Decision also affirmed the Government’s ownership of the six CIIF companies, the fourteen holding companies, and the CIIF block of San Miguel Corporation shares of stock, for having likewise been acquired using the coconut levy funds. Accordingly, the properties subject of the January 24, 2012 Decision were declared owned by and ordered reconveyed to the Government, to be used only for the benefit of all coconut farmers and for the development of the coconut industry.

By Resolution of September 4, 2012,8 the Court affirmed the above-stated Decision promulgated on January 24, 2012.

It bears to stress at this juncture that the only portion of the appealed Partial Summary Judgment dated July 11, 2003 ("PSJ-A") which remains at issue revolves around the following decretal holdings of that court relating to the "compensation" paid to petitioner for exercising his personal and exclusive option to acquire the FUB/UCPB shares.9 It will be recalled that the Sandiganbayan declared the Agreement between the PCA and Cojuangco containing the assailed "compensation" null and void for not having the required valuable consideration. Consequently, the UCPB shares of stocks that are subject of the Agreement were declared conclusively owned by the Government. It also held that the Agreement did not have the effect of law as it was not published as part of P.D. 755, even if Section 1 thereof made reference to the same.

Facts

We reproduce, below, portions of the statement of facts in COCOFED v. Republic relevant to the present case:10

In 1971, Republic Act No. ("R.A.") 6260 was enacted creating the Coconut Investment Company ("CIC") to administer the Coconut Investment Fund ("CIF"), which, under Section 8 thereof, was to be sourced from a PhP 0.55 levy on the sale of every 100 kg. of copra. Of the PhP 0.55 levy of which the copra seller was – or ought to be – issued COCOFUND receipts, PhP 0.02 was placed at the disposition of COCOFED, the national association of coconut producers declared by the

Philippine Coconut Administration ("PHILCOA" now "PCA") as having the largest membership.

The declaration of martial law in September 1972 saw the issuance of several presidential decrees ("P.D.") purportedly designed to improve the coconut industry through the collection and use of the coconut levy fund. While coming generally from impositions on the first sale of copra, the coconut levy fund came under various names x x x. Charged with the duty of collecting and administering the Fund was PCA. Like COCOFED with which it had a legal linkage, the PCA, by statutory provisions scattered in different coco levy decrees, had its share of the coco levy.

The following were some of the issuances on the coco levy, its collection and utilization, how the proceeds of the levy will be managed and by whom and the purpose it was supposed to serve:

1. P.D. No. 276 established the Coconut Consumers Stabilization Fund ("CCSF") and declared the proceeds of the CCSF levy as trust fund, to be utilized to subsidize the sale of coconut-based products, thus stabilizing the price of edible oil.

2. P.D. No. 582 created the Coconut Industry Development Fund ("CIDF") to finance the operation of a hybrid coconut seed farm.

3. Then came P.D. No. 755 providing under its Section 1 the following:

It is hereby declared that the policy of the State is to provide readily available credit facilities to the coconut farmers at preferential rates; that this policy can be expeditiously and efficiently realized by the implementation of the "Agreement for the Acquisition of a Commercial Bank for the benefit of Coconut Farmers" executed by the PCA…; and that the PCA is hereby authorized to distribute, for free, the shares of stock of the bank it acquired to the coconut farmers….

Towards achieving the policy thus declared, P.D. No. 755, under its Section 2, authorized PCA to utilize the CCSF and the CIDF collections to acquire a commercial bank and deposit the CCSF levy collections in said bank interest free, the deposit withdrawable only when the bank has attained a certain level of sufficiency in its equity capital. The same section also decreed that all levies PCA is authorized to collect shall not be considered as special and/or fiduciary funds or form part of the general funds of the government within the contemplation of P.D. No. 711.

4. P.D. No. 961 codified the various laws relating to the development of coconut/palm oil industries.

5. The relevant provisions of P.D. No. 961, as later amended by P.D. No. 1468 (Revised Coconut Industry Code), read:

ARTICLE IIILevies

Section 1. Coconut Consumers Stabilization Fund Levy. — The PCA is hereby empowered to impose and collect … the Coconut Consumers Stabilization Fund Levy, ….

….

Section 5. Exemption. — The CCSF and theCIDF as well as all disbursements as herein authorized, shall not be construed … as special and/or fiduciary funds, or as part of the general funds of the national government within the contemplation of PD 711; … the intention being that said Fund and the disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned by them in their private capacities: …. (Emphasis supplied)

6. Letter of Instructions No. ("LOI") 926, s. of 1979, made reference to the creation, out of other coco levy funds, of the Coconut Industry Investment Fund ("CIIF") in P.D. No. 1468 and entrusted a portion of the CIIF levy to UCPB for investment, on behalf of coconut farmers, in oil mills and other private corporations, with the following equity ownership structure:

Section 2. Organization of the Cooperative Endeavor. – The UCPB, in its capacity as the investment arm of the coconut farmers thru the CIIF … is hereby directed to invest, on behalf of the coconut farmers, such portion of the CIIF … in private corporations … under the following guidelines:

a) The coconut farmers shall own or control at least … (50%) of the outstanding voting capital stock of the private corporation acquired thru the CIIF and/or corporation owned or controlled by the farmers thru the CIIF …. (Words in bracket added.)

Through the years, a part of the coconut levy funds went directly or indirectly to finance various projects and/or was converted into various assets or investments.11

Relevant to the present petition is the acquisition of the First United Bank ("FUB"), which was subsequently renamed as United Coconut Planters Bank ("UCPB").12

Apropos the intended acquisition of a commercial bank for the purpose stated earlier, it would appear that FUB was the bank of choice which Pedro Cojuangco’s group (collectively, "Pedro Cojuangco") had control of. The plan, then, was for PCA to buy all of Pedro Cojuangco’s shares in FUB. However, as later events unfolded, a simple direct sale from the seller (Pedro) to PCA did not ensue as it was made to appear that Cojuangco had the exclusive option to acquire the former’s FUB controlling interests. Emerging from this elaborate, circuitous arrangement were two deeds. The first one was simply denominated as Agreement, dated May 1975, entered into by and between Cojuangco for and in his behalf and in behalf of "certain other buyers", and Pedro Cojuangco in which the former was purportedly accorded the option to buy 72.2% of FUB’s outstanding capital stock, or 137,866 shares (the "option shares," for brevity), at PhP 200 per share. On its face, this agreement does not mention the word "option."

The second but related contract, dated May 25, 1975, was denominated as Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines. It had PCA, for itself and for the benefit of the coconut farmers, purchase from Cojuangco the shares of stock subject of the First Agreement for PhP200.00 per share. As additional consideration for PCA’s buy-out of what Cojuangco would later claim to be his exclusive and personal option, it was stipulated that, from PCA, Cojuangco shall receive equity in FUB amounting to 10%, or 7.22%, of the 72.2%, or fully paid shares. And so as not to dilute Cojuangco’s equity position in FUB, later UCPB, the PCA agreed under paragraph 6 (b) of the second agreement to cede over to the former a number of fully paid FUB shares out of the

shares it (PCA) undertakes to eventually subscribe. It was further stipulated that Cojuangco would act as bank president for an extendible period of 5 years.

Apart from the aforementioned 72.2%, PCA purchased from other FUB shareholders 6,534 shares of which Cojuangco, as may be gathered from the records, got 10%..

While the 64.98% portion of the option shares (72.2% – 7.22% = 64.98%) ostensibly pertained to the farmers, the corresponding stock certificates supposedly representing the farmers’ equity were in the name of and delivered to PCA. There were, however, shares forming part of the aforesaid 64.98% portion, which ended up in the hands of non-farmers. The remaining 27.8% of the FUB capital stock were not covered by any of the agreements.

Under paragraph # 8 of the second agreement, PCA agreed to expeditiously distribute the FUB shares purchased to such "coconut farmers holding registered COCOFUND receipts" on equitable basis.

As found by the Sandiganbayan, the PCA appropriated, out of its own fund, an amount for the purchase of the said 72.2% equity, albeit it would later reimburse itself from the coconut levy fund.

And per Cojuangco’s own admission, PCA paid, out of the CCSF, the entire acquisition price for the 72.2% option shares.13

As of June 30, 1975, the list of FUB stockholders included Cojuangco with 14,440 shares and PCA with 129,955 shares.14 It would appear later that, pursuant to the stipulation on maintaining Cojuangco’s equity position in the bank, PCA would cede to him 10% of its subscriptions to (a) the authorized but unissued shares of FUB and (b) the increase in FUB’s capital stock (the equivalent of 158,840 and 649,800 shares, respectively). In all, from the "mother" PCA shares, Cojuangco

would receive a total of 95,304 FUB (UCPB) shares broken down as follows: 14,440 shares + 10% (158,840 shares) + 10% (649,800 shares) = 95,304.15

We further quote, from COCOFED v. Republic, facts relevant to the instant case:16

Shortly after the execution of the PCA – Cojuangco Agreement, President Marcos issued, on July 29, 1975, P.D. No. 755 directing x x x as narrated, PCA to use the CCSF and CIDF to acquire a commercial bank to provide coco farmers with "readily available credit facilities at preferential rate" x x x.

Then came the 1986 EDSA event. One of the priorities of then President Corazon C. Aquino’s revolutionary government was the recovery of ill-gotten wealth reportedly amassed by the Marcos family and close relatives, their nominees and associates. Apropos thereto, she issued Executive Order Nos. (EO) 1, 2 and 14, as amended by E.O. 14-A, all series of 1986. E.O. 1 created the PCGG and provided it with the tools and processes it may avail of in the recovery efforts;17 E.O. No. 2 asserted that the ill-gotten assets and properties come in the form of shares of stocks, etc., while E.O. No. 14 conferred on the Sandiganbayan exclusive and original jurisdiction over ill-gotten wealth cases, with the proviso that "technical rules of procedure and evidence shall not be applied strictly" to the civil cases filed under the EO. Pursuant to these issuances, the PCGG issued numerous orders of sequestration, among which were those handed out x x x against shares of stock in UCPB purportedly owned by or registered in the names of (a) the more than a million coconut farmers, (b) the CIIF companies and (c) Cojuangco, Jr., including the SMC shares held by the CIIF companies. On July 31, 1987, the PCGG instituted before the Sandiganbayan a recovery suit docketed thereat as CC No. 0033.

x x x x

3. Civil Case 0033 x x x would be subdivided into eight complaints, docketed as CC 0033-A to CC 0033-H.

x x x x

5. By Decision of December 14, 2001, in G.R. Nos. 147062-64 (Republic v. COCOFED),18 the Court declared the coco levy funds as prima facie public funds. And purchased as the sequestered UCPB shares were by such funds, beneficial ownership thereon and the corollary voting rights prima facie pertain, according to the Court, to the government.

x x x x

Correlatively, the Republic, on the strength of the December 14, 2001 ruling in Republic v. COCOFED and on the argument, among others, that the claim of COCOFED and Ballares et al., over the subject UCPB shares is based solely on the supposed COCOFUND receipts issued for payment of the RA 6260 CIF levy, filed a Motion for Partial Summary Judgment RE: COCOFED, et al. and Ballares, et al. dated April 22, 2002, praying that a summary judgment be rendered declaring:

a. That Section 2 of [PD] 755, Section 5, Article III of P.D. 961 and Section 5, Article III of P.D. No. 1468 are unconstitutional;

b. That x x x (CIF) payments under x x x (R.A.) No. 6260 are not valid and legal bases for ownership claims over UCPB shares; and

c. That COCOFED, et al., and Ballares, et al. have not legally and validly obtained title over the subject UCPB shares.

Right after it filed the Motion for Partial Summary Judgment RE: COCOFED, et al. and Ballares, et al., the Republic interposed a Motion for Partial Summary Judgment Re: Eduardo M. Cojuangco, Jr., praying that a summary judgment be rendered:

a. Declaring that Section 1 of P.D. No. 755 is unconstitutional insofar as it validates the provisions in the "PCA-Cojuangco Agreement x x x" dated May 25, 1975 providing payment of ten percent (10%) commission to defendant Cojuangco with respect to the FUB, now UCPB shares subject matter thereof;

b. Declaring that x x x Cojuangco, Jr. and his fronts, nominees and dummies, including x x x and Danilo S. Ursua, have not legally and validly obtained title over the subject UCPB shares; and

c. Declaring that the government is the lawful and true owner of the subject UCPB shares registered in the names of … Cojuangco, Jr. and the entities and persons above-enumerated, for the benefit of all coconut farmers. x x x

Following an exchange of pleadings, the Republic filed its sur-rejoinder praying that it be conclusively declared the true and absolute owner of the coconut levy funds and the UCPB shares acquired therefrom.19

We quote from COCOFED v. Republic:20

A joint hearing on the separate motions for summary judgment to determine what material facts exist with or without controversy then ensued. By Order of March 11, 2003, the Sandiganbayan detailed, based on this Court’s ruling in related ill-gotten cases, the parties’ manifestations made in open court and the pleadings and evidence on record, the facts it found to be without substantial controversy, together with the admissions and/or extent of the admission made by the parties respecting relevant facts, as follows:

As culled from the exhaustive discussions and manifestations of the parties in open court of their respective pleadings and evidence on record, the facts which exist without any substantial controversy are set forth hereunder, together with the

admissions and/or the extent or scope of the admissions made by the parties relating to the relevant facts:

1. The late President Ferdinand E. Marcos was President x x x for two terms under the 1935 Constitution and, during the second term, he declared Martial Law through Proclamation No. 1081 dated September 21, 1972.

2. On January 17, 1973, he issued Proclamation No. 1102 announcing the ratification of the 1973 Constitution.

3. From January 17, 1973 to April 7, 1981, he x x x exercised the powers and prerogative of President under the 1935 Constitution and the powers and prerogative of President x x x the 1973 Constitution.

He x x x promulgated various P.D.s, among which were P.D. No. 232, P.D. No. 276, P.D. No. 414, P.D. No. 755, P.D. No. 961 and P.D. No. 1468.

4. On April 17, 1981, amendments to the 1973 Constitution were effected and, on June 30, 1981, he, after being elected President, "reassumed the title and exercised the powers of the President until 25 February 1986."

5. Defendants Maria Clara Lobregat and Jose R. Eleazar, Jr. were PCA Directors x x x during the period 1970 to 1986 x x x.

6. Plaintiff admits the existence of the following agreements which are attached as Annexes "A" and "B" to the Opposition dated October 10, 2002 of defendant Eduardo M. Cojuangco, Jr. to the above-cited Motion for Partial Summary Judgment:

a) "This Agreement made and entered into this ______ day of May, 1975 at Makati, Rizal, Philippines, by and between:

PEDRO COJUANGCO, Filipino, of legal age and with residence at 1575 Princeton St., Mandaluyong, Rizal, for and in his own behalf and in behalf of certain other stockholders of First United Bank listed in Annex "A" attached hereto (hereinafter collectively called the SELLERS);

– and –

EDUARDO COJUANGCO, JR., Filipino, of legal age and with residence at 136 9th Street corner Balete Drive, Quezon City, represented in this act by his duly authorized attorney-in-fact, EDGARDO J. ANGARA, for and in his own behalf and in behalf of certain other buyers, (hereinafter collectively called the BUYERS)";

WITNESSETH: That

WHEREAS, the SELLERS own of record and beneficially a total of 137,866 shares of stock, with a par value of P100.00 each, of the common stock of the First United Bank (the "Bank"), a commercial banking corporation existing under the laws of the Philippines;

WHEREAS, the BUYERS desire to purchase, and the SELLERS are willing to sell, the aforementioned shares of stock totaling 137,866 shares (hereinafter called the "Contract Shares") owned by the SELLERS due to their special relationship to EDUARDO COJUANGCO, JR.;

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein contained, the parties agree as follows:

1. Sale and Purchase of Contract Shares

Subject to the terms and conditions of this Agreement, the SELLERS hereby sell, assign, transfer and convey unto the BUYERS, and the

BUYERS hereby purchase and acquire, the Contract Shares free and clear of all liens and encumbrances thereon.

2. Contract Price

The purchase price per share of the Contract Shares payable by the BUYERS is P200.00 or an aggregate price of P27,573,200.00 (the "Contract Price").

3. Delivery of, and payment for, stock certificates

Upon the execution of this Agreement, (i) the SELLERS shall deliver to the BUYERS the stock certificates representing the Contract Shares, free and clear of all liens, encumbrances, obligations, liabilities and other burdens in favor of the Bank or third parties, duly endorsed in blank or with stock powers sufficient to transfer the shares to bearer; and (ii) BUYERS shall deliver to the SELLERS P27,511,295.50 representing the Contract Price less the amount of stock transfer taxes payable by the SELLERS, which the BUYERS undertake to remit to the appropriate authorities. (Emphasis added.)

4. Representation and Warranties of Sellers

The SELLERS respectively and independently of each other represent and warrant that:

(a) The SELLERS are the lawful owners of, with good marketable title to, the Contract Shares and that (i) the certificates to be delivered pursuant thereto have been validly issued and are fully paid and non-assessable; (ii) the Contract Shares are free and clear of all liens, encumbrances,

obligations, liabilities and other burdens in favor of the Bank or third parties x x x.

This representation shall survive the execution and delivery of this Agreement and the consummation or transfer hereby contemplated.

(b) The execution, delivery and performance of this Agreement by the SELLERS does not conflict with or constitute any breach of any provision in any agreement to which they are a party or by which they may be bound.

(c) They have complied with the condition set forth in Article X of the Amended Articles of Incorporation of the Bank.

5. Representation of BUYERS

x x x x

6. Implementation

The parties hereto hereby agree to execute or cause to be executed such documents and instruments as may be required in order to carry out the intent and purpose of this Agreement.

7. Notices

x x x x

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands at the place and on the date first above written.

PEDRO COJUANGCO(on his own behalf and in

behalf of the other listed in Annex "A" hereof)

(SELLERS)

EDUARDO COJUANGCO, JR.(on his own behalf and in behalf

Sellers of the other Buyers)(BUYERS)

By:

EDGARDO J. ANGARAAttorney-in-Fact

x x x x

b) "Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines, made and entered into this 25th day of May 1975 at Makati, Rizal, Philippines, by and between:

EDUARDO M. COJUANGCO, JR., Filipino, of legal age, with business address at 10th Floor, Sikatuna Building, Ayala Avenue, Makati, Rizal, hereinafter referred to as the SELLER;

– and –

PHILIPPINE COCONUT AUTHORITY, a public corporation created by Presidential Decree No. 232, as amended, for itself and for the benefit of the coconut farmers of the Philippines, (hereinafter called the BUYER)"

WITNESSETH: That

WHEREAS, on May 17, 1975, the Philippine Coconut Producers Federation ("PCPF"), through its Board of Directors, expressed the desire of the coconut farmers to own a commercial bank which will be an effective instrument to solve the perennial credit problems and, for

that purpose, passed a resolution requesting the PCA to negotiate with the SELLER for the transfer to the coconut farmers of the SELLER’s option to buy the First United Bank (the "Bank") under such terms and conditions as BUYER may deem to be in the best interest of the coconut farmers and instructed Mrs. Maria Clara Lobregat to convey such request to the BUYER;

WHEREAS, the PCPF further instructed Mrs. Maria Clara Lobregat to make representations with the BUYER to utilize its funds to finance the purchase of the Bank;

WHEREAS, the SELLER has the exclusive and personal option to buy 144,400 shares (the "Option Shares") of the Bank, constituting 72.2% of the present outstanding shares of stock of the Bank, at the price of P200.00 per share, which option only the SELLER can validly exercise;

WHEREAS, in response to the representations made by the coconut farmers, the BUYER has requested the SELLER to exercise his personal option for the benefit of the coconut farmers;

WHEREAS, the SELLER is willing to transfer the Option Shares to the BUYER at a price equal to his option price of P200 per share;

WHEREAS, recognizing that ownership by the coconut farmers of a commercial bank is a permanent solution to their perennial credit problems, that it will accelerate the growth and development of the coconut industry and that the policy of the state which the BUYER is required to implement is to achieve vertical integration thereof so that coconut farmers will become participants in, and beneficiaries of the development and growth of the coconut industry, the BUYER approved the request of PCPF that it acquire a commercial bank to be owned by the coconut farmers and, appropriated, for that purpose,

the sum of P150 Million to enable the farmers to buy the Bank and capitalize the Bank to such an extension as to be in a position to adopt a credit policy for the coconut farmers at preferential rates;

WHEREAS, x x x the BUYER is willing to subscribe to additional shares ("Subscribed Shares") and place the Bank in a more favorable financial position to extend loans and credit facilities to coconut farmers at preferential rates;

NOW, THEREFORE, for and in consideration of the foregoing premises and the other terms and conditions hereinafter contained, the parties hereby declare and affirm that their principal contractual intent is (1) to ensure that the coconut farmers own at least 60% of the outstanding capital stock of the Bank; and (2) that the SELLER shall receive compensation for exercising his personal and exclusive option to acquire the Option Shares, for transferring such shares to the coconut farmers at the option price of P200 per share, and for performing the management services required of him hereunder.

1. To ensure that the transfer to the coconut farmers of the Option Shares is effected with the least possible delay and to provide for the faithful performance of the obligations of the parties hereunder, the parties hereby appoint the Philippine National Bank as their escrow agent (the "Escrow Agent").

Upon execution of this Agreement, the BUYER shall deposit with the Escrow Agent such amount as may be necessary to implement the terms of this Agreement x x x.

2. As promptly as practicable after execution of this Agreement, the SELLER shall exercise his

option to acquire the Option Share and SELLER shall immediately thereafter deliver and turn over to the Escrow Agent such stock certificates as are herein provided to be received from the existing stockholders of the Bank by virtue of the exercise on the aforementioned option x x x.

3. To ensure the stability of the Bank and continuity of management and credit policies to be adopted for the benefit of the coconut farmers, the parties undertake to cause the stockholders and the Board of Directors of the Bank to authorize and approve a management contract between the Bank and the SELLER under the following terms:

(a) The management contract shall be for a period of five (5) years, renewable for another five (5) years by mutual agreement of the SELLER and the Bank;

(b) The SELLER shall be elected President and shall hold office at the pleasure of the Board of Directors. While serving in such capacity, he shall be entitled to such salaries and emoluments as the Board of Directors may determine;

(c) The SELLER shall recruit and develop a professional management team to manage and operate the Bank under the control and supervision of the Board of Directors of the Bank;

(d) The BUYER undertakes to cause three (3) persons designated by the SELLER to be elected to the Board of Directors of the Bank;

(e) The SELLER shall receive no compensation for managing the Bank, other than such salaries or emoluments to which he may be entitled by virtue of the discharge of his function and duties as President, provided x x x and

(f) The management contract may be assigned to a management company owned and controlled by the SELLER.

4. As compensation for exercising his personal and exclusive option to acquire the Option Shares and for transferring such shares to the coconut farmers, as well as for performing the management services required of him, SELLER shall receive equity in the Bank amounting, in the aggregate, to 95,304 fully paid shares in accordance with the procedure set forth in paragraph 6 below;

5. In order to comply with the Central Bank program for increased capitalization of banks and to ensure that the Bank will be in a more favorable financial position to attain its objective to extend to the coconut farmers loans and credit facilities, the BUYER undertakes to subscribe to shares with an aggregate par value of P80,864,000 (the "Subscribed Shares"). The obligation of the BUYER with respect to the Subscribed Shares shall be as follows:

(a) The BUYER undertakes to subscribe, for the benefit of the coconut farmers, to shares with an aggregate par value of P15,884,000 from the present authorized but unissued shares of the Bank; and

(b) The BUYER undertakes to subscribe, for the benefit of the coconut farmers, to shares with an aggregate par value of P64,980,000 from the increased capital stock of the Bank, which subscriptions shall be deemed made upon the approval by the stockholders of the increase of the authorized capital stock of the Bank from P50 Million to P140 Million.

The parties undertake to declare stock dividends of P8 Million out of the present authorized but unissued capital stock of P30 Million.

6. To carry into effect the agreement of the parties that the SELLER shall receive as his compensation 95,304 shares:

(a) The Escrow Agent shall, upon receipt from the SELLER of the stock certificates representing the Option Shares, duly endorsed in blank or with stock powers sufficient to transfer the same to bearer, present such stock certificates to the Transfer Agent of the Bank and shall cause such Transfer Agent to issue stock certificates of the Bank in the following ratio: one share in the name of the SELLER for every nine shares in the name of the BUYER.

(b) With respect to the Subscribed Shares, the BUYER undertakes, in order to prevent the dilution of SELLER’s equity position, that it shall cede over to the SELLER 64,980 fully-paid shares out of the Subscribed Shares. Such undertaking shall be complied with in the following manner: upon receipt of advice that the BUYER has

subscribed to the Subscribed Shares upon approval by the stockholders of the increase of the authorized capital stock of the Bank, the Escrow Agent shall thereupon issue a check in favor of the Bank covering the total payment for the Subscribed Shares. The Escrow Agent shall thereafter cause the Transfer Agent to issue a stock certificates of the Bank in the following ratio: one share in the name of the SELLER for every nine shares in the name of the BUYER.

7. The parties further undertake that the Board of Directors and management of the Bank shall establish and implement a loan policy for the Bank of making available for loans at preferential rates of interest to the coconut farmers x x x.

8. The BUYER shall expeditiously distribute from time to time the shares of the Bank, that shall be held by it for the benefit of the coconut farmers of the Philippines under the provisions of this Agreement, to such, coconut farmers holding registered COCOFUND receipts on such equitable basis as may be determine by the BUYER in its sound discretion.

9. x x x x

10. To ensure that not only existing but future coconut farmers shall be participants in and beneficiaries of the credit policies, and shall be entitled to the benefit of loans and credit facilities to be extended by the Bank to coconut farmers at preferential rates, the shares held by the coconut farmers shall not be entitled to pre-emptive rights with respect to the unissued portion of the authorized capital stock or any increase thereof.

11. After the parties shall have acquired two-thirds (2/3) of the outstanding shares of the Bank, the parties shall call a special stockholders’ meeting of the Bank:

(a) To classify the present authorized capital stock of P50,000,000 divided into 500,000 shares, with a par value of P100.00 per share into: 361,000 Class A shares, with an aggregate par value of P36,100,000 and 139,000 Class B shares, with an aggregate par value of P13,900,000. All of the Option Shares constituting 72.2% of the outstanding shares, shall be classified as Class A shares and the balance of the outstanding shares, constituting 27.8% of the outstanding shares, as Class B shares;

(b) To amend the articles of incorporation of the Bank to effect the following changes:

(i) change of corporate name to First United Coconut Bank;

(ii) replace the present provision restricting the transferability of the shares with a limitation on ownership by any individual or entity to not more than 10% of the outstanding shares of the Bank;

(iii) provide that the holders of Class A shares shall not be entitled to pre-emptive rights with respect to the unissued portion of the authorized capital stock or any increase thereof; and

(iv) provide that the holders of Class B shares shall be absolutely entitled to pre-emptive rights, with respect to the unissued portion of Class B shares comprising part of the authorized capital stock or any increase

thereof, to subscribe to Class B shares in proportion t the subscriptions of Class A shares, and to pay for their subscriptions to Class B shares within a period of five (5) years from the call of the Board of Directors.

(c) To increase the authorized capital stock of the Bank from P50 Million to P140 Million, divided into 1,010,800 Class A shares and 389,200 Class B shares, each with a par value of P100 per share;

(d) To declare a stock dividend of P8 Million payable to the SELLER, the BUYER and other stockholders of the Bank out of the present authorized but unissued capital stock of P30 Million;

(e) To amend the by-laws of the Bank accordingly; and

(f) To authorize and approve the management contract provided in paragraph 2 above.

The parties agree that they shall vote their shares and take all the necessary corporate action in order to carry into effect the foregoing provisions of this paragraph 11, including such other amendments of the articles of incorporation and by-laws of the Bank as are necessary in order to implement the intention of the parties with respect thereto.

12. It is the contemplation of the parties that the Bank shall achieve a financial and equity position to be able to lend to the coconut farmers at preferential rates.

In order to achieve such objective, the parties shall cause the Bank to adopt a policy of reinvestment, by way of

stock dividends, of such percentage of the profits of the Bank as may be necessary.

13. The parties agree to execute or cause to be executed such documents and instruments as may be required in order to carry out the intent and purpose of this Agreement.

IN WITNESS WHEREOF x x x

PHILIPPINE COCONUT AUTHORITY(BUYER)

By:

EDUARDO COJUANGCO, JR.(SELLER)

MARIA CLARA L. LOBREGAT

x x x x

7. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the x x x (PCA) was the "other buyers" represented by defendant Eduardo M. Cojuangco, Jr. in the May 1975 Agreement entered into between Pedro Cojuangco (on his own behalf and in behalf of other sellers listed in Annex "A"of the agreement) and defendant Eduardo M. Cojuangco, Jr. (on his own behalf and in behalf of the other buyers). Defendant Cojuangco insists he was the "only buyer" under the aforesaid Agreement.

8. Defendant Eduardo M. Cojuangco, Jr. did not own any share in the x x x (FUB) prior to the execution of the two Agreements x x x.

9. Defendants Lobregat, et al., and COCOFED, et al., and Ballares, et al. admit that in addition to the 137,866 FUB shares of Pedro Cojuangco, et al. covered by the Agreement, other FUB stockholders sold their shares to PCA such that the total

number of FUB shares purchased by PCA … increased from 137,866 shares to 144,400 shares, the OPTION SHARES referred to in the Agreement of May 25, 1975. Defendant Cojuangco did not make said admission as to the said 6,534 shares in excess of the 137,866 shares covered by the Agreement with Pedro Cojuangco.

10. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the Agreement, described in Section 1 of Presidential Decree (P.D.) No. 755 dated July 29, 1975 as the "Agreement for the Acquisition of a Commercial Bank for the Benefit of Coconut Farmers" executed by the Philippine Coconut Authority" and incorporated in Section 1 of P.D. No. 755 by reference, refers to the "AGREEMENT FOR THE ACQUISITION OF A COMMERCIAL BANK FOR THE BENEFIT OF THE COCONUT FARMERS OF THE PHILIPPINES" dated May 25, 1975 between defendant Eduardo M. Cojuangco, Jr. and the PCA (Annex "B" for defendant Cojuangco’s OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT RE: EDUARDO M. COJUANGCO, JR. dated September 18, 2002).

Plaintiff refused to make the same admission.

11. As to whether P.D. No. 755 and the text of the agreement described therein was published, the Court takes judicial notice that P.D. No. 755 was published in x x x volume 71 of the Official Gazette but the text of the agreement x x x was not so published with P.D. No. 755.

12. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the PCA used public funds x x x in the total amount of P150 million, to purchase the FUB shares amounting to 72.2% of the authorized capital stock of the FUB, although the PCA was later reimbursed from the coconut levy funds and that the PCA subscription in the increased capitalization of the FUB, which was later renamed the x x x (UCPB), came from the said coconut levy funds x x x.

13. Pursuant to the May 25, 1975 Agreement, out of the 72.2% shares of the authorized and the increased capital stock of the FUB (later UCPB), entirely paid for by PCA, 64.98% of the shares were placed in the name of the "PCA for the benefit of the coconut farmers" and 7,22% were given to defendant Cojuangco. The remaining 27.8% shares of stock in the FUB which later became the UCPB were not covered by the two (2) agreements referred to in item no. 6, par. (a) and (b) above. "There were shares forming part of the aforementioned 64.98% which were later sold or transferred to non-coconut farmers.

14. Under the May 27, 1975 Agreement, defendant Cojuangco’s equity in the FUB (now UCPB) was ten percent (10%) of the shares of stock acquired by the PCA for the benefit of the coconut farmers.

15. That the fully paid 95.304 shares of the FUB, later the UCPB, acquired by defendant x x x Cojuangco, Jr. pursuant to the May 25, 1975 Agreement were paid for by the PCA in accordance with the terms and conditions provided in the said Agreement. 16. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the affidavits of the coconut farmers (specifically, Exhibit "1-Farmer" to "70-Farmer") uniformly state that:

a. they are coconut farmers who sold coconut products;

b. in the sale thereof, they received COCOFUND receipts pursuant to R.A. No. 6260;

c. they registered the said COCOFUND receipts; and

d. by virtue thereof, and under R.A. No. 6260, P.D. Nos. 755, 961 and 1468, they are allegedly entitled to the subject UCPB shares.

but subject to the following qualifications:

a. there were other coconut farmers who received UCPB shares although they did not present said COCOFUND receipt because the PCA distributed the unclaimed UCPB shares not only to those who already received their UCPB shares in exchange for their COCOFUND receipts but also to the coconut farmers determined by a national census conducted pursuant to PCA administrative issuances;

b. there were other affidavits executed by Lobregat, Eleazar, Ballares and Aldeguer relative to the said distribution of the unclaimed UCPB shares; and

c. the coconut farmers claim the UCPB shares by virtue of their compliance not only with the laws mentioned in item (d) above but also with the relevant issuances of the PCA such as, PCA Administrative Order No. 1, dated August 20, 1975 (Exh. "298-Farmer"); PCA Resolution No. 033-78 dated February 16, 1978….

The plaintiff did not make any admission as to the foregoing qualifications.

17. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. claim that the UCPB shares in question have legitimately become the private properties of the 1,405,366 coconut farmers solely on the basis of their having acquired said shares in compliance with R.A. No. 6260, P.D. Nos. 755, 961 and 1468 and the administrative issuances of the PCA cited above.

18. On the other hand, defendant … Cojuangco, Jr. claims ownership of the UCPB shares, which he holds, solely on the basis of the two Agreements…. (Emphasis and words in brackets added.)

On July 11, 2003, the Sandiganbayan issued the assailed PSJ-A, ruling in favor of the Republic, disposing insofar as pertinent as follows:21

WHEREFORE, in view of the foregoing, we rule as follows:

x x x x

C. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: EDUARDO M. COJUANGCO, JR.) dated September 18, 2002 filed by plaintiff.

1. Sec. 1 of P.D. No. 755 did not validate the Agreement between PCA and defendant Eduardo M. Cojuangco, Jr. dated May 25, 1975 nor did it give the Agreement the binding force of a law because of the non-publication of the said Agreement.

2. Regarding the questioned transfer of the shares of stock of FUB (later UCPB) by PCA to defendant Cojuangco or the so-called "Cojuangco UCPB shares" which cost the PCA more than Ten Million Pesos in CCSF in 1975, we declare, that the transfer of the following FUB/UCPB shares to defendant Eduardo M. Cojuangco, Jr. was not supported by valuable consideration, and therefore null and void:

a. The 14,400 shares from the "Option Shares";

b. Additional Bank Shares Subscribed and Paid by PCA, consisting of:

1. Fifteen Thousand Eight Hundred Eighty-Four (15,884) shares out of the authorized but unissued shares of the bank, subscribed and paid by PCA;

2. Sixty Four Thousand Nine Hundred Eighty (64,980) shares of the increased capital stock subscribed and paid by PCA; and

3. Stock dividends declared pursuant to paragraph 5 and paragraph 11 (iv) (d) of the Agreement.

3. The above-mentioned shares of stock of the FUB/UCPB transferred to defendant Cojuangco are hereby declared conclusively owned by the plaintiff Republic of the Philippines.

4. The UCPB shares of stock of the alleged fronts, nominees and dummies of defendant Eduardo M. Cojuangco, Jr. which form part of the 72.2% shares of the FUB/UCPB paid for by the

PCA with public funds later charged to the coconut levy funds, particularly the CCSF, belong to the plaintiff Republic of the Philippines as their true and beneficial owner.

Let trial of this Civil Case proceed with respect to the issues which have not been disposed of in this Partial Summary Judgment. For this purpose, the plaintiff’s Motion Ad Cautelam to Present

Additional Evidence dated March 28, 2001 is hereby GRANTED.22 (Emphasis and underlining added.)

As earlier explained, the core issue in this instant petition is Part C of the dispositive portion in PSJ-A declaring the 7.22% FUB (now UCPB) shares transferred to Cojuangco, plus the other shares paid by the PCA as "conclusively" owned by the Republic. Parts A and B of the same dispositive portion have already been finally resolved and adjudicated by this Court in COCOFED v. Republic on January 24, 2012.23

From PSJ-A, Cojuangco moved for partial reconsideration but the Sandiganbayan, by Resolution24 of December 28, 2004, denied the motion.

Hence, the instant petition.

The Issues

Cojuangco’s petition formulates the issues in question form, as follows:25

a. Is the acquisition of the so-called Cojuangco, Jr. UCPB shares by petitioner Cojuangco x x x "not supported by valuable consideration and, therefore, null and void"?

b. Did the Sandiganbayan have jurisdiction, in Civil Case No. 0033-A, an "ill-gotten wealth" case brought under EO Nos. 1 and 2, to declare the Cojuangco UCPB shares acquired by virtue of the Pedro Cojuangco, et al. Agreement and/or the PCA Agreement null and void because "not supported by valuable consideration"?

c. Was the claim that the acquisition by petitioner Cojuangco of shares representing 7.2% of the outstanding capital stock of FUB (later UCPB) "not supported by valuable consideration", a "claim" pleaded in the complaint and may therefore be the basis of a "summary judgment" under Section 1, Rule 35 of the Rules of Court?

d. By declaring the Cojuangco UCPB shares as "not supported by valuable consideration, and therefore, null and void", did the Sandiganbayan effectively nullify the PCA Agreement? May the Sandiganbayan nullify the PCA Agreement when the parties to the Agreement, namely: x x x concede its validity? If the PCA Agreement be deemed "null and void", should not the FUB (later UCPB) shares revert to petitioner Cojuangco (under the PCA Agreement) or to Pedro Cojuangco, et al. x x x? Would there be a basis then, even assuming the absence of consideration x x x, to declare 7.2% UCPB shares of petitioner Cojuangco as "conclusively owned by the plaintiff Republic of the Philippines"?26

The Court’s Ruling

I

THE SANDIGANBAYAN HAS JURISDICTION OVER THE SUBJECT MATTER OF THE SUBDIVIDED AMENDED COMPLAINTS, INCLUDING THE SHARES ALLEGEDLY ACQUIRED BY COJUANGCO BY VIRTUE OF THE PCA AGREEMENTS.

The issue of jurisdiction over the subject matter of the subdivided amended complaints has peremptorily been put to rest by the Court in its January 24, 2012 Decision in COCOFED v. Republic. There, the Court, citing Regalado27 and settled jurisprudence, stressed the following interlocking precepts: Subject matter jurisdiction is conferred by law, not by the consent or acquiescence of any or all of the parties. In turn, the issue on whether a suit comes within the penumbra of a statutory conferment is determined by the allegations in the complaint, regardless of whether or not the suitor will be entitled to recover upon all or part of the claims asserted.

The Republic’s material averments in its complaint subdivided in CC No. 0033-A included the following:

CC No. 0033-A

12. Defendant Eduardo M. Cojuangco, Jr. served as a public officer during the Marcos administration. During the period of his incumbency as a public officer, he acquired assets, funds and other property grossly and manifestly disproportionate to his salaries, lawful income and income from legitimately acquired property.

13. Defendant Eduardo M. Cojuangco, Jr., taking undue advantage of his association, influence, connection, and acting in unlawful concert with Defendants Ferdinand E. Marcos and Imelda R. Marcos, AND THE INDIVIDUAL DEFENDANTS, embarked upon devices, schemes and stratagems, to unjustly

enrich themselves at the expense of Plaintiff and the Filipino people, such as when he –

a) manipulated, beginning the year 1975 with the active collaboration of Defendants x x x Maria Clara Lobregat, Danilo Ursua etc., the purchase by . . . (PCA) of 72.2% of the outstanding capital stock of the x x x (FUB) which was subsequently converted into a universal bank named x x x (UCPB) through the use of the Coconut Consumers Stabilization Fund (CCSF) being initially in the amount of P85,773,100.00 in a manner contrary to law and to the specific purposes for which said coconut levy funds were imposed and collected under P.D. 276, and with sinister designs and under anomalous circumstances, to wit:

(i) Defendant Eduardo Cojuangco, Jr. coveted the coconut levy funds as a cheap, lucrative and risk-free source of funds with which to exercise his private option to buy the controlling interest in FUB; thus, claiming that the 72.2% of the outstanding capital stock of FUB could only be purchased and transferred through the exercise of his "personal and exclusive action option to acquire the 144,000 shares" of the bank, Defendant Eduardo M. Cojuangco, Jr. and PCA, x x x executed on May 26, 1975 a purchase agreement which provides, among others, for the payment to him in fully paid shares as compensation thereof 95,384 shares worth P1,444,000.00 with the further condition that he shall manage and control the bank as Director and President for a term of five (5) years renewable for another five (5) years and to designate three (3) persons of his choice who shall be elected as members of the Board of Directors of the Bank;

(ii) to legitimize a posteriori his highly anomalous and irregular use and diversion of government funds to advance his own private and commercial

interests, Defendant Eduardo Cojuangco, Jr. caused the issuance by Defendant Ferdinand E. Marcos of PD 755 (a) declaring that the coconut levy funds shall not be considered special and fiduciary and trust funds and do not form part of the general funds of the National Government, conveniently repealing for that purpose a series of previous decrees, PDs 276 and 414, establishing the character of the coconut levy funds as special, fiduciary, trust and governmental funds; (b) confirming the agreement between Defendant Eduardo Cojuangco, Jr. and PCA on the purchase of FUB by incorporating by reference said private commercial agreement in PD 755;

(iii)To further consolidate his hold on UCPB, Defendant Eduardo Cojuangco, Jr. imposed as consideration and conditions for the purchase that (a) he gets one out of every nine shares given to PCA, and (b) he gets to manage and control UCPB as president for a term of five (5) years renewable for another five (5) years;

(iv) To perpetuate his opportunity to deal with and make use of the coconut levy funds x x x Cojuangco, Jr. caused the issuance by Defendant Ferdinand E. Marcos of an unconstitutional decree (PD 1468) requiring the deposit of all coconut levy funds with UCPB, interest free to the prejudice of the government.

(v) In gross violation of their fiduciary positions and in contravention of the goal to create a bank for the coconut farmers of the country, the capital stock of UCPB as of February 25, 1986 was actually held by the defendants, their lawyers, factotum and business associates, thereby finally gaining control of the UCPB by misusing the

names and identities of the so-called "more than one million coconut farmers."

14. The acts of Defendants, singly or collectively, and/or in unlawful concert with one another, constitute gross abuse of official position and authority, flagrant breach of public trust and fiduciary obligations, brazen abuse of right and power, and unjust enrichment, violation of the constitution and laws of the Republic of the Philippines, to the grave and irreparable damage of Plaintiff and the Filipino people.28

In no uncertain terms, the Court has upheld the Sandiganbayan’s assumption of jurisdiction over the subject matter of Civil Case Nos. 0033-A and 0033-F.29 The Court wrote:

Judging from the allegations of the defendants’ illegal acts thereat made, it is fairly obvious that both CC Nos. 0033-A and CC 0033-F partake, in the context of EO Nos. 1, 2 and 14, series of 1986, the nature of ill-gotten wealth suits. Both deal with the recovery of sequestered shares, property or business enterprises claimed, as alleged in the corresponding basic complaints, to be ill-gotten assets of President Marcos, his cronies and nominees and acquired by taking undue advantage of relationships or influence and/or through or as a result of improper use, conversion or diversion of government funds or property. Recovery of these assets––determined as shall hereinafter be discussed as prima facie ill-gotten––falls within the unquestionable jurisdiction of the Sandiganbayan.30

P.D. No. 1606, as amended by R.A. 7975 and E.O. No. 14, Series of 1986, vests the Sandiganbayan with, among others, original jurisdiction over civil and criminal cases instituted pursuant to and in connection with E.O. Nos. 1, 2, 14 and 14-A. Correlatively, the PCGG Rules and Regulations defines the term "Ill-Gotten Wealth" as "any asset, property, business enterprise or material possession of persons within the purview of E.O. Nos. 1 and 2, acquired by them directly, or indirectly thru

dummies, nominees, agents, subordinates and/or business associates by any of the following means or similar schemes":

(1) Through misappropriation, conversion, misuse or malversation of public funds or raids on the public treasury;

(2) x x x x

(3) By the illegal or fraudulent conveyance or disposition of assets belonging to the government or any of its subdivisions, agencies or instrumentalities or government-owned or controlled corporations;

(4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation in any business enterprise or undertaking;

(5) Through the establishment of agricultural, industrial or commercial monopolies or other combination and/or by the issuance, promulgation and/or implementation of decrees and orders intended to benefit particular persons or special interests; and

(6) By taking undue advantage of official position, authority, relationship or influence for personal gain or benefit. (Emphasis supplied)

Section 2(a) of E.O. No. 1 charged the PCGG with the task of assisting the President in "The recovery of all ill-gotten wealth accumulated by former … President Marcos, his immediate family, relatives, subordinates and close associates … including the takeover or sequestration of all business enterprises and entities owned or controlled by them, during his administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship." Complementing the aforesaid Section 2(a) is Section 1 of E.O. No. 2 decreeing the freezing of

all assets "in which the Marcoses their close relatives, subordinates, business associates, dummies, agents or nominees have any interest or participation."

The Republic’s averments in the amended complaints, particularly those detailing the alleged wrongful acts of the defendants, sufficiently reveal that the subject matter thereof comprises the recovery by the Government of ill-gotten wealth acquired by then President Marcos, his cronies or their associates and dummies through the unlawful, improper utilization or diversion of coconut levy funds aided by P.D. No. 755 and other sister decrees. President Marcos himself issued these decrees in a brazen bid to legalize what amounts to private taking of the said public funds.

x x x x

There was no actual need for Republic, as plaintiff a quo, to adduce evidence to show that the Sandiganbayan has jurisdiction over the subject matter of the complaints as it leaned on the averments in the initiatory pleadings to make visible the jurisdiction of the Sandiganbayan over the ill-gotten wealth complaints. As previously discussed, a perusal of the allegations easily reveals the sufficiency of the statement of matters disclosing the claim of the government against the coco levy funds and the assets acquired directly or indirectly through said funds as ill-gotten wealth. Moreover, the Court finds no rule that directs the plaintiff to first prove the subject matter jurisdiction of the court before which the complaint is filed. Rather, such burden falls on the shoulders of defendant in the hearing of a motion to dismiss anchored on said ground or a preliminary hearing thereon when such ground is alleged in the answer.

x x x x

Lest it be overlooked, this Court has already decided that the sequestered shares are prima facie ill-gotten wealth rendering the issue of the validity of their sequestration and of the

jurisdiction of the Sandiganbayan over the case beyond doubt. In the case of COCOFED v. PCGG, We stated that:

It is of course not for this Court to pass upon the factual issues thus raised. That function pertains to the Sandiganbayan in the first instance. For purposes of this proceeding, all that the Court needs to determine is whether or not there is prima facie justification for the sequestration ordered by the PCGG. The Court is satisfied that there is. The cited incidents, given the public character of the coconut levy funds, place petitioners COCOFED and its leaders and officials, at least prima facie, squarely within the purview of Executive Orders Nos. 1, 2 and 14, as construed and applied in BASECO, to wit:

"1. that ill-gotten properties (were) amassed by the leaders and supporters of the previous regime;

"a. more particularly, that ‘(i) Ill-gotten wealth was accumulated by x x x Marcos, his immediate family, relatives, subordinates and close associates, x x x (and) business enterprises and entities (came to be) owned or controlled by them, during x x x (the Marcos) administration, directly or through nominees, by taking undue advantage of their public office and using their powers, authority, influence, connections or relationships’;

"b. otherwise stated, that ‘there are assets and properties purportedly pertaining to the Marcoses, their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the Government x x x or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment x x x;

x x x x

2. The petitioners’ claim that the assets acquired with the coconut levy funds are privately owned by the coconut farmers is founded on certain provisions of law, to wit Sec. 7, RA 6260 and Sec. 5, Art. III, PD 1468… (Words in bracket added; italics in the original).

x x x x

E.O. 1, 2, 14 and 14-A, it bears to stress, were issued precisely to effect the recovery of ill-gotten assets amassed by the Marcoses, their associates, subordinates and cronies, or through their nominees. Be that as it may, it stands to reason that persons listed as associated with the Marcoses refer to those in possession of such ill-gotten wealth but holding the same in behalf of the actual, albeit undisclosed owner, to prevent discovery and consequently recovery. Certainly, it is well-nigh inconceivable that ill-gotten assets would be distributed to and left in the hands of individuals or entities with obvious traceable connections to Mr. Marcos and his cronies. The Court can take, as it has in fact taken, judicial notice of schemes and machinations that have been put in place to keep ill-gotten assets under wraps. These would include the setting up of layers after layers of shell or dummy, but controlled, corporations31 or manipulated instruments calculated to confuse if not altogether mislead would-be investigators from recovering wealth deceitfully amassed at the expense of the people or simply the fruits thereof. Transferring the illegal assets to third parties not readily perceived as Marcos cronies would be another. So it was that in PCGG v. Pena, the Court, describing the rule of Marcos as a "well entrenched plundering regime of twenty years," noted the magnitude of the past regime’s organized pillage and the ingenuity of the plunderers and pillagers with the assistance of experts and the best legal minds in the market.32

Prescinding from the foregoing premises, there can no longer be any serious challenge as to the Sandiganbayan’s subject matter jurisdiction. And in connection therewith, the Court wrote in COCOFED v. Republic, that the instant petition shall be

decided separately and should not be affected by the January 24, 2012 Decision, "save for determinatively legal issues directly addressed" therein.33 Thus:

We clarify that PSJ-A is subject of another petition for review interposed by Eduardo Cojuangco, Jr., in G.R. No. 180705 entitled, Eduardo M. Cojuangco, Jr. v. Republic of the Philippines, which shall be decided separately by this Court. Said petition should accordingly not be affected by this Decision save for determinatively legal issues directly addressed herein.34

(Emphasis Ours.)

We, therefore, reiterate our holding in COCOFED v. Republic respecting the Sandiganbayan’s jurisdiction over the subject matter of Civil Case No. 0033-A, including those matters whose adjudication We shall resolve in the present case.

II

PRELIMINARILY, THE AGREEMENT BETWEEN THE PCA AND EDUARDO M. COJUANGCO, JR. DATED MAY 25, 1975 CANNOT BE ACCORDED THE STATUS OF A LAW FOR THE LACK OF THE REQUISITE PUBLICATION.

It will be recalled that Cojuangco’s claim of ownership over the UCPB shares is hinged on two contract documents the respective contents of which formed part of and reproduced in their entirety in the aforecited Order35 of the Sandiganbayan dated March 11, 2003. The first contract refers to the agreement entered into by and between Pedro Cojuangco and his group, on one hand, and Eduardo M. Cojuangco, Jr., on the other, bearing date "May 1975"36 (hereinafter referred to as "PC-ECJ Agreement"), while the second relates to the accord between the PCA and Eduardo M. Cojuangco, Jr. dated May 25, 1975 (hereinafter referred to as "PCA-Cojuangco Agreement"). The PC-ECJ Agreement allegedly contains, inter alia, Cojuangco’s personal and exclusive option to acquire the FUB ("UCPB") shares from Pedro and his group. The PCA-Cojuangco

Agreement shows PCA’s acquisition of the said option from Eduardo M. Cojuangco, Jr.

Section 1 of P.D. No. 755 incorporated, by reference, the "Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers" executed by the PCA. Particularly, Section 1 states:

Section 1. Declaration of National Policy. It is hereby declared that the policy of the State is to provide readily available credit facilities to the coconut farmers at preferential rates; that this policy can be expeditiously and efficiently realized by the implementation of the "Agreement for the Acquisition of a Commercial Bank for the benefit of the Coconut Farmers" executed by the Philippine Coconut Authority, the terms of which "Agreement" are hereby incorporated by reference; and that the Philippine Coconut Authority is hereby authorized to distribute, for free, the shares of stock of the bank it acquired to the coconut farmers under such rules and regulations it may promulgate. (Emphasis Ours.)

It bears to stress at this point that the PCA-Cojuangco Agreement referred to above in Section 1 of P.D. 755 was not reproduced or attached as an annex to the same law. And it is well-settled that laws must be published to be valid. In fact, publication is an indispensable condition for the effectivity of a law. Tañada v. Tuvera37 said as much:

Publication of the law is indispensable in every case x x x.

x x x x

We note at this point the conclusive presumption that every person knows the law, which of course presupposes that the law has been published if the presumption is to have any legal justification at all. It is no less important to remember that Section 6 of the Bill of Rights recognizes "the right of the people to information on matters of public concern," and this certainly

applies to, among others, and indeed especially, the legislative enactments of the government.

x x x x

We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for their effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative powers whenever the same are validly delegated by the legislature, or, at present, directly conferred by the Constitution. Administrative rules and regulations must also be published if their purpose is to enforce or implement existing law pursuant also to a valid delegation.38

We even went further in Tañada to say that:

Laws must come out in the open in the clear light of the sun instead of skulking in the shadows with their dark, deep secrets. Mysterious pronouncements and rumored rules cannot be recognized as binding unless their existence and contents are confirmed by a valid publication intended to make full disclosure and give proper notice to the people. The furtive law is like a scabbarded saber that cannot feint, parry or cut unless the naked blade is drawn.39

The publication, as further held in Tañada, must be of the full text of the law since the purpose of publication is to inform the public of the contents of the law. Mere referencing the number of the presidential decree, its title or whereabouts and its supposed date of effectivity would not satisfy the publication requirement.40

In this case, while it incorporated the PCA-Cojuangco Agreement by reference, Section 1 of P.D. 755 did not in any

way reproduce the exact terms of the contract in the decree. Neither was acopy thereof attached to the decree when published. We cannot, therefore, extend to the said

Agreement the status of a law. Consequently, We join the Sandiganbayan in its holding that the PCA-Cojuangco Agreement shall be treated as an ordinary transaction between agreeing minds to be governed by contract law under the Civil Code.

III

THE PCA-COJUANGCO AGREEMENT IS A VALID CONTRACT FOR HAVING THE REQUISITE CONSIDERATION.

In PSJ-A, the Sandiganbayan struck down the PCA-Cojuangco Agreement as void for lack of consideration/cause as required under Article 1318, paragraph 3 in relation to Article 1409, paragraph 3 of the Civil Code. The Sandiganbayan stated:

In sum, the evidence on record relied upon by defendant Cojuangco negates the presence of: (1) his claimed personal and exclusive option to buy the 137,866 FUB shares; and (2) any pecuniary advantage to the government of the said option, which could compensate for generous payment to him by PCA of valuable shares of stock, as stipulated in the May 25, 1975 Agreement between him and the PCA.41

On the other hand, the aforementioned provisions of the Civil Code state:

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established. (Emphasis supplied)42

Art. 1409. The following contracts are inexistent and void from the beginning:

x x x x

(3) Those whose cause or object did not exist at the time of the transaction;43

The Sandiganbayan found and so tagged the alleged cause for the agreement in question, i.e., Cojuangco’s "personal and exclusive option to acquire the Option Shares," as fictitious. A reading of the purchase agreement between Cojuangco and PCA, so the Sandiganbayan ruled, would show that Cojuangco was not the only seller; thus, the option was, as to him, neither personal nor exclusive as he claimed it to be. Moreover, as the Sandiganbayan deduced, that option was inexistent on the day of execution of the PCA-Cojuangco Agreement as the Special Power of Attorney executed by Cojuangco in favor of now Senator Edgardo J. Angara, for the latter to sign the PC-ECJ Agreement, was dated May 25, 1975 while the PCA-Cojuangco Agreement was also signed on May 25, 1975. Thus, the Sandiganbayan believed that when the parties affixed their signatures on the second Agreement, Cojuangco’s option to purchase the FUB shares of stock did not yet exist. The Sandiganbayan further ruled that there was no justification in the second Agreement for the compensation of Cojuangco of 14,400 shares, which it viewed as exorbitant. Additionally, the Sandiganbayan ruled that PCA could not validly enter, in behalf of FUB/UCPB, into a veritable bank management contract with Cojuangco, PCA having a personality separate and distinct from that of FUB. As such, the Sandiganbayan concluded that the PCA-Cojuangco Agreement was null and void. Correspondingly, the Sandiganbayan also ruled that the sequestered FUB (UCPB) shares of stock in the name of Cojuangco are conclusively owned by the Republic.

After a circumspect study, the Court finds as inconclusive the evidence relied upon by Sandiganbayan to support its ruling that the PCA-Cojuangco Agreement is devoid of sufficient consideration. We shall explain.

Rule 131, Section 3(r) of the Rules of Court states:

Sec. 3. Disputable presumptions.—The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence:

x x x x

(r) That there was a sufficient consideration for a contract;

The Court had the occasion to explain the reach of the above provision in Surtida v. Rural Bank of Malinao (Albay), Inc.,44 to wit:

Under Section 3, Rule 131 of the Rules of Court, the following are disputable presumptions: (1) private transactions have been fair and regular; (2) the ordinary course of business has been followed; and (3) there was sufficient consideration for a contract. A presumption may operate against an adversary who has not introduced proof to rebut it. The effect of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption, the one who has that burden is relieved for the time being from introducing evidence in support of the averment, because the presumption stands in the place of evidence unless rebutted.

The presumption that a contract has sufficient consideration cannot be overthrown by the bare uncorroborated and self-serving assertion of petitioners that it has no consideration. To overcome the presumption of consideration, the alleged lack of consideration must be shown by preponderance of evidence.

Petitioners failed to discharge this burden x x x. (Emphasis Ours.)

The assumption that ample consideration is present in a contract is further elucidated in Pentacapital Investment Corporation v. Mahinay:45

Under Article 1354 of the Civil Code, it is presumed that consideration exists and is lawful unless the debtor proves the contrary. Moreover, under Section 3, Rule 131 of the Rules of Court, the following are disputable presumptions: (1) private transactions have been fair and regular; (2) the ordinary course of business has been followed; and (3) there was sufficient consideration for a contract. A presumption may operate against an adversary who has not introduced proof to rebut it. The effect of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which, if no proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption, the one who has that burden is relieved for the time being from introducing evidence in support of the averment, because the presumption stands in the place of evidence unless rebutted.46 (Emphasis supplied.)

The rule then is that the party who stands to profit from a declaration of the nullity of a contract on the ground of insufficiency of consideration––which would necessarily refer to one who asserts such nullity––has the burden of overthrowing the presumption offered by the aforequoted Section 3(r). Obviously then, the presumption contextually operates in favor of Cojuangco and against the Republic, as plaintiff a quo, which then had the burden to prove that indeed there was no sufficient consideration for the Second Agreement. The Sandiganbayan’s stated observation, therefore, that based on the wordings of the Second Agreement, Cojuangco had no personal and exclusive option to purchase the FUB shares from Pedro Cojuangco had really little to commend itself for acceptance. This, as opposed to the fact that such sale and purchase agreement is

memorialized in a notarized document whereby both Eduardo Cojuangco, Jr. and Pedro Cojuangco attested to the correctness of the provisions thereof, among which was that Eduardo had such option to purchase. A notarized document, Lazaro v. Agustin47 teaches, "generally carries the evidentiary weight conferred upon it with respect to its due execution, and documents acknowledged before a notary public have in their favor the disputable presumption of regularity."

In Samanilla v. Cajucom,48 the Court clarified that the presumption of a valid consideration cannot be discarded on a simple claim of absence of consideration, especially when the contract itself states that consideration was given:

x x x This presumption appellants cannot overcome by a simple assertion of lack of consideration. Especially may not the presumption be so lightly set aside when the contract itself states that consideration was given, and the same has been reduced into a public instrument will all due formalities and solemnities as in this case. (Emphasis ours.)

A perusal of the PCA-Cojuangco Agreement disclosed an express statement of consideration for the transaction:

NOW, THEREFORE, for and in consideration of the foregoing premises and the other terms and conditions hereinafter contained, the parties hereby declare and affirm that their principal contractual intent is (1) to ensure that the coconut farmers own at least 60% of the outstanding capital stock of the Bank, and (2) that the SELLER shall receive compensation for exercising his personal and exclusive option to acquire the Option Shares, for transferring such shares to the coconut farmers at the option price of P200 per share, and for performing the management services required of him hereunder.

x x x x

4. As compensation for exercising his personal and exclusive option to acquire the Option ShareApplying Samanilla to the case at bar, the express and positive declaration by the parties of the presence of adequate consideration in the contract makes conclusive the presumption of sufficient consideration in the PCA Agreement. Moreover, the option to purchase shares and management services for UCPB was already availed of by petitioner Cojuangco for the benefit of the PCA. The exercise of such right resulted in the execution of the PC-ECJ Agreement, which fact is not disputed. The document itself is incontrovertible proof and hard evidence that petitioner Cojuangco had the right to purchase the subject FUB (now UCPB) shares. Res ipsa loquitur.

The Sandiganbayan, however, pointed to the perceived "lack of any pecuniary value or advantage to the government of the said option, which could compensate for the generous payment to him by PCA of valuable shares of stock, as stipulated in the May 25, 1975 Agreement between him and the PCA."49

Inadequacy of the consideration, however, does not render a contract void under Article 1355 of the Civil Code:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (Emphasis supplied.)

Alsua-Betts v. Court of Appeals50 is instructive that lack of ample consideration does not nullify the contract:

Inadequacy of consideration does not vitiate a contract unless it is proven which in the case at bar was not, that there was fraud, mistake or undue influence. (Article 1355, New Civil Code). We do not find the stipulated price as so inadequate to shock the court’s conscience, considering that the price paid was much higher than the assessed value of the subject properties and considering that the sales were effected by a father to her daughter in which case filial love must be taken into account.

(Emphasis supplied.)s and for transferring such shares to the coconut farmers, as well as for performing the management services required of him, SELLER shall receive equity in the Bank amounting, in the aggregate, to 95,304 fully paid shares in accordance with the procedure set forth in paragraph 6 below. (Emphasis supplied.)

Vales v. Villa51 elucidates why a bad transaction cannot serve as basis for voiding a contract:

x x x Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. x x x Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them – indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it. (Emphasis ours.)

While one may posit that the PCA-Cojuangco Agreement puts PCA and the coconut farmers at a disadvantage, the facts do not make out a clear case of violation of any law that will necessitate the recall of said contract. Indeed, the anti-graft court has not put forward any specific stipulation therein that is at war with any law, or the Constitution, for that matter. It is even clear as day that none of the parties who entered into the two agreements with petitioner Cojuangco contested nor sought the nullification of said agreements, more particularly the PCA who is always provided legal advice in said transactions by the Government corporate counsel, and a battery of lawyers and presumably the COA auditor assigned to said agency. A government agency, like the PCA, stoops down to level of an ordinary citizen when it enters into a private transaction with private individuals. In this setting, PCA is bound by the law on contracts and is bound to comply with the terms of the PCA-Cojuangco Agreement which is the law between the parties. With the silence of PCA not to challenge the validity of the PCA-

Cojuangco Agreement and the inability of government to demonstrate the lack of ample consideration in the transaction, the Court is left with no other choice but to uphold the validity of said agreements.

While consideration is usually in the form of money or property, it need not be monetary. This is clear from Article 1350 which reads:

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liability of the benefactor. (Emphasis supplied.)

Gabriel v. Monte de Piedad y Caja de Ahorros52 tells us of the meaning of consideration:

x x x A consideration, in the legal sense of the word, is some right, interest, benefit, or advantage conferred upon the promisor, to which he is otherwise not lawfully entitled, or any detriment, prejudice, loss, or disadvantage suffered or undertaken by the promisee other than to such as he is at the time of consent bound to suffer. (Emphasis Ours.)

The Court rules that the transfer of the subject UCPB shares is clearly supported by valuable consideration.

To justify the nullification of the PCA-Cojuangco Agreement, the Sandiganbayan centered on the alleged imaginary option claimed by petitioner to buy the FUB shares from the Pedro Cojuangco group. It relied on the phrase "in behalf of certain other buyers" mentioned in the PC-ECJ Agreement as basis for the finding that petitioner’s option is neither personal nor exclusive. The pertinent portion of said agreement reads:

EDUARDO COJUANGCO, JR., Filipino, of legal age and with residence at 136 9th Street corner Balete Drive, Quezon City,

represented in this act by his duly authorized attorney-in-fact, EDGARDO J. ANGARA, for and in his own behalf and in behalf of certain other buyers, (hereinafter collectively called the "BUYERS"); x x x.

A plain reading of the aforequoted description of petitioner as a party to the PC-ECJ Agreement reveals that petitioner is not only the buyer. He is the named buyer and there are other buyers who were unnamed. This is clear from the word "BUYERS." If petitioner is the only buyer, then his description as a party to the sale would only be "BUYER." It may be true that petitioner intended to include other buyers. The fact remains, however, that the identities of the unnamed buyers were not revealed up to the present day. While one can conjure or speculate that PCA may be one of the buyers, the fact that PCA entered into an agreement to purchase the FUB shares with petitioner militates against such conjecture since there would be no need at all to enter into the second agreement if PCA was already a buyer of the shares in the first contract. It is only the parties to the PC-ECJ Agreement that can plausibly shed light on the import of the phrase "certain other buyers" but, unfortunately, petitioner was no longer allowed to testify on the matter and was precluded from explaining the transactions because of the motion for partial summary judgment and the eventual promulgation of the July 11, 2003 Partial Summary Judgment.

Even if conceding for the sake of argument that PCA is one of the buyers of the FUB shares in the PC-ECJ Agreement, still it does not necessarily follow that petitioner had no option to buy said shares from the group of Pedro Cojuangco. In fact, the very execution of the first agreement undeniably shows that he had the rights or option to buy said shares from the Pedro Cojuangco group. Otherwise, the PC-ECJ Agreement could not have been consummated and enforced. The conclusion is incontestable that petitioner indeed had the right or option to buy the FUB shares as buttressed by the execution and enforcement of the very document itself.

We can opt to treat the PC-ECJ Agreement as a totally separate agreement from the PCA-Cojuangco Agreement but it will not detract from the fact that petitioner actually acquired the rights to the ownership of the FUB shares from the Pedro Cojuangco group. The consequence is he can legally sell the shares to PCA. In this scenario, he would resell the shares to PCA for a profit and PCA would still end up paying a higher price for the FUB shares. The "profit" that will accrue to petitioner may just be equal to the value of the shares that were given to petitioner as commission. Still we can only speculate as to the true intentions of the parties. Without any evidence adduced on this issue, the Court will not venture on any unproven conclusion or finding which should be avoided in judicial adjudication.

The anti-graft court also inferred from the date of execution of the special power of attorney in favor of now Senator Edgardo J. Angara, which is May 25, 1975, that the PC-ECJ Agreement appears to have been executed on the same day as the PCA-Cojuangco Agreement (dated May 25, 1975). The coincidence on the dates casts "doubts as to the existence of defendant Cojuangco’s prior ‘personal and exclusive’ option to the FUB shares."

The fact that the execution of the SPA and the PCA-Cojuangco Agreement occurred sequentially on the same day cannot, without more, be the basis for the conclusion as to the non-existence of the option of petitioner. Such conjecture cannot prevail over the fact that without petitioner Cojuangco, none of the two agreements in question would have been executed and implemented and the FUB shares could not have been successfully conveyed to PCA.

Again, only the parties can explain the reasons behind the execution of the two agreements and the SPA on the same day. They were, however, precluded from elucidating the reasons behind such occurrence. In the absence of such illuminating proof, the proposition that the option does not exist has no leg to stand on.

More importantly, the fact that the PC-ECJ Agreement was executed not earlier than May 25, 1975 proves that petitioner Cojuangco had an option to buy the FUB shares prior to that date. Again, it must be emphasized that from its terms, the first Agreement did not create the option.It, however, proved the exercise of the option by petitioner.

The execution of the PC-ECJ Agreement on the same day as the PCA-Cojuangco Agreement more than satisfies paragraph 2 thereof which requires petitioner to exercise his option to purchase the FUB shares as promptly as practicable after, and not before, the execution of the second agreement, thus:

2. As promptly as practicable after execution of this Agreement, the SELLER shall exercise his option to acquire the Option Shares and SELLER shall immediately thereafter deliver and turn over to the Escrow Agent such stock certificates as are herein provided to be received from the existing stockholders of the bank by virtue of the exercise on the aforementioned option. The Escrow Agent shall thereupon issue its check in favor of the SELLER covering the purchase price for the shares delivered. (Emphasis supplied.)

The Sandiganbayan viewed the compensation of petitioner of 14,400 FUB shares as exorbitant. In the absence of proof to the contrary and considering the absence of any complaint of illegality or fraud from any of the contracting parties, then the presumption that "private transactions have been fair and regular"53 must apply.

Lastly, respondent interjects the thesis that PCA could not validly enter into a bank management agreement with petitioner since PCA has a personality separate and distinct from that of FUB. Evidently, it is PCA which has the right to challenge the stipulations on the management contract as unenforceable. However, PCA chose not to assail said stipulations and instead even complied with and implemented its prestations contained in said stipulations by installing petitioner as Chairman of UCPB.

Thus, PCA has waived and forfeited its right to nullify said stipulations and is now estopped from questioning the same.

In view of the foregoing, the Court is left with no option but to uphold the validity of the two agreements in question.

IV

COJUANGCO IS NOT ENTITLED TO THE UCPB SHARES WHICH WERE BOUGHT WITH PUBLIC FUNDS AND HENCE, ARE PUBLIC PROPERTY.

The coconut levy funds were exacted for aspecial public purpose. Consequently, anyuse or transfer of the funds that directlybenefits private individuals should beinvalidated.

The issue of whether or not taxpayers’ money, or funds and property acquired through the imposition of taxes may be used to benefit a private individual is once again posed. Preliminarily, the instant case inquires whether the coconut levy funds, and accordingly, the UCPB shares acquired using the coconut levy funds are public funds. Indeed, the very same issue took center stage, discussed and was directly addressed in COCOFED v. Republic. And there is hardly any question about the subject funds’ public and special character. The following excerpts from COCOFED v. Republic,54 citing Republic v. COCOFED and related cases, settle once and for all this core, determinative issue:

Indeed, We have hitherto discussed, the coconut levy was imposed in the exercise of the State’s inherent power of taxation. As We wrote in Republic v. COCOFED:

Indeed, coconut levy funds partake of the nature of taxes, which, in general, are enforced proportional contributions from persons and properties, exacted by the State by virtue of its

sovereignty for the support of government and for all public needs.

Based on its definition, a tax has three elements, namely: a) it is an enforced proportional contribution from persons and properties; b) it is imposed by the State by virtue of its sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall squarely into these elements for the following reasons:

(a) They were generated by virtue of statutory enactments imposed on the coconut farmers requiring the payment of prescribed amounts. Thus, PD No. 276, which created the … (CCSF), mandated the following:

"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in other coconut products, shall be imposed on every first sale, in accordance with the mechanics established under RA 6260, effective at the start of business hours on August 10, 1973.

"The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the Coconut Consumers Stabilization Fund, as a separate trust fund which shall not form part of the general fund of the government."

The coco levies were further clarified in amendatory laws, specifically PD No. 961 and PD No. 1468 – in this wise:

"The Authority (PCA) is hereby empowered to impose and collect a levy, to be known as the Coconut Consumers Stabilization Fund Levy, on every one hundred kilos of copra resecada, or its equivalent … delivered to, and/or purchased by, copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products. The levy shall be paid by such copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products under such rules and regulations as the Authority may

prescribe. Until otherwise prescribed by the Authority, the current levy being collected shall be continued."

Like other tax measures, they were not voluntary payments or donations by the people. They were enforced contributions exacted on pain of penal sanctions, as provided under PD No. 276:

"3. Any person or firm who violates any provision of this Decree or the rules and regulations promulgated thereunder, shall, in addition to penalties already prescribed under existing administrative and special law, pay a fine of not less than P2, 500 or more than P10,000, or suffer cancellation of licenses to operate, or both, at the discretion of the Court."

Such penalties were later amended thus: ….

(b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative authorities of the State. Indeed, the CCSF was collected under PD No. 276, …."

(c) They were clearly imposed for a public purpose. There is absolutely no question that they were collected to advance the government’s avowed policy of protecting the coconut industry.

This Court takes judicial notice of the fact that the coconut industry is one of the great economic pillars of our nation, and coconuts and their byproducts occupy a leading position among the country’s export products; ….

Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the stabilization of a threatened industry, which is so affected with public interest as to be within the police power of the State ….

Even if the money is allocated for a special purpose and raised by special means, it is still public in character…. In Cocofed v. PCGG, the Court observed that certain agencies or enterprises

"were organized and financed with revenues derived from coconut levies imposed under a succession of law of the late dictatorship … with deposed Ferdinand Marcos and his cronies as the suspected authors and chief beneficiaries of the resulting coconut industry monopoly." The Court continued: "…. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. It is, therefore, the State’s concern to make it a strong and secure source not only of the livelihood of a significant segment of the population, but also of export earnings the sustained growth of which is one of the imperatives of economic stability. (Emphasis Ours.)

The following parallel doctrinal lines from Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa sa Niyugan (PKSMMN) v. Executive Secretary55 came next:

The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper governmental purpose. They were raised with the use of the police and taxing powers of the State for the benefit of the coconut industry and its farmers in general. The COA reviewed the use of the funds. The Bureau of Internal Revenue (BIR) treated them as public funds and the very laws governing coconut levies recognize their public character.

The Court has also recently declared that the coco-levy funds are in the nature of taxes and can only be used for public purpose. Taxes are enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs. Here, the coco-levy funds were imposed pursuant to law, namely, R.A. 6260 and P.D. 276. The funds were collected and managed by the PCA, an independent government corporation directly under the President. And, as the respondent public officials pointed out, the pertinent laws used the term levy, which means to tax, in describing the exaction.

Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the government’s general funds but to provide means for the rehabilitation and stabilization of a threatened industry, the coconut industry, which is so affected with public interest as to be within the police power of the State. The funds sought to support the coconut industry, one of the main economic backbones of the country, and to secure economic benefits for the coconut farmers and far workers. The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, and the oil price stabilization funds under P.D. 1956, as amended by E.O. 137.

From the foregoing, it is at once apparent that any property acquired by means of the coconut levy funds, such as the subject UCPB shares, should be treated as public funds or public property, subject to the burdens and restrictions attached by law to such property. COCOFED v. Republic, delved into such limitations, thusly:

We have ruled time and again that taxes are imposed only for a public purpose. "They cannot be used for purely private purposes or for the exclusive benefit of private persons." When a law imposes taxes or levies from the public, with the intent to give undue benefit or advantage to private persons, or the promotion of private enterprises, that law cannot be said to satisfy the requirement of public purpose. In Gaston v. Republic Planters Bank, the petitioning sugar producers, sugarcane planters and millers sought the distribution of the shares of stock of the Republic Planters Bank (RPB), alleging that they are the true beneficial owners thereof. In that case, the investment, i.e., the purchase of RPB, was funded by the deduction of PhP 1.00 per picul from the sugar proceeds of the sugar producers pursuant to P.D. No. 388. In ruling against the petitioners, the Court held that to rule in their favor would contravene the general principle that revenues received from the imposition of taxes or levies "cannot be used for purely private purposes or for the exclusive benefit of private persons." The Court amply reasoned that the sugar stabilization fund is to "be utilized for the benefit of the entire sugar industry, and all its

components, stabilization of the domestic market including foreign market, the industry being of vital importance to the country’s economy and to national interest."

Similarly in this case, the coconut levy funds were sourced from forced exactions decreed under P.D. Nos. 232, 276 and 582, among others, with the end-goal of developing the entire coconut industry. Clearly, to hold therefore, even by law, that the revenues received from the imposition of the coconut levies be used purely for private purposes to be owned by private individuals in their private capacity and for their benefit, would contravene the rationale behind the imposition of taxes or levies.

Needless to stress, courts do not, as they cannot, allow by judicial fiat the conversion of special funds into a private fund for the benefit of private individuals. In the same vein, We cannot subscribe to the idea of what appears to be an indirect – if not exactly direct – conversion of special funds into private funds, i.e., by using special funds to purchase shares of stocks, which in turn would be distributed for free to private individuals. Even if these private individuals belong to, or are a part of the coconut industry, the free distribution of shares of stocks purchased with special public funds to them, nevertheless cannot be justified. The ratio in Gaston, as articulated below, applies mutatis mutandis to this case:

The stabilization fees in question are levied by the State … for a special purpose – that of "financing the growth and development of the sugar industry and all its components, stabilization of the domestic market including the foreign market." The fact that the State has taken possession of moneys pursuant to law is sufficient to constitute them as state funds even though they are held for a special purpose….

That the fees were collected from sugar producers etc., and that the funds were channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fund for their benefit nor make them the beneficial owners of the shares

so purchased. It is but rational that the fees be collected from them since it is also they who are benefited from the expenditure of the funds derived from it. ….56

In this case, the coconut levy funds were being exacted from copra exporters, oil millers, desiccators and other end-users of copra or its equivalent in other coconut products.57 Likewise so, the funds here were channeled to the purchase of the shares of stock in UCPB. Drawing a clear parallelism between Gaston and this case, the fact that the coconut levy funds were collected from the persons or entities in the coconut industry, among others, does not and cannot entitle them to be beneficial owners of the subject funds – or more bluntly, owners thereof in their private capacity. Parenthetically, the said private individuals cannot own the UCPB shares of stocks so purchased using the said special funds of the government.58 (Emphasis Ours.)

As the coconut levy funds partake of the nature of taxes and can only be used for public purpose, and importantly, for the purpose for which it was exacted, i.e., the development, rehabilitation and stabilization of the coconut industry, they cannot be used to benefit––whether directly or indirectly–– private individuals, be it by way of a commission, or as the subject Agreement interestingly words it, compensation. Consequently, Cojuangco cannot stand to benefit by receiving, in his private capacity, 7.22% of the FUB shares without violating the constitutional caveat that public funds can only be used for public purpose. Accordingly, the 7.22% FUB (UCPB) shares that were given to Cojuangco shall be returned to the Government, to be used "only for the benefit of all coconut farmers and for the development of the coconut industry."59

The ensuing are the underlying rationale for declaring, as unconstitutional, provisions that convert public property into private funds to be used ultimately for personal benefit:

… not only were the laws unconstitutional for decreeing the distribution of the shares of stock for free to the coconut farmers

and therefore negating the public purposed declared by P.D. No. 276, i.e., to stabilize the price of edible oil and to protect the coconut industry. They likewise reclassified the coconut levy fund as private fund, to be owned by private individuals in their private capacities, contrary to the original purpose for the creation of such fund. To compound the situation, the offending provisions effectively removed the coconut levy fund away from the cavil of public funds which normally can be paid out only pursuant to an appropriation made by law. The conversion of public funds into private assets was illegally allowed, in fact mandated, by these provisions. Clearly therefore, the pertinent provisions of P.D. Nos. 755, 961 and 1468 are unconstitutional for violating Article VI, Section 29 (3) of the Constitution. In this context, the distribution by PCA of the UCPB shares purchased by means of the coconut levy fund – a special fund of the government – to the coconut farmers is, therefore, void.60

It is precisely for the foregoing that impels the Court to strike down as unconstitutional the provisions of the PCA-Cojuangco Agreement that allow petitioner Cojuangco to personally and exclusively own public funds or property, the disbursement of which We so greatly protect if only to give light and meaning to the mandates of the Constitution.

As heretofore amply discussed, taxes are imposed only for a public purpose.61 They must, therefore, be used for the benefit of the public and not for the exclusive profit or gain of private persons.62 Otherwise, grave injustice is inflicted not only upon the Government but most especially upon the citizenry––the taxpayers––to whom We owe a great deal of accountability.

In this case, out of the 72.2% FUB (now UCPB) shares of stocks PCA purchased using the coconut levy funds, the May 25, 1975 Agreement between the PCA and Cojuangco provided for the transfer to the latter, by way of compensation, of 10% of the shares subject of the agreement, or a total of 7.22% fully paid shares. In sum, Cojuangco received public assets – in the form of FUB (UCPB) shares with a value then of ten million eight hundred eighty-six thousand pesos (PhP 10,886,000) in

1975, paid by coconut levy funds. In effect, Cojuangco received the aforementioned asset as a result of the PCA-Cojuangco Agreement, and exclusively benefited himself by owning property acquired using solely public funds. Cojuangco, no less, admitted that the PCA paid, out of the CCSF, the entire acquisition price for the 72.2% option shares.63 This is in clear violation of the prohibition, which the Court seeks to uphold.1âwphi1

We, therefore, affirm, on this ground, the decision of the Sandiganbayan nullifying the shares of stock transfer to Cojuangco. Accordingly, the UCPB shares of stock representing the 7.22% fully paid shares subject of the instant petition, with all dividends declared, paid or issued thereon, as well as any increments thereto arising from, but not limited to, the exercise of pre-emptive rights, shall be reconveyed to the Government of the Republic of the Philippines, which as We previously clarified, shall "be used only for the benefit of all coconut farmers and for the development of the coconut industry."64

But apart from the stipulation in the PCA-Cojuangco Agreement, more specifically paragraph 4 in relation to paragraph 6 thereof, providing for the transfer to Cojuangco for the UCPB shares adverted to immediately above, other provisions are valid and shall be enforced, or shall be respected, if the corresponding prestation had already been performed. Invalid stipulations that are independent of, and divisible from, the rest of the agreement and which can easily be separated therefrom without doing violence to the manifest intention of the contracting minds do not nullify the entire contract.65

WHEREFORE, Part C of the appealed Partial Summary Judgment in Sandiganbayan Civil Case No. 0033-A is AFFIRMED with modification. As MODIFIED, the dispositive portion in Part C of the Sandiganbayan’s Partial Summary Judgment in Civil Case No. 0033-A, shall read as follows:

C. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: EDUARDO M. COJUANGCO, JR.) dated September 18, 2002 filed by Plaintiff.

1. Sec. 1 of P.D. No. 755 did not validate the Agreement between PCA and defendant Eduardo M. Cojuangco, Jr. dated May 25, 1975 nor did it give the Agreement the binding force of a law because of the non-publication of the said Agreement.

2. The Agreement between PCA and defendant Eduardo M. Cojuangco, Jr. dated May 25, 1975 is a valid contract for having the requisite consideration under Article 1318 of the Civil Code.

3. The transfer by PCA to defendant Eduardo M. Cojuangco, Jr. of 14,400 shares of stock of FUB (later UCPB) from the "Option Shares" and the additional FUB shares subscribed and paid by PCA, consisting of

a. Fifteen Thousand Eight Hundred Eighty-Four (15,884) shares out of the authorized but unissued shares of the bank, subscribed and paid by PCA;

b. Sixty Four Thousand Nine Hundred Eighty (64,980) shares of the increased capital stock subscribed and paid by PCA; and

c. Stock dividends declared pursuant to paragraph 5 and paragraph 11 (iv) (d) of the PCA-Cojuangco Agreement dated May 25, 1975. or the so-called "Cojuangco-UCPB shares" is declared unconstitutional, hence null and void.1âwphi1

4. The above-mentioned shares of stock of the FUB/UCPB transferred to defendant Cojuangco are hereby declared conclusively owned by the Republic of the Philippines to be used only for the benefit of all

coconut farmers and for the development of the coconut industry, and ordered reconveyed to the Government.

5. The UCPB shares of stock of the alleged fronts, nominees and dummies of defendant Eduardo M. Cojuangco, Jr. which form part of the 72.2% shares of the FUB/UCPB paid for by the PCA with public funds later charged to the coconut levy funds, particularly the CCSF, belong to the plaintiff Republic of the Philippines as their true and beneficial owner.

Accordingly, the instant petition is hereby DENIED.

Costs against petitioner Cojuangco.

SO ORDERED.

PRESBITERO J. VELASCO, JR.Associate Justice

WE CONCUR:

ARIA LOURDES P. A. SERENOMChief Justice

(No part)ANTONIO T. CARPIO*

Associate Justice

(No part)TERESITA J.

LEONARDO-DE CASTRO*

Associate Justice

(On leave)ARTURO D. BRION**

Associate Justice

(No part)DIOSDADO M.

PERALTA*

Associate Justice

LUCAS P. BERSAMIN MARIANO C. DEL

Associate JusticeCASTILLO

Associate Justice

ROBERTO A. ABADAssociate Justice

MARTIN S. VILLARAMA, JR.

Associate Justice

JOSE PORTUGAL PEREZ**

Associate Justice

JOSE CATRAL MENDOZA

Associate Justice

(On leave)BIENVENIDO L. REYES

Associate Justice

(On leave)ESTELA M. PERLAS-

BERNABE**

Associate Justice

MARVIC MARIO VICTOR F. LEONENAssociate Justice

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court.

MARIA LOURDES P. A. SERENOChief Justice

Footnotes

* No part.

** On leave.

1 G.R. Nos. 177857-58 & 178193, January 24, 2012.

2 Id.

3 Id.

4 Penned by Associate Justice Teresita Leonardo-De Castro (now a member of this Court), concurred in by Associate Justices Diosdado M. Peralta (now also a member of this Court) and Francisco H. Villaruz, Jr.; rollo, pp. 179-261.

5 Rollo, pp. 361-400.

6 Id. at 1043-53.

7 COCOFED v. Republic, G.R. Nos. 177857-58 & 178193, January 24, 2012.

The dispositive portion of the Our modificatory decision reads:

WHEREFORE, the petitions in G.R. Nos. 177857-58 and 178793 are hereby DENIED. The Partial Summary Judgment dated July 11, 2003 in Civil Case No. 0033-A as reiterated with modification in Resolution dated June 5, 2007, as well as the Partial Summary Judgment dated May 7, 2004 in Civil Case No. 0033-F, which was effectively amended in Resolution dated May 11, 2007, are AFFIRMED with MODIFICATION, only with respect to those issues subject of the petitions in G.R. Nos. 177857-58 and 178193. However, the issues raised in G.R. No. 180705 in relation to Partial Summary Judgment dated July 11, 2003 and Resolution dated June 5, 2007 in Civil Case No. 0033-A, shall be decided by this Court in a separate decision.

The Partial Summary Judgment in Civil Case No. 0033-A dated July 11, 2003, is hereby MODIFIED, and shall read as follows:

WHEREFORE, in view of the foregoing, We rule as follows:

SUMMARY OF THE COURT’S RULING.

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY JUDGMENT dated April 11,

2001 filed by Defendant Maria Clara L. Lobregat, COCOFED, et al., and Ballares, et al.

The Class Action Motion for Separate Summary Judgment dated April 11, 2001 filed by defendant Maria Clara L. Lobregat, COCOFED, et al. and Ballares, et al., is hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COCOFED, ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed by Plaintiff.

1. a. The portion of Section 1 of P.D. No. 755, which reads:

…and that the Philippine Coconut Authority is hereby authorized to distribute, for free, the shares of stock of the bank it acquired to the coconut farmers under such rules and regulations it may promulgate.

taken in relation to Section 2 of the same P.D., is unconstitutional: (i) for having allowed the use of the CCSF to benefit directly private interest by the outright and unconditional grant of absolute ownership of the FUB/UCPB shares paid for by PCA entirely with the CCSF to the undefined "coconut farmers", which negated or circumvented the national policy or public purpose

declared by P.D. No. 755 to accelerate the growth and development of the coconut industry and achieve its vertical integration; and (ii) for having unduly delegated legislative power to the PCA.

b. The implementing regulations issued by PCA, namely, Administrative Order No. 1, Series of 1975 and Resolution No. 074-78 are likewise invalid for their failure to see to it that the distribution of shares serve exclusively or at least primarily or directly the aforementioned public purpose or national policy declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not be considered special and/or fiduciary funds nor part of the general funds of the national government and similar provisions of Sec. 5, Art. III, P.D. No. 961 and Sec. 5, Art. III, P.D. No. 1468 contravene the provisions of the Constitution, particularly, Art. IX (D), Sec. 2; and Article VI, Sec. 29 (3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and validly obtained title of ownership over the subject UCPB shares by virtue of P.D. No. 755, the Agreement dated May 25, 1975 between the PCA and defendant Cojuangco, and PCA implementing rules, namely, Adm. Order No. 1, s. 1975 and Resolution No. 074-78.

4. The so-called "Farmers’ UCPB shares" covered by 64.98% of the UCPB shares of stock, which formed part of the 72.2% of the shares of stock of the former FUB and now of the UCPB, the entire consideration of which was charged by PCA to the CCSF, are hereby declared conclusively owned by, the Plaintiff Republic of the Philippines.

… … …

SO ORDERED.

The Partial Summary Judgment in Civil Case No. 0033-F dated May 7, 2004, is hereby MODIFIED, and shall read as follows:

WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY JUDGMENT (RE: CIIF BLOCK OF SMC SHARES OF STOCK) dated August 8, 2005 of the plaintiff is hereby denied for lack of merit. However, this Court orders the severance of this particular claim of Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now considered a separate final and appealable judgment with respect to the said CIIF Block of SMC shares of stock.

The Partial Summary Judgment rendered on May 7, 2004 is modified by deleting the last paragraph of the dispositive portion, which will now read, as follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed, et al) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors; Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS WELL AS ANY

INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT TO BE USED ONLY FOR THE BENEFIT OF ALL COCONUT FARMERS AND FOR THE DEVELOPMENT OF THE COCONUT INDUSTRY, AND ORDERED RECONVEYED TO THE GOVERNMENT.

THE COURT AFFIRMS THE RESOLUTIONS ISSUED BY THE SANDIGANBAYAN ON JUNE 5, 2007 IN CIVIL CASE NO. 0033-A AND ON MAY 11, 2007 IN CIVIL CASE NO. 0033-F, THAT THERE IS NO MORE NECESSITY OF FURTHER TRIAL WITH RESPECT TO THE ISSUE OF OWNERSHIP OF (1) THE SEQUESTERED UCPB SHARES, (2) THE CIIF BLOCK OF SMC SHARES, AND (3) THE CIIF COMPANIES. AS THEY HAVE FINALLY BEEN ADJUDICATED IN THE AFOREMENTIONED PARTIAL SUMMARY JUDGMENTS DATED JULY 11, 2003 AND MAY 7, 2004.

SO ORDERED

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-39427             February 24, 1934

TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of China, plaintiff-appellee, vs.LIM CHU SING, defendant-appellant.

Marcelino Lontok for appellant.Nicolas Santiago for appellee.

VILLA-REAL, J.:

This is an appeal taken by the defendant Lim Chu Sing from the judgment rendered by the Court of First Instance of Manila, the dispositive part of which reads as follows:

Wherefore, judgment is rendered sentencing the defendant to pay the sum of P9,105.17 with interest thereon at the rate of six per cent per annum from September 1, 1932, until fully paid, plus the sum of P910.51, as attorney's fees, with the costs of this suit.

In conformity with the stipulation, this judgment shall be subject to execution after ninety (90) days. So ordered.

In support of his appeal, the appellant assigns the following alleged errors as committed by the court a quo in its decision, to wit:

1. In denying the motion dated December 27, 1932, praying for the inclusion of Lim Cuan Sy, being the principal debtor, as party to this suit.

2. In holding as improper the compensation of the defendant's debt of P9,106.17, claimed in the complaint, with his credit amounting to P10,000 with the Mercantile Bank of China.

3. In not ordering that after the compensation the plaintiff-appellee, as receiver of the Mercantile Bank of China, should liquidate the dividends of the defendant-appellant's shares.

4. In sentencing the defendant-appellant to pay to the plaintiff-appellee the sum of P910.51 as attorney's fees, plus interest at 6 per cent per annum on the sum of P9,105.17, with costs.

5. In denying the motion for a new trial.

When the case was called for hearing, the parties submitted the following stipulation of facts for the consideration of the trial court, to wit:

Come now both parties and to this Honorable Court respectfully submit the following stipulation:

1. The defendant admits the facts alleged in the complaint.

2. The plaintiff admits the allegations in the answer, particularly with reference to the fact that the defendant is

the owner of two hundred shares at a par value of fifty pesos (P50) each, that is (Pl0,000).

3. The court may render judgment in accordance with this stipulation, but the same shall be subject to execution after ninety (90) days.

Wherefore, they respectfully submit this stipulation and pray that judgment be rendered in accordance therewith.

The facts alleged in the complaint and admitted by both parties under the above quoted stipulation of facts are as follows:

On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the Mercantile Bank of China promissory note for the sum of P19,605.17 with interest thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930; P500 on August 1, 1930; and P500 on the first of every month thereafter until the amount of the promissory note together with the interest thereon is fully paid (Exhibit A). One of the conditions stipulated in said promissory note is that in case of defendant's default in the payment of any of the monthly installments, as they become due, the entire amount or the unpaid balance thereof together with interest thereon at 6 per cent per annum, shall become due and payable on demand. The defendant had been, making several partial payments thereon, leaving an unpaid balance of P9,105.17. However, he defaulted in the payment of several installments by reason of which the unpaid balance of P9,105.17 on the promissory note has ipso facto become due and demandable.

The facts alleged in the answer and admitted by both parties under the same stipulation of facts are as follows:

The debt which is the subject matter of the complaint was not really an indebtedness of the defendant but of Lim Cuan Sy, who had an account with the plaintiff bank in the form of "trust receipts" guaranteed by the defendant as surety and with chattel mortgage securities. The plaintiff bank, without the knowledge

and consent of the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby. Inasmuch as Lim Cuan Sy failed to comply with his obligations, the plaintiff required the defendant, as surety, to sign a promissory note for the sum of P19,105.17 payable in the manner hereinbefore stated (Exhibit A). The defendant had been paying the corresponding installments until the debt was reduced to the sum of P9,105.17 claimed in the complaint. The defendant is the owner of shares of stock of the plaintiff Mercantile Bank of China amounting to P10,000. The plaintiff bank is now under liquidation.

On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion praying for the inclusion of the principal debtor Lim Cuan Sy as party defendant so that he could avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. Said motion was denied in open court by the presiding judge without the defendant-appellant having excepted to such order of denial.

The proceeds of the sale of the mortgaged chattels together with other payments made were applied to the amount of the promissory note in question, leaving the balance which the plaintiff now seeks to collect.

The first question to be decided in this appeal is whether or not the court a quo erred in denying the motion for inclusion of a party a defendant, filed by the defendant-appellant.

According to the provisions of section 141 of the Code of Civil Procedure, ". . . Rulings of the court upon minor matters, such as adjournments, postponements of trials, the extension of time for filing pleadings or motions, and other matters addressed to the discretion of the court in the performance of its duty, shall not be subject to exception. But exception may be taken to any other ruling, order, or judgment of the court made during the pendency of the action in the Court of First Instance." "An `exception' has been defined as an objection taken to the decision of the trial court upon a matter of law, and is a notice

that the party taking it preserves for the consideration of the appellate court a ruling deemed erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a judgment or decree will not be noticed on appeal in the absence of objections and exceptions taken below, and they should be sufficiently specific to direct the attention of the court to the alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs. Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is an objection taken to the decision of the trial court upon a matter of law and is a notice that the party taking it will submit for the consideration of the appellate court the ruling deemed erroneous, failure to interpose it deprived the appellant of the right to raise the question whether or not the court a quo committed the alleged error attributed to it in its ruling which had not been excepted to by the said appellant. The inclusion in, or exclusion from an action of a certain party is a question of law. The herein defendant-appellant, not having excepted to the order of the Court of First Instance of Manila denying his motion for the inclusion of Lim Cuan Sy as party defendant, is estopped from raising such question upon appeal (Roman Catholic Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag, 28 Phil., 439; Andrews vs. Morente Rosario, 9 Phil., 634).

The second question to be decided is whether or not it is proper to compensate the defendant-appellant's indebtedness of P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank of China.

According to the weight of authority, a share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit (14 Corpus Juris, p. 388, see. 511). Stockholders, as such, are not creditors of the corporation (14 Corpus Juris, p. 848, Sec. 1289). It is the prevailing doctrine of the American courts, repeatedly asserted in the broadest terms, that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal

with it on the credit of its capital stock (14 Corpus Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation (art. 1195, Civil Code; Acuña Co Chongco vs. Dievas, 12 Phil., 250).

The third question to be decided in this appeal is whether or not the court a quo erred in sentencing the said defendant-appellant to pay the sum of P910.51 as attorney's fees in addition to interest at 6 per cent per annum on the amount sought in the complaint.

The pertinent clause of the promissory note Exhibit A reads as follows: "In case of default of any of the above installments, the total amount of the balance still unpaid of this note will become due and payable on demand plus interest thereon at the rate of 6 per cent per annum from date of this note until payment is made. And I further agree to pay an additional sum equivalent to 10 per cent of the said note to cover cost and attorney's fees for collection."

The stipulation relative to the payment of interest at the rate of 6 per cent per annum on the unpaid balance of the promissory note Exhibit A refers to the capital and the 10 per cent stipulated for costs and attorney's fees cannot be considered as interest but an indemnity for damages occasioned by the collection of the indebtedness through judicial process. Therefore the two rates in question cannot be combined and considered usurious interest.

With reference to the costs, the 10 per cent stipulated in the promissory note is for costs and attorney's fees which may be incurred in the collection of the indebtedness through judicial process. Therefore, the defendant-appellant should not again be made to pay for them (Bank of the Philippine Islands vs. Yulo, 31 Phil., 476).

In view of the foregoing, this court is of the opinion and so holds: (1) That failure to file an exception to a ruling rendered in open court denying a motion for the inclusion of a party as defendant deprives the petitioner, upon appeal of the right to raise the question whether such denial proper or improper; (2) that the shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the latter is not a creditor of the former for such shares; (3) that the indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares therein, there being no relation of creditor and debtor with respect to such shares; and (4) that the percentage stipulated in a contract, for costs and attorney's fees for the collection of an indebtedness, includes judicial costs.

Wherefore, with the sole modification that the costs be eliminated from the appealed judgment, the same is hereby affirmed, without special pronouncement as to costs of this instance. So ordered.

Malcolm, Hull, Imperial, and Goddard, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 80039April 18, 1989

ERNESTO M. APODACA, petitioner, 

- versus -

NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and INTRANS PHILS., INC., respondents.

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

Diego O. Untalan for petitioner.The Solicitor General for public respondent.Barcelona, Perlas, Joven & Academia Law Offices for private respondents.

GANCAYCO, J.:

Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve a claim for non-payment of stock subscriptions to a corporation?  Assuming that it has, can an obligation arising therefrom be offset against a money claim of an employee against the employer?  These are the issues brought to this court through this petition for review of a decision of the NLRC dated September 18, 1987.

The only remedy provided for by law from such a decision is a special civil action for certiorari under Rule 65 of the Rules of

Court based on jurisdictional grounds or on alleged grave abuse of discretion amounting to lack or excess of jurisdiction, not by way of an appeal by certiorari. Nevertheless, in the interest of justice, this petition is treated as a special civil action for certiorari.

Petitioner was employed in respondent corporation.  On August 28, 1985, respondent Jose M. Mirasol persuaded petitioner to subscribe to 1,500 shares of respondent corporation at P100.00 per share or a total of P150,000.00. He made an initial payment of P37,500.00. On September 1, 1975, petitioner was appointed President and General Manager of the respondent corporation. However, on January 2, 1986, he resigned.

On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986. Petitioner and private respondents submitted their position papers to the labor arbiter. Private respondents admitted that there is due to petitioner the amount of P17,060.07 but this was applied to the unpaid balance of his subscription in the amount of P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for the payment of the unpaid subscription and that, accordingly, the alleged obligation is not enforceable.

In a decision dated April 28, 1987, the labor arbiter sustained the claim of petitioner for P17,060.07 on the ground that the employer has no right to withhold payment of wages already earned under Article 103 of the Labor Code. Upon the appeal of the private respondents to public respondent NLRC, the decision of the labor arbiter was reversed in a decision dated September 18, 1987. The NLRC held that a stockholder who fails to pay his unpaid subscription on call becomes a debtor of the corporation and that the set-off of said obligation against the wages and others due to petitioner is not contrary to law, morals and public policy.

Hence, the instant petition.

The petition is impressed with merit.

Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission. [1]

Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the circumstances of this case, the unpaid subscriptions are not due and payable until a call is made by the corporation for payment.[2]   Private respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation.

What the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions.[3]   No doubt such set-off was without lawful basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable.

Lastly, assuming further that there was a call for payment of the unpaid subscription, the NLRC cannot validly set it off against the wages and other benefits due petitioner. Article 113 of the Labor Code allows such a deduction from the wages of the employees by the employer, only in three instances, to wit:

ART. 113. Wage Deduction. — No employer, in his own behalf or in behalf of any person, shall make any deduction from the wages of his employees, except:

[[

(a)  In cases where the worker is insured with his consent by the employer, and the deduction is to recompense the employer for the amount paid by him as premium on the insurance;

(b)  For union dues, in cases where the right of the worker or his union to check-off has been recognized by the employer or authorized in writing by the individual worker concerned; and

(c)  In cases where the employer is authorized by law or regulations issued by the Secretary of Labor. [4]

WHEREFORE, the petition is GRANTED and the questioned decision of the NLRC dated September 18, 1987 is hereby set aside and another judgment is hereby rendered ordering private respondents to pay petitioner the amount of P17,060.07 plus legal interest computed from the time of the filing of the complaint on December 19, 1986, with costs against private respondents.

SO ORDERED.

Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-27872             February 25, 1928

THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs.I. B. DEXTER, defendant-appellant.

Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for appellant.Lucio Javillonar for appellee.

STREET, J.:

This action was instituted in the Court of First Instance of Manila by the National Exchange Co., Inc., as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose of recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares of the capital stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause the trial judge gave judgment for the plaintiff to recover the amount claimed, with lawful interest from January 1, 1920, and with costs. From this judgment the defendant appealed.

It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written subscription to the corporate stock of C. S. Salmon & Co. in the following form:

I hereby subscribe for three hundred (300) shares of the capital stock of C. S. Salmon and Company, payable

from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid.

Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend declared at about that time by the company, supplemented by money supplied personally by the subscriber. Beyond this nothing has been paid on the shares and no further dividend has been declared by the corporation. There is therefore a balance of P15,000 still paid upon the subscription.

As the case reaches this court the sole question here presented for consideration is one of law, namely, whether the stipulation contained in the subscription to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares. The trial court held, in effect, that the stipulation mentioned is invalid.

In discussing this problem we accept as sound law the proposition propounded by the appellant's attorneys and taken from Fletcher's Cyclopedia as follows:

In the absence of restrictions in its character, a corporation, under its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by positive law or contrary to public policy, provided they are not such as to require the performance of acts which are beyond the powers conferred upon the corporation by its character, and provided they do not constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become creditors of the corporation. (Fletcher, Cyc. Corp., sec. 602, p. 1314.)

Under the American regime corporate franchises in the Philippine Islands are granted subject to the provisions of

section 74 of the Organic Act of July 1, 1902, which, in the part here material, is substantially reproduced in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is among other things, declared: "That all franchises, privileges, or concessions granted under this Act shall forbid the issue of stock or bonds except in exchange for actual cash or for property at a fair valuation equal to the par value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902, sec. 74.)

Pursuant to this provision we find that the Philippine Commission inserted in the Corporation Law, enacted March 1, 1906, the following provision: ". . . no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)

The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stock to its full equivalent in property is thus enshrined in both the organic and statutory law of the Philippine; Islands; and it would seem that our lawmakers could scarely have chosen language more directly suited to secure absolute equality stockholders with respect to their liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such as that now under consideration, in a stock subcription, is illegal, for this stipulation obligates the subcriber to pay nothing for the shares except as dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This is a discrimination in favor of the particular subcriber, and hence the stipulation is unlawful.

The general doctrine of corporation law is in conformity with this conclusion, as may be seen from the following proposition taken from the standard encyclopedia treatise, Corpus Juris:

Nor has a corporation the power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers or stockholders by subjecting the particular subcriber to lighter burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the corporation by withdrawing or decreasing the capital. It is well settled therefore, as a general rule, that an agreement between a corporation and a particular subscriber, by which the subscription is not to be payable, or is to be payable in part only, whether it is for the purpose of pretending that the stock is really greater than it is, or for the purpose of preventing the predominance of certain stockholders, or for any other purpose, is illegal and void as in fraud of other stockholders or creditors, or both, and cannot be either enforced by the subcriber or interposed as a defense in an action on the subcription. (14 C. J., p. 570.)

The rule thus stated is supported by a long line of decisions from numerous courts, with little or no diversity of opinion. As stated in the headnote to the opinion of the Supreme Court of United States in the case of Putnan vs. New Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that "Conditions attached to subcriptions, which, if valid, lessen the capital of the company, are a fraud upon the grantor of the franchise, and upon those who may become creditors of the corporation, and upon unconditional stockholders."

In the appellant's brief attention is called to the third headnote to Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral agreement with a subcriber to stock that his subcription shall not be collectible except from dividends on the stock, is valid as between the parties and a complete defense to a suit on notes given for the amount of the subscription. A careful persual of the decision will show that the rule thus broadly stated in the headnote is not justified by anything in the reported decision; for what the court really held was that the making of such promise by the agent of the corporation who sold the stock is admissible in evidence in support of the

defense of fraud and failure of consideration. Moreover, even if the decision had been to the effect supposed, the relu announced in the headnote could have no weight in a jurisdiction like this were there is a statutory provision prohibiting such agreements.

We may add that the law in force in this jurisdiction makes no distinction, in respect to the liability of the subcriber, between shares subscribed before incorporation is effected and shares subscribed thereafter. All like are bound to pay full value in cash or its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden. In what is here said we have reference of course primarily to subcriptions to shares that have not been previously issued. It is conceivable that the power of the corporation to make terms with the purchaser would be greater where the shares which are the subject of the transaction have been acquired by the corporation in course of commerce, after they have already been once issued. But the shares with which are here concerned are not of this sort.

The judgment appealed from must be affirmed, and it is so ordered, with costs against the appellant.

Malcolm, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-11528            March 15, 1918

MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.), plaintiff-appellant, vs.JEAN M. POIZAT, defendant-appellee.

Vicente Rodriguez for appellant.A. J. Burke for appellee.

STREET, J.:

From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of said company. It appears that the corporation in question was originally organized by several residents of the city of Manila, where the company had its principal place of business, with a capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares of the stock of the company, an paid in upon his subscription the sum of P500, the par value of 5 shares . The action was brought to recover the amount subscribed upon the remaining shares.

It appears that the defendant was a stock holder in the company from the inception of the enterprise, and for sometime acted as its treasurer and manager. While serving in this capacity he called in and collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares

subscribed by himself and another 15 shares owned by Jose R. Infante.

Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of the stock was presented. Up[on this occasion two resolutions, important to be here noted, were adopted. The first was a proposal that the directors, or shareholders, of the company should make good by new subscriptions, in proportion to their respective holdings, 15 shares which had been surrendered by Infante. It seems that this shareholder had already paid 25 per cent of his subscription upon 20 shares, leaving 15 shares unpaid for, and an understanding had been reached by him and the management by which he was to be released from the obligation of his subscription, it being understood that what he had already paid should not be refunded. Accordingly the directors present at this meeting subscribed P1,200 toward taking up his shares, leaving a deficiency of P300 to be recovered by voluntary subscriptions from stockholders not present at the meeting.

The other proposition was o the effect that Juan [Jean] M. Poizat, who was absent, should be required to pay the amount of his subscription upon the 15 shares for which he was still indebted to the company. The resolution further provided that, in case he should refuse to make such payment, the management of the corporation should be authorized to undertake judicial proceedings against him. When notification of this resolution reached Poizat through the mail it evoked from him a manifestation of surprise and pain, which found expression in a letter written by him in reply, dated July 27, 1914, and addressed to Velasco, as treasurer and administrator. In this letter Poizat states that he had been given to understand by some member of the board of directors that he was to be relieved from his subscription upon the terms conceded to Infante; and he added:

My desire to be relieved from the payment of the remaining 75 per cent arises from the poor opinion which

I entertain of the business and the faint hope of ever recovering any money invested. In consequence, I prefer to lose the whole of the 25 per cent I have already paid rather than to continue investing more money in what I consider to be ruinous proposition.

Within a short while the unfavorable opinion entertained by Poizat as to the prospect of the company was found to be fully justified, as the company soon went into voluntary insolvency, Velasco being named as the assignee. He qualified at once by giving bond, and was duly inducted into the office of assignee upon November 25, 1914, by virtue of a formal transfer executed by the clerk in pursuance of section 32 of Act No. 1956.

The answer of the defendant consisted of a general denial and a so-called special defense, consisting of a concatenation of statements more appropriate for a demurrer than as material for a special defense. The principal contention is that the call made by the board of directors of the company on July 13, 1914 , was not made pursuant to the requirements of sections 37 and 38 of the Corporation Law (Act No. 1459), and in particular that the action was instituted before the expiration of the 30 days specified in section 38.

At the hearing of the Court of First Instance, judgment was rendered in favor of the defendant, and the complaint was dismissed. From this action the plaintiff has appealed.

We think that Poizat is liable upon this subscription. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States, that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the

subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable.

The provisions of the Corporation Law (Act No. 1459) given recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy given by the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive , of the Corporation Law are applicable and must be followed. The other remedy is by action in court, concerning which we find in section 49 the following provision:

Nothing in this Act shall prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred.

It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court; and it has been held that the ordinary legal remedy by action exists even though no express mention thereof is made in the statute. (Instone vs. Frankfort Bridge Co., 2 Bibb [Ky.], 576; 5 Am. Dec., 638.)

No attempt is made in the Corporation Law to define the precise conditions under which an action may be maintained upon a stock subscription, as such conditions should be determined with reference to the rules governing contract liability in general; and where it appears as in this case that a matured stock subscription is unpaid, none of the provisions contained in section 38 to 48, inclusive, of Act No. 1459 can be permitted to obstruct or impede the action to recover thereon. By virtue of the first subsection of section 36 of the Insolvency Law (Act No. 1956) the assignee of the insolvent corporation succeeds to all

the corporate rights of action vested in the corporation prior to its insolvency; and the assignee therefore has the same freedom with respect to suing upon the stock subscription as the directors themselves would have had under section 49 above cited.

But there is another reason why the present plaintiff must prevail in this case, even supposing that the failure of the directors to comply with the requirements of the provisions of sections 38 to 48, inclusive, of Act No. 1459 might have been an obstacle to a recovery by the corporation itself. That reason is this: When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind up, all unpaid stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee or receiver appointed by the court. This rule apparently had origin in a recognition of the principle that a court of equity, having jurisdiction of the insolvency proceedings, could, if necessary, make the call itself, in its capacity as successor to the powers exercised by the board of directors of the defunct company. Later a further rule gained recognition to the effect that the receiver or assignee, in an action instituted by proper authority, could himself proceed to collect the subscription without the necessity of any prior call whatever. This conclusion is well supported by reference to the following authorities:

. . . a court of equity may enforce payment of the stock subscriptions, although there have been no calls for them by the company. (Hatch vs. Dana, 101 U. S., 205.)

It is again insisted that the plaintiffs cannot recover because the suit was not preceded by a call or assessment against no right of action accrues. In a suit by a solvent going corporation to collect a subscription, and in certain suits provided by the statute this would be true; but it is now quite well settled that when the corporation becomes insolvent, with proceedings instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution

of suits to collect unpaid balances on subscription. (Ross-Meehan Shoe F. Co. vs. Southern Malleable Iron Co., 72 Fed., 957, 960; see also Henry vs. Vermillion etc. R. R. Co., 17 Ohio, 187, and Thompson on Corporations 2d ed., vol. 3, sec. 2697.)

It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of the officers of the corporation to perform their duty in making a call; and when the original model of making the call becomes impracticable, the obligation must be treated as due upon demand. If the corporation must be treated still an active entity, and this action should be dismissed for irregularity in the making of the call, other steps could be taken by the board to cure the defect and another action could be brought; but where the company is being wound up, no such procedure would be practicable. The better doctrine is that when insolvency supervenes all unpaid subscriptions become at once due and enforceable.

The printed bill of exceptions in this cause does not contain the original complaint, nor does it state who was plaintiff therein or the date when the action was instituted. It may, however, be gathered from the papers transmitted to this court that the action was originally instituted in the name of the Philippine Chemical Product Co. (Ltd.), prior to its insolvency, and that later the assignee was substituted as plaintiff and then filed the amended complaint, with the permission of the court. Now, if we concede that no right of action existed when the original complaint was filed, a right of action certainly existed when the assignee filed his amended complaint; and as the bill of exceptions fails to show that any exception was taken to the action of the court in allowing the amended complaint to be filed, no objection would be here entertained on the ground that the action was prematurely brought.

The circumstance that the board of directors in their meeting of July 13, 1914, resolved to release Infante from his obligation upon a subscription for 15 shares is no wise prejudicial to the

right of the corporation or its assignee to recover from Poizat upon a subscription made by him. In releasing Infante the board transcended its powers, and he no doubt still remained liable on such of his shares as were not taken up and paid for by other persons.

The general doctrine is that the corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, . . . (10 Cyc., 450.)

The suggestion contained in Poizat's letter of July 27, 1914, to the effect that he understood that he was to be relieved upon the same terms as Infante is, for the same reason, of no merit as matter of defense, even if an agreement to that effect had been duly proved.

From what has been said it is manifest that the defendant is liable for P1,500, the amount of his subscription upon the unpaid shares. Under section 36 of the Corporation Law he is also liable for interest at the lawful rate from the date of his subscription, unless relieved from this liability by the by-laws of the company. These by-laws have not been introduced in evidence and there is no proof showing the exact date upon which the subscription was made, though it is alleged in the original complaint that the company was organized upon March 23, 1914. This allegation is not admitted in the agreed statement of facts. The defendant, however, inferentially admits in his letter of July 27, 1914, that his subscription had been made prior to July 13, 1914. It resulted that in our opinion he should be held liable for interest from that date.

The judgment of the lower court is therefore reversed, and judgment will be rendered in favor of the plaintiff and against the defendant for the sum of one thousand five hundred pesos (P1,500), with interest from July 13, 1014, and costs of both instances. So ordered.

Arellano, C.J., Torres, Johnson, Carson, Araullo, Malcolm, Avanceña and Fisher, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-4824             June 30, 1953

LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant, vs.IRINEO BALTAZAR, defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-6244             June 30, 1953

LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee, vs.IRINEO BALTAZAR, defendant and appellant.

Manuel L. Fernandez for appellant.Sofronio C. Quimson and daniel C. Macaraeg for appellee.

MONTEMAYOR, J.:

These two cases here on appeal stem from the same case, that of civil case No. 10944 of the Court of First Instance of Pangasinan. From the trial court's decision, plaintiff Lingayen Gulf Electric Power Company, Inc. appealed directly to this court under G.R. No. L-4824. Defendant Irineo Baltazar appealed to the Court of Appeals. By a resolution of that appellate tribunal, the appeal was certified to this court pursuant to section 17, (5) and (6) of the Judiciary Act of 1948, and is now listed here under G.R. No. L-6344.

The main facts of the case are not disputed, and we are reproducing and making our own the relation of facts contained in the decision appealed from.

The plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an authorized capital stock of P300,000 divided into

3,000 shares with a par value of P100 per share. The defendant, Irineo Baltazar appears to have subscribed for 600 shares on account of which he had paid upon the organization of the corporation the sum of P15,000. (See Exhibit A, page 2). After incorporation, the defendant made further payments on account of his subscription, leaving a balance of P18,500 unpaid for, which amount, the plaintiff now claims in this action.

On July 23, 1946, a majority of the stockholders of the corporation, among them the herein defendant, held a meeting and adopted stockholders' resolution No. 17. By said resolution, it was agreed upon by the stockholders present to call the balance of all unpaid subscribed capital stock as of July 23, 1946, the first 50 per cent payable within 60 days beginnning August 1, 1946, and the remaining 50 per cent payable within 60 days beginning October 1, 1946. The resolution also provided, that all unpaid subscription after the due dates of both calls would be subject to 12 per cent interest per annum. Lastly, the resolution provided, that after the expiration of 60 days' grace which would be on December 1, 1946, for the first call, and on February 1, 1947, for the second call, all subscribed stocks remaining unpaid would revert to the corporation. (See Exhibit F and Exhibit I).

On September 22, 1946, the plaintiff corporation wrote a letter to the defendant reminding him that the first 50 per cent of his unpaid subscription would be due on October 1, 1946. The plaintiff requested the defendant to "kindly advise the company thru the undersigned your decision regarding this matter." (See Exhibit 4). The defendant answered on September 25, 1946, asking the corporation that he be allowed to pay his unpaid subscription by February 1, 1947. In his answer, the defendant also agreed that if he could not pay the balance of his subscription by February 1, 1947, his unpaid subscription would be reverted to the corporation. (See Exhibit 5).

On December 19, 1947, the defendant wrote another letter to the members of the Board of Directors of the plaintiff corporation, offering to withdraw completely from the corporation by selling out to the corporation all his shares of stock in the total amount of P23,000.

(See Exhibit 8). Apparently this offer of the defendant was left unacted upon by the plaintiff.

On April 17, 1948, the Board of Directors of the plaintiff corporation held a meeting, and in the course of the said meeting they adopted Resolution No. 17. This resolution in effect set aside the stockholders resolution approved on June 23, 1946 (Exhibit D), on the ground that said stockholders' resolution was null and void, and because the plaintiff corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. At the said meeting the directors also decided to call 50 per cent of the unpaid subscription within 30 days from April 17, 1948, the call payable within 60 days from receipt of notice from the Secretary-Treasurer. This resolution also authorized legal counsel of the company to take all the necessary legal steps for the collection of the payment of the call. (See Exhibit E-2).

On June 10, 1949, the stockholders of the corporation held another meeting in which the stockholders were all present, either in person or by proxy. At such meeting, the stockholders adopted resolution No. 4, whereby it was agreed to revalue the stocks and assets of the company so as to attract outside investors to put in money for the rehabilitation of the company. The president was authorized to make all arrangement for such appraisal and the Secretary to call a meeting upon completion of the reassessment. (See Exhibit 2).

It was admitted by the defendant that he received notice from the Secretary-Treasurer of the company, demanding payment of the unpaid balance of his subscription. It was agreed by the parties that the call of the Board of Directors was not published in a newspaper of general circulation as required by section 40 of the Corporation Law.

On September 28, 1949, the legal counsel of the plaintiff corporation wrote a letter to the defendant, demanding the payment of the unpaid balance of his subscription amounting to P18,500. Copy of this letter was sent by registered mail to the defendant on September 29,1 949. (See Exhibit G). The defendant ignored the said demand. Hence this action.

The defendant, in his answer, disclaims liability tot he plaintiff corporation on the following grounds:

1. That the plaintiffs' action is premature because there was no valid call; and

2. That granting that there was a valid call, he was released from the obligation of the balance of his subscription by stockholders' resolution No. 17 and No. 4.

By way of counterclaim, the defendant also claims from the plaintiff a reasonable compensation at the rate of P700 per month as president of the company, for the period from March 1, 1946 to December 31, 1948.

In the light of the foregoing undisputed facts, the only questions are as follows:

1. Was the call Exhibit E-2 valid?

2. Was the defendant released from the obligation of the unpaid balance of his subscription by virtue of stockholders' resolution Nos. 17 and 4?

3. Is the defendant entitled to compensation as president of the plaintiff corporation?

In an exhaustive and well prepared decision, Judge M. Mejia of the lower court found that the call for payment embodied in resolution No. 17 of July 23, 1946 was null and void for lack of publication; consequently, he dismissed the complaint as premature. He further held said resolution null and void in so far as it tried to relieve the defend- ant from liability on his unpaid subscription, on the ground that the resolution was not approved by all the stockholders of the corporation. He also dismissed the defendant's counterclaim for compensation as president of the corporation.

Inasmuch as in the two appeals, the assignment of errors are related to each other, and because they refer to the same case, we propose to determine both appeals in one single decision.

We agree with the lower court that the law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. This is clear from the provisions of section 40 of the Corporation Law, Act No. 1459, as amended, which reads as follows:

SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon each stockholder or deposited in the post office, postage prepaid, addressed to him at his place of residence, if known, and if not known, addressed to the place where the principal office of the corporation is situated. The notice must also be published once a week for four successive weeks in some newspaper of general circulation devoted to the publication of general news published at the place where the principal office of the corporation is established or located, and posted in some prominent place at the works of the corporation if any such there be. If there be no newspaper published at the place where the principal office of the corporation is established or located, then such notice may be published in any newspaper of general news in the Philippines.

It will be noted that section 40 is mandatory as regards publication, using the word "must". As correctly stated by the trial court, the reason for the mandatory provision is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on stockholders. (14 C.J. 639).

This rule finds support in authorities on corporation law, such as, Thompson on Corporations, Vol. 5, 3rd edition, pages 588-590, from which we make the following quotation:

SEC. 3744. Provisions requiring notice of calls. — The governing statute, charter or by-laws usually require that notice of calls be given the subscriber or stockholder. If any particular notice or demand is required by either of these, or by the contract of subscription, then

such notice or demand must be given, and must be alleged and proved in order to maintain an action for the call.

x x x           x x x           x x x

SEC. 3745. Notice. — Compliance with requirements-From what has preceded it is clear that where any particular form or kind of notice is required, such form or kind must be given-the requirement must be complied with. Thus, where the charter expressly required notice to be given in certain newspapers for a certain number of days, the corporation must show compliance with the conditions before recovery on the call. An action is ordinarily made effective by notice thereof to the subscribers, in accordance with the by-laws or general regulations of the corporation in that regard. So, where there are statutory or other regulations as to the form and sufficiency of the notice, these must be followed. Thus, where such a notice was required to be signed by the directors, a notice with the names of the directors signed by a clerk, was held insufficient. These cases and others proceed on the theory that where the manner of giving notice is prescribed by law every condition precedent must be strictly and literally complied with. (Thompson on Corporations, Vol. 5, 3rd ed.)

This view is shared by Justice Fisher. In his book "The Philippine Law on Stock Corporations" he says: "Not only must personal notice be given in one of these manners, but the notice must also be published once a week, for four consecutive weeks, in some newspaper." (p. 110.).

We find the citation of authorities made by the plaintiff and appellant inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee. Said the court in that case:

. . . . it is now quite well settled that when the corporation becomes insolvent, with proceedings instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution of suits to collect unpaid balance on subscription.

But when the corporation is a solvent concern, the rule is:

It is again insisted that plaintiffs cannot recover because the suit was not proceeded by a call or assessment against the defendant as a subscriber, and that until this is done no right of action accrues. In a suit by a solvent going corporation to collect a subscription, and in certain suits provided by statute this would be true;. . . . . (Id.)

Going to the claim of defendant and appellant that Resolution No. 17 of 1946 released him from the obligation to pay for his unpaid subscription, the authorities are generally agreed that in order to effect the release, there must be unanimous consent of the stockholders of the corporation. We quote some authorities:

Subject to certain exceptions, considered in subdivision (3) of this section, the general rule is that a valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the stockholders or subscribers. Furthermore, a subscription cannot be cancelled by the company, even under a secret or collateral agreement for cancellation made with the subscriber at the time of the subscription, as against persons who subsequently subscribed or purchased without notice of such agreement. (18 C.J.S. 874).

(3) Exceptions.

In particular circumstances, as where it is given pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release, supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors. A release which might originally have been held invalid may be sustained after a considerable lapse of time. (18 C.J.S. 874).

In the present case, the release claimed by defendant and appellant does not fall under the exception above referred to, because it was not given pursuant to a bona fide compromise, or to set off a debt due from the corporation, and there was no consideration for it.

Another authority:

SEC. 850. Unanimous consent of stockholders necessary to release subscriber. — It may be asserted as the first rule under this proposition that, after a valid subscription to the capital stock of a corporation has been made and accepted, there can be no cancellation or release from the obligation without the consent of the corporation and all the stockholders; . . . . (2 Thompson on Corporation, p. 186).

He states the reason for the rule as follows:

SEC. 855. Right to withdraw as against subscribers. — A contract of subscription is, at least in the sense which creates as estoppel, a contract among the several subscribers. For this reason no one of the subscribers can withdraw from the contract without the consent of all the others, and thereby diminish, without the universal consent, the common fund in which all have acquired an interest. . . . (2 Thompson on Corporations, p. 194.).

As already found by the trial court, the release attempted in Resolution No. 17 of 1946 was not valid for lack of a unanimous vote. If found that at least seven stockholders were absent from the meeting when said resolution was approved.

Defendant and appellant, however, contends that after dismissing the complaint for being premature, there was no necessity or reason for the trial court to go further and say that defendant was not validly released from the payment for his unpaid subscription. It must be borne in mind, however, that this was one of the principal issues involved in the case and the trial court was called upon to pass upon it, because unless so passed upon and deter- mined, it might decisively affect the case on appeal. Supposing that on appeal the appellate court decides that the call was valid, then it would be important to know whether or not in spite of the validity of the call, defendant was nevertheless not liable because he had been validly released by a resolution of the corporation. If that question was not decided by the trial court, and naturally was not touched upon in the appeal, then the appellate court would have no occasion to pass upon it, and it might be necessary to bring another action to determine the point, which means multiplicity of suits. Moreover, the authority given to the courts to render judgments for declaratory relief in order to determine the rights or

duties of parties over a certain transaction or under a certain written instrument, or to remove the uncertainty or controversy over the same (Rule 66 of the Rules of Court), justified the trial court in passing upon this question of release.

As regards the compensation of President claimed by defendant and appellant, it is clear that he is not entitled to the same. The by-laws of the company are silent as to the salary of the President. And, while resolutions of the incorporators and stockholders (Exhibits G-1 and I-1) provide salaries for the general manager, secretary-treasurer and other employees, there was no provision for the salary of the President. On the other hand, other resolutions (Exhibits H-1 and J-3) provide for per diems to be paid to the President and the directors of each meeting attended, P10 for the President and P8 for each director, which were later increased to P25 and P15, respectively. This leads to the conclusions that the President and the board of directors were expected to serve without salary, and that the per diems paid to them were sufficient compensation for their services. Furthermore, for defendant's several years of service as President and up to the filing of the action against him, he never filed a claim for salary. He thought of claiming it only when this suit was brought against him.

In conclusion we hold that under the Corporation Law, notice of call for payment for unpaid subscribed stock must be published, except when the corporation is insolvent, in which case, payment is immediately demandable. We also rule that release from such payment must be made by all the stockholders.

In view of the foregoing and finding no reversible error in the decision appealed, the same is hereby affirmed.

No pronouncement as to costs.

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista Angelo and Labrador, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-19893             March 31, 1923

ARNALDO F. DE SILVA, plaintiff-appellant, vs.ABOITIZ & COMPANY, INC., defendant-appellee.

Del Rosario and Del Rosario and Andres Jayme for appellant.Rodriguez and Zacarias for appellee.

ARAULLO, C. J.:

The plaintiff subscribed for 650 shares of stock of the defendant corporation of the value of P500 each, of which he has paid only the total value of 200 shares, there remaining 450 shares unpaid, for which he was indebted to the corporation in the sum of P225,000, the value thereof. On April 22, 1922, he was notified by the secretary of the corporation of a resolution adopted by the board of directors of the corporation on the preceding day, declaring the unpaid subscriptions to the capital stock of the corporation to have become due and payable on the following May 31st at the office thereof, the payment to be made to the treasurer, and stating that all such shares as may have not been paid then, with the accrued interest up to that date, will be declared delinquent, advertised for sale at public auction, and sold on the following June 16th, for the purpose of paying up the amount of the subscription and accrued interest, with the expenses of the advertisement and sale, unless said payment was made before. The proper advertisement having been published, as announced in the aforesaid notice, the plaintiff filed a complaint in the Court of First Instance of Cebu on May 5th of the same year against the said corporation, wherein, after relating the above-mentioned facts, he prayed for a judgment in his favor, decreeing that, in prescribing another method of paying the subscription to the capital stock different from that provided in article 46 of its by-laws, in declaring the aforesaid 450 shares delinquent, and in directing the sale thereof, as advertised, the corporation had exceeded its executive authority, and as a consequence thereof he asked that a writ of injunction be issued against the said defendant, enjoining it from taking any further action of whatever nature in connection with the acts complained of and that it pay the costs of this suit.

The plaintiff alleged as the grounds of his petition: (1) That, according to aforesaid article 46 of the by-law of the corporation, which was inserted in the complaint, all the shares subscribed to by the incorporation that were not paid for at the time of the incorporation, shall be paid out of the 70 per cent of the profit obtained, the same to be distributed among the subscribers, who shall not receive any dividend until said shares were paid in full; (2) that in declaring the plaintiff's unpaid subscription to the capital stock to have become due and payable on May 31st, and in publishing the aforesaid notice declaring his unpaid shares delinquent, the defendant corporation has violated the aforesaid article, which prescribes an operative method of paying for the shares continuously until their full amortization, thus violating and disregarding a right of the plaintiff vested under the said by-laws; (3) that the aforesaid acts of the defendant corporation were in excess of its powers and executive authority and the plaintiff had no other plain, speedy and adequate remedy in the ordinary course of law than that prayed for in the said complaint, to prevent the defendant from taking any further action in connection with the sale and alienation of the said shares.

A preliminary injunction having been issued against the defendant, as prayed for by the plaintiff, upon the giving of the proper bond, and the defendant having been summoned, the latter filed a demurrer to the complaint on the ground that the facts alleged therein did not constitute a cause of action, and that even supposing the plaintiff to have any lawful claim against the defendant corporation, the special remedy applied for by the plaintiff was not the most adequate and speedy.

Hearing having been had the court below by an order dated September 21, 1922, sustained the aforesaid demurrer on the first ground, giving the plaintiff five days within which to amend his complaint, but the said period having elapsed without the plaintiff having amended his complaint, upon motion of the defendant, that court, by an order dated the 2d of the following month of October, dismissed the complaint and ordered the dissolution of the preliminary injunction previously issued, with costs, to which orders the plaintiff excepted, asking at the same time for the annulment thereof and a new hearing, which motion was

denied by the lower court. To that ruling the plaintiff also excepted, and brought the case to this court by the proper bill of exceptions.

Assuming the truth of the facts alleged in the complaint filed against the herein defendant, as the filling of a demurrer to a complaint is made on that assumption, the question to be decided reduces itself to determining whether or not, under the provision of article 46 of the by-laws of the defendant corporation, the latter may declare the unpaid shares delinquent, or collect their value by another method different from that prescribed in the aforecited article.

Said article reads thus:

ART. 46. The net profit resulting from the annual liquidation shall be distributed as follows: Ten per cent (10%) for the Board of Directors and in the manner prescribed in article twenty-six (26) of these by-laws; ten per cent (10%) for the general manager; ten per cent (10%) for the reserve fund, and seventy per cent (70%) for the shareholders in equal parts; Provided, however, That from this seventy per cent dividend the Board of Directors may deduct such amount as it may deem fit for the payment of the unpaid subscription to the capital stock and not pay any dividend to the holders of the said unpaid shares until they are fully paid; Provided, further, That when all the shares have been paid in full as provided in the preceding paragraph, the Board of Directors may also deduct such amount as it may deem fit for the creation of an emergency special fund, or extraordinary reserve fund when in its judgment the same may convenient for the development of the business of the corporation or for meeting any such contingencies as may arise from its operation, whenever the distributable dividend is found, after the foregoing deduction, to be not less than ten per cent (10%) of the paid up capital stock.

No dividend shall be declared or paid, except when there remains a net profit after the payment of all the expenses incurred, or allowances made, by the corporation to carry out

the operation of its business; so that no such dividend may be declared as may affect the capital of the corporation.

As will be seen from the context of the said article, its first part specifies the manner in which the net profit from the annual liquidation should be distributed, fixing a certain per cent for the board of directors; another for the general manager; another for the reserve fund, and the remaining 70 per cent to be distributed in equal parts among the shareholders. But it authorizes or empowers the board of directors to collect the value of the shares subscribed to and not fully paid by deducting from the 70 per cent, distributable in equal parts among the shareholders, such amount as may be deemed convenient, to be applied on the payment of the said shares, and not to pay the subscriber until the same are fully paid up. In no other way can the words "Provided, however, that from this seventy per cent dividend the board of directors may deduct such amount as it may deem fit for the payment, etc." And this is so clear that in that same article the board of directors is also authorized to create a special emergency fund or extraordinary reserve fund, when, in its judgment, and in case all the shares subscribed to have been fully paid, the same is convenient for the development of the business of the corporation or for meeting any such contingencies as my arise from its operation, applying said 70 per cent of the profit on the payment of the shares that may have not been fully paid, provided that the distributable dividend remaining after the deduction to be made for the creation of the said special emergency fund or extraordinary reserve fund is not less than 10 per cent of the capital actually paid. So that it is discretionary on the part of the board of directors to do whatever is provided in the said article relative to the application of a part of the 70 per cent of the profit distributable in equal parts on the payment of the shares subscribed to and not fully paid, and to the creation of a special emergency fund or extraordinary reserve fund; and the fact itself that said special fund may not be created when the dividend appearing to be distributable, after deducting from the said 70 per cent the amount to be applied on the payment of the unpaid subscription, is less than 10 per cent of the capital actually paid, shows that it is the board of directors and not the delinquent subscriber that may and must judge and decide whether or not such value must be paid out of a part of the 70 per cent of the profit distributable in equal parts among the shareholders, as provided

in the first part of the said article. It lies therefore, within the discretion of the board of directors to make use of such authority.

If the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for accomplishing the same purpose. As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):

The first and most special remedy given by the statute consists in permitting the corporation to put the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and must be followed. The other remedy is by action in court concerning which we find in section 49 the following provision:

"Nothing in this Act prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred."

In the instant case the board of directors of the defendant corporation elected to avail itself of the first of said two remedies, and, complying strictly with the provisions of sections 37 to 49, inclusive, of the aforesaid Corporation Law, which is binding upon it and its stockholders. it being an artificial entity created by virtue of that same law (sec. 2), the board of directors made use of the discretionary power granted to it by that law and declared that payment of plaintiff's subscription to 450 shares which had not been paid by him was due, and that said shares were delinquent, and performed all the other acts subsequent to said declaration that are mentioned in the complaint, as it did not deem it advantageous to the corporation to apply on the payment of said shares, as was authorized by the by-law, a part of the profit that was, or might have been realized, and was distributable among the stockholders in equal parts, as to the existence of which profit no allegation is made in the complaint, or to enforce payment of such shares by bringing in court the proper action against the debtor or delinquent stockholders. It is, however, alleged by the appellant that the by-law of the corporation being of the nature of a contract between

it and its stockholders or members, and article 46 of the by-laws of the said corporation providing an operative method for the payment of stock subscriptions continuously until the full amortization thereof, application cannot be made in the present case of the provisions above cited of the Corporation Law for the purpose contemplated by the defendant, as the provision of said article must prevail against that law.

Admitting that the provision of article 46 of the said by-laws maybe regarded as a contract between the defendant corporation and its stockholders , yet as it is only to the board of directors of the corporation that said articles gives the authority or right to apply on the payment of unpaid subscriptions such amount of the 70 per cent of the profit distributable among the shareholders in equal parts as may be deemed fit, it cannot be maintained that the said article has prescribe an operative method for the payment of said subscription continuously until their full amortization, or, what would be the same thing, that said article has prescribe that sole and exclusive method for that purpose, for, in the first place, the adoption of that method for the purpose of collecting the value of subscriptions due and unpaid lies, according to said article, within the discretion of the board of directions, that is, it is subject to this condition, and this can in no way be reconciled with the idea of method, which implies something fixed as a rule or permanent standard, and not variable at the will of somebody and according to the circumstances; and, in the second place, in connection with the provision of the said article relative to the aforesaid discretionary power of the board of directors to adopt that method, there is also the discretionary power granted the same board of directors to avail itself, for the same purpose, to either of the two remedies prescribed in sections 38 to 49, inclusive, of the aforecited Corporation Law.

In the instant case, the defendant corporation, through its board of directors, made use of its discretionary power, taking advantage of the first of the two remedies provided by the aforesaid law. On the other hand, the plaintiff has no right whatsoever under the provision of the above cited article 46 of the said by-laws to prevent the board of directors from following, for that purpose, any other method than that mentioned in the said article, for the very reason that the same does not give the stockholders any right in connection with the determination of

the question whether or not there should be deducted from the 70 per cent of the profit distributable among the stockholders such amount as may be deemed fit for the payment of subscriptions due and unpaid. Therefore, it is evident that the defendant corporation has not violated, nor disregarded any right of the plaintiff recognized by the said by-laws, nor exceeded its authority in the discharge of its executive functions, nor abused its discretion when it performed the acts mentioned in the complaint as grounds thereof, and, consequently, the facts therein alleged do not constitute a cause of action.

For the foregoing, the orders appealed from are affirmed, with the costs of both instances against the appellant. So ordered.

Street, Malcolm, Avanceña, Ostrand, Johns, and Romualdez, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-39861             March 21, 1934

BONIFACIO LUMANLAN, plaintiff-appellee, vs.JACINTO R. CURA, ET AL., defendants. DIZON & CO., INC., ETC., appellant.

Leoncio M. Aranda and Gregorio M. Bañaga for appellant.Lagman and Santos for appellee.

GODDARD, J.:.

This is an appeal from a decision of the Court of First Instance of Tarlac, the dispositive part of which reads as follows:

Por las consideraciones expuestas, el Juzgado falla este asunto condenando a Dizon y Cia., Inc., a acreditar en sus libros como pago de las obligaciones de Bonifacio Lumanlan la suma de P11,840, ordenando a la misma entidad que inmediatamente expida los certificados de accion equivalente a la mencionada suma; declarando perpetuo y absoluto el interdicto prohibitorio expedido contra los demandados; condenando a la Dizon y Cia,. Inc., al pago de la suma de P2,000 a favor del demandante, y se condena a los demandados al pago de las costas del juicio. En cuanto a los daños y perjuicios reclamados por el demandante, no habiendo este probado los mismos, el Juzgado no puede accederlos.

The appellant, Dizon & co., Inc., assigns twenty-three errors as having been committed by the trial court.

The appellant is a corporation duly organized under the laws of the Philippine Islands with its central office in the City of Manila. The plaintiff-appellee Bonifacio Lumanlan, on July 31, 1922, subscribed for 300 shares of stock of said corporation at a par value of P50 or a

total of P15,000. Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against it in the Court of First Instance of Manila, case No. 37007, praying that a receiver be appointed, as it appeared that the corporation at that time had no assets except credits against those who had subscribed for shares of stock. The court named Tayag as receiver for the purpose of collecting, said subscriptions. As Bonifacio Lumanlan had only paid P1,500 of the P15,000, par value of the stock for which he subscribed, the receiver on August 30, 1930, filed a suit against him in the Court of First Instance of Manila, civil case No. 37492, for the collection of P15,109, P13,500 of which was the amount he owed for unpaid stock and P1,609 for loans and advances by the corporation to Lumanlan. In that case Lumanlan was sentenced to pay the corporation the above-mentioned sum of P15,109 with legal interest thereon from August 30, 1930, and costs. Lumanlan appealed from this decision.

Pending this appeal, with the permission of the court, the creditors, some of the directors and the majority of the stockholders held several meetings in which it was agreed in substance that subscribers for the capital stock who were in default should pay the creditors; Lumanlan was designated to pay the debt of the corporation to Julio Valenzuela, one of the petitioners in case No. 37007; at that time the corporation owed Valenzuela the sum of P8,000 plus interest thereon at the rate of 12 per cent per annum from March 17, 1928. Lumanlan agreed to assume this obligation and in turn the corporation agreed that if Lumanlan would dismiss his appeal in case No. 37492 the corporation would collect only 50 per cent of the amount subscribed by him for stock, provided that in case the 50 percent was insufficient to pay Valenzuela he should pay an additional amount which should not exceed the amount of the judgment against him in that case. In view of this agreement Lumanlan withdrew his appeal and paid Valenzuela the sum of P11,840 including interest and thereby was subrogated in place of Valenzuela. The petitioning creditors having been paid the amounts owed to them by the corporation asked that the receiver be dismissed and the court granted this. Disregarding this agreement and notwithstanding the payment made by Lumanlan to Valenzuela, the corporation on May 5, 1932, asked for the execution of the sentence in case No. 37492 and by virtue of an order of execution the provincial

sheriff levied upon two parcels of land belonging to Lumanlan described in certificate of title No. 901 of the Province of Tarlac. Lumanlan brought this case to collect from Dizon & Co., Inc., and to prevent the sheriff from selling the two parcels of land. Pending the result of this case the sheriff was enjoined from proceeding with the sale.1ªvvphi1.ne+

In the promissory note given by the corporation to Valenzuela the former obligated itself to pay Valenzuela the sum of P8,000 with interest at 12 per cent per annum and, upon failure to pay said sum and interest when due, 25 per cent of the principal as expenses of collection and judicial costs in case of litigation.

By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this suit to collect, or receive credit for the sum which he had paid Valenzuela for and in place of the corporation, or a total of P13,840. This leaves a balance due Dizon & co., Inc., of P1,269 on that judgment with interest thereon at 6 per cent per annum from August 30, 1930.

It appears from the record that during the trial of the case now under consideration, the Bank of the Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was appointed assignee in case No. 43065 of the Court of First Instance of the City of Manila on November 28, 1932. It is therefore evident that there are still other creditors of Dizon & Co., Inc. This being the case that corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it.

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)

. . . the Corporation Law clearly recognizes that a stock subscription is a subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. (Velasco vs. Poizat, 37 Phil., 802, 805.)

In view of the above conclusions it is not necessary to discuss the other questions raised by the parties in this case.

The judgment of the trial court is modified in accordance with the above and Dizon & Co., Inc., is ordered to credit Bonifacio Lumanlan with the sum of P13,840 against the judgment for P15,109, in case No. 37492 of the Court of First Instance of Manila; to issue to Bonifacio Lumanlan 300 shares of its capital stock upon payment by him of the sum of P1,269 with interest thereon at 6 per cent per annum from August 30, 1930. The preliminary injunction issued in this case is hereby dissolved for the purpose of enabling Dizon & Co., Inc., to ask for a new order of execution in case No. 37492, Court of First Instance of Manila, for the sum of P1,269 with interest thereon as stated above. Without pronouncement as to costs.

Malcolm, Villa-Real, Hull, and Imperial, JJ., concur.

FIRST DIVISION

[G.R. No. 117604. March 26, 1997]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.

D E C I S I O N

KAPUNAN, J.:

Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which denied petitioner's motion for reconsideration.

The case unfolds thus:

On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for brevity).i[1]

On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its books.ii[2]

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in petitioner's favor was duly noted in its corporate books.iii[3]

On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured by the aforestated pledge

iv

agreement still existing between Calapatia and petitioner.iv[4]

Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock.v[5]

v

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-19441             March 27, 1923

FUA CUN (alias Tua Cun), plaintiff-appellee, vs.

iiiiii

On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to petitioner's request in view of Calapatia's unsettled accounts with the club.vi[6]

RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION, defendants-appellants.

Araneta and Zaragoza for appellants.Canillas and Cardenas for appellee.

OSTRAND, J.:

It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash, for which a receipt was issued in the following terms:

This is to certify, That Chua Soco, a subscriber for five hundred shares of the capital stock of the China Banking Corporation at its par value of P100 per share, has paid into the Treasury of the Corporation, on account of said subscription and in accordance with its terms, the sum of twenty-five thousand pesos (P25,000), Philippine currency.

Upon receipt of the balance of said subscription in accordance with the terms of the calls of the Board of Directors, and surrender of this certificate, duly executed certificates for said five hundred shares of stock will be issued to the order of the subscriber.

It is expressly understood that the total number of shares specified in this receipt is subject to sale by the China Banking

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued the corresponding certificate of sale.vii[7]

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24.viii[8] Said notice was followed by a demand letter dated 12 December 1985 for

Corporation for the payment of any unpaid subscriptions, should the subscriber fail to pay the whole or any part of the balance of his subscription upon 30 days' notice issued therefor by the Board of Directors.

Witness our official signatures at Manila, P. I., this 25th day of August, 1920.

(Sgd.) MERVIN WEBSTERCashier

(Sgd.) DEE C. CHUANPresident

On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua Soco, but was told to await action upon the matter by the Board of Directors.

In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The attachment was levied after the defendant bank had received notice of the facts that the receipt had been endorsed over to

the same amountix[9] and another notice dated 22 November 1986 for P23,483.24.x[10]

On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m.

the plaintiff.

Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-half of the subscription price of five hundred shares Chua Soco in effect became the owner of two hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation; that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the sum of P5,000 in damages for wrongful attachment.

The trial court rendered judgment in favor of the plaintiff declaring that Chua Soco, through the payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which shares the plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering that the receipt be returned to said plaintiff. From this judgment the defendants appeal.

Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment appealed from is in the main correct.

The claim of the defendant Banking Corporation upon which it brought the action in which the writ of attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct connection with the shares of stock in question. At common law a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375) and our attention has not been called to any statute creating such lien here. On the contrary, section 120 of the Corporation Act provides

Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).

Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership due to the sale of his share of stock in the 10 December 1986 auction.xi[11]

that "no bank organized under this Act shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in accordance with law."

Section 35 of the United States National Banking Act of 1864 contains a similar provision and it has been held in various decisions of the United States Supreme Court that a bank organized under that Act can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws provide that the shares shall be transferable only on the books of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the corporation. (Jones on Liens, 3d ed., sec. 384; First National Bank of South Bend vs. Lanier and Handy, 11 Wall., 369; Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and McMillan, 107 U.S., 676.) The reasons for this doctrine are obvious; if banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective.

Turning now to the rights of the plaintiff in the stock in question, it is argued that the interest held by Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. Though the courts have uniformly held that chattel mortgages on shares of stock and other choses in action are valid as between the parties, there is still much to be said in favor of the defendants' contention that

On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock be issued in its name.xii[12]

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 December 1986 for P25,000.00.xiii[13]

the chattel mortgage here in question would not prevail over liens of third parties without notice; an equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will furnish constructive notice to third parties. As said by the court in the case of Spalding vs. Paine's Adm'r. (81 Ky., 416), in regard to a chattel mortgage of shares of stock:

These certificates of stock are in the pockets of the owner, and go with him where he may happen to locate, as choses in action, or evidence of his right, without any means on the part of those with whom he proposes to deal on the faith of such a security of ascertaining whether or not this stock is in pledge or mortgaged to others. He finds the name of the owner on the books of the company as a subscriber of paid-up stock, amounting to 180 shares, with the certificates in his possession, pays for these certificates their full value, and has the transfer to him made on the books of the company, thereby obtaining a perfect title. What other inquiry is he to make, so as to make his investment certain and secure? Where is he to look, in order to ascertain whether or not this stock has been mortgaged? The chief office of the company may be at one place to-day and at another tomorrow. The owner may have no fixed or permanent abode, and with his notes in one pocket and his certificates of stock in the other — the one evidencing the extent of his interest in the stock of the corporation, the other his right to money owing him by his debtor, we are asked to say that the mortgage is effectual as to the one and inoperative as to the other.

But a determination of this question is not essential in the present case. There can be no doubt that an equity in shares of stock may be

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its name.xiv[14]

On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied petitioner's motion for reconsideration.

assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above mentioned reads:

For value received, I assign all my rights in these shares in favor of Mr. Tua Cun.

Manila, P. I., May 18, 1921.

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a conditional equitable assignment.

As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by virtue of the attachment. But the attachment was levied after the bank had received notice of the assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the latter. It follows that as against these rights the defendant bank holds no lien whatever.

As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for said five hundred shares in his favor."

On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of delinquency."xv[15] Consequently, the case was dismissed.xvi[16]

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration.xvii[17]

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer. It declared thus:

viviiviiiixxxixiixiiixivxvxvixvii

The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of the pledged share.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue another membership certificate in the name of appellant-petitioner bank.

SO ORDERED.xviii[18]

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its resolution dated 7 December 1993.xix[19]

xviiixix

The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the costs against the appellants Banking Corporation. So ordered.

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Johns, and Romualdez, JJ., concur.

The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate. It ruled as follows:

In order that the respondent Commission can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members, or officers; (c) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned, and (d) among the stockholders, partners or associates themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the relationship mentioned will not necessarily always confer jurisdiction over the dispute on the Securities and Exchange Commission to the exclusion of the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions is not that absolute. The better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It is not any of those mentioned in the aforecited case.

WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for lack of jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent China Banking

Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in this instance.

SO ORDERED.xx[20]

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994.xxi[21]

Hence, this petition wherein the following issues were raised:

II

ISSUES

WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY ERRED WHEN:

1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;

2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.

The petition is granted.

The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts or the SEC.

P.D. No. 902-A conferred upon the SEC the following pertinent powers:

SECTION 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement agencies of the government, civil or military as well as any private institution, corporation, firm, association or person.

xxx

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with 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.

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

c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations.

d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all of its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this Decree.

The aforecited law was expounded upon in Viray v. CAxxii[22] and in the recent cases of Mainland Construction Co., Inc. v. Movillaxxiii[23] and Bernardo v. CA,xxiv[24] thus:

. . . The better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy.

Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of the controversy between petitioner and private respondent corporation is intra-corporate.

As to the first query, there is no question that the purchase of the subject share or membership certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same to the latter and thus entitled petitioner to have the said share registered in its name as a member of VGCCI. It is readily observed that VGCCI did not assail the transfer

xxxxixxiixxiiixxiv

directly and has in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by the original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate books.xxv[25] In addition, Calapatia, the original owner of the subject share, has not contested the said transfer.

By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

An important consideration, moreover, is the nature of the controversy between petitioner and private respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club . . ."xxvi[26] It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special competence of the SEC.

We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz:xxvii[27]

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction . . . the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question

demands the exercise of sound administrative discretion requiring the special knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regulatory statute administered."

In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently,. . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim."

In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.

VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and VGCCI.

VGCCI's contention lacks merit.

In Zamora v. Court of Appeals,xxviii[28] this Court, through Mr. Justice Isagani A. Cruz, declared that:

It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it does not prevent the plaintiff from filing the same complaint later with the competent court. The plaintiff is not estopped from doing so simply because it made a mistake before in the choice of the proper forum . . .

We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court dismissed petitioner's complaint and led to petitioner's recourse to the SEC.

Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in the same proceedings.

It must be underscored that petitioner did not confine the instant petition for review on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the case. In turn, in its responsive pleadings, private respondent duly answered and countered all the issues raised by petitioner.

Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Gabriel-Almoradie v. Court of Appeals,xxix[29] citing Escudero v. Dulayxxx[30] and The Roman Catholic Archbishop of Manila v. Court of Appeals:xxxi[31]

In the interest of the public and for the expeditious administration of justice the issue on infringement shall be resolved by the court considering that this case has dragged on for years and has gone from one forum to another.

It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future litigation. No useful purpose will be served if a case or the determination of an issue in a case is remanded to the trial court only to have its decision raised again to the Court of Appeals and from there to the Supreme Court.

We have laid down the rule that the remand of the case or of an issue to the lower court for further reception of evidence is not necessary where the Court is in position to resolve the dispute based on the records before it and particularly where the ends of justice would not be subserved by the remand thereof. Moreover, the Supreme Court is clothed with ample authority to review matters, even those not raised on appeal if it finds that their consideration is necessary in arriving at a just disposition of the case.

In the recent case of China Banking Corp., et al. v. Court of Appeals, et al.,xxxii[32] this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:

At the outset, the Court's attention is drawn to the fact that that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or proceeding. The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their various positions and arguments on the matter necessitating prompt adjudication.

In the case at bar, since we already have the records of the case (from the proceedings before the SEC) sufficient to enable us to render a sound judgment and since only questions of law were raised (the proper jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule on the merits of the case.

The procedural niceties settled, we proceed to the merits.

VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends that the same was null and void for lack of consideration because the pledge agreement was entered into on 21 August 1974xxxiii[33] but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3 August 1983.xxxiv[34]

VGCCI's contention is unmeritorious.

A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly stipulated therein that the said pledge will also stand as security for any future advancements (or renewals thereof) that Calapatia (the pledgor) may procure from petitioner:

xxx

This pledge is given as security for the prompt payment when due of all loans, overdrafts, promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind which have heretofore been contracted, or which may hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided, plus the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE may incur in connection with the collection thereof.xxxv[35]

(Emphasis ours.)

The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell the share in question in accordance with the express provision found in its by-laws.

Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction. By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.

In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise:

The general rule really is that third persons are not bound by the by-laws of a corporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when third persons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed on September 17, 1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private respondent's by-laws which is material to the issue herein in a letter it wrote to private respondent. Because of this actual knowledge of such by-laws then the same bound the petitioner as of the time when petitioner purchased the share. Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the right of the private respondent to sell the said share for reasons of delinquency and the right of private respondent to have a first lien on said shares as these rights are provided for in the by-laws very very clearly.xxxvi[36]

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.:xxxvii[37]

And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

"An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption." (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

"When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

"The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone." (Ireland vs. Globe Milling Co., 21 R.I., 9.)

"A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons." (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Underscoring ours.)

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. VGCCI could have easily

informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:

By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. (9 Fletcher 4166. 1982 Ed.)

The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of shares cannot have any effect on the the transferee of the shares in question as he "had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by the by-law between the shareholder x x x and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser." (Underscoring supplied.)

By analogy of the above-cited case, the Commission en banc is of the opinion that said case is applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent communicated to appellant-petitioner bank that the pledge

agreement was duly noted in the club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent only in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was contracted.

The Commission en banc also believes that for the exception to the general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor.

In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an opinion to the effect that:

According to the weight of authority, the pledgee's right is entitled to full protection without surrender of the certificate, their cancellation, and the issuance to him of new ones, and when done, the pledgee will be fully protected against a subsequent purchaser who would be charged with constructive notice that the certificate is covered by the pledge. (12-A Fletcher 502)

The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to him the amount due on the debt secured. In other words, the pledgee has the right to resort to its collateral for the payment of the debts. (Ibid, 502)

To cancel the pledged certificate outright and the issuance of new certificate to a third person who purchased the same certificate covered by the pledge, will certainly defeat the right of the pledgee to resort to its collateral for the payment of the debt. The pledgor or his representative or registered stockholders has no right to require a return of the pledged stock until the debt for which it was given as

security is paid and satisfied, regardless of the length of time which have elapsed since debt was created. (12-A Fletcher 409)

A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it free of liens or claims that may subsequently arise in favor of the corporation if it has notice of the pledge, although no demand for a transfer of the stock to the pledgee on the corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739)xxxviii[38]

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H . Lee,xxxix[39] is clearly not applicable:

In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive.

It is quite obvious from the aforequoted case that a membership share is quite different in character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's by-laws.

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction."xl[40] In the case at bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219.xli[41] What Calapatia owed the

corporation were merely the monthly dues. Hence, the aforequoted provision does not apply.

WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.

SO ORDERED.

Padilla, (Chairman), Bellosillo, Vitug, and Hermosisima, Jr., JJ., concur.

xxviii

xxixxxxxxxixxxiixxxiiixxxivxxxvxxxvixxxviixxxviiixxxixxlxli

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-28120 November 25, 1976

RICARDO A. NAVA, petitioner-appellant. vs.PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO CUSI, respondents-appellees.

Rolando M. Medalla, for appellant.

Jose Y. Montalvo, for appellees.

 

AQUINO, J:

This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos. Po paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificate of stock was issued to him or, for that

matter, to any incorporator, subscriber or stockholder.

On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. In the deed of sale Po represented that he was "the absolute and registered owner of twenty shares" of Peers Marketing Corporation.

Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount of his subscription. Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which included the twenty shares that had been sold to Nava.

On December 21, 1966 Nava filed this mandamus action in the Court of First Instance of Negros Occidental, Bacolod City Branch to compel the corporation and Renato R. Cusi and Amparo Cusi, its executive vice-president and secretary, respectively, to register the said twenty shares in Nava's name in the corporation's transfer book.

The respondents in their answer pleaded the defense that no shares of stock against which the corporation holds an unpaid claim are transferable in the books of the corporation.

After hearing, the trial court dismissed the petition. Nava appealed on the ground that the decision "is contrary to law ". His sole assignment of error is that the trial court erred in applying the ruling in Fua Cun vs. Summers and China Banking Corporation, 44 Phil. 705 to justify respondents' refusal in registering the twenty shares in Nava's name

in the books of the corporation.

The rule enunciated in the Fua Cun case is that payment of one-half of the subscription does not entitle the subscriber to a certificate of stock for one-half of the number of shares subscribed.

Appellant Nava contends that the Fua Cun case was decided under section 36 of the Corporation Law which provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof has been paid by him to the corporation". Section 36 was amended by Act No. 3518. It is now section 37. Section 37 provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full subscription in case of no par stock, has been paid by him to the corporation".

The issue is whether the officers of Peers Marketing Corporation can be compelled by mandamus to enter in its stock and transfer book the sale made by Po to Nava of the twenty shares forming part of Po's subscription of eighty shares, with a total par value of P8,000 and for which Po had paid only P2,000, it being admitted that the corporation has an unpaid claim of P6,000 as the balance due on Po's subscription and that the twenty shares are not covered by any stock certificate.

Apparently, no provision of the by-laws of the corporation covers that situation. The parties did not bother to submit in evidence the by-laws nor invoke any of its provisions. The corporation can include in its by-laws rules, not inconsistent with law, governing the transfer of its shares of stock (Sec. 137 , Act No. 1459; Fleischer vs. Botica Nolasco Co., 47 Phil. 583, 589).

We hold that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law.

As a rule, the shares which may be alienated are those which are covered by certificates of stock, as shown in the following provisions of the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138 (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616, notes, and Hodges vs. Lezama, 14 SCRA 1030).

SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the, parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.

SEC. 36. (re voting trust agreement) ...

The certificates of stock so transferred shall be surrendered and cancelled, and new certificates therefor issued to such person or persons, or corporation, as such trustee or trustees, in which new certificates it shall appear that they are issued pursuant to said agreement.

xxx xxx xxx

(Emphasis supplied).

(In the case of nonstock corporations a membership certificate is usually issued. Lee E. Won vs. Wack Wack Golf & Country Club, Inc., 104 Phil. 466; Wack Wack Golf & Country Club, Inc. vs. Won, L-23851, March 26, 1976, 70 SCRA 165).

As prescribed in section 35, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof" (18 C.J.S. 928). There should be compliance with the mode of transfer prescribed by law (18 C.J.S. 930).

The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. (Hager vs.

Bryan, 19 Phil. 138, 143-4).

That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. (Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).

A corporation cannot release an original subscriber from paying for his shares without a valuable consideration (Philippine National Bank vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous consent of the stockholders (Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).

Under the facts of this case, there is no clear legal duty on the part of the officers of the corporation to register the twenty shares in Nava's name, Hence, there is no cause of action for mandamus.

Nava argues that under section 37 a certificate of stock may be issued for shares the par value of which have already been paid for although the entire subscription has not been fully paid. He contends that Peers Marketing Corporation should issue a certificate of stock for the twenty shares, notwithstanding that Po had not paid fully his subscription for the eighty shares, because section 37 requires full payment for the subscription, as a condition precedent for the issuance of the certificate of stock, only in the case of no par stock.

Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc., L-16236-38, June 30, 1965, 14 SCRA 522, where it was held that section 37 "requires as a condition before a shareholder can vote his shares that his full subscription be paid in the case of no par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent shares".

There is no parallelism between this case and the Baltazar case. It is noteworthy that in the Baltazar case the stockholder, an incorporator, was the holder of a certificate of stock for the shares the par value of which had been paid by him. The issue was whether the said shares had voting rights although the incorporator had not paid fully the total amount of his subscription. That is not the issue in this case.

In the Baltazar case, it was held that where a stockholder subscribed to a certain number of shares with par value and he made a partial payment and was issued a certificate for the shares covered by his partial payment, he is entitled to vote the said shares, although he has not paid the balance of his subscription and a call or demand had been made for the payment of the par value of the delinquent shares.

As already stressed, in this case no stock certificate was issued to Po. Without stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction (Davis vs. Wachter, 140 So. 361).

The delivery of the stock certificate, which represents the shares to be alienated , is essential for the protection of both the corporation and its stockholders (Smallwood vs. Moretti, 128 So. 2d 628).

In view of the foregoing considerations, the trial court's judgment dismissing the petition for mandamus is affirmed. Costs against the petitioner-appellant.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio and Concepcion, Jr., JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 95696 March 3, 1992

ALFONSO S. TAN, Petitioner, vs.SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and PATRICIA AGUILAR, Respondents.

 

PARAS, J.:

Petitioner filed a petition for certiorari against the public respondent Securities and Exchange Commission and its co-respondents, after the former in an en banc Order, overturned with modification, the decision of its Cebu SEC Extension hearing officer, Felix Chan, in SEC Case No. C-0096, dated May 23, 1989, on October 10, 1990, under SEC-AC No. 263. (Rollo, pp. 3 and 4)

Sought to be reversed by petitioner, is the ruling of the Commission, specifically declaring that:

1. Confirming the validity of the resolution of the board of directors of the Visayan Educational Supply Corporation so far as it cancelled Stock Certificate No. 2 and split the same into Stock Certificates No. 6 (for Angel S. Tan) and No. 8 (for Alfonso S. Tan);

2. Invalidating the sale of shares represented under Stock Certificate No. 8 between Alfonso S. Tan and the

respondent corporation which converted the said stocks into treasury shares, as well as those transactions involved in the withdrawal of the stockholders from the respondent corporation for being contrary to law, but ordering the neither party may recover pursuant to Article 1412 (1) Civil Code of the Philippines; and

3. Revoking the Order of Hearing Officer Felix Chan to reinstate complainant's original 400 shares of stock in the books of the corporation in view of the validity of the sale of 50 shares represented under stock certificate No. 6; and the nullity of the sale 350 shares represented under stock certificate No. 8, pursuant to the "in pari delicto" doctrine aforecited. (Rollo, p. 4)

The antecedent facts of the case are as follows:

Respondent corporation was registered on October 1, 1979. As incorporator, petitioner had four hundred (400) shares of the capital stock standing in his name at the par value of P100.00 per share, evidenced by Certificate of Stock No. 2. He was elected as President and subsequently reelected, holding the position as such until 1982 but remained in the Board of Directors until April 19, 1983 as director. (Rollo, p. 5)

On January 31, 1981, while petitioner was still the president of the respondent corporation, two other incorporators, namely, Antonia Y. Young and Teresita Y. Ong, assigned to the corporation their shares, represented by certificate of stock No. 4 and 5 after which, they were paid the corresponding 40% corporate stock-in-trade. (Rollo, p. 43)

Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary and respondent Patricia Aguilar by virtue of Resolution No. 1981 (b), which was passed and approved while petitioner was still a member of the Board of Directors of the respondent corporation. (Rollo, p. 6)

Due to the withdrawal of the aforesaid incorporators and in order to complete the membership of the five (5) directors of the board, petitioner sold fifty (50) shares out of his 400 shares of capital stock to his brother Angel S. Tan. Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of capital stock to Teodora S. Tan and both new stockholders attended the special meeting, Angel Tan was elected director and on March 27, 1981, the minutes of said meeting was filed with the SEC. These facts stand unchallenged. (Rollo, p. 43)

Accordingly, as a result of the sale by petitioner of his fifty (50) shares of stock to Angel S. Tan on April 16, 1981, Certificate of Stock No. 2 was cancelled and the corresponding Certificates Nos. 6 and 8 were issued, signed by the newly elected fifth member of the Board, Angel S. Tan as Vice-president, upon instruction of Alfonso S. Tan who was then the president of the Corporation.(Memorandum of the Private Respondent, p. 15)

With the cancellation of Certificate of stock No. 2 and the subsequent issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the remaining 350 shares, Stock Certificate No. 8 was issued in the name of petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging that:

9. That in view of his having taken 33 1/3 interest, I was personally requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper endorsement

in the cancelled Certificate of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the cancelled (1981) Certificate of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I delivered to Tan Su Ching.

10. That the cancellation of his stock (Stock No. 2) was known by him in 1981; that it was Stock No. 8, that was delivered in March 1983 for his endorsement and cancellation. (Ibid, p. 18)

From the same Affidavit, it was alleged that Atty. Ramirez prepared a Memorandum of Agreement with respect to the transaction of the fifty (50) shares of stock part of the Stock Certificate No. 2 of petitioner, which was submitted to its former owner, Alfonso Tan, but which the purposely did not return. (Ibid., p. 18)

On January 29, 1983, during the annual meeting of the corporation, respondent Tan Su Ching was elected as President while petitioner was elected as Vice-president. He, however, did not sign the minutes of said meeting which was submitted to the SEC on March 30, 1983. (Rollo, p. 43)

When petitioner was dislodged from his position as president, he withdrew from the corporation on February 27, 1983, on condition that he be paid with stocks-in-trade equivalent to 33.3% in lieu of the stock value of his shares in the amount of P35,000.00. After the withdrawal of the stocks, the board of the respondent corporation held a meeting on April 19, 1983, effecting the cancellation of Stock Certificate Nos. 2 and 8 (Exh. 278-C) in the corporate stock and transfer book 1 (Exh. 1-1-A) and submitted the minutes thereof to the SEC on May 18, 1983. (Rollo, p. 44)

Five (5) years and nine (9) months after the transfer of 50 shares to Angel S. Tan, brother of petitioner Alfonso S. Tan, and three (3) years and seven (7) months after effecting the transfer of Stock Certificate Nos. 2 and 8 from the original owner (Alfonso S. Tan) in the stock and transfer book of the corporation, the latter filed the case before the Cebu SEC Extension Office under SEC Case No. C-0096, more specifically on December 3, 1983, questioning for the first time, the cancellation of his aforesaid Stock Certificates Nos. 2 and 8. (Rollo, p. 44)

The bone of centention raised by the petitioner is that the deprivation of his shares despite the non-endorsement or surrender of his Stock Certificate Nos. 2 and 8, was without the process contrary to the provision of Section 63 of the Corporation Code (Batas Pambansa Blg. 68), which requires that:

. . . No transfer, however, shall be valid, except as between the parties, until the transfer is recorded to the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

After hearing, the Cebu SEC Extension Office Hearing Officer, Felix Chan ruled, that:

a) The cancellation of the complainant's shares of stock with the Visayan Educational Supply Corporation is null and void;

b) The earlier cancellation of stock certificate No. 2 and the subsequent issuance of stock certificate No. 8 is

also hereby declared null and void;

c) The Secretary of the Corporation is hereby ordered to make the necessary corrections in the books of the corporation reinstating thereto complainant's original 400 shares of stock. (Rollo, pp. 39-40)

Private respondent in the original complaint went to the Securities and Exchange and Commission on appeal, and on October 10, 1990, the commission en banc unanimously overturned the Decision of the Hearing Officer under SEC-AC No. 263. (Order, Rollo, pp. 42-49)

The petition for certiorari centered on three major issues, with other issues considered as subordinate to them, to wit:

1. The meaning of shares of stock are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. (Rollo, p. 10)

The case of Nava vs. peers Marketing corporation (74 SCRA 65) was cited by petitioner making the reference to commentaries taken from 18 C.J.S. 928-930, that the transfer by delivery to the transferee of the certificate should be properly indorsed, and that "There should be compliance with the mode of transfer prescribed by law." Using Section 35, now Section 63 of the Corporation Code, the provision of the law, reads:

SEC. 63. Certificate of stock and transfer of shares. — The capital stock and stock and corporations shall be divided into shares for which certificates signed by the

president and vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stocks so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stocks against which the corporation holds any unpaid claim shall be transferable in the books of the corporations.

There is no doubt that there was delivery of Stock Certificate No. 2 made by the petitioner to the Corporation before its replacement with the Stock Certificate No. 6 for fifty (50) shares to Angel S. Tan and Stock Certificate No. 8 for 350 shares to the petitioner, on March 16, 1981. The problem arose when petitioner was given back Stock Certificate No. 2 for him to endorse and he deliberately witheld it for reasons of his own. That the Stock Certificate in question was returned to him for his purpose was attested to by Mr. Buzon in his Affidavit, the pertinent portion of which has been earlier quoted.

The proof that Stock Certificate No. 2 was split into two (2) consisting of Stock Certificate No. 6 for fifty (50) shares and Stock Certificate No. 8 for 350 shares, is the fact that petitioner surrendered the latter stock (No. 8) in lieu of P2 million pesos 1 worth of stocks, which the board

passed in a resolution in its meeting on April 19, 1983. Thus, on February 27, 1983, petitioner indicated he was withdrawing from the corporation on condition that he be paid with stock-in-trade corresponding to 33.3% (Exh. 294), which had only a par value of P35,000.00. In this same meeting, the transfer of Stock Certificate Nos. 2 and 8 from the original owner, Alfonso S. Tan was ordered to be recorded in the corporate stock and transfer book (Exh. "I-1-A") thereafter submitting the minutes of said meeting to the SEC on May 18, 1983 (Exhs. 12 and I). (Order, Rollo, p. 44)

It is also doubtless that Stock Certificate No. 8 was exchanged by petitioner for stocks-in-trade since he was operating his own enterprise engaged in the same business, otherwise, why would a businessman be interested in acquiring P2,000,000.00 worth of goods which could possibly at that time, fill up warehouse? In fact, he even padlocked the warehouse of the respondent corporation, after withdrawing the thirty-three and one-third (33 1/3%) percent stocks. Accordingly, the Memorandum of Agreement prepared by the respondents' counsel, Atty. Ramirez evidencing the transaction, was also presented to petitioner for his signature, however, this document was never returned by him to the corporate officer for the signature of the other officers concerned. (Rollo, p. 28)

At the time the warehouse was padlocked by the petitioner, the remaining stock inventory was valued at P7,454,189.05 of which 66 2/3 percent thereof belonged to the private respondents. (Ibid., p. 28)

It was very obvious that petitioner devised the scheme of not returning the cancelled Stock Certificate No. 2 which was returned to him for his endorsement, to skim off the largesse of the corporation as shown by the trading of his Stock Certificate No. 8 for goods of the corporation valued at P2 million when the par value of the same was only worth

P35,000.00. (Ibid., p. 470) He also used this scheme to renege on his indebtedness to respondent Tan Su Ching in the amount of P1 million. (Decision, p. 6)

It is not remote that if petitioner could have cashed in on Stock Certificate No. 2 with the remainder of the goods that he padlocked, he would have done so, until the respondent corporation was bled entirely.

Along this line, petitioner put up the argument that he was responsible for the growth of the corporation by the alleging that during his incumbency, the corporation grew, prospered and flourished in the court of business as evidenced by its audited financial statements, and grossed the following incomes from: 1980 — P8,658,414.10, 1981 — P8,039,816.67, 1982 — P7,306,168.67, 1983 — P5,874,453.55, 1984 — P3,911,667.76. (Ibid., Rollo, p. 24)

Moreover, petitioner asserted that he was ousted from the corporation by reason of his efforts to establish fiscal controls and to demand an accounting of corporate funds which were accordingly being transferred and diverted to certain of private respondents' personal accounts which were allegedly misapplied, misappropriated and converted to their own personal use and benefit. (Ibid., p. 125)

2. Petitioner further claims that "(T)he cancellation and transfer of petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And, that Section 63 of the Corporation Code of the Philippines is "mandatory in nature", meaning that without the actual delivery and endorsement of the certificate in question, there can be no transfer, or that such transfer is null and void. (Rollo, p. 10)

These arguments are all motivated by self-interest, using foreign authorities that are slanted in his favor and even misquoting local authorities to prop up his erroneous posture and all these attempts are intended to stifle justice, truth and equity.

Contrary to the understanding of the petitioner with respect to the use of the word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27 November 1990), this Court held, that "Remedial law statues are to be construed liberally." The term 'may' as used in adjective rules, is only permissive and not mandatory. In several earlier cases, the usage of the word "may" was described as follows:

The word "may"is an auxilliary verb showing among others, opportunity or possibility. Under ordinary circumstances, the phrase "may be" implies the possible existence of something. In this case, the "something" is a law governing sectoral representation. The phrase in question should, therefore, be understood to mean as prescribed by such law that governs the matter at the time . . . The phrase does not and cannot, by its very wording, restrict itself to the uncertainly of future legislation. (Legaspi v. Estrella, 189 SCRA 58, 24 Aug. 1990, En Banc)

Years before the above rulings concerning the interpretation of the word "may", this Court held in Chua v. Samahang Magsasaka, that "the word "may" indicates that the transfer may be effected in a manner different from that provided for in the law." (62 Phil. 472)

Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos. 6

and 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate non-endorsement.

For all intents and purposes, however, since this was already cancelled which cancellation was also reported to the respondent Commission, there was no necessity for the same certificate to be endorsed by the petitioner. All the acts required for the transferee to exercise its rights over the acquired stocks were attendant and even the corporation was protected from other parties, considering that said transfer was earlier recorded or registered in the corporate stock and transfer book.

Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina, where this Court held, that:

But delivery is not essential where it appears that the persons sought to be held as stockholders are officers of the corporation, and have the custody of the stock book . . . (67 Phi. 36).

Furthermore, there is a necessity to delineate the function of the stock itself from the actual delivery or endorsement of the certificate of stock itself as is the question in the instant case. A certificate of stock is not necessary to render one a stockholder in corporation.

Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the

equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share in stock or the nation of the relation of shareholder to the corporation. (13 Am. Jur. 2d, 769)

Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his rights and prerogatives as stockholder and was even elected as member of the board of directors in the respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof.

Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferror's creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel." (De los Santos vs. McGrath, 96 Phil. 577)

To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself as the only law governing transfer of stocks. While Section 47(s) grants a stock corporations the authority to determine in the by-laws "the manner of issuing certificates" of shares

of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. (Emphasis supplied)

In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the president or board of directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade. (47 Phil. 583)

3. Attempt to mislead — Petitioner should be held guilty of manipulating the provision of Section 63 of the Corporation Law for contumaciously withholding the endorsement of Stock Certificate No. 2 which was returned to him for the purpose, wasting time and resources of the Court, even after he had received the stocks-in-trade equivalent to P2,000,000.00 in lieu of his 350 shares of stock with a par value of P35,000.00 only, and thereafter withdrawing from the respondent corporation.

Not content with the fantastic return of his investment in the corporation and bent on sucking out the corporate resources by filing the instant case for damages and seeking the nullity of the cancellation of his Certificate of Stock Nos. 2 and 8, petitioner even attempted to mislead the Court by erroneously quoting the ruling of the Court in C. N. Hodges v. Lezama, which has some parallelism with the instant case was the parties involved therein were also close relatives as in this case.

The quoted portion appearing on p. 11 of the petition, was cut short in such a way that relevant portions thereof were purposely left out in order to impress upon the Court that the unendorsed and uncancelled stock certificate No. 17, was unconditionally declared null and void,

flagrantly omitting the justifying circumstances regarding its acquisition and the reason given by the Court why it was declared so. The history of certificate No. 17 is quoted below, showing the reason why the certificate in question was considered null and void, as follows:

(P)etitioner Hodges did not cause to be entered in the books of the corporation as he had his stock certificate No. 17 which, therefore had not been endorsed by him to anybody or cancelled and which he considered still subsisting. On September 18, 1958, petitioner Hodges again sold his aforesaid 2,230 shares of stock covered by his stock certificate No. 17 on installment basis to his co-petitioner Ricardo Gurrea, but continued keeping the stock certificate in his possession without endorsing it to Gurrea or causing the sale to be entered in the books of the corporation, believing that said shares of stock were his until fully paid for. Up to the present, petitioner Hodges has in his possession and under his control his aforesaid stock certificate No. 17, unendorsed and uncancelled (Exhs. A & A-1), a fact known to the respondents. (14 SCRA p. 1032)

The pertinent misquoted portion follows:

Before the stockholders' meeting of the La Paz ice Plant & Cold Storage Co., Inc., — hereinafter referred to as the Corporation - which was scheduled to be held on August 6, 1959, petitioners C.N. Hodges and Ricardo Gurrea filed with the CFI of Iloilo, a petition — docketed as Civil Case No. 5261 of said court — for a writ of prohibition with preliminary injunction, to restrain

respondents Jose Manuel Lezama, as president and secretary, respectively, of said Corporation from allowing their brother-in-law and brother, respectively, respondent Benjamin L. Borja, to vote in said meeting on the aforementioned 2,230 shares of stock. Upon the filing of said petition and of a bond in the sum of P1,000, the writ of preliminary injunction prayed for was issued. After due trial, or on March 28, 1960, (start of petitioner's quotation) "The court of origin rendered a decision holding that, in view of the provision in stock certificate no. 17, in the name of Hodges, to the effect that he

. . . is the owner of Two Thousand Two Hundred Thirty shares of the capital stock of La Paz Ice Plant & Cold Storage Co., Inc., transferrable only on the books of the corporation by the holder hereof in person or by attorney upon surrender of this certificate properly endorsed.

stock certificate no. 18, issued in favor of Borja and the entry thereof at his instance in the books of the corporation without stock certificate no. 17 being first properly endorsed, surrendered and cancelled, is null and void. . . . " (end of quotation by petitioner, but the ruling, continues without the period after the word void.) "and that it would be unconscionable and for Borja to vote on said shares of stock, knowing that he had ceased to have actual interest therein since September 17, 1958, when Hodges bought such

interest at the public auction held in the proceedings for the foreclosure of his chattel was rendered making said preliminary injunction permanent and declaring Hodges as the one entitled to vote on the shares of stock in question.

Petitioner ought to have even included the following which was the reason for declaring the following which was the reason for declaring the unedorsed, unsurrendered and uncancelled stock certificate, null and void:

. . . It is, moreover, obvious that Hodges retained it (stock certificate no. 17) with Borja's consent. It was evidently part of their agreement, or implied therein, that Hodges would keep the stock certificate and thus remain in the records of the Corporation as owner of the shares, despite the aforementioned sale thereof and the chattel mortgage thereon. In other words, the parties thereto intended Hodges to continue, for all intents and purposes, as owner of said share, until Borja shall have fully paid its stipulated price. (Ibid, pp. 1033-1034)

Other issues raised by the petitioner, subordinate to the principal issues above, (except the ruling by the respondent Commission with respect to the "pari delicto" doctrine which is not acceptable to this Court) are of no moment.

Considering the circumstances of the case, it appearing that petitioner is guilty of manipulation, and high-handedness, circumventing the clear provisions of law in shielding himself from his wrongdoing contrary to the protective mantle that the law intended for innocent

parties, the Court finds the excuses of the petitioner as unworthy of belief.

WHEREFORE, in view of the foregoing, the Order of the Commission under SEC-AC No. 263 dated October 10, 1990 is hereby AFFIRMED but modified with respect to the "nullity of the sale of 350 shares represented under stock certification No. 8, pursuant to the "in pari delicto" doctrine. The court holds that the conversion of the 350 shares with a par value of only P35,000.00 at P100.00 per share into treasury stocks after petitioner exchanged them with P2,000,000.00 worth of stocks-in-trade of the corporation, is valid and lawful. With regard to the damages being claimed by the petitioner, the respondent Commission is not empowered to award such, other than the imposition of fine and imprisonment under Section 56 of the Corporation Code of the Philippines, as amended.

SO ORDERED.

Melencio-Herrera, Padilla, Regalado and Nocon, JJ., concur.

FIRST DIVISION

[G.R. NO. 164588 October 19, 2005]

NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME HOLDINGS, INC. and FERNANDO R. ARGUELLES, JR., Petitioners

v. ROBERTO C. YUMUL, Respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

Petitioners assail the September 26, 2001 Decision1 of the Court of Appeals in CA-G.R. SP No. 61919, affirming in toto the Decision of the Securities and Exchange Commission (SEC) En Banc in SEC Case No. 10-96-5455, as well as the July 16, 2004 Resolution2 denying the motion for reconsideration.

The facts of the case show that Nautica Canning Corporation (Nautica) was organized and incorporated on May 11, 1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par value of P100.00 per share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions from its incorporators

as follows:3

Name No. of Shares Amount Subscribed Amount Paid

ALVIN Y. DEE 89,991 P8,999,100 P4,499,100

JONATHAN Y. DEE 2 200 200

JOANNA D. LAUREL 2 200 200

DARLENE EDSA MARIE

GONZALES 2 200 200

JENNIFER Y. DEE 2 200 200

ROBERTO C. YUMUL 1 100 100

JERRY ANGPING 10,000 1,000,000 500,000

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

100,000 P10,000,000 P5,000,000

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General Manager of Nautica with a monthly compensation of P85,000 and an additional compensation equal to 5% of the company's operating profit for the calendar year.4 On the same date, First Dominion Prime Holdings, Inc., Nautica's parent

company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase5 up to 15% of the total stocks it subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment6 was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the 14,999 "shares were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE."

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul representing his 15% share.

After Yumul's resignation from Nautica on August 5, 1996, he wrote a letter7 to Dee requesting the latter to formalize his offer to buy Yumul's 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nautica's corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica.

On September 6, 19968 and September 9, 1996,9 Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records.

Yumul's requests were denied allegedly because he neither exercised the option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime

Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name.10

On October 12, 2000, the SEC En Banc rendered the Decision,11 the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondents, as follows:

1. Declaring petitioner as a stockholder of respondent Nautica;

2. Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and Assignment dated June 22, 1995

3. Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to the pertinent provisions of the Corporation Code; andcralawlibrary

4. Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and Assignment dated June 22, 1995.

SO ORDERED.12

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners' motion for reconsideration was denied in a Resolution dated July 16, 2004.

Hence, this petition.

At the outset, we note that petitioners' recourse to this Court via a "combined" petition under Rule 65 and an appeal under Rule 45 of the Rules of Court is irregular. A Petition for Review under Rule 45 is the proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a petition for certiorari under Rule 65. Under Rule 45, decisions, final orders or resolutions of the Court of Appeals is appealed by filing a Petition for Review , which is a continuation of the appellate process over the original case.13 On the other hand, the writ of certiorari under Rule 65 is filed when petitioner has no plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. A remedy is considered "plain, speedy and adequate" if it will promptly relieve the petitioner from the injurious effects of the judgment and the acts of the lower court or agency.

In this case, petitioners' speedy, available and adequate remedy is appeal via Rule 45, and not certiorari under Rule 65. Notwithstanding petitioners' procedural lapse, we shall treat the petition as one filed under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated. They presented China Banking Corporation Check No. A2620636 and Citibank Check No. B82642 as proof of payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate secretary of Nautica to issue a certificate of stock in Yumul's name but in trust for Dee; and Stock Certificate No. 6 with annotation "ITF Alvin

Y. Dee" which means that respondent held said stock "In Trust For Alvin Y. Dee".

We are not persuaded.

Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four incorporators. This is not necessarily illegal.14 But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.15

In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of Nautica, of one share of stock recorded in Yumul's name, although allegedly held in trust for Dee. Nautica's Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that Yumul was an incorporator and subscriber of one share.16 Even granting that there was an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only as between them. From the corporation's vantage point, Yumul is its stockholder with one share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner of the share, after Nautica's incorporation.

We held in Ponce v. Alsons Cement Corp.17 that:

... [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates[.]

Moreover, the contents of the articles of incorporation bind the corporation and its stockholders. Its contents cannot be disregarded considering that it was the basic document which legally triggered the creation of the corporation.18

The Court of Appeals, in affirming the factual findings of SEC, held that:

The evidence submitted by petitioners to establish trust is palpably incompetent, consisting mainly of the self-serving allegations by the petitioners and the China Banking Corporation checks issued as payment for the shares of stock of Nautica. Dee did not testify on the supposed trust relationship between him and Yumul. While Atty. Arguelles testified, his testimony is barren of probative value since he had no first-hand knowledge of the relationship in question. The

isolated fact that Dee might have paid for the share in the name of Yumul did not by itself make the latter a man of straw. Such act of payment is so nebulous and equivocal that it can not yield the meaning which the petitioners would want to squeeze from it without the clarificatory testimony of Dee.19

We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals. Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their consideration,20 moreso if the same has been upheld by the appellate court, as in this case.

Besides, other than petitioners' self-serving assertion that the beneficial ownership belongs to Dee, they failed to show that the subscription was transferred to Dee after Nautica's incorporation. The conduct of the parties also constitute sufficient proof of Yumul's status as a stockholder. On April 4, 1995, Yumul was elected during the regular annual stockholders' meeting as a Director of Nautica's Board of Directors.21 Thereafter, he was elected as president of Nautica.22 Thus, Nautica and its stockholders knowingly held respondent out to the public as an officer and a stockholder of the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director.23 Since Yumul was elected as Nautica's Director and as President thereof, it follows that he must have owned at least one share of the corporation's capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the SEC correctly ruled that he has the right to inspect the books and records of Nautica,24 pursuant to Section 74 of BP Blg. 68 which states that the records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of Nautica, petitioners allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to Purchase dated December 19, 1994. However, he failed to exercise the option, thus there was no cause or consideration for the Deed of Trust and Assignment, which makes it void for being simulated or fictitious.25

Anent this issue, the SEC did not make a categorical finding on whether Yumul exercised his option and also on the validity of the Deed of Trust and Assignment. Instead, it held that:

... Although unsubstantiated, the apparent objective of the respondents' allegation was to refute petitioners claim over the shares covered by the Deed of Trust and Assignment. This must therefore be deemed as nothing but a ploy to deprive petitioner of his right over the shares in question, which to us should not be countenanced.26

Neither did the Court of Appeals rule on the issue as it only held that:

Petitioners also contend that the Deed is a simulated contract.

Simulation is "the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a judicial act which does not exist or is different with that which was really executed." The characteristic of simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties.

The requisites for simulation are: (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. These requisites have not been proven in this case.27

Thus, other than defining and enumerating the requisites of a simulated contract or deed, the Court of Appeals did not make a determination whether the SEC has the jurisdiction to resolve the issue and whether the questioned deed was fictitious or simulated.

In Intestate Estate of Alexander T. Ty v. Court of Appeals,28 we held that:

'The question raised in the complaints is whether or not there was indeed a sale in the absence of cause or consideration. The proper forum for such a dispute is a regular trial court. The Court agrees with the ruling of the Court of Appeals that no special corporate skill is necessary in resolving the issue of the validity of the transfer of shares from one stockholder to another of the same corporation. Both actions, although involving different property, sought to declare the nullity of the transfers of said property to the decedent on the ground that they were not supported by any cause or consideration, and thus, are considered void ab initio for being absolutely simulated or

fictitious. The determination whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code, particularly those relative to obligations and contracts. Disputes concerning the application of the Civil Code are properly cognizable by courts of general jurisdiction. No special skill is necessary that would require the technical expertise of the SEC. (Emphasis supplied)ςrαlαωlιbrαrÿ

Thus, when the controversy involves matters purely civil in character, it is beyond the ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of Appeals,29 the better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties, but also the nature of the question that is the subject of their controversy. This, however, is now moot and academic due to the passage of Republic Act No. 8799 or The Securities Regulation Code which took effect on August 8, 2000. The Act transferred from the SEC to the regional trial court jurisdiction over cases involving intra-corporate disputes. Thus, whether or not the issue is intra-corporate, it is now the regional trial court and no longer the SEC that takes cognizance of the controversy.

Considering that the issue of the validity of the Deed of Trust and Assignment is civil in nature, thus, under the competence of the regular courts, and the failure of the SEC and the Court of Appeals to make a determinative finding as to its validity, we are constrained to refrain from ruling on whether or not Yumul can compel the corporate secretary to register said deed. It is only after an appropriate case is filed and decision rendered thereon by the proper forum can the issue be resolved.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 26, 2001 Decision of the Court of Appeals in CA-G.R. SP

No. 61919, is AFFIRMED insofar as it declares respondent Roberto C. Yumul as a subscriber and stockholder of one share of stock of Nautica Canning Corporation. The Decision is REVERSED and SET ASIDE insofar as it affirms the validity of the Deed of Trust and Assignment and orders its registration in the Stock and Transfer Book of Nautica Canning Corporation.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 170585             October 6, 2008

DAVID C. LAO and JOSE C. LAO, petitioners, vs.DIONISIO C. LAO, respondents.

D E C I S I O N

REYES, R.T., J.:

IS the mere inclusion as shareholder in the General Information Sheet of a corporation sufficient proof that one is a shareholder in such corporation?

This is the main question for resolution in this petition for review on certiorari of the Amended Decision 1 of the Court of Appeals (CA) affirming the Decision2 of the Regional Trial Court (RTC), Branch 11, Cebu City in CEB-25916-SRC.

The Facts

On October 15, 1998, petitioners David and Jose Lao filed a petition with the Securities and Exchange Commission (SEC) against respondent Dionisio Lao, president of Pacific Foundry Shop

Corporation (PFSC). Petitioners prayed for a declaration as stockholders and directors of PFSC, issuance of certificates of shares in their name and to be allowed to examine the corporate books of PFSC.3

Petitioners claimed that they are stockholders of PFSC based on the General Information Sheet filed with the SEC, in which they are named as stockholders and directors of the corporation. Petitioner David Lao alleged that he acquired 446 shares in PFSC from his father, Lao Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleged that he acquired 333 shares from respondent Dionisio Lao himself.4

Respondent denied petitioners' claim. He alleged that the inclusion of their names in the corporation's General Information Sheet was inadvertently made. He also claimed that petitioners did not acquire any shares in PFSC by any of the modes recognized by law, namely subscription, purchase, or transfer. Since they were neither stockholders nor directors of PFSC, petitioners had no right to be issued certificates or stocks or to inspect its corporate books.5

On June 19, 2000, Republic Act 8799, otherwise known as the Securities Regulation Code, was enacted, transferring jurisdiction over all intra-corporate disputes from the SEC to the RTC. Pursuant to the law, the petition with the SEC was transferred to the RTC in Cebu City and docketed as Civil Case No. CEB-25916-SRC. The case was consolidated with another intra-corporate dispute, Civil Case No. CEB-25910-SRC, filed by the Heirs of Uy Lam Tiong against respondent Dionisio Lao.6

During pre-trial, the parties agreed to submit the case for resolution based on the evidence on record.7

RTC Disposition

On December 19, 2001, the RTC rendered a Joint Decision8 with the following pertinent disposition, thus:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by the Court in these cases:

(a) Denying the petition of David C. Lao and Jose C. Lao to be recognized as stockholders and directors of Pacific Foundry Shop Corporation, to be issued certificates of stock of said corporation and to be allowed to exercise rights of stockholders of the same corporation.9

In denying the petition, the RTC ratiocinated:

x x x Thus, the petitioners David C. Lao and Jose C Lao do not appear to have become registered stockholders of Pacific Foundry Shop corporation, as they do not appear to have acquired shares of stock of the corporation either as subscribers or by purchase from a holder of outstanding shares or by purchase from the corporation of additionally issued shares.

x x x x

Secondly, the claim or contention of the petitioners David C. Lao and Jose C. Lao is wanting in merit because they have no

stock certificates in their names . A stock certificate, as we very well know, is the evidence of ownership of corporate stock. If ever the said petitioners acquired shares of stock of the corporation, there is a need for their acquisition of said shares to be registered in the Stock and Transfer Book of the corporation. Registration is necessary to entitle a person to exercise the rights of a stockholder and to hold office as director or other offices (12 Fletcher 343). That is why it is explicitly provided in Section 63 of the Corporation Code of the Philippines that no transfer of shares of stock shall be valid until the transfer is recorded in the books of the corporation. An unregistered transfer is not valid as against the corporation (Uson vs. Diosomito, 61 Phil. 535). A transfer must be registered, or at least notice thereof given to the corporation for the purpose of registration, before the transferee can acquire any right as against the corporation other than the right to have the transfer registered (12 Fletcher 339). An unrecorded transferee can not enjoy the status of a stockholder, he can not vote nor he voted for (Price & Sulu Development Corp. vs. Martin, 58 Phil. 707). Until the transfer is registered, the transferee is not a stockholder but an outsider (Rivera vs. Florendo, G.R. No. L-57586, October 8, 1986). So, a person who has acquired or purchased shares of stock of a corporation, and who desires to be recognized as stockholder for the purpose of voting and exercising other rights of a stockholder, must secure such a standing by having the acquisition or transfer recorded in the corporate books (Price & Sulu development Corp. vs. Martin, supra). Unfortunately, in the cases at bench, the petitioners David C. Lao and Jose C. Lao did not secure such a standing. Consequently, their petition to be recognized as stockholders of Pacific Foundry Shop Corporation must fail.10

Petitioners appealed to the CA.

CA Disposition

On May 27, 2005, the CA rendered a Decision11 modifying that of the RTC, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered modifying the Joint Decision dated December 19, 2001 of the trial court in so far as it relates to Civil Case No. CEB-25916-SRC by:

(a) Declaring that petitioners have owned since 1987 shares of stock in Pacific Foundry Shop Corporation, numbering 446 for petitioner-appellant David C. Lao and 333 for petitioner-appellant Jose C. Lao;

(b) Ordering respondent-appellee through the corporate secretary to issue to petitioners-appellants the certificates of stock for the aforementioned number of shares;

(c) Ordering respondent-appellee, as President of Pacific Foundry Shop Corporation, to allow petitioners-appellants to exercise their rights as stock holders;

(d) Ordering respondent-appellee to call a stockholders meeting every fourth Saturday of January in accordance with the By-Laws of Pacific Foundry shop Corporation.12

The CA decision was penned by Justice Arsenio Magpale and concurred in by Justices Sesinando Villon and Enrico Lanzanas.

In modifying the RTC decision, the appellate court gave credence to the General Information Sheet submitted by petitioners that names them as stockholders of PFSC, thus:

The General Information Sheet of PFSC for the years 1987-1998 state that petitioners-appellants David C. Lao and Jose C. Lao own 446 and 333 shares, respectively, in PFSC. It is also indicated therein that David C. Lao occupied various key positions in PFSC from 1987-1998 and Jose C. Lao served as Director in PFSC from 1990-1998. The Sworn Statements of Uy Lam Tiong, former corporate secretary of the PFSC, also state that petitioners-appellants David C. Lao and Jose C. Lao, per corporate records of PFSC, own shares of stock numbering 446 and 333, respectively. The minutes of the Annual Stockholders Meeting of PFSC on January 28, 1988 at 3:00 o'clock p.m. shows that among those present were petitioners-appellants David C. Lao and Jose C. Lao. During the said meeting, petitioner-appellant David C. Lao was nominated and elected Director of PFSC. Withal, the Minutes of the Meeting of the Board of Directors of PFSC at its Office at Hipodromo, Cebu City, on January 28, 1988 at 4:00 p.m. disclose that petitioner-appellant David C. Lao was elected vice-president of PFSC. Both minutes were signed by the officers of PFSC including respondent-appellee.13

Respondent filed a motion for reconsideration14 of the CA decision.

On July 11, 2005, respondent moved to inhibit15 the ponente of the CA decision, Justice Magpale, from resolving his pending motion for reconsideration.

On July 22, 2005, Justice Magpale issued a Resolution16 voluntarily inhibiting himself from further participating in the resolution of the pending motion for reconsideration. Justice Magpale stated:

Although the undersigned ponente does not agree with the imputations of respondent-appellee and that the same are not any of those grounds mentioned in Rule 137 of the Revised Rules of Court, nonetheless the ponente voluntarily inhibits himself from further handling this case in order to free the entire court of the slightest suspicion of bias and prejudice against the respondent-appellee.17

Amended Decision

On August 31, 2005, the CA rendered an Amended Decision18 affirming that of the RTC, with a fallo reading:

IN VIEW OF THE FOREGOING, the May 27, 2005 Decision of this Court is hereby SET ASIDE and the Decision of the Regional Trial Court, Branch 11, Cebu City with respect to Civil Case No. 25916-SRC is hereby AFIRMED in toto.19

The Amended Decision was penned by Justice Enrico Lanzanas and concurred in by Justices Sesinando Villon and Vicente Yap. The CA stated:

Petitioners-appellants maintain that they acquired their shares of stocks through transfer - the third mode mentioned by the trial court. David C. Lao claims that he acquired his 446 shares through his father, Lao Pong Bao, when the latter purchased said shares from Hipolito Lao. On the other hand, Jose C. Lao

asserts that he acquired his 333 shares through Dionisio C. Lao himself from the original 1,333 shares of stocks of the latter.

Petitioner-appellants asseverations are unavailing. To substantiate their statements, they merely relied on the General Information Sheets submitted to the Securities and Exchange Commission for the year 1987 to 1998, as well as on the Minutes of the Stockholders Meeting and Board of Directors Meeting held on January 28, 1988. They did not adduce evidence that would indubitably show that there was indeed a valid transfer of stocks, i.e. endorsement and delivery, from the transferors, Hipolito Lao and Dionisio Lao, to them as transferees.

x x x x

To our mind, David C. Lao utterly failed to confute the argument posited by respondent-appellee or demonstrate compliance with any of the statutory requirements as to warrant a favorable ruling on his part. No proof was ever shown that there was endorsement and delivery to him of the stock certificates representing the 446 shares of Hipolito Lao. Neither was the transfer registered in PFSC's Stock and Transfer Book. Conversely, Dionisio C. Lao was able to show conformity with the aforementioned requirements. Accordingly, it is but logical to conclude that the certificate of stock covering 446 shares of Hipolito Lao was in fact endorsed and delivered to Dionisio C. Lao and as such is reflected in PFSC's Stock and Transfer Book x x x.

In fact, it is a rule that private transactions are presumed to have been faire and regular and that the regular course of business is presumed to have been followed. Thus, the transfer made by Hipolito Lao of the 446 shares of stocks to Dionisio C. Lao is deemed to have been valid and well-founded unless proven otherwise. David C. Lao's mere allegation that Dionisio Lao illegally appropriated upon himself the 446 shares failed to hurdle such presumption. In this jurisdiction, neither fraud nor evil is presumed and the record does not show either as to establish by clear and sufficient evidence that may lead Us to believe such allegation. The party alleging the same has the burden of proof to present evidence necessary to establish his claim, unfortunately however petitioners failed to do so. The General Information Sheets and the Minutes of the Meetings adduced by petitioners-appellants do not prove such allegation of fraud or deceit. In the absence thereof, the presumption remains that private transactions have been fair and regular.

As for the alleged shares of Jose C. Lao, We find his position identically situated with David C. Lao. There is also no evidence on record that would clearly establish how he acquired said shares of PFSC. Jose C. Lao failed to show that there was endorsement and delivery to him of the stock certificates or any documents showing such transfer or assignment. In fact, the 333 shares being claimed by him is still under the name of Dionisio C. Lao was reflected by the Certificate of Stock as well as in PFSC's Stock and Transfer Book. Corollary, Jose C. Lao could not be considered a stockholder of PFSC in the absence of support reflecting his right to the 333 shares other than the inclusion of his name in the General Information Sheets from 1987 to 1998 and the

Minutes of the Stockholder's Meeting and Board of Director's Meeting.20

Petitioners moved for reconsideration but their motion was denied.21 Hence, the present petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure.

Issues

Petitioners raise five (5) issues for Our consideration, thus:

1. Whether or not the inhibition of Justice Arsenio J. Magpale is proper when there is no "extrinsic evidence of bias, bad faith, malice, or corrupt purpose" on the part of Justice Magpale, which is required by this Honorable Court in its decision in Webb, et al. v. People of the Philippines, 276 SCRA 243 [1997], as basis for disqualification.

2. Whether or not the inhibition of Justice Magpale constitutes, in effect, forum shopping, which is proscribed under Section 5, Rule 7 of the Rules of Court, as amended, and decisions of this Honorable Court.

3. Whether or not determination of ownership of shares of stock in a corporation shall be based on the Stock and Transfer Book alone, or other evidence can be considered pursuant to the decision of this Honorable Court in Tan v. Securities and Exchange Commission, 206 SCRA 740.

4. Whether or not the admissions and representations of respondent in the General Information Sheets submitted by

him to the Securities and Exchange Commission during the years 1987 to 1998 that (a) petitioners were stockholders of Pacific Foundry Shop Corporation; that (b) petitioner David C. Lao and Jose C. Lao owned 446 and 333 shares in the corporation, respectively; and that (c) petitioners had been directors and officers of the corporation, as well as the Sworn Statement of Uy Lam Tiong, former Corporate Secretary, the Minutes of the Annual Stockholders Meeting of PFSC on January 28, 1988, and the Minutes of Meeting of the Board of Directors on January 28, 1988, mentioned by Justice Magpale in his ponencia, are sufficient proof of petitioners ownership of stocks in the corporation.

5. Whether or not respondent is stopped from questioning petitioners' ownership of stocks in the corporation in view of his admissions and representations in the General Information Sheets he submitted to the Securities and Exchange Commission from 1987 to 1998 that petitioners were stockholders and officers of the corporation.22

Essentially, only two (2) issues are raised in this petition. The first concerns the voluntary inhibition of Justice Magpale, while the second involves the substantive issue of whether or not petitioners are indeed stockholders of PFSC.

Our Ruling

We deny the petition.

Voluntary inhibition is within the sound discretion of a judge.

Petitioners claim that the motion to inhibit Justice Magpale from resolving the pending motion for reconsideration was improper and unethical. They assert that the "bias and prejudice" grounds alleged by private respondent were unsubstantiated and, worse, constituted proscribed forum shopping. They argue that Justice Magpale should have resolved the pending motion, instead of voluntarily inhibiting himself from the case.

In cases of voluntary inhibition, the law leaves to the sound discretion of the judge the decision to decide for himself the question of whether or not he will inhibit himself from the case. Section 1, Rule 137 of the Rules of Court provides:

Section 1. Disqualification of judges. - No judge or judicial officer shall sit in any case in which he, or his wife or child, is pecuniarily interested as heir, legatee, creditor, or otherwise, or in which he is related to either party within the sixth degree of consanguinity or affinity, or to counsel within the fourth degree, computed according to the rules of the civil law, or in which he has been executor, administrator, guardian, trustee, or counsel, or in which he has presided in any inferior court when his ruling or decision is the subject of review, without the written consent of all parties in interest, signed by them and entered upon the record.

A judge may, in the exercise of his sound discretion, disqualify himself from sitting in a case, for just or valid reasons other than those mentioned above.

Here, Justice Magpale voluntarily inhibited himself "in order to free the entire court [CA] of the slightest suspicion of bias and prejudice x x x."23 We certainly cannot nullify the decision of Justice Magpale

recusing himself from the case because that is a matter left entirely to his discretion. Nor can We fault him for doing so. No judge should preside in a case in which he feels that he is not wholly free, disinterested, impartial, and independent.

We agree with petitioners that it may seem unpalatable and even revolting when a losing party seeks the disqualification of a judge who had previously ruled against him in the hope that a new judge might be more favorable to him. But We cannot take that basic proposition too far. That Justice Magpale opted to voluntarily recuse himself from the appealed case is already fait accompli. It is, in popular idiom, water under the bridge.

Petitioners cannot bank on his voluntary inhibition to nullify the Amended Decision later issued by the appellate court. It is highly specious to assume that Justice Magpale would have ruled in favor of petitioners on the pending motion for reconsideration if he took a different course and opted to stay on with the case. It is also illogical to presume that the Amended Decision would not have been issued with or without the participation of Justice Magpale. The Amended Decision is too far removed from the issue of voluntary inhibition. It does not follow that petitioners would be better off were it not for the voluntary inhibition.

Petitioners failed to prove that they are shareholders of PSFC.

Petitioners insist that they are shareholders of PFSC. They claim purchasing shares in PFSC. Petitioner David Lao alleges that he acquired 446 shares in the corporation from his father, Lao Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleges that he acquired 333 shares from respondent Dionisio Lao.

Records, however, disclose that petitioners have no certificates of shares in their name. A certificate of stock is the evidence of a holder's interest and status in a corporation. It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock.24 It is prima facie evidence that the holder is a shareholder of a corporation.

Nor is there any written document that there was a sale of shares, as claimed by petitioners. Petitioners did not present any deed of assignment, or any similar instrument, between Lao Pong Bao and Hipolito Lao; or between Lao Pong Bao and petitioner David Lao. There is likewise no deed of assignment between petitioner Jose Lao and private respondent Dionisio Lao.

Absent a written document, petitioners must prove, at the very least, possession of the certificates of shares in the name of the alleged seller. Again, they failed to prove possession. They failed to prove the due delivery of the certificates of shares of the sellers to them. Section 63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the

corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

In contrast, respondent was able to prove that he is the owner of the disputed shares. He had in his possession the certificates of stocks of Hipolito Lao. The certificates of stocks were also properly endorsed to him. More importantly, the transfer was duly registered in the stock and transfer book of the corporation. Thus, as between the parties, respondent has proven his right over the disputed shares. As correctly ruled by the CA:

Au contraire, Dionisio C. Lao was able to show through competent evidence that he is undeniably the owner of the disputed shares of stocks being claimed by David C. Lao. He was able to validate that he has the physical possession of the certificates covering the shares of Hipolito Lao. Notably, it was Hipolito Lao who properly endorsed said certificates to herein Dionisio Lao and that such transfer was registered in PFSC's Stock and Transfer Book. These circumstances are more in accord with the valid transfer contemplated by Section 63 of the Corporation Code.25

The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in which they were named as shareholders of PFSC. They claim that respondent is now estopped from contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders in the General Information Sheet submitted to the SEC, that document alone does not conclusively prove that they are shareholders of PFSC. The information in the document will still have to be correlated with the corporate books of PFSC. As between the General Information Sheet and the corporate books, it is the latter that is controlling. As correctly ruled by the CA:

We agree with the trial court that mere inclusion in the General Information Sheets as stockholders and officers does not make one a stockholder of a corporation, for this may have come to pass by mistake, expediency or negligence. As professed by respondent-appellee, this was done merely to comply with the reportorial requirements with the SEC. This maybe against the law but "practice, no matter how long continued, cannot give rise to any vested right."

If a transferee of shares of stock who failed to register such transfer in the Stock and Transfer Book of the Corporation could not exercise the rights granted unto him by law as stockholder, with more reason that such rights be denied to a person who is not a stockholder of a corporation. Petitioners-appellants never secured such a standing as stockholders of PFSC and consequently, their petition should be denied.26

It should be stressed that the burden of proof is on petitioners to show that they are shareholders of PFSC. This is so because they do not have any certificates of shares in their name. Moreover, they do not appear in the corporate books as registered shareholders. If they had certificates of shares, the burden would have been with PFSC to prove that they are not shareholders of the corporation.

As discussed, petitioners failed to hurdle their burden. There is no written document evidencing their claimed purchase of shares. We note that petitioners agreed to submit their case for decision based merely on the documents on record. Hence, no testimonial evidence was presented to prove the alleged purchase of shares. Absent any documentary or testimonial evidence, the bare assertion of petitioners that they are shareholders cannot prevail.

All told, We agree with the RTC and CA decision that petitioners are not shareholders of PFSC.

WHEREFORE, the petition is DENIED and the appealed Amended Decision AFFIRMED IN FULL.

SO ORDERED.

RUBEN T. REYESAssociate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGOAssociate Justice

ChairpersonMA. ALICIA AUSTRIA-MARTINEZAssociate JusticeMINITA V. CHICO-NAZARIO

Associate JusticeANTONIO EDUARDO B. NACHURAAssociate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

CONSUELO YNARES-SANTIAGOAssociate Justice

Chairperson

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

REYNATO S. PUNOChief Justice

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-23241             March 14, 1925

HENRY FLEISCHER, plaintiff-appellee, vs.BOTICA NOLASCO CO., INC., defendant-appellant.

Antonio Gonzalez for appellant.Emilio M. Javier for appellee.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the Province of Oriental Negros on the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation duly organized and existing under the laws of the Philippine Islands. The plaintiff prayed that said board of directors be ordered to register in the books of the corporation five shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by him resulting from the refusal of said body to register the shares of stock in question. The defendant filed a demurrer on the ground that the facts alleged in the complaint did not constitute sufficient cause of action, and that the action was not brought against the proper party, which was the Botica Nolasco, Inc. The demurrer was sustained, and the plaintiff was granted five days to amend his complaint.

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in the books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which refusal caused

him damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in his name in the books of the corporation the five shares of stock recorded in said books in the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to pay the costs. The defendant again filed a demurrer on the ground that the amended complaint did not state facts sufficient to constitute a cause of action, and that said amended complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.

The defendant answered the amended complaint denying generally and specifically each and every one of the material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in question, and to pay damages in the sum of P500, and the costs.

Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section 35 thereof; and rendered a judgment ordering the defendant corporation, through its board of directors, to register in the books of said corporation the said five shares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original owner,

Manuel Gonzalez, with costs against the defendant.

The defendant appealed from said judgment, and now makes several assignment of error, all of which, in substance, raise the question whether or not article 12 of the by-laws of the corporation is in conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated as follows:

That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on the back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws of the corporation.

It also appears from the record that on the 13th day of March, 1923, two days after the assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer

be noted transferred to Fleischer's name. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on June 15, 1923, replied, declaring that his written statement was in conformity with the by-laws of the corporation; that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No. 1459). Appellant invoked said article as its ground for denying the request of the plaintiff that the shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now contends that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459. Said article is as follows:

ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero para que estas transferencias tengan validez legal, deben constar en los registros de la Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion o acciones que se transfieran, o un documento de transferencia. Entendiendose que, ningun accionista transferira accion alguna a otra persona sin participar antes por escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)

The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc., governing the transfer of shares of stock of said corporation. The latter part of said article creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the share or shares of stock of a retiring shareholder. Has said corporation any power, under the Corporation Law (Act. No. 1459), to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

SEC. 13. Every corporation has the power:

x x x           x x x           x x x

(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the number of its officers and directors within the limits prescribed by law, and for the transferring of its stock, the administration of its corporate affairs, etc.

x x x           x x x           x x x

SEC. 35. The capital stock of stock corporations shall de divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer.

No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, that date of the transfer, the number of the certificate, and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. It follows from said provision, that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459 above quoted. Said section specifically provides that the shares of stock "are personal property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said section 35 defines the nature, character and transferability of shares of stock. Under said section they are personal property and may be transferred as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith.

The by-law now in question was adopted under the power conferred upon the corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the limits fixed by law in the same section, and has not taken into consideration the provisions of section 35 of Act No. 1459.

As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. (People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)

The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)

The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-law are intended merely for the

protection of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law cannot take away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137, p. 674.

The right of unrestrained transfer of shares inheres in the very nature of a corporation, and courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right of stockholders to sell and assign their stock. The right to impose any restraint in this respect must be conferred upon the corporation either by the governing statute or by the articles of the corporation. It cannot be done by a by-law without statutory or charter authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)

The jus disponendi, being an incident of the ownership of property, the general rule (subject to exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable right to alien them which attaches to the ownership of any other species of property. A shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains and profits. (10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade. (10 Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question. They hold that the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by

said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of action against the defendant corporation,

but against the president and secretary thereof, inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to section 35 of the Corporation Law. This contention cannot be sustained now. The question should have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as stated above, the corporation was made defendant in this action upon the demurrer of the attorney of the original defendant in the lower court, who contended that the Botica Nolasco, Inc., should be made the party defendant in this action. Accordingly, upon order of the court, the complaint was amended and the said corporation was made the party defendant.

Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court is in accordance with law and should be and is hereby affirmed, with costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

FIRST DIVISION

[G.R. No. 116631. October 28, 1998]

MARSH THOMSON, petitioner, vs. COURT OF APPEALS and THE AMERICAN CHAMBER OF COMMERCE OF THE PHILIPPINES, INC., respondents.

D E C I S I O N

QUISUMBING, J.:

This is a petition for review on certiorari seeking the reversal of the Decision?[1] of the Court of Appeals on May 19, 1994, disposing as follows:

“WHEREFORE, THE DECISION APPEALED FROM IS HEREBY SET ASIDE. ANOTHER JUDGMENT IS ENTERED ORDERING DEFENDANT-APPELLEE MARSH THOMSON TO TRANSFER THE SAID MPC [Manila Polo Club] SHARE TO THE NOMINEE OF THE APPELLANT.”

The facts of the case are:

Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and, later on, the Management Consultant of private respondent, the American Chamber of Commerce of the Philippines, Inc. (AmCham) for over ten years, 1979-1989.

While petitioner was still working with private respondent, his superior, A. Lewis Burridge, retired as AmCham’s President. Before Burridge decided to return to his home country, he wanted to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through the intercession of Burridge, private respondent paid for the share but had it listed in petitioner’s name. This was made clear in an employment advice dated January 13, 1986, wherein petitioner was informed by private respondent as follows:

x x x x x x x x x

“11. If you so desire, the Chamber is willing to acquire for your use a membership in the Manila Polo Club. The timing of such acquisition shall be subject to the discretion of the Board based on the Chamber’s financial position. All dues and other charges relating to such membership shall be for your personal account. If the membership is acquired in your name, you would execute such documents as

necessary to acknowledge beneficial ownership thereof by the Chamber.”?[2]

x x x x x x x x x

On April 25, 1986, Burridge transferred said proprietary share to petitioner, as confirmed in a letter?[3] of notification to the Manila Polo Club.

Upon his admission as a new member of the MPC, petitioner paid the transfer fee of P40,000.00 from his own funds; but private respondent subsequently reimbursed this amount. On November 19, 1986, MPC issued Proprietary Membership Certificate Number 3398 in favor of petitioner. But petitioner, however, failed to execute a document recognizing private respondent’s beneficial ownership over said share.

Following AmCham’s policy and practice, there was a yearly renewal of employment contract between the petitioner and private respondent. Separate letters of employment advice dated October 1, 1986,?[4] as well March 4, 1988?[5] and January 7, 1989,?[6] mentioned the MPC share. But petitioner never acknowledged that private respondent is the beneficial owner of the share as requested in follow-up requests, particularly one dated March 4, 1988 as follows:

“Dear Marsh:

x x x x x x x x x

All other provisions of your compensation/benefit package will remain the same and are summarized as follows:

x x x x x x x x x

9) The Manila Polo Club membership provided by the Chamber for you and your family will continue on the same basis, to wit: all dues and other charges relating to such membership shall be for your personal account and, if you have not already done so, you will execute such documents as are necessary to acknowledge that the Chamber is the beneficial owner of your membership in the Club.”?[7]

When petitioner’s contract of employment was up for renewal in 1989, he notified private respondent that he would no longer be available as Executive Vice President after September 30, 1989. Still, the private respondent asked the petitioner to stay on for another six (6) months. Petitioner indicated his acceptance of the consultancy arrangement with a counter-proposal in his letter dated October 8, 1989, among others as follows:

“11.) Retention of the Polo Club share, subject to my reimbursing the purchase price to the Chamber, or one hundred ten thousand pesos (P110,000.00).”?[8]

Private respondent rejected petitioner’s counter-proposal.

Pending the negotiation for the consultancy arrangement, private respondent executed on September 29, 1989 a Release and Quitclaim,?[9] stating that “AMCHAM, its directors, officers and assigns, employees and/or representatives do hereby release, waive, abandon and discharge J. MARSH THOMSON from any and all existing claims that the AMCHAM, its directors, officers and assigns, employees and/or representatives may have against J. MARSH

THOMSON.”?[10] The quitclaim, expressed in general terms, did not mention specifically the MPC share.

On April 5, 1990, private respondent, through counsel sent a letter to the petitioner demanding the return and delivery of the MPC share which “it (AmCham) owns and placed in your (Thomson’s) name.”?[11]

Failing to get a favorable response, private respondent filed on May 15, 1990, a complaint against petitioner praying, inter alia, that the Makati Regional Trial Court render judgment ordering Thomson “to return the Manila Polo Club share to the plaintiff and transfer said share to the nominee of plaintiff.”?[12]

On February 28, 1992, the trial court promulgated its decision,?[13] thus:

“The foregoing considered judgment is rendered as follows:

1.) The ownership of the contested Manila Polo Club share is adjudicated in favor of defendant Marsh Thomson; and;

2.) Defendant shall pay plaintiff the sum of P300,000.00

Because both parties thru their respective faults have somehow contributed to the birth of this case, each shall bear the incidental expenses incurred.”?[14]

In said decision, the trial court awarded the MPC share to defendant (petitioner now) on the ground that the Articles of Incorporation and By-laws of Manila Polo Club prohibit artificial persons, such as

corporations, to be club members, ratiocinating in this manner:

“An assessment of the evidence adduced by both parties at the trial will show clearly that it was the intention of the parties that a membership to Manila Polo Club was to be secured by plaintiff [herein private respondent] for defendant’s [herein petitioner] use. The latter was to execute the necessary documents to acknowledge ownership of the Polo membership in favor of plaintiff. (Exh. C par 9) However, when the parties parted ways in disagreement and with some degree of bitterness, the defendant had second thoughts and decided to keep the membership for himself. This is evident from the exhibits (E & G) where defendant asked that he retained the Polo Club membership upon reimbursement of its purchase price; and where he showed his ‘profound disappointment, both at the previous Board’s unfair action, and at what I consider to be harsh terms, after my long years of dedication to the Chamber’s interest.’

x x x x x x x x x

“Notwithstanding all these evidence in favor of plaintiff, however, defendant may not be declared the owner of the contested membership nor be compelled to execute documents transferring the Polo Membership to plaintiff or the latter’s nominee for the reason that this is prohibited by Polo Club’s Articles & By-Laws. x x x

“It is for the foregoing reasons that the Court rules that the ownership of the questioned Polo Club membership be retained by defendant.?[15] x x x.”

Not satisfied with the trial court’s decision, private respondent appealed to the Court of Appeals.

On May 19, 1994, the Court of Appeals (Former Special Sixth Division) promulgated its decision?[16] in said CA-G.R. CV No. 38417, reversing the trial court’s judgment and ordered herein petitioner to transfer the MPC share to the nominee of private respondent, reasoning thus:

x x x x x x x x x

“The significant fact in the instant case is that the appellant [herein private respondent] purchased the MPC share for the use of the appellee [herein petitioner] and the latter expressly conformed thereto as shown in Exhibits A-1, B, B-1, C, C-1, D, D-1. By such express conformity of the appellee, the former was bound to recognize the appellant as the owner of the said share for a contract has the force of law between the parties. (Alim vs. CA, 200 SCRA 450; Sasuhura Company, Inc., Ltd. vs. IAC, 205 SCRA 632) Aside from the foregoing, the appellee conceded the true ownership of the said share to the appellant when (1) he offered to buy the MPC share from the appellant (Exhs. E and E-1) upon the termination of his employment; (2) he obliged himself to return the MPC share after his six month consultancy contract had elapsed, unless its return was earlier requested in writing (Exh. I); and (3) on cross-examination, he admitted that the proprietary share listed as one of the assets of the appellant corporation in its 1988 Corporate Income Tax Return, which he signed as the latter’s Executive Vice President (prior to its filing), refers to the Manila Polo Club share (tsn., pp. 19-20, August 30, 1991). x x x”?[17]

On 16 June 1994, petitioner filed a motion for reconsideration?[18] of said decision. By resolution?[19] promulgated on August 4, 1994, the Court of Appeals denied the motion for reconsideration.

In this petition for review, petitioner alleges the following errors of public respondent as grounds for our review:

I. The respondent Court of Appeals erred in setting aside the Decision dated 28 February 1992 of the Regional Trial Court, NCJR, Branch 65, Makati, Metro Manila, in its Civil Case No. 90-1286, and in not confirming petitioner’s ownership over the MPC membership share.

II. The respondent Court of Appeals erred in ruling that “the Quitclaim executed by AmCham in favor of petitioner on September 29, 1989 was superseded by the contractual agreement entered into by the parties on October 13, 1989 wherein again the appellee acknowledged that the appellant owned the MPC share, there being absolutely no evidence to support such a conclusion and/or such inference is manifestly mistaken.

III. The respondent Court of Appeals erred in rendering judgment ordering petitioner to transfer the contested MPC share to a nominee of respondent AmCham notwithstanding that: (a) AmCham has no standing in the Manila Polo Club (MPC), and being an artificial person, it is precluded under MPC’s Articles of Incorporation and governing rules and regulations from owning a proprietary share or from becoming a member thereof; and (b) even under AmCham’s Articles of Incorporation, and the purposes for which it is dedicated, becoming a stockholder or shareholder in other corporations is not one of the express or implied powers fixed in AmCham’s said corporate franchise.?[20]

As posited above, these assigned errors show the disputed matters herein are mainly factual. As such they are best left to the trial and appellate courts’ disposition. And this Court could have dismissed the petition outright, were it not for the opposite results reached by the

courts below. Moreover, for the enhanced appreciation of the jural relationship between the parties involving trust, this Court has given due course to the petition, which we now decide.

After carefully considering the pleadings on record, we find there are two main issues to be resolved: (1) Did respondent court err in holding that private respondent is the beneficial owner of the disputed share? (2) Did the respondent court err in ordering petitioner to transfer said share to private respondent’s nominee?

Petitioner claims ownership of the MPC share, asserting that he merely incurred a debt to respondent when the latter advanced the funds for the purchase of the share. On the other hand, private respondent asserts beneficial ownership whereby petitioner only holds the share in his name, but the beneficial title belongs to private respondent. To resolve the first issue, we must clearly distinguish a debt from a trust.

The beneficiary of a trust has beneficial interest in the trust property, while a creditor has merely a personal claim against the debtor. In trust, there is a fiduciary relation between a trustee and a beneficiary, but there is no such relation between a debtor and creditor. While a debt implies merely an obligation to pay a certain sum of money, a trust refers to a duty to deal with a specific property for the benefit of another. If a creditor-debtor relationship exists, but not a fiduciary relationship between the parties, there is no express trust. However, it is understood that when the purported trustee of funds is entitled to use them as his or her own (and commingle them with his or her own money), a debtor-creditor relationship exists, not a trust.?[21]

In the present case, as the Executive Vice-President of AmCham, petitioner occupied a fiduciary position in the business of Amcham.

AmCham released the funds to acquire a share in the Club for the use of petitioner but obliged him to “execute such document as necessary to acknowledge beneficial ownership thereof by the Chamber”.?[22] A trust relationship is, therefore, manifestly indicated.

Moreover, petitioner failed to present evidence to support his allegation of being merely a debtor when the private respondent paid the purchase price of the MPC share. Applicable here is the rule that a trust arises in favor of one who pays the purchase money of property in the name of another, because of the presumption that he who pays for a thing intends a beneficial interest therein for himself.?[23]

Although petitioner initiated the acquisition of the share, evidence on record shows that private respondent acquired said share with its funds. Petitioner did not pay for said share, although he later wanted to, but according to his own terms, particularly the price thereof.

Private respondent’s evident purpose in acquiring the share was to provide additional incentive and perks to its chosen executive, the petitioner himself. Such intention was repeated in the yearly employment advice prepared by AmCham for petitioner’s concurrence. In the cited employment advice, dated March 4, 1988, private respondent once again, asked the petitioner to execute proof to recognize the trust agreement in writing:

“The Manila Polo membership provided by the Chamber for you and your family will continue on the same basis, to wit: all dues and other charges relating to such membership shall be for your personal account and, if you have not already done so, you will execute such documents as are necessary to acknowledge that the Chamber is the beneficial owner of your membership in the Club.”?[24]

Petitioner voluntarily affixed his signature to conform with the employment advice, including his obligation stated therein -- for him to execute the necessary document to recognize his employer as the beneficial owner of the MPC share. Now, we cannot hear him claiming otherwise, in derogation of said undertaking, without legal and equitable justification.

For private respondent’s intention to hold on to its beneficial ownership is not only presumed; it was expressed in writing at the very outset. Although the share was placed in the name of petitioner, his title is limited to the usufruct, that is, to enjoy the facilities and privileges of such membership in the club appertaining to the share. Such arrangement reflects a trust relationship governed by law and equity.

While private respondent paid the purchase price for the share, petitioner was given legal title thereto. Thus, a resulting trust is presumed as a matter of law. The burden then shifted to the transferee to show otherwise, that it was just a loan. Such resulting trust could have been rebutted by proof of a contrary intention by a showing that, in fact, no trust was intended. Petitioner could have negated the trust agreement by contrary, consistent and convincing evidence on rebuttal. However, on the witness stand, petitioner failed to do so persuasively.

On cross-examination, the petitioner testified as follows:

“ATTY. AQUINO (continuing)

Q. Okay, let me go to the cash advance that you mentioned Mr. Witness, is there any document proving that you claimed cash advance signed by an officer of the Chamber?

A. I believe the best evidence is the check.

Q. Is there any document?

C O U R T

Other than the Check?

MR. THOMSON

Nothing more.

ATTY. AQUINO

Is there any application filed in the Chamber to avail of this cash advance?

A. Verbal only.

Q. Nothing written, and can you tell to this Honorable Court what are the stipulations or conditions, or terms of this transaction of securing this cash advance or loan?

x x x x x x x x x

COURT

How are you going to repay the cash advance?

MR THOMSON

The cash advance, we never stipulate when I have to repay it, but I presume that I would, when able to repay the money.”?[25]

In deciding whether the property was wrongfully appropriated or retained and what the intent of the parties was at the time of the conveyance, the court must rely upon its impression of the credibility of the witnesses.?[26] Intent is a question of fact, the determination of which is not reviewable unless the conclusion drawn by the trier is one which could not reasonably be drawn.?[27] Petitioner’s denial is not adequate to rebut the trust. Time and again, we have ruled that denials, if unsubstantiated by clear and convincing evidence, are deemed negative and self-serving evidence, unworthy of credence.?[28]

The trust between the parties having been established, petitioner advanced an alternative defense that the private respondent waived the beneficial ownership of MPC share by issuing the Release and Quitclaim in his favor.

This argument is less than persuasive. The quitclaim executed by private respondent does not clearly show the intent to include therein the ownership over the MPC share. Private respondent even asserts that at the time the Release and Quitclaim was executed on September 29, 1989, the ownership of the MPC share was not controversial nor contested. Settled is the rule that a waiver to be valid and effective must, in the first place, be couched in clear and unequivocal terms which leave no doubt as to the intention of a party to give up a right or benefit which legally pertains to him.?[29] A waiver may not be attributed to a person when the terms thereof do not explicitly and clearly evidence an intent to abandon a right vested in such person.?[30] If we apply the standard rule that waiver must be cast in clear and unequivocal terms, then clearly the general terms of

the cited release and quitclaim indicates merely a clearance from general accountability, not specifically a waiver of AmCham’s beneficial ownership of the disputed shares.

Additionally, the intention to waive a right or advantage must be shown clearly and convincingly, and when the only proof of intention rests in what a party does, his act should be so manifestly consistent with, and indicative of, an intent to voluntarily relinquish the particular right or advantage that no other reasonable explanation of his conduct is possible.?[31] Considering the terms of the quitclaim executed by the President of private respondent, the tenor of the document does not lead to the purported conclusion that he intended to renounce private respondent’s beneficial title over its share in the Manila Polo Club. We, therefore, find no reversible error in the respondent Court’s holding that private respondent, AmCham, is the beneficial owner of the share in dispute.

Turning now to the second issue, the petitioner contends that the Articles of Incorporation and By-laws of Manila Polo Club prohibit corporate membership. However, private respondent does not insist nor intend to transfer the club membership in its name but rather to its designated nominee. For as properly ruled by the Court of Appeals:

“The matter prayed for does not involve the transfer of said share to the appellant, an artificial person. The transfer sought is to the appellant’s nominee. Even if the MPC By-Laws and Articles prohibit corporate membership, there would be no violation of said prohibition for the appellant’s nominee to whom the said share is sought to be transferred would certainly be a natural person. x x x

As to whether or not the transfer of said share to the appellant’s nominee would be disapproved by the MPC, is a matter that should

be raised at the proper time, which is only if such transfer is disapproved by the MPC.”?[32]

The Manila Polo Club does not necessarily prohibit the transfer of proprietary shares by its members. The Club only restricts membership to deserving applicants in accordance with its rules, when the amended Articles of Incorporation states that: “No transfer shall be valid except between the parties, and shall be registered in the Membership Book unless made in accordance with these Articles and the By-Laws”.?[33] Thus, as between parties herein, there is no question that a transfer is feasible. Moreover, authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer.?[34]

In this case, the petitioner was the nominee of the private respondent to hold the share and enjoy the privileges of the club. But upon the expiration of petitioner’s employment as officer and consultant of AmCham, the incentives that go with the position, including use of the MPC share, also ceased to exist. It now behooves petitioner to surrender said share to private respondent’s next nominee, another natural person. Obviously this arrangement of trust and confidence cannot be defeated by the petitioner’s citation of the MPC rules to shield his untenable position, without doing violence to basic tenets of justice and fair dealing.

However, we still have to ascertain whether the rights of herein parties to the trust still subsist. It has been held that so long as there has been no denial or repudiation of the trust, the possession of the trustee of an express and continuing trust is presumed to be that of the beneficiary, and the statute of limitations does not run between

them.?[35] With regard to a constructive or a resulting trust, the statute of limitations does not begin to run until the trustee clearly repudiates or disavows the trust and such disavowal is brought home to the other party, “cestui que trust”.?[36] The statute of limitations runs generally from the time when the act was done by which the party became chargeable as a trustee by operation of law or when the beneficiary knew that he had a cause of action,?[37] in the absence of fraud or concealment.

Noteworthy in the instant case, there was no declared or explicit repudiation of the trust existing between the parties. Such repudiation could only be inferred as evident when the petitioner showed his intent to appropriate the MPC share for himself. Specifically, this happened when he requested to retain the MPC share upon his reimbursing the purchase price of P110,000, a request denied promptly by private respondent. Eventually, petitioner refused to surrender the share despite the written demand of private respondent. This act could then be construed as repudiation of the trust. The statute of limitation could start to set in at this point in time. But private respondent took immediate positive action. Thus, on May 15, 1990, private respondent filed an action to recover the MPC share. Between the time of implicit repudiation of the trust on October 9, 1989, as evidenced by petitioner’s letter of said date, and private respondent’s institution of the action to recover the MPC share on May 15, 1990, only about seven months had lapsed. Our laws on the matter provide that actions to recover movables shall prescribe eight years from the time the possession thereof is lost,?[38] unless the possessor has acquired the ownership by prescription for a less period of four years if in good faith.?[39] Since the private respondent filed the necessary action on time and the defense of good faith is not available to the petitioner, there is no basis for any purported claim of prescription, after repudiation of the trust, which will entitle petitioner

to ownership of the disputed share. As correctly held by the respondent court, petitioner has the obligation to transfer now said share to the nominee of private respondent.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Decision of the Court of Appeals of May 19, 1994, is AFFIRMED.

COSTS against petitioner.

SO ORDERED.

Davide, Jr., (Chairman), Vitug, and Panganiban, JJ., concur.

Bellosillo, J., on official leave.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 96674 June 26, 1992

RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO TRIAS, petitioners,

vs.

COURT OF APPEALS*, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR., respondents.

 

PARAS, J.:

The basic controversy in this case is whether or not the respondent court erred in sustaining the Securities and Exchange Commission

when it compelled by Mandamus the Rural Bank of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private respondents. Petitioners maintain that the Petition for Mandamus should have been denied upon the following grounds.

(1) Mandamus cannot be a remedy cognizable by the Securities and Exchange Commission when the purpose is to register certificates of stock in the names of claimants who are not yet stockholders of a corporation:

(2) There exist valid reasons for refusing to register the transfer of the subject of stock, namely:

(a) a pending controversy over the ownership of the certificates of stock with the Regional Trial Court;

(b) claims that the Deeds of Assignment covering the subject certificates of stock were fictitious and antedated; and

(c) claims on a resultant possible deprivation of inheritance share in relation with a conflicting claim over the subject certificates of stock.

The facts are not disputed.

On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name

(represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to receive and sign receipts for the dispositions.

On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5 shares).

Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980, private respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of Assignment for the remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr.

Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania Guerrero.

On December 5, 1980, private respondent Melania Guerrero filed with the Securities and Exchange Commission" (SEC) an action for mandamus against petitioners Rural Bank of Salinas, its President and Corporate Secretary. The case was docketed as SEC Case No. 1979.

Petitioners filed their Answer with counterclaim on December 19, 1980 alleging the upon the death of Clemente G. Guerrero, his 473 shares of stock became the property of his estate, and his property and that of his widow should first be settled and liquidated in accordance with law before any distribution can be effected so that petitioners may not be a party to any scheme to evade payment of estate or inheritance tax and in order to avoid liability to any third persons or creditors of the late Clemente G. Guerrero.

On January 29, 1981, a motion for intervention was filed by Maripol Guerrero, a legally adopted daughter of the late Clemente G. Guerrero and private respondent Melania Guerrero, who stated therein that on November 26, 1980 (almost two weeks before the filing of the petition for Mandamus) a Petition for the administration of the estate of the late Clemente G. Guerrero had been filed with the Regional Trial Court, Pasig, Branch XI, docketed as Special Proceedings No. 9400. Maripol Guerrero further claimed that the Deeds of Assignment for the subject shares of stock are fictitious and antedated; that said conveyances are donations since the considerations therefor are below the book value of the shares, the assignees/private respondents being close relatives of private respondent Melania Guerrero; and that the transfer of the shares in question to assignees/private respondents, other than private respondent Melania Guerrero, would deprive her (Maripol Guerrero) of her rightful share in the inheritance. The SEC hearing officer denied the Motion for Intervention for lack of merit. On appeal, the SEC En Banc affirmed the decision of the hearing officer.

Intervenor Guerrero filed a complaint before the then Court of First Instance of Rizal, Quezon City Branch, against private respondents for the annulment of the Deeds of Assignment, docketed as Civil Case No. Q-32050. Petitioners, on the other hand, filed a Motion to Dismiss

and/or to Suspend Hearing of SEC Case No. 1979 until after the question of whether the subject Deeds of Assignment are fictitious, void or simulated is resolved in Civil Case No. Q-32050. The SEC Hearing Officer denied said motion.

On December 10, 1984, the SEC Hearing Officer rendered a Decision granting the writ of Mandamus prayed for by the private respondents and directing petitioners to cancel stock certificates nos. 26, 49 and 65 of the Bank, all in the name of Clemente G. Guerrero, and to issue new certificates in the names of private respondents, except Melania Guerrero. The dispositive, portion of the decision reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioners and against the respondents, directing the latter, particularly the corporate secretary of respondent Rural Bank of Salinas, Inc., to register in the latter's Stock and Transfer Book the transfer of 473 shares of stock of respondent Bank and to cancel Stock Certificates Nos. 26, 45 and 65 and issue new Stock Certificates covering the transferred shares in favor of petitioners, as follows:

1. Luz Andico 457 shares

2. Wilhelmina Rosales 10 shares

3. Francisco Guerrero, Jr. 5 shares

4. Francisco Guerrero, Sr. 1 share

and to pay to the above-named petitioners, the dividends for said shares corresponding to the years 1981, 1982, 1983 and 1984 without interest.

No pronouncement as to costs.

SO ORDERED. (p. 88, Rollo)

On appeal, the SEC En Banc affirmed the decision of the Hearing Officer. Petitioner filed a petition for review with the Court of Appeals but said Court likewise affirmed the decision of the SEC.

We rule in favor of the respondents.

Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. An intracorporate controversy has been defined as one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate.

Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private respondent's names. Such ruling finds support under Section 63 of the Corporation Code, to wit:

Sec. 63. . . . Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his

attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation . . .

In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63 in his wise:

Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. . . .

The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred, which is absent here.

A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because:

. . . Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot

ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs. Nolasco, Supra).

The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus:

Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco, 47 Phil. 583, 594).

The corporation's obligation to register is ministerial.

In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the question of ownership. (Fletcher, Sec. 5528, page 434).

The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without good cause, it may be compelled to do so by mandamus. (See. 5518, 12 Fletcher 394)

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is

ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding the Decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book in the names of private respondents. At all events, the registration is without prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question.

WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Nocon, J., is on leave.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 74306 March 16, 1992

ENRIQUE RAZON, petitioner, vs.INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN, respondents.

G.R. No. 74315 March 16, 1992

VICENTE B. CHUIDIAN, petitioner, vs.INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON, INC., respondents.

 

GUTIERREZ, JR., J.:

The main issue in these consolidated petitions centers on the ownership of 1,500 shares of stock in E. Razon, Inc. covered by Stock Certificate No. 003 issued on April 23, 1966 and registered under the name of Juan T. Chuidian in the books of the corporation.

The then Court of First Instance of Manila, now Regional Trial Court of Manila, declared that Enrique Razon, the petitioner in G.R. No. 74306 is the owner of the said shares of stock. The then Intermediate Appellate Court, now Court of Appeals, however, reversed the trial court's decision and ruled that Juan T. Chuidian, the deceased father of petitioner Vicente B. Chuidian in G.R. No. 74315 is the owner of the shares of stock. Both parties filed separate motions for reconsideration. Enrique Razon wanted the appellate court's decision reversed and the trial court's decision affirmed while Vicente Chuidian asked that all cash and stock dividends and all the pre-emptive rights accruing to the 1,500 shares of stock be ordered delivered to him. The appellate court denied both motions. Hence, these petitions.

The relevant Antecedent facts are as follows:

In his complaint filed on June 29, 1971, and amended on November 16, 1971, Vicente B. Chuidian prayed that defendants Enrique B. Razon, E. Razon, Inc., Geronimo Velasco, Francisco de Borja, Jose Francisco, Alfredo B. de Leon, Jr., Gabriel Llamas and Luis M. de Razon be ordered to deliver certificates of stocks representing the shareholdings of the deceased Juan T. Chuidian in the E. Razon, Inc. with a prayer for an order to restrain the defendants from disposing of the said shares of stock, for a writ of preliminary attachment v. properties of defendants having possession of shares of stock and for receivership of the properties of defendant corporation . . .

xxx xxx xxx

In their answer filed on June 18, 1973, defendants alleged that all the shares of stock in the name of stockholders of record of the corporation were fully paid for by defendant, Razon; that said shares are subject to the agreement between defendants and incorporators; that the shares of stock were actually owned and remained in the possession of Razon. Appellees also alleged . . . that neither the late Juan T. Chuidian nor the appellant had paid any amount whatsoever for the 1,500 shares of stock in question . . .

xxx xxx xxx

The evidence of the plaintiff shown that he is the administrator of the intestate estate of Juan Telesforo Chuidian in Special Proceedings No. 71054, Court of First Instance of Manila.

Sometime in 1962, Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for the arrastre services in South Harbor, Manila. The incorporators consisted of Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose Tuason, Jr., Victor Lim, Jose F. Castro and Salvador Perez de Tagle.

On April 23, 1966, stock certificate No. 003 for 1,500 shares of stock of defendant corporation was issued in the name of Juan T. Chuidian.

On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, the plaintiff-appellant, were elected as directors of E. Razon, Inc. Both of them actually served and were paid compensation as directors of E. Razon, Inc.

From the time the certificate of stock was issued on April 1966 up to April 1971, Enrique Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in question and had not brought any action to have the certificate of stock over the said shares cancelled.

The certificate of stock was in the possession of defendant Razon who refused to deliver said shares to the plaintiff, until the same was surrendered by defendant Razon and deposited in a safety box in Philippine Bank of Commerce.

Defendants allege that after organizing the E. Razon, Inc., Enrique Razon distributed shares of stock previously placed in the names of the withdrawing nominal incorporators to some friends including Juan T. Chuidian

Stock Certificate No. 003 covering 1,500 shares of stock upon instruction of the late Chuidian on April 23, 1986 was personally delivered by Chuidian on July 1, 1966 to the Corporate Secretary of Attorney Silverio B. de Leon who was himself an associate of the Chuidian Law Office (Exhs. C & 11). Since then, Enrique Razon was in possession of said stock certificate even during

the lifetime of the late Chuidian, from the time the late Chuidian delivered the said stock certificate to defendant Razon until the time (sic) of defendant Razon. By agreement of the parties (sic) delivered it for deposit with the bank under the joint custody of the parties as confirmed by the trial court in its order of August 7, 1971.

Thus, the 1,500 shares of stook under Stock Certificate No. 003 were delivered by the late Chuidian to Enrique because it was the latter who paid for all the subscription on the shares of stock in the defendant corporation and the understanding was that he (defendant Razon) was the owner of the said shares of stock and was to have possession thereof until such time as he was paid therefor by the other nominal incorporators/stockholders (TSN., pp. 4, 8, 10, 24-25, 25-26, 28-31, 31-32, 60, 66-68, July 22, 1980, Exhs. "C", "11", "13" "14"). (Ro11o — 74306, pp. 66-68)

In G.R. No. 74306, petitioner Enrique Razon assails the appellate court's decision on its alleged misapplication of the dead man's statute rule under Section 20(a) Rule 130 of the Rules of Court. According to him, the "dead man's statute" rule is not applicable to the instant case. Moreover, the private respondent, as plaintiff in the case did not object to his oral testimony regarding the oral agreement between him and the deceased Juan T. Chuidian that the ownership of the shares of stock was actually vested in the petitioner unless the deceased opted to pay the same; and that the petitioner was subjected to a rigid cross examination regarding such testimony.

Section 20(a) Rule 130 of the Rules of Court (Section 23 of the Revised Rules on Evidence) States:

Sec. 20. Disqualification by reason of interest or relationship — The following persons cannot testify as to matters in which they are interested directly or indirectly, as herein enumerated.

(a) Parties or assignors of parties to a case, or persons in whose behalf a case is prosecuted, against an executor or administrator or other representative of a deceased person, or against a person of unsound mind, upon a claim or demand against the estate of such deceased person or against such person of unsound mind, cannot testify as to any matter of fact accruing before the death of such deceased person or before such person became of unsound mind." (Emphasis supplied)

xxx xxx xxx

The purpose of the rule has been explained by this Court in this wise:

The reason for the rule is that if persons having a claim against the estate of the deceased or his properties were allowed to testify as to the supposed statements made by him (deceased person), many would be tempted to falsely impute statements to deceased persons as the latter can no longer deny or refute them, thus unjustly subjecting their properties or rights to false or unscrupulous claims or demands. The purpose of the law is to "guard against the temptation

to give false testimony in regard to the transaction in question on the part of the surviving party." (Tongco v. Vianzon, 50 Phil. 698; Go Chi Gun, et al. v. Co Cho, et al., 622 [1955])

The rule, however, delimits the prohibition it contemplates in that it is applicable to a case against the administrator or its representative of an estate upon a claim against the estate of the deceased person. (See Tongco v. Vianzon, 50 Phil. 698 [1927])

In the instant case, the testimony excluded by the appellate court is that of the defendant (petitioner herein) to the affect that the late Juan Chuidian, (the father of private respondent Vicente Chuidian, the administrator of the estate of Juan Chuidian) and the defendant agreed in the lifetime of Juan Chuidian that the 1,500 shares of stock in E. Razon, Inc. are actually owned by the defendant unless the deceased Juan Chuidian opted to pay the same which never happened. The case was filed by the administrator of the estate of the late Juan Chuidian to recover shares of stock in E. Razon, Inc. allegedly owned by the late Juan T. Chuidian.

It is clear, therefore, that the testimony of the petitioner is not within the prohibition of the rule. The case was not filed against the administrator of the estate, nor was it filed upon claims against the estate.

Furthermore, the records show that the private respondent never objected to the testimony of the petitioner as regards the true nature of his transaction with the late elder Chuidian. The petitioner's testimony was subject to cross-examination by the private respondent's counsel. Hence, granting that the petitioner's testimony is within the prohibition of Section 20(a), Rule 130 of the Rules of

Court, the private respondent is deemed to have waived the rule. We ruled in the case of Cruz v. Court of Appeals (192 SCRA 209 [1990]):

It is also settled that the court cannot disregard evidence which would ordinarily be incompetent under the rules but has been rendered admissible by the failure of a party to object thereto. Thus:

. . . The acceptance of an incompetent witness to testify in a civil suit, as well as the allowance of improper questions that may be put to him while on the stand is a matter resting in the discretion of the litigant. He may assert his right by timely objection or he may waive it, expressly or by silence. In any case the option rests with him. Once admitted, the testimony is in the case for what it is worth and the judge has no power to disregard it for the sole reason that it could have been excluded, if it had been objected to, nor to strike it out on its own motion (Emphasis supplied). (Marella v. Reyes, 12 Phil. 1.)

The issue as to whether or not the petitioner's testimony is admissible having been settled, we now proceed to discuss the fundamental issue on the ownership of the 1,500 shares of stock in E. Razon, Inc.

E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose of participating in the bidding for the arrastre services in South Harbor, Manila. The incorporators were Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose Tuazon, Jr., Victor L. Lim, Jose F. Castro and Salvador Perez de Tagle. The business, however, did not start operations until 1966. According to the petitioner, some of the incorporators withdrew from the said corporation. The petitioner

then distributed the stocks previously placed in the names of the withdrawing nominal incorporators to some friends, among them the late Juan T. Chuidian to whom he gave 1,500 shares of stock. The shares of stock were registered in the name of Chuidian only as nominal stockholder and with the agreement that the said shares of stock were owned and held by the petitioner but Chuidian was given the option to buy the same. In view of this arrangement, Chuidian in 1966 delivered to the petitioner the stock certificate covering the 1,500 shares of stock of E. Razon, Inc. Since then, the Petitioner had in his possession the certificate of stock until the time, he delivered it for deposit with the Philippine Bank of Commerce under the parties' joint custody pursuant to their agreement as embodied in the trial court's order.

The petitioner maintains that his aforesaid oral testimony as regards the true nature of his agreement with the late Juan Chuidian on the 1,500 shares of stock of E. Razon, Inc. is sufficient to prove his ownership over the said 1,500 shares of stock.

The petitioner's contention is not correct.

In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled:

. . . For an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the

transferee by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of the Corporation Law)

In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was ellected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. (See Section 30, Corporation Code) From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the questioned shares of stock must show that the same were transferred to him by proving that all the requirements for the effective transfer of shares of stock in accordance with the corporation's by laws, if any, were followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in accordance with the provisions of law.

The petitioner failed in both instances. The petitioner did not present any by-laws which could show that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's by-laws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to

such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock.

Moreover, the preponderance of evidence supports the appellate court's factual findings that the shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the legal affairs of the corporation. We give credence to the testimony of the private respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation. Petitioner Razon failed to overcome this testimony.

In G.R. No. 74315, petitioner Vicente B. Chuidian insists that the appellate court's decision declaring his deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should have included all cash and stock dividends and all the pre-emptive rights accruing to the said 1,500 shares of stock.

The petition is impressed with merit.

The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership.

The rights of stockholders are generally enumerated as follows:

xxx xxx xxx

. . . [F]irst, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to participate proportionately in the distribution of the corporate assets upon the dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554) (Pascual v. Del Saz Orozco, 19 Phil. 82, 87)

WHEREFORE, judgment is rendered as follows:

a) In G.R. No. 74306, the petition is DISMISSED. The questioned decision and resolution of the then Intermediate Appellate Court, now the Court of Appeals, are AFFIRMED. Costs against the petitioner.

b) In G.R. No. 74315, the petition is GRANTED. The questioned Resolution insofar as it denied the petitioner's motion to clarify the dispositive portion of the decision of the then Intermediate Appellate Court, now Court of Appeals is REVERSED and SET ASIDE. The decision of the appellate court is MODIFIED in that all cash and stock dividends as, well as all pre-emptive rights that have accrued and attached to the 1,500 shares in E. Razon, Inc., since 1966 are declared to belong to the estate of Juan T. Chuidian.

SO ORDERED.

Bidin, Davide, Jr. and Romero, JJ., concur.

Feliciano, J., is on leave.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

 

G.R. No. 120138 September 5, 1997

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN,

petitioners, vs.COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY & DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES and DANTE D. MORALES, respondents.

 

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and its subsequent resolution dated 10 May 1995 denying petitioners' motion for reconsideration.

The present case involves two separate but interrelated conflicts. The facts leading to the first controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil Realty & Development Corporation while private respondents who are the children of Judge Torres' deceased brother Antonio A. Torres, constituted the minority stockholders. In particular, their respective shareholdings and positions in the corporation were as follows:

Name of Stockholder Number of Percentage Position(s)Shares

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./ChairMilagros P. Torres 33,430 19.10 Dir./TreasurerJosefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.Antonio P. Torres, Jr. 8,290 4.73 DirectorMa. Jacinta P. Torres 8,290 4.73 DirectorMa. Luisa T. Morales 7,790 4.45 DirectorDante D. Morales 500 .28 Director 1

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate planning" scheme under which he assigned to Tormil Realty & Development Corporation (Tormil for brevity) various real properties he owned and his shares of stock in other corporations in exchange for 225,972 Tormil Realty shares. Hence, on various dates in July and August of 1984, ten (10) deeds of assignment were executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BEISSUED

1. July 13, 1984 TCT 81834 Quezon City 13,252TCT 144240 Quezon City

2. July 13, 1984 TCT 77008 ManilaTCT 65689 Manila 78,493TCT 109200 Manila

3. July 13, 1984 TCT 374079 Makati 8,307

4. July 24, 1984 TCT 41527 PasayTCT 41528 Pasay 9,855TCT 41529 Pasay

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000

6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737

7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283

8. Aug. 07, 1984 China banking Corp. Stocks 6,300

9. Aug. 20, 1984 Ayala Corp. Stocks 7,468

10. Aug. 29, 1984 Ayala Fund Stocks 1,322

———225,972 2

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil Realty and the revenues generated by the said properties were correspondingly entered in the corporation's books of account and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective Register of Deeds in the name of Tormil Realty, except for the ones located in Makati and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares remained unsubscribed, all of which were duly issued to and received by Judge Torres (as evidenced by stock

certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25). 3

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of private respondents to approve the needed increase in the corporation's authorized capital stock (to cover the shortage of 972 shares due to Judge Torres under the "estate planning" scheme), on 11 September 1986, Judge Torres revoked the two (2) deeds of assignment covering the properties in Makati and Pasay City. 4

Noting the disappearance of the Makati and Pasay City properties from the corporation's inventory of assets and financial records private respondents, on 31 March 1987, were constrained to file a complaint with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil corporation the two (2) deeds of assignment covering the aforementioned Makati and Pasay City properties which he had unilaterally revoked and to cause the registration of the corresponding titles in the name of Tormil. Private respondents alleged that following the disappearance of the properties from the corporation's inventory of assets, they found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel, respectively, of Tormil, formed and organized a corporation named "Torres-Pabalan Realty and Development Corporation" and that as part of Judge Torres' contribution to the new corporation, he executed in its favor a Deed of Assignment conveying the same Makati and Pasay City properties he had earlier transferred to Tormil.

The second controversy — involving the same parties — concerned the election of the 1987 corporate board of directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled on 25 March 1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of "qualifying shares," for the sole purpose of meeting the legal requirement to be able to elect them (Tobias and company) to the Board of Directors as Torres' nominees.

The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029, 028, 027, 026 and at the back of each certificate the following inscription is found:

The present certificate and/or the one share it represents, conformably to the purpose and intention of the Deed of Assignment dated March 6, 1987, is not held by me under any claim of ownership and I acknowledge that I hold the same merely as trustee of Judge Manuel A. Torres, Jr. and for the sole purpose of qualifying me as Director;

(Signature of Assignee) 5

The reason behind the aforestated action was to remedy the "inequitable lopsided set-up obtaining in the corporation, where, notwithstanding his controlling interest in the corporation, the late Judge held only a single seat in the nine-member Board of Directors and was, therefore, at the mercy of the minority, a combination of any two (2) of whom would suffice to overrule the majority stockholder in the Board's decision making functions." 6

On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official representatives dispatched by the SEC to observe the proceedings (upon request of the late Judge Torres) in their report dated 27 March 1987:

xxx xxx xxx

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres introduced us to the stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our authority and personality to appear in the meeting claiming subject corporation is a family and private firm. We explained that our appearance there was merely in response to the request of Manuel Torres, Jr. and that SEC has jurisdiction over all registered corporations. Manuel Torres, Jr., a septuagenarian, argued that as holder of the major and controlling shares, he approved of our attendance in the meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty. Azura told the body that they came as counsels of Manuel Torres, Jr. and as stockholders having assigned qualifying shares by Manuel Torres, Jr.

The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding after verbally authorized by Manuel Torres, Jr., the President and Chairman of the Board. The secretary when asked about the quorum, said that there was more than a quorum. Mr. Pabalan distributed copies of the president's report and the financial statements. Antonio Torres, Jr. requested time to study the said reports and brought out the question of auditing the finances of the corporation which he claimed was approved previously by the board. Heated arguments ensued which also touched on family matters. Antonio Torres, Jr. moved for the suspension of the meeting but Manuel Torres, Jr. voted for the continuation of the proceedings.

Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the propriety of suspending the meeting but Antonio Torres, Jr. objected reasoning out that we were just observers.

When the Chairman called for the election of directors, the Secretary refused to write down the names of nominees prompting Atty. Azura to initiate the appointment of Atty. Jocson, Jr. as Acting Secretary.

Antonio Torres, Jr. nominated the present members of the Board. At this juncture, Milagros Torres cried out and told the group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of Ma. Jacinta

Torres in San Miguel Village, Makati, Metro Manila. The undersigned joined them since the group with Manuel Torres, Jr. the one who requested for S.E.C. observers, represented the majority of the outstanding capital stock and still constituted a quorum.

At the resumption of the meeting, the following were nominated and elected as directors for the year 1987-1988:

1. Manuel Torres, Jr.

2. Ma. Jacinta Torres

3. Edgardo Pabalan

4. Graciano Tobias

5. Rodolfo Jocson, Jr.

6. Melvin Jurisprudencia

7. Augustus Cesar Azura

8. Josefina Torres

9. Dante Morales

After the election, it was resolved that after the meeting, the new board of directors shall convene for the election of officers.

xxx xxx xxx 7

Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC Case No. 3161) praying in the main, that the election of petitioners to the Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the assignment of shares to them violated the minority stockholders' right of pre-emption as provided in the corporation's articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing and adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of private respondents. The dispositive portion thereof states, thus:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering and directing the respondents, particularly respondent Manuel A. Torres, Jr., to turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina T. Carlos: (a) the originals of the Deeds of Assignment dated July 13 and 24, 1984 together with the owner's duplicates of Transfer Certificates of Title Nos. 374079 of the Registry of Deeds for Makati, and 41527, 41528 and 41529 of the Registry of Deeds for Pasay City and/or to cause the formal registration and transfer of title in and over such real properties in favor

of TORMIL with the proper government agency; (b) all corporate books of account, records and papers as may be necessary for the conduct of a comprehensive audit examination, and to allow the examination and inspection of such accounting books, papers and records by any or all of the corporate directors, officers and stockholders and/or their duly authorized representatives or auditors;

2. Declaring as permanent and final the writ of preliminary injunction issued by the Hearing Panel on February 13, 1989;

3. Declaring as null and void the election and appointment of respondents to the Board of Directors and executive positions of TORMIL held on March 25, 1987, and all their acts and resolutions made for and in behalf of TORMIL by authority of and pursuant to such invalid appointment & election held on March 25, 1987;

4. Ordering the respondents jointly and severally, to pay the complainants the sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) as and by way of attorney's fees. 8

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on 3 April 1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died. However, notice thereof was brought to the attention of the SEC not by petitioners' counsel but by private respondents in a Manifestation dated 24 April 1991. 9

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no administrator or legal representative of the late Judge Torres' estate has yet been appointed by the Regional Trial Court of Makati where Sp. Proc. No. M-1768 ("In Matter of the Issuance of the Last Will and Testament of Manuel A Torres, Jr.") was pending. Two similar motions for suspension were filed by petitioners on 28 June 1993 and 9 July 1993.

On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited motions on the following ground:

Before the filing of these motions, the Commission en banc had already completed all proceedings and had likewise ruled on the merits of the appealed cases. Viewed in this light, we thus feel that there is nothing left to be done except to deny these motions to suspend proceedings. 10

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads, thus:

WHEREFORE, premises considered, the appealed decision of the hearing panel is hereby affirmed and all motions pending before us incident to this appealed case are necessarily DISMISSED.

SO ORDERED. 11

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals by way of a petition for review (docketed as CA-G.R. SP No. 31748).

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which states:

WHEREFORE, the petition for review is DISMISSED and the appealed decision is accordingly affirmed.

SO ORDERED. 12

From the said decision, petitioners filed a motion for reconsideration which was denied in a resolution issued by the Court of Appeals dated 10 May 1995. 13

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of Appeals committed the following errors in its decision:

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH DECISION, WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 BEING PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN OMISSION RESULTING IN A CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE SAID DECEASED'S TESTATE ESTATE, AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;

(3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and,

(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE

LATE JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER STOCKHOLDERS. 14

We shall resolve the issues in seriatim.

I

Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived them of procedural due process. Without the evidence and the original records of the proceedings before the SEC, the Court of Appeals, petitioners adamantly state, could not have possibly made a proper appreciation and correct determination of the issues, particularly the factual issues, they had raised on appeal. Petitioners also assert that since the Court of Appeals allegedly gave due course to their petition, the original records should have been forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991) which provides that:

8. WHEN PETITION GIVEN DUE COURSE. — The Court of Appeals shall give due course to the petition only when it shows prima facie that the court, commission, board, office or agency concerned has committed errors of fact or law that would warrant reversal or modification of the order, ruling or decision sought to be reviewed. The findings of fact of the court

commission, board, office or agency concerned when supported by substantial evidence shall be final.

xxx xxx xxx

11. TRANSMITTAL OF RECORD. — Within fifteen (15) days from notice that the petition has been given due course, the court, commission, board, office or agency concerned shall transmit to the Court of Appeals the original or a certified copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction or addition to the record.

Petitioners contend that the Court of Appeals had given due course to their petition as allegedly indicated by the following acts:

a) it granted the restraining order applied for by the herein petitioners, and after hearing, also the writ of preliminary injunction sought by them; under the original SC Circular No. 1-91, a petition for review may be given due course at the onset (paragraph 8) upon a mere prima facie finding of errors of fact or law having been committed, and such prima facie finding is but consistent with the grant of the extra-ordinary writ of preliminary injunction;

b) it required the parties to submit "simultaneous memoranda" in its resolution dated October 15, 1993 (this is in addition to the comment required to be filed by the respondents) and furthermore declared in the same resolution that the petition will be decided "on the merits," instead of outrightly dismissing the same;

c) it rendered a full length decision, wherein: (aa) it expressly declared the respondent S.E.C. as having erred in denying the pertinent motions to suspend proceedings; (bb) it declared the supposed error as having become a non-issue when the respondent C.A. "proceeded to hear (the) appeal"; (cc) it formulated and applied its own theory of negotiorum gestio in justifying the non-substitution of the deceased principal party in S.E.C. — AC No. 339 and moreover, its theory of di minimis non curat lex (this, without first determining the true extent of and the correct legal characterization of the so-called "shortage" of Tormil shares;and, (dd) it expressly affirmed the assailed decision of respondent S.E.C. 15

Petitioners' contention is unmeritorious.

There is nothing on record to show that the Court of Appeals gave due course to the petition. The fact alone that the Court of Appeals issued a restraining order and a writ of preliminary injunction and required the parties to submit their respective memoranda does not indicate that the petition was given due course. The office of an injunction is merely to preserve the status quo pending the disposition of the case. The court can require the submission of memoranda in support of the respective claims and positions of the parties without necessarily giving due course to the petition. The matter of whether or not to give due course to a petition lies in the discretion of the court.

It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative Circular No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from quasi-judicial agencies to the Court of Appeals was clarified thus:

10. Due course. — If upon the filing of the comment or such other pleadings or documents as may be required or allowed by the Court of Appeals or upon the expiration of the period for the filing thereof, and on the bases of the petition or the record the Court of Appeals finds prima facie that the court or agency concerned has committed errors of fact or law that would warrant reversal or modification of the award, judgment, final order or resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss the same. The findings of fact of the court or agency concerned, when supported by substantial evidence, shall be binding on the Court of Appeals.

11. Transmittal of record. — Within fifteen (15) days from notice that the petition has been given due

course, the Court of Appeals may require the court or agency concerned to transmit the original or a legible certified true copy of the entire record of the proceeding under review. The record to be transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may require or permit subsequent correction of or addition to the record. (Emphasis ours.)

The aforecited circular now formalizes the correct practice and clearly states that in resolving appeals from quasi judicial agencies, it is within the discretion of the Court of Appeals to have the original records of the proceedings under review be transmitted to it. In this connection petitioners' claim that the Court of Appeals could not have decided the case on the merits without the records being brought before it is patently lame. Indubitably, the Court of Appeals decided the case on the basis of the uncontroverted facts and admissions contained in the pleadings, that is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the parties.

II

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for being rendered without the necessary substitution of parties (for the deceased petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which provides as follows:

Sec. 17. Death of party. — After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the

deceased, within a period of thirty (30) days, or within such time as may be granted. If the legal representative fails to appear within said time, the court may order the opposing party to procure the appointment of a legal representative of the deceased within a time to be specified by the court, and the representative shall immediately appear for and on behalf of the interest of the deceased. The court charges involved in procuring such appointment, if defrayed by the opposing party, may be recovered as costs. The heirs of the deceased may be allowed to be substituted for the deceased, without requiring the appointment of an executor or administrator and the court may appoint guardian ad litem for the minor heirs.

Petitioners insist that the SEC en banc should have granted the motions to suspend they filed based as they were on the ground that the Regional Trial Court of Makati, where the probate of the late Judge Torres' will was pending, had yet to appoint an administrator or legal representative of his estate.

We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that survives, and no order is issued by the Court for the appearance of the legal representative or of the heirs of the deceased to be substituted for the deceased, and as a matter of fact no such substitution has ever been effected, the trial held by the court without such legal representative or heirs, and the judgment rendered after such trial, are null and void because the

court acquired no jurisdiction over the persons of the legal representative or of the heirs upon whom the trial and the judgment are not binding. 16

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the Regional Trial Court of Makati for the ante-mortem probate of his holographic will which he had executed on 31 October 1986. Testifying in the said proceedings, Judge Torres confirmed his appointment of petitioner Edgardo D. Pabalan as the sole executor of his will and administrator of his estate. The proceedings, however, were opposed by the same parties, herein private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, 17 who are nephew and nieces of Judge Torres, being the children of his late brother Antonio A. Torres.

It can readily be observed therefore that the parties involved in the present controversy are virtually the same parties fighting over the representation of the late Judge Torres' estate. It should be recalled that the purpose behind the rule on substitution of parties is the protection of the right of every party to due process. It is to ensure that the deceased party would continue to be properly represented in the suit through the duly appointed legal representative of his estate. In the present case, this purpose has been substantially fulfilled (despite the lack of formal substitution) in view of the peculiar fact that both proceedings involve practically the same parties. Both parties have been fiercely fighting in the probate proceedings of Judge Torres' holographic will for appointment as legal representative of his estate. Since both parties claim interests over the estate, the rights of the estate were expected to be fully protected in the proceedings before the SEC en banc and the Court of Appeals. In either case, whoever shall be appointed legal representative of Judge Torres' estate (petitioner Pabalan or private respondents) would no longer be a

stranger to the present case, the said parties having voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having thoroughly participated in the proceedings.

The foregoing rationate finds support in the recent case of Vda. de Salazar v. CA, 18 wherein the Court expounded thus:

The need for substitution of heirs is based on the right to due process accruing to every party in any proceeding. The rationale underlying this requirement in case a party dies during the pendency of proceedings of a nature not extinguished by such death, is that . . . the exercise of judicial power to hear and determine a cause implicitly presupposes in the trial court, amongst other essentials, jurisdiction over the persons of the parties. That jurisdiction was inevitably impaired upon the death of the protestee pending the proceedings below such that unless and until a legal representative is for him duly named and within the jurisdiction of the trial court, no adjudication in the cause could have been accorded any validity or binding effect upon any party, in representation of the deceased, without trenching upon the fundamental right to a day in court which is the very essence of the constitutionally enshrined guarantee of due process.

We are not unaware of several cases where we have ruled that a party having died in an action that survives, the trial held by the court without appearance of the deceased's legal representative or substitution of heirs and the judgment rendered after such trial, are null and void because the court acquired no jurisdiction over the

persons of the legal representatives or of the heirs upon whom the trial and the judgment would be binding. This general rule notwithstanding, in denying petitioner's motion for reconsideration, the Court of Appeals correctly ruled that formal substitution of heirs is not necessary when the heirs themselves voluntarily appeared, participated in the case and presented evidence in defense of deceased defendant. Attending the case at bench, after all, are these particular circumstances which negate petitioner's belated and seemingly ostensible claim of violation of her rights to due process. We should not lose sight of the principle underlying the general rule that formal substitution of heirs must be effectuated for them to be bound by a subsequent judgment. Such had been the general rule established not because the rule on substitution of heirs and that on appointment of a legal representative are jurisdictional requirements per se but because non-compliance therewith results in the undeniable violation of the right to due process of those who, though not duly notified of the proceedings, are substantially affected by the decision rendered therein . . . .

It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc had already fully heard the parties and what remained was the evaluation of the evidence and rendition of the judgment.

Further, petitioners filed their motions to suspend proceedings only after more than two (2) years from the death of Judge Torres. Petitioners' counsel was even remiss in his duty under Sec. 16, Rule 3 of the Revised Rules of Court. 19 Instead, it was private respondents

who informed the SEC of Judge Torres' death through a manifestation dated 24 April 1991.

For the SEC en banc to have suspended the proceedings to await the appointment of the legal representative by the estate was impractical and would have caused undue delay in the proceedings and a denial of justice. There is no telling when the probate court will decide the issue, which may still be appealed to the higher courts.

In any case, there has been no final disposition of the properties of the late Judge Torres before the SEC. On the contrary, the decision of the SEC en banc as affirmed by the Court of Appeals served to protect and preserve his estate. Consequently, the rule that when a party dies, he should be substituted by his legal representative to protect the interests of his estate in observance of due process was not violated in this case in view of its peculiar situation where the estate was fully protected by the presence of the parties who claim interests therein either as directors, stockholders or heirs.

Finally, we agree with petitioners' contention that the principle of negotiorum gestio 20 does not apply in the present case. Said principle explicitly covers abandoned or neglected property or business.

III

Petitioners find legal basis for Judge Torres' act of revoking the assignment of his properties in Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which provides that:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the findings of SEC, as affirmed by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-46) that —

. . . the shortage of 972 shares would not be valid ground for respondent Torres to unilaterally revoke the deeds of assignment he had executed on July 13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL real

properties covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively.

A comparison of the number of shares that respondent Torres received from TORMIL by virtue of the "deeds of assignment" and the stock certificates issued by the latter to the former readily shows that TORMIL had substantially performed what was expected of it. In fact, the first two issuances were in satisfaction to the properties being revoked by respondent Torres. Hence, the shortage of 972 shares would never be a valid ground for the revocation of the deeds covering Pasay and Quezon City properties.

In Universal Food Corp. vs. CA, the Supreme Court held:

The general rule is that rescission of a contract will not be permitted for a slight or carnal breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement.

The shortage of 972 shares definitely is not substantial and fundamental breach as would defeat the very object of the parties in entering into contract. Art. 1355 of the Civil Code also provides: "Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influences." There being no fraud, mistake or undue influence exerted on respondent Torres by TORMIL and the latter having already issued to the former of its 225,000 unissued shares, the most logical course of action is to declare as null and void the deed of revocation executed by respondent Torres. (Rollo, pp. 45-46.) 21

The aforequoted Civil Code provision does not apply in this particular situation for the obvious reason that a specific number of shares of stock (as evidenced by stock certificates) had already been issued to the late Judge Torres in exchange for his Makati and Pasay City properties. The records thus disclose:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OFASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*

1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rdTCT 144240 Quezon City)

2. July 13, 1984 TCT 77008 Manila)TCT 65689 Manila) 78,493 2ndTCT 102200 Manila)

3. July 13, 1984 TCT 374079 Makati 8,307 1st

4. July 24, 1984 TCT 41527 PasayTCT 41528 Pasay) 9,855 4thTCT 41529 Pasay)

5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th

6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th

7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th

8. August 7, 1984 China Banking Corp. Stocks 6,300 6th

9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th

10. August 29, 1984 Ayala Fund Stocks 1,322.1)

—————TOTAL 225,972.3

*Order of stock certificate issuances by TORMIL to respondent Torres relative to the Deeds of Assignment he executed sometime in July and August, 1984. 22 (Emphasis ours.)

Moreover, we agree with the contention of the Solicitor General that the shortage of shares should not have affected the assignment of the Makati and Pasay City properties which were executed in 13 and 24 July 1984 and the consideration for which have been duly paid or fulfilled but should have been applied logically to the last assignment of property — Judge Torres' Ayala Fund shares — which was executed on 29 August 1984. 23

IV

Petitioners insist that the assignment of "qualifying shares" to the nominees of the late Judge Torres (herein petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock as would call for the "imposition of stringent requirements (with respect to the) recording of the transfer of said shares." Anyway, petitioners add, there was substantial compliance with the above-stated requirement since said assignments were entered by the late Judge Torres himself in the corporation's stock and transfer book on 6 March 1987, prior to the 25 March 1987 annual stockholders meeting and which entries were confirmed on 8 March 1987 by petitioner Azura who was appointed Assistant Corporate Secretary by Judge Torres.

Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the late Judge Torres by invalidating the questioned entries in the stock and transfer book, simply because he initially made those entries (they were later affirmed by an acting corporate secretary) and because the stock and transfer book was in his possession instead of the elected corporate

secretary, if the background facts herein-before narrated and the serious animosities that then reigned between the deceased Judge and his relatives are to be taken into account;

xxx xxx xxx

10.12. Indeed it was a practice in the corporate respondent, a family corporation with only a measly number of stockholders, for the late judge to have personal custody of corporate records; as president, chairman and majority stockholder, he had the prerogative of designating an acting corporate secretary or to himself make the needed entries, in instances where the regular secretary, who is a mere subordinate, is unavailable or intentionally defaults, which was the situation that obtained immediately prior to the 1987 annual stockholders meeting of Tormil, as the late Judge Torres had so indicated in the stock and transfer book in the form of the entries now in question;

10.13. Surely, it would have been futile nay foolish for him to have insisted under those circumstances, for the regular secretary, who was then part of a group ranged against him, to make the entries of the assignments in favor of his nominees; 24

Petitioners' contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private respondents — his nephew and nieces that should have placed Judge Torres on his guard. He should have been more careful

in ensuring that his actions (particularly the assignment of qualifying shares to his nominees) comply with the requirements of the law. Petitioners cannot use the flimsy excuse that it would have been a vain attempt to force the incumbent corporate secretary to register the aforestated assignments in the stock and transfer book because the latter belonged to the opposite faction. It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance. 25 In other words, there are remedies within the law that petitioners could have availed of, instead of taking the law in their own hands, as the cliche goes.

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the Corporation Code, as follows (Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the stock and transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by respondent Torres, the President and Chairman of

the Board of Directors of TORMIL. In contravention to the above cited provision, the stock and transfer book was not kept at the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer book on March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to Pabalan and Co. cannot therefore be given any valid effect. Where the entries made are not valid, Pabalan and Co. cannot therefore be considered stockholders of record of TORMIL. Because they are not stockholders, they cannot therefore be elected as directors of TORMIL. To rule otherwise would not only encourage violation of clear mandate of Sec. 74 of the Corporation Code that stock and transfer book shall be kept in the principal office of the corporation but would likewise open the flood gates of confusion in the corporation as to who has the proper custody of the stock and transfer book and who are the real stockholders of records of a certain corporation as any holder of the stock and transfer book, though not the corporate secretary, at

pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding capital stock of TORMIL is of no moment and is not a license for him to arrogate unto himself a duty lodged to (sic) the corporate secretary. 26

All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law.

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.

SO ORDERED.

Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.Republic of the Philippines

SUPREME COURTManila

SECOND DIVISION

G.R. No. L-57586 October 8, 1986

AQUILINO RIVERA, ISAMU AKASAKO and FUJIYAMA HOTEL & RESTAURANT, INC., petitioners, vs.THE HON. ALFREDO C. FLORENDO, as Judge of the Court of

First Instance of Manila (Branch XXXVI), LOURDES JUREIDINI and MILAGROS TSUCHIYA, respondents.

Bobby P. Yuseco for petitioners.

Arthur Canlas for private respondents.

 

PARAS, J.:

This is a petition for certiorari and prohibition with preliminary injunction seeking the annulment of the following Orders of the then Court of First Instance of Manila, Branch XXXVI: (a) Order dated June 5, 1981 directing the issuance of a writ of preliminary mandatory injunction requiring petitioners Fujiyama Hotel & Restaurant, Inc., Isamu Akasako and Aquilino Rivera to allow respondents Lourdes Jureidini and Milagros Tsuchiya to manage the corporate property upon filing of a bond in the amount of P30,000.00 (Rollo, pp. 43-57) and (b) Order dated July 24, 1981 denying petitioners' motion for reconsideration and motion to dismiss for lack of jurisdiction but increasing the bond to P120,000.00 (Rollo, p. 81).

Petitioner corporation was organized and register under Philippine laws with a capital stock of P1,000,000.00 divided into 10,000 shares of P100.00 par value each by the herein petitioner Rivera and four (4) other incorporators. Sometime thereafter petitioner Rivera increased his subscription from the original 1,250 to a total of 4899 shares (Rollo, p. 4).

Subsequently, Isamu Akasako, a Japanese national and co-petitioner who is allegedly the real owner of the shares of stock in the name of petitioner Aquilino Rivera, sold 2550 shares of the same to private respondent Milagros Tsuchiya for a consideration of P440,000.00 with the assurance that Milagros Tsuchiya will be made the President and Lourdes Jureidini a director after the purchase. Aquilino Rivera who was in Japan also assured private respondents by overseas call that he will sign the stock certificates because Isamu Akasako is the real owner. However, after the sale was consummated and the consideration was paid with a receipt of payment therefor shown, Aquilino Rivera refused to make the indorsement unless he is also paid. (Rollo, pp. 51-52).

It also appears that the other incorporators sold their shares to both respondent Jureidini and Tsuchiya such that both respondents became the owners of a total of 3300 shares or the majority out of 5,649 outstanding subscribed shares of the corporation (Rollo, pp. 4-5), and that there was no dispute as to the legality of the transfer of the stock certificate Exhibits "B-1" to "B-4" to Jureidini, all of which bear the signatures of the president and the secretary as required by the Corporation Law with the proper indorsements of the respective owners appearing thereon. Exhibits "B-1" to "B-4" are specifically indorsed to her while Exhibits "B-2" and "B-3" are indorsed in blank. Aquilino Rivera admitted the genuineness of an the signatures of the officers of the corporation and of an the indorsee therein. (Order dated June 5, 1981, Civil Case No. 13273, Rollo, pp. 51-53).

Nonetheless, private respondents attempted several times to register their stock certificates with the corporation but the latter refused to register the same. (Ibid., Rollo, pp. 54-55). Thus, private respondents filed a special civil action for mandamus and damages with

preliminary mandatory injunction and/or receivership naming herein petitioners as respondents, docketed as Special Civil Action No. 13273, "Lourdes Jureidini, et al. v. Fujiyama Hotel et al." of the Court of First Instance of Manila, Branch XXXVI presided by respondent Judge. Petitioners' counsel Atty. Marcelino A. Bueno, upon receipt of the summons and a copy of the aforesaid petition, filed an answer thereto with denials, special and affirmative defenses and counterclaim. Thereafter, a hearing was held on the application for preliminary mandatory injunction and/or receivership, after which respondent Judge issued an order for a writ of preliminary mandatory injunction authorizing respondent Jureidini and Tsuchiya to manage the corporation's hotel and restaurant, upon the filing of a bond in the amount of P30,000.00. Then through another counsel Atty. Eriberto D. Ignacio in collaboration with their counsel of record, Atty. Marcelino A. Bueno, petitioners (respondents therein) filed a motion to dismiss the petition on the ground that respondent Judge has no jurisdiction to entertain the case, while through Atty. Bueno, they filed a motion for reconsideration of the Order granting the issuance of a writ of mandatory preliminary injunction. Private respondents filed their opposition to both motions and on July 24, 1981, respondent Judge issued an Order denying both the motion for reconsideration and the motion to dismiss the petition but increased the amount of the bond from P30,000.00 to P120,000.00 to sufficiently protect the interests of herein petitioners. (Rollo, p. 81).

Hence, this petition.

After filing the petition, Atty. Eriberto D. Ignacio withdrew as counsel for petitioners on August 6, 1981. Such withdrawal was confirmed by petitioner Isamu Akasako (Rollo, p. 83). On August 10, 1981 the appearance of Isaca & Espiritu Law Offices as counsel in substitution of former counsel Attys. Marcelino A. Bueno and Eriberto D. Ignacio

was received by this Court. (Rollo, p. 84); all of which were noted in the resolution of the First Division of this Court dated August 17, 1981. (Rollo, p. 160).

The new counsel filed a Manifestation and Motion praying that the therein attached Supplement and certified copies of the questioned orders and writs be admitted and considered as part of petitioners' original petition for certiorari and Prohibition with Preliminary injunction. (Rollo, pp. 85-131). On August 14, 1981 petitioners filed an Urgent Motion for Restraining Order and Other Provisional Injunctive Reliefs (Rollo, pp. 154-159). In the same resolution of August 17, 1981, after deliberating on the petition and supplemental to the petition, the Court Resolved: (a) to require the respondents to comment thereon (not to file a motion to dismiss within ten (10) days from notice and (b) upon petitioners' filing of an injunction bond in the amount of P30,000.00 to issue a Writ of Preliminary Injunction enjoining respondents from enforcing the writ of preliminary mandatory injunction dated June 23, 1981 issued in Civil Case No. 132673. (Rollo, p. 160). Said bond was filed on August 20, 1981 (Rollo, p. 161) and accordingly, a writ of preliminary injunction was issued by this Court on August 21, 1981 (Rollo, pp. 172-173).

Subsequently, petitioners filed a manifestation and urgent motion on August 28, 1981 praying that private respondent Lourdes Jureidini and her counsel Atty. Arthur Canlas be declared in contempt of court for the former's alleged defiant refusal: (a) to acknowledge receipt of the Writ of Preliminary Injunction of August 21, 1981 and (b) to comply with the said writ issued by this Court. (Rollo, pp. 174-180).

Comment thereon was filed by private respondents through counsel (Rollo, pp. 185-199) in compliance with the resolution of the First Division dated August 17, 1981 (Rollo, p. 160), praying for the

immediate lifting of the preliminary injunction. Said comment of private respondents was noted in the resolution of October 5, 1981 (Rollo, p. 200) which also required respondents to comment on the supplement to the petition.

On October 2, 1981, comment on the manifestation and urgent motion to declare Jureidini and her counsel in contempt of court was filed by counsel for private respondent (Reno, pp. 201-214) in compliance with the resolution of September 14, 1981 (Rollo, p. 181).

In the resolution of October 26, 1981 (Reno, p. 215) the Court Resolved to require petitioners to file a reply to aforesaid comment. (Rollo, p. 215).

Meanwhile, supplemental comment on the supplement to the petition was filed by private respondents on October 14, 1981 (Rollo, pp. 216-222) reiterating their stand that it is the ordinary court and not the Securities and Exchange Commission (SEC) that has jurisdiction to entertain the case as the controversies did not arise from the intra-corporate relationship among the parties.

On October 21, 1981, petitioner filed: (a) motion for leave to file reply to comment of respondents on the petition and supplemental petition required in the resolution of August 17, 1981 (Rollo, pp. 223-224) and (b) the attached Reply (Rollo, pp. 225-241). On November 25, 1981, petitioners filed their Reply to respondents' Comment on petitioners' manifestation and urgent motion to declare them in contempt. (Rollo, pp. 246-257).

On December 7, 1981 Atty. Bobby P. Yuseco entered his appearance as collaborating counsel for petitioners (Rollo, p. 258) and filed an urgent petition for early resolution of petitioners' motion to hold private

respondents in contempt and for issuance of Order clarifying Writ of Injunction dated August 21, 1981. (Rollo, pp. 259-261).

In the resolution of January 18, 1982, this case and all pending incidents were set for hearing on February 3, 1982. (Rollo, p. 268).

On February 1, 1982, Lesaca and Espiritu Law Offices filed a Manifestation and Motion for Leave to withdraw as counsel for petitioners. (Rollo, pp. 274-275).

When this case was called for hearing on February 3, 1982, counsel for both parties appeared and argued their causes and both were required by the Court within an unextendible period of ten (10) days to file their respective memoranda in support of their positions on an pending incidents of the case at bar while the hearing on the contempt proceedings was reset for February 10, 1982 where the personal appearance of private respondent Lourdes Jureidini through her counsel was required. (Rollo, p. 279).

On February 9, 1982, counsel for private respondent Jureidini filed an Urgent Motion and Manifestation that he was informed by his client that she is physically exhausted and is beset with hypertension and praying that she be excused from appearing at the hearing set for February 10, 1982, that the hearing be cancelled and the contempt incident be considered submitted for decision on the basis of pleadings previously filed. (Rollo, pp. 280-282).

On the same date, February 9, 1982, counsel for petitioners filed his Memorandum in support of his oral argument at the hearing of February 3, 1982, (Rollo, pp. 283-287) while a supplement thereto was filed on February 12, 1982. (Rollo, pp. 291-294).

At the hearing of February 10, 1982, private respondent Lourdes Jureidini and her counsel failed to appear. Accordingly the Court Resolved: (a) to IMPOSE on said counsel Atty. Canlas a fine of P200.00 or to suffer imprisonment if said fine is not paid; (b) to RESET the hearing on the contempt incidents on March 3, 1982 and (c) to REQUIRE the presence of Atty. Canlas and respondent Lourdes Jureidini and of complainants Attys. Bibiano P. Lasaca, Rodolfo A. Espiritu and Renato T. Paqui. (Resolution of February 10, 1982, Rollo, p. 290).

On February 15, 1982, private respondents file their memorandum in compliance with the resolution of this Court of February 3, 1982 while petitioners on February 25, 1982 filed their reply thereto.

At the hearing of March 3, 1982, both counsel as well as private respondent Lourdes Jureidini, Attys. Bibiano P. Lesaca, Rodolfo A. Espiritu and Renato R. Paguio appeared. Atty. Canlas, Lourdes Jureidini, Atty. Lesaca and a representative of the petitioners were interpellated by the Court. Thereafter, the incident was declared submitted for resolution. (Resolution of March 3, 1982, Rollo, p. 316).

On March 5, 1982, counsel for private respondents filed his compliance with the resolution of February 10, 1982 enclosing a check payable to this Court in the amount of P200.00 in payment of the fine imposed with motion for reconsideration explaining why he should not be declared in contempt and praying that the aforesaid resolution of February 10, 1982 be set aside, (Rollo, pp. 312-314). However, in the resolution of March 10, 1982, (Rollo, p. 317) the Court acting on the compliance of Atty. Arthur Canlas with motion for reconsideration, denied the motion and required the Chief of the Docket Division to return to Atty. Canlas the check in the amount of P200.00 it being an out of town check, and Atty. Canlas to pay the

fine in cash, and to show cause why he should not be disciplinary dealt with or held in contempt for wilful delay in paying the fine by mail through an out of town check contrary to his manifestation at the hearing that he had promptly paid the fine, both within forty eight hours from notice.

Meanwhile, counsel for petitioners filed on April 6, 1982 an Urgent Petition for Permission to Implement Injunction Writ issued on August 21, 1981 (Rollo, pp. 323-325) which was granted in the resolution of May 26, 1982 (Rollo, p. 313). In the same resolution the Court ordered Lourdes Jureidini and Milagros Tsuchiya to strictly and immediately comply with the Court's aforesaid writ of preliminary injunction; indicated that it would resolve the pending incident for contempt against private respondent Lourdes Jureidini when the Court decides the case on the merits; and gave the parties thirty (30) days from notice within which to submit simultaneously their respective memoranda on the merits of the case.

On May 31, 1982, counsel for private respondent Atty. Canlas filed in compliance with the resolution of March 10, 1982, his explanation and manifestation why he should not be disciplinarily dealt with and held in contempt of Court (Rollo, pp. 316-318). In the resolution of June 2, 1982, the Court Resolved to set aside and lift the Order of Atty. Canlas' arrest and commitment it had issued on March 31, 1982 but found the explanation and manifestation of Atty. Canlas dated May 29, 1982 unsatisfactory. In view thereof, he was reprimanded for negligence and undue delay in complying with the Court's resolution. (Rollo, p. 319).

On June 18, 1982, counsel for petitioners allegedly for purposes of clarification as to the laws involved in the matter of contempt of Lourdes Jureidini, filed a pleading entitled "Re Incident of Contempt

against Lourdes Jureidini." (Rollo, pp. 320-326) which was noted by the Court in the resolution of July 7, 1982. (Rollo, p. 328).

Counsel for private respondents manifested (Rollo, p. 329), on July 12, 1982 that they are adopting the memorandum submitted in the preliminary injunction incident as their memorandum in the main case. Said manifestation was noted in the resolution of July 26, 1982. (Rollo, p. 331). Counsel for petitioners manifested (Rollo, p. 333) that they are adopting their memorandum in support of argument last February 3, 1982 as their combined memoranda on the merits of the case. Said manifestation was noted in the resolution of September 15, 1982. (Rollo, p. 334). In the resolution of November 29, 1982, this case was transferred to the Second Division. (Rollo, p. 336).

In their petition and supplemental petition, petitioners raised the following issues:

I

THE RESPONDENT COURT OF FIRST INSTANCE HAS NO JURISDICTION OVER THE PETITION FOR mandamus AND RECEIVERSHIP "AS WELL AS IN PLACING THE CORPORATE ASSETS UNDER PROVISIONAL RECEIVERSHIP IN THE GUISE OF A WRIT OF PRELIMINARY MANDATORY INJUNCTION.

II

EVEN FALSELY ASSUMING THAT THE RESPONDENT COURT HAD JURISDICTION, THE

PRIVATE RESPONDENTS' PRINCIPAL ACTION OF mandamus IS AN IMPROPER COURSE OF ACTION.

III

ASSUMING ARGUENDO THAT WHAT THE RESPONDENT COURT FOUND IS TRUE, NAMELY THAT PRIVATE RESPONDENTS "ARE OUTSIDERS" AND "NOT YET STOCKHOLDERS," THUS, HAVING NO PERSONALLY AT ALL, THEN PROVISIONAL RECEIVERSHIP, ALBEIT CLOTHED AS A "WRIT OF PRELIMINARY MANDATORY INJUNCTION" WAS ILLEGALLY ISSUED DE HORS ITS JURISDICTION.

IV

ASSUMING ARGUENDO THAT THE RESPONDENT COURT HAD JURISDICTION OVER BOTH THE PETITION FOR mandamus AS WELL AS THE PROVISIONAL RECEIVERSHIP STILL THE RESPONDENT COURT ACTED IN EXCESS OF ITS JURISDICTION OR IN GRAVE ABUSE OF ITS DISCRETION TO GRANT RECEIVERSHIP OVER THE MANAGEMENT OF THE CORPORATE BUSINESS AND ASSETS WHICH NEVER WAS NOR IS A SUBJECT MATTER OF LITIGATION.

V

EVEN GRANTING FOR THE SAKE OF AGRGUMENT THAT THE RESPONDENT COURT HAD

JURISDICTION OVER THE SUBJECT MATTER OF THE CASE; NONETHELESS IT WAS IN GRAVE ABUSE OF ITS DISCRETION TO UNILATERALLY GRANT TO A "PARTY-IN-LITIGATION," THE PRIVATE RESPONDENTS HEREIN, THE MANAGEMENT OF THE CORPORATE BUSINESS. (Petition and Supplemental Petition; Rollo, pp. 2-18; 88-131).

I

The crucial issue in this case is whether it is the regular court or the Securities and Exchange Commission that has jurisdiction over the present controversy.

Presidential Decree No. 902-A provides:

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

(a) ...

(b) Controversies arising out of intra-corporate or partnership relations and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of

which they are stockholders, members, or associates, respectively and between such corporations, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity.

It has already been settled that an intracorporate controversy would call for the jurisdiction of the Securities and Exchange Commission. (Philippine School of Business Administration v. Lanao, 127 SCRA 781, February 24, 1984). On the other hand, an intra-corporate controversy has been defined as "one which arises between a stockholder and the corporate. There is no distinction, qualification, nor any exemption whatsoever." (Philex Mining Corporation v. Reyes, 118 SCRA 605, November 19, 1982). This Court has also ruled that cases of private respondents who are not shareholders of the corporation, cannot be a "controversy arising out of intracorporate or partnership relations between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association, of which they are stockholders, members or associates, respectively." (Sunset View Condominium Corporation v. Campos, Jr., 104 SCRA 303, April 27, 1981).

Under Batas Pambansa Blg. 68 otherwise known as "The Corporation Code of the Philippines," shares of stock are transferred as follows:

SEC. 63. Certificate of stock and transfer of shares. — The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are

personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in- fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the book of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

xxx xxx xxx

As confirmed by this Court, "shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. 'Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof ' (18 C.J. S. 928). There should be compliance with the mode of transfer prescribed by law (18 C.J.S. 930)' " (Nava v. Peers Marketing Corp. 74 SCRA 65, 69, Nov. 25, 1976)

As the bone of contention in this case, is the refusal of petitioner Rivera to indorse the shares of stock in question and the refusal of the Corporation to register private respondents' shares in its books, there is merit in the findings of the lower court that the present controversy is not an intracorporate controversy; private respondents are not yet stockholders; they are only seeking to be registered as stockholders because of an alleged sale of shares of stock to them. Therefore, as the petition is filed by outsiders not yet members of the corporation, jurisdiction properly belongs to the regular courts.

II

On the other hand, there is merit in petitioners' contention that private respondents' principal action of mandamus is an improper course of action.

It is evident that mandamus wig not lie in the instant case where the shares of stock in question are not even indorsed by the registered owner Rivera who is specifically resisting the registration thereof in the books of the corporation. Under the above ruling, even the shares of stock which were purchased by private respondents from the other incorporators cannot also be the subject of mandamus on the strength of mere indorsement of the supposed owners of said shares in the absence of express instructions from them. The rights of the parties will have to be threshed out in an ordinary action.

III-V

Petitioners insist that what was issued was a provisional receivership, while private respondents maintain that the trial court issued a Writ of Preliminary Mandatory Injunction. Be that as it may, it appears obvious that from the abovementioned rulings of this Court, petitioners' contention that respondent Judge in the issuance thereof committed acts of grave abuse of discretion, is well taken.

In the Order dated June 5, 1981, in Civil Case No. 132673, the basis of aforesaid Writ was as follows:

Finally, the Court, after assessing the evidence, finds that the issuance of a preliminary mandatory injunction is proper. Respondents Isamu Akasako and Aquilino Rivera, thru their simulated relationship, have succeeded for two years since 1979 to deprive the petitioners to participate in the profit and management

of the corporation of which they are the majority stockholders considering that the stocks certificates appearing in the name of Aquilino Rivera (Exh. "8") is 55% to 75% of the total stocks of the corporation by Isamu Akasako would only prolong the injustice committed against the petitioners and the damages they would suffer would be irreparable. The Court is aware that preliminary mandatory injunction is the exception rather than the rule, but according to the Code Commission, in its report on page 98, "the writ of preliminary mandatory injunction is called for by the fact that there are at present prolonged litigation between owner and usurper and the former is deprived of his possession even when he has an immediate right thereto." In the instant case, the right of the petitioners is clear and unmistakable on the law and the facts and there exists an urgent and paramount necessity for the issuing of the writ in order to prevent extreme or rather serious damage which ensues from withholding it. (43 C.J.S. 413)

WHEREFORE, in view of the foregoing circumstances, let a writ of preliminary mandatory injunction issue requiring respondents to allow petitioners to manage the corporate property known as the Fujiyama Hotel & Restauarant, Inc. upon petitioners' filing of a bond in the amount of P30,000.00.

A mandatory injunction is granted only on a showing (a) that the invasion of the right is material and substantial; (b) the right of complainant is clear and unmistakable; and (c) there is an urgent and permanent necessity for the writ to prevent serious damage. (Pelejo v.

Court of Appeals, 117 SCRA 668, Oct. 18, 1982).

A mandatory injunction which commands the performance of some specific act is regarded as of a more serious nature than a mere prohibitive injunction, the latter being intended generally to maintain the status quo only. While our courts, being both of law and equity, have jurisdiction to issue a mandatory writ, it has always been held that its issuance would be justified only in clear cases; that it is generally improper to issue it before final hearing because it tends to do more than maintain the status quo; that it should be issued only where there is a willful and unlawful invasion of plaintiff's right and that the latter's case is one free from doubt and dispute. (National Marketing v. Cloribel, 22 SCRA 1038, March 13, 1968).

Respondent court in the instant case violated the fundamental rule of injunctions that a mandatory injunction will not issue in favor of a party whose rights are not clear and free of doubt or as yet undetermined. (Namarco v. Cloribel, 22 SCRA 1038-1039, March 13, 1968). It will be recalled that the disputed shares of stock were purchased not from the registered owner but from a Japanese national who allegedly was the real owner thereof. It was also alleged that the registered owner was only a dummy of Akasako. it is also true that the trial court has already made findings to that effect at the hearing for the issuance of the Order of June 5, 1981. Nonetheless, these are contentious issues that should properly be ventilated at the trial on the merits. As correctly stated in petitioners' motion for reconsideration, the Order of the trial court is in effect a judgment on the merits, declaring expressly or impliedly that petitioners are stockholders of the Corporation at the hearing of only the incident for the issuance of a Writ of Preliminary Injunction. On the other hand if the Order amounts to a judgment on the merits, the lower court should first rule on what private respondents seek, the registration of their shareholdings in the books

of the corporation and the issuance of new stock certificates. It is only thereafter that the subsequent act of management may be ordered and the period of finality of such a judgment should be in accordance with the Rules of Court, giving the respondents the right to an appeal or review and not be immediately executory as the Writ of Preliminary Mandatory Injunction would infer. (Rollo, p. 65).

Another fundamental rule which appears to have been violated in the case at bar is that no advantage may be given to one to the prejudice of the other, a court should not by means of a preliminary injunction transfer the property in litigation from the possession of one party to another where the legal title is in dispute and the party having possession asserts ownership thereto. (Rodulfo v. Alonso, 76 Phil. 225), February 28, 1946). Similarly, the primary purpose of an injunction is to preserve the status quo, that is the last actual peaceable uncontested status which preceded the controversy. In the instant case, petitioner Rivera is the registered majority and controlling stockholder of the corporation before the ensuing events transpired. By the issuance of the Writ in question he appears to have been deprived of his rights as stockholder thereof apart from his status as Chairman of the Board and President of the corporation, with Akasako as the Manager of the two restaurants in this case; the same being the last uncontested status which preceded the controversy. (Rollo, p. 127).

On the contempt incident involving private respondent Lourdes Jureidini, a Manifestation and Urgent Motion was filed by petitioners to declare her in contempt of Court for allegedly refusing to acknowledge receipt of the Writ of Preliminary Injunction issued by this Court and for allegedly refusing to comply therewith. Attributed to her were the following statements: "I will not obey that ... Yes, I am higher than the Supreme Court ... I will obey only what my lawyer tells me."

In her explanation however, filed through her counsel she denied having uttered the statements alluded to her, the truth of the matter being that she was alone in the restaurant when this Court's process server, accompanied by petitioners' lawyers, approached her and demanded that she vacate the premises and surrender the management of the Restaurant. Fazed by the unusual display of lawyers she requested that she be given time to confer with her counsel Said request allegedly precipitated the remark from Petitioners' counsel that neither respondent herself, nor her counsel can be higher than the Supreme Court and that any conference seeking to clarify the effect of the Writ of Preliminary Injunction would be futile. (Rollo, pp. 174-175).

It was likewise explained that respondent Jureidini did not sign and acknowledge receipt of the Writ because it was not addressed to her but to the lower court and to her counsel.

Respondent's counsel says that the incident was concocted and devised by the petitioners and their counsel to serve no salutary purpose but to scare and harass respondent Jureidini. He also stated that "it is equally improper, at least in practice, for lawyers to accompany officers of the Court in serving or otherwise executing processes of said court as to create a seeming suspicion to the public that lawyers are not involved only professionally in the case they handle but signify their personal interests as well." (Rollo, pp. 208-209).

When this contempt incident was heard on March 3, 1982, Atty. Arthur A. Canlas, counsel for private respondent Lourdes Jureidini, Jureidini herself, Atty. Bibiano P. Lesaca a representative of the petitioners were interpellated by the Court. Thereafter, the incident was declared submitted for resolution. (Resolution of March 3, 1982; Rollo, p. 316).

Thereafter, counsel for petitioner filed a pleading "The Incident of Contempt of Lourdes Jureidini" in the form of a summation of the incident and reiteration of petitioners' charges of contempt.

Counsel for petitioner invokes the provisions of: Section 3, Rule 71 on Indirect Contempt and par. (b) thereof, on Disobedience of or Resistance to a Lawful Writ, Process, Order, Judgement or Command of a Court; or Injunction granted by a Court or Judge ... ; (2) Section 6, Rule 71 regarding punishment or penalty thereof and (3) Section 5, Rule 135, par. (e) to compel obedience to its judgments, orders and processes, and to the lawful orders of a judge out of Court, in a case pending therein.

On the incident itself, petitioners' counsel stressed that present when the writ was served were attorneys for petitioners Bibiano P. Lesaca, and Renato P. Paguio in the company of petitioners Isamu Akasako, Akasako's assistants Furnio, Fujihara and Isamu Tajewakai and this Court's process server, before whose presence the alleged contemptuous acts were committed.

Counsel for petitioners also reminded the Court that the first summons of the Court were answered only by counsel for private respondent Jureidini while the latter feigned sickness without a medical certificate. The hearing for the contempt charge was reset but neither counsel for private respondent nor the latter appeared for which non-appearance Atty. Canlas was fined P200.00 for contempt when finally both counsel and client appeared on the third day, the hearing was set.

At that hearing, counsel for petitioners narrated that Attys. Lesaca and Paguio and two Japanese nationals testified in unison that Lourdes Jureidini not only disregarded the writ but distinctly uttered the complained of statements.

Petitioners' counsel laid emphasis on the fact that Lourdes Jureidini is a graduate of nursing, who speaks in straight polished English, capable of understanding the Writ of Mandatory Injunction of the Respondent Court served on petitioners by herself and a Deputy Sheriff of Manila, but incredibly unable to understand the Writ issued by the Supreme Court. She was assessed as "overbearing to the point of insolence" and capable of uttering "I am higher than the Supreme Court."

There is no question that disobedience or resistance to a lawful writ, process, order, judgment or command of a court, or injunction granted by a court or judge, more particularly in this case, the Supreme Court, constitutes Indirect Contempt punishable under Rule 71 of the Rules of Court. (Rule 71, Section 3(b) and Section 6).

It has been held that contempt of court is a defiance of the authority, justice or dignity of the court, such conduct as tends to bring the authority and administration of the law into disrespect or to interfere with or prejudice parties litigant or their witnesses during litigation. It is defined as a disobedience to the court by setting up an opposition to its authority justice and dignity. It signifies not only a willful disregard or disobedience of the court's orders but such conduct as tends to bring the authority of the court and the administration of law into disrepute or in some manner to impede the due administration of justice (Halili v. Court of Industrial Relations, 136 SCRA 135, April 30, 1985).

However, it is also well settled that "the power to punish for contempt of court should be exercised on the preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent power in order to retain that respect without which the administration of justice must falter or fail." (Villavicencio v. Lukban,

39 Phil. 778 [1919]; Gamboa v. Teodoro, et al., 91 Phil. 274 [1952]; Sulit v. Tiangco, 115 SCRA 207 [1982]; Lipata v. Tutaan, 124 SCRA 880 [1983]). "Only in cases of clear and contumacious refusal to obey should the power be exercised. A bona fide misunderstanding of the terms of the order or of the procedural rules should not immediately cause the institution of contempt proceedings." "Such power 'being drastic and extra-ordinary in its nature ... should not be resorted to ... unless necessary in the interest of justice.' " (Gamboa v. Teodoro, et al., supra).

In the case at bar, although private respondent Jureidini did not immediately comply with the Writ of Injunction issued by this Court, it appears reasonable on her part to request that she be allowed to confer with her lawyer first before she makes any move of her own. It is likewise reasonable for counsel for private respondent to request that he be given time to file a motion for clarification with the Supreme Court.

It will also be noted that the testimonies produced at the hearing to establish the fact that she had uttered the alleged contemptuous statements alluded to her were those of Attys. Lesaca and Paguio and two Japanese nationals, a one-sided version for the petitioners.

It appears to Us that the version of counsel for private respondent is more in accord with human experience: Jureidini who was alone in the Restaurant was fazed by the unusual display of might and by the presence of lawyers demanding that she vacate premises and surrender the management of the Restaurant (Rollo, p. 204), this is more believable than the version of counsel for petitioners who summed her up as a person "overbearing to the point of insolence" and capable of uttering" I am higher than the Supreme Court." It would therefore be more reasonable to believe that what she uttered

in that situation where she felt threatened, was more in self-defense and not an open defiance of the Supreme Court.

Jureidini cannot also be faulted for finding it difficult to understand the writ issued against her by the Supreme Court as she believed that not only have she and her correspondent the legal right to manage the restaurant but the equitable right as well, having been placed in possession of the corporate property only after posting a bond of P120,000.00. (Rollo, pp. 197-198).

In connection with this incident, Jureidini through her counsel filed her comment on October 2, 1981 (Rollo, p. 201) contrary to the allegation of petitioners' counsel that it was only Atty. Canlas who filed his comment.

WHEREFORE, the assailed orders of respondent Judge are SET ASIDE; the complaint (special civil action for mandamus with damages, etc.) should ordinarily be dismissed without prejudice to the filing of the proper action; but as all parties are already duly represented, We hereby consider the case as an ordinary civil action for specific performance, and the case is therefore remanded to the lower court for trial on the merits; the charge of contempt against respondent Jureidini is DISMISSED but the order of Our Court restraining respondent from taking over the management of the restaurant remains until after this case is decided.

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

 

G.R. No. 126891 August 5, 1998

LIM TAY, petitioner, vs.COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF ALFONSO LIM, respondents.

 

PANGANIBAN, J.:

The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the

transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute when a party's claim to being a shareholder is, on the face of the complaint, invalid or inadequate or is otherwise negated by the very allegations of such complaint. Mandamus will not issue to establish a right, but only to enforce one that is already established.

Statement of the Case

There are the principles, used by this Court in resolving this Petition for Review on Certiorari before us, assailing the October 24, 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40832, the dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE COURSE and is hereby DISMISSED. With costs against the [p]etitioner. 3

By the foregoing disposition, the Court of Appeals effectively affirmed the March 7, 1996 Decision 4 of the Securities and Exchange Commission (SEC) en banc:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing the appeal on the ground that mandamus will only issue upon a clear showing of ownership over the assailed shares of stock, [t]he

determination of which, on the basis of the foregoing facts, is within the jurisdiction of the regular courts and not with the SEC. 5

The SEC en banc upheld the August 16, 1993 Decision 6 of SEC Hearing Officer Rolando C. Malabonga, which dismissed the action for mandamus filed by petitioner.

The Facts

As found by the Court of Appeals, the facts of the case are as follows:

. . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the [p]etitioner in the amount of P40,000 payable within six (6) months. To secure the payment of the aforesaid loan and interest thereon, Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three hundred (300) shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake. Respondent Guiok obliged himself to pay interest on said loan at the rate of 10% per annum from the date of said contract of pledge. On the same date, Alfonso Sy Lim secured a loan from the [p]etitioner in the amount of P40,000 payable in six (6) months. To secure the payment of his loan, Sy Lim executed a "Contract of Pledge" covering his three hundred (300) shares of stock in Respondent Corporation. Under said contract, Sy Lim obliged himself to pay interest on his loan at the rate of 10% per annum from the date of the execution of said contract.

Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim covenanted, inter alia, that:

3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided;

4. In the event of the foreclosure of this pledge and the sale of the pledged certificate, any surplus remaining in the hands of the PLEDGEE after the payment of the said sum and interest, and the expenses, if any, connected with the foreclosure sale, shall be paid by the PLEDGEE to the PLEDGOR;

5. Upon payment of the said amount and interest in full, the PLEDGEE will, on demand of the PLEDGOR, redeliver to him the said shares of stock by surrendering the certificate delivered to him by the PLEDGOR or by retransferring each share to the PLEDGOR, in the event that the PLEDGEE, under the option hereby granted, shall have caused such shares to be transferred to him upon the books of the issuing company."(idem, supra)

Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to the [p]etitioner. 7

However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed a "Petition for Mandamus" against Respondent Corporation, with the SEC entitled "Lim Tay versus Go Fay & Company. Inc., SEC Case No. 03894", praying that:

PRAYER

WHEREFORE, premises considered, it is respectfully prayed that an order be issued directing the corporate secretary of [R]espondent Go Fay & Co., Inc. to register the stock transfers and issue

new certificates in favor of Lim Tay. It is likewise prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to pay all dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay.

Plaintiff further prays for such other relief just and equitable in the premises. ( page 34, Rollo)

The [p]etitioner alleged, inter alia, in his Petition that the controversy between him as stockholder and the Respondent Corporation was intra-corporate in view of the obstinate refusal of the corporate secretary of Respondent Corporation to record the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor of and under the name of the [p]etitioner and to issue new certificates of stock to the [p]etitioner.

The Respondent Corporation filed its Answer to the Complaint and alleged, as Affirmative Defense, that:

AFFIRMATIVE DEFENSE

7. Respondent repleads and incorporates herein by reference the foregoing allegations.

8. The Complaint states no cause of action against [r]espondent.

9. Complainant is not a stockholder of [r]espondent. Hence, the Honorable Commission has no jurisdiction to enter the present controversy since their [sic] is no intracorporate relationship between complainant and respondent.

10. Granting arguendo that a pledge was constituted over the shareholdings of Sy Guiok in favor of the complainant and that the former defaulted in the payment of his obligations to the latter, the same did not automatically vest [i]n complainant ownership of the pledged shares. ( pace 37, Rollo)

In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-Intervention with the SEC alleging, inter alia, that:

xxx xxx xxx

3. Deny specifically the allegation under paragraph 5 of the Complaint that, failure to pay the loan within the contract period automatically foreclosed the pledged shares of stocks and that the share of stocks are automatically purchased by the plaintiff, for being false and distorted, the truth being that pursuant to the [sic] paragraph 3 of the

contract of pledges, Annexes "A" and "B", it is clear that upon failure to pay the amount within the stipulated period, the pledgee is authorized to foreclose the pledge and thereafter, to sell the same to satisfy the loan. [H]owever, to this point in time, plaintiff has not performed any operative act of foreclosing the shares of stocks of [i]ntervenors in accordance with the Chattel Mortgage law, [n]either was there any sale of stocks — by way of public or private auction — made after foreclosure in favor of the plaintiff to speak about, and therefore, the respondent company could not be force[d] to [sic] by way of mandamus, to transfer the subject shares of stocks from the name of your [i]ntervenors to that of the plaintiff in the absence of clear and legal basis for such;

4. DENY specifically the allegations under paragraphs 6, 7 and 8 of the complaint as to the existence of the alleged intracorporate dispute between plaintiff and company for being without proper and legal basis. In the first place, plaintiff is not a stockholder of the respondent corporation; there was no foreclosure of shares executed in accordance with the Chattel Mortgage

Law whatsoever; there were no sales consummated that would transfer to the plaintiff the subject shares of stocks and therefore, any demand to transfer the shares of stocks to the name of the plaintiff has no legal basis. In the second place, [i]ntervenors had been in the past negotiating possible compromise and at the same time, had tendered payment of the loan secured by the subject pledges but plaintiff refused unjustifiably to oblige and accept payment o[r] even agree on the computation of the principal amount of the loan and interest on top of a substantial amount offered just to settle and compromise the indebtedness of [i]ntervenors;

II. SPECIAL AFFIRMATIVE DEFENSES

Intervenors replead by way of reference all the foregoing allegations to form part of the special affirmative defenses;

5. This Honorable Commission has no jurisdiction over the person of the respondent and nature of the action, plaintiff having no personality at all to compel respondent by way of mandamus to perform certain corporate function[s];

6. The complaint states no cause of action;

7. That respondent is not [a] real party in interest;

8. The appropriation of the subject shares of stocks by plaintiff, without compliance with the formality of law, amounted to "[p]actum commis[s]orium" therefore, null and void;

9. Granting for the sake of argument only that there was a valid foreclosure and sale of the subject st[o]cks in favor of the plaintiff — which [i]ntervenors deny — still paragraph 5 of the contract allows redemption, for which intervenors are willing to redeem the share of stocks pledged;

10. Even the Chattel Mortgage law allowed redemption of the [c]hattel foreclosed;

11. As a matter of fact, on several occasions, [i]ntervenors had made representations with the plaintiff for the compromise and settlement of all the obligations secured by the subject pledges — even offering to pay compensation over and above the value

of the obligations, interest[s] and dividends accruing to the share of stocks but, plaintiff unjustly refused to accept the offer of payment; ( pages 39-42, Rollo)

The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in their favor, as follows:

IV. PRAYER

It is respectfully prayed to this Honorable Commission after due hearing, to dismiss the case for lack of merit, ordering plaintiff to accept payment for the loans secured by the subject shares of stocks and to pay plaintiff:

1. The sum of P50,000.00, as moral damages;

2. the sum of P50,000.00, as attorneys fees; and,

3. costs of suit.

Other reliefs just and equitable [are] likewise prayed for.( pages 42-43, Rollo)

After due proceedings, the [h]earing [o]fficer promulgated a Decision dismissing [p]etitioner's

Complaint on the ground that although the SEC had jurisdiction over the action, pursuant to the Decision of the Supreme Court in the case of "Rural Bank of Salinas, et al. vs. Court of Appeals, et al., 210 SCRA 510", he failed to prove the legal basis for the secretary of the Respondent Corporation to be compelled to register stock transfers in favor of the [p]etitioner and to issue new certificates of stock under his name ( pages 67-77, Rollo). The [p]etitioner appealed the Decision of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the SEC promulgated a Decision, dismissing [p]etitioner's appeal on the grounds that: (a) the issue between the [p]etitioner and the [r]espondents being one involving the ownership of the shares of stock pledged by Respondent Guiok and Sy Lim, the SEC had no jurisdiction over the action filed by the [p]etitioner; (b) the latter had no cause of action for mandamus against the Respondent Corporation, the right of ownership of the [p]etitioner over the 300 shares of stock pledged by Respondent Guiok and Sy Lim not having been as yet, established, preparatory to the institution of said Petition for Mandamus with the SEC.

Ruling of the Court of Appeals

On the issue of jurisdiction, the Court of Appeals ruled:

In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioner's action, the [a]ppellate [c]ourt must delve into and ascertain: (a) whether or not there is a need to enlist the expertise and technical

know-how of the SEC in resolving the issue of the ownership of the shares of stock; (b) the status of the relationships of the parties; [and] (c) the nature of the question that is the subject of the controversy. Where the controversy is purely a civil matter resoluble by civil law principles and there is no need for the application of the expertise and technical know-how of the SEC, then the regular courts have jurisdiction over the action. 8 [citations omitted]

On the issue of whether mandamus can be availed of by the petitioner, the Court of Appeals agreed with the SEC, viz.:

. . . [T]he [p]etitioner failed to establish a clear and legal right to the writ of mandamus prayed for by him. . . . Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial doubt exists . . . . The principal function of the writ of mandamus is to command and expedite, and not to inquire and adjudicate and, therefore it is not the purpose of the writ to establish a legal right, but to enforce one which has already been established. 9 [citations omitted]

The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares by virtue of novation, holding that respondents' indorsement and delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and that petitioner's receipt of dividends was in compliance with Article 2102 of the same Code. Petitioner's claim that he had acquired ownership of the shares by virtue of prescription was likewise dismissed by Respondent Court in this wise:

The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover the shares of stock from the [p]etitioner accrued only from the time they paid their loans and the interests thereon and [made] a demand for their return. 10

Hence, the petitioner brought before us this Petition for Review on Certiorari in accordance with Rule 45 of the Rules of Court. 11

Assignment of Errors

Petitioner submits, for the consideration of this Court, these issues: 12

(a) Whether the Securities and Exchange Commission had jurisdiction over the complaint filed by the petitioner; and

(b) Whether the petitioner is entitled to the relief of mandamus as against the respondent Go Fay & Co., Inc.

In addition, petitioner contends that it has acquired ownership of the shares "through extraordinary prescription," pursuant to Article 1132 of the Civil Code, and through respondents' subsequent acts, which amounted to a novation of the contracts of pledge. Petitioner also claims that there was dacion en pago, in which the shares of stock were deemed sold to petitioner, the consideration for which was the extinguishment of the loans and the interests thereon. Petitioner likewise claims that laches bars respondents from recovering the subject shares.

The Court's Ruling

The petition has no merit.

First Issue: Jurisdiction of the SEC

Claiming that the present controversy is intra-corporate and falls within the exclusive jurisdiction of the SEC, petitioner relies heavily on Abejo v. De la Cruz, 13 which upheld the jurisdiction of the SEC over a suit filed by an unregistered stockholder seeking to enforce his rights. He also seeks support from Rural Bank of Salinas, Inc. v. Court of Appeals, 14 which ruled that the right of a transferee or an assignee to have stocks transferred to his name was an inherent right flowing from his ownership of the said stocks.

The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. The determination of whether or not a shareholder is entitled to exercise the above-mentioned rights falls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed, then jurisdiction lies with the regular courts.

Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as follows:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with 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 stockholders, partners, members of associations or organizations registered with the Commission;

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

(c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where

the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this decree. 15

Thus, a controversy "among stockholders, partners or associates themselves" 16 is intra-corporate in nature and falls within the jurisdiction of the SEC.

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint. 17 In the present case, however, petitioner's claim that he was the owner of the shares of stock in question has no prima facie basis.

In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he became the owner of the shares when the term for the loans expired. The Complaint contained the following pertinent averments:

xxx xxx xxx

3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three hundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine currency, the sum of which was payable within six (6) months [with interest] at ten percentum (10%) per annum from the date of the execution of the contract; a copy of this Contract of Pledge is attached as Annex "A" and made part hereof;

4. On the same date January 8, 1980, under a similar Contract of Pledge, Lim Tay received three hundred (300) shares of stock of Go Pay & Co., Inc. from Alfonso Sy Lim as security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine currency, the sum of which was payable within six (6) months [with interest] at ten percentum (10%) per annum from the date of the execution of the contract; a copy of this Contract of Pledge is attached as Annex "B" and made part hereof;

5. By the express terms of the agreements, upon failure of the borrowers to pay the stated amounts within the contract period, the pledge is foreclosed and the shares of stock are purchased by [p]laintiff, who is expressly authorized and empowered to transfer the duly endorsed shares of stock on the books of the corporation to his own name; . . . 18 (emphasis supplied)

However, the contracts of pledge, which were made integral parts of the Complaint, contain this common proviso:

3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his option, to transfer the said shares of

stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided;

This contractual stipulation, which was part of the Complaint, shows that plaintiff was merely authorized to foreclose the pledge upon maturity of the loans, not to own them. Such foreclosure is not automatic, for it must be done in a public or private sale. Nowhere did the Complaint mention that petitioner had in fact foreclosed the pledge and purchased the shares after such foreclosure. His status as a mere pledgee does not, under civil law, entitle him to ownership of the subject shares. It is also noteworthy that petitioner's Complaint did not aver that said shares were acquired through extraordinary prescription, novation or laches. Moreover, petitioner's claim, subsequent to the filing of the Complaint, that he acquired ownership of the said shares through these three modes is not indubitable and still has to be resolved. In fact, as will be shown, such allegation-has no merit. Manifestly, the Complaint by itself did not contain any prima facie showing that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an owner. Accordingly, it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. In fact, the very allegations of the Complaint and its annexes negated the jurisdiction of the SEC.

Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo, he Abejo spouses sold to Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent to such contract of

sale, the corporate secretary, Norberto Braga, refused to record the transfer of the shares in the corporate books and instead asked for the annulment of the sale, claiming that he and his wife had a preemptive right over some of the shares, and that his wife's shares were sold without consideration or consent.

At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby demonstrating that Telectronic Systems, Inc. was already the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale was perfected until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a rule, retroact to the time the sale was made. Therefore, at the time the Bragas questioned the validity of the tranfers made by the Abejos, Telectronic Systems, Inc. was already a prima facie shareholder of the corporation, thus making the dispute between the Bragas and the Abejos "intra-corporate" in nature. Hence, the Court held that "the issue is not on ownership of shares but rather the non-performance by the corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary." 19

Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when the Complaint was filed. The contract of pledge certainly does not make him the owner of the shares pledged. Further, whether prescription effectively transferred ownership of the shares, whether there was a novation of the contracts of pledge, and whether laches had set in were difficult legal issues, which were unpleaded and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the transfer, in his favor, of the shares pledged to him.

In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the shares in favor of the respondents in that case. When the corporate secretary refused to register the transfer, an action for mandamus was instituted. Subsequently, a motion for intervention was filed, seeking the annulment of the deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in fact donations because the considerations therefor were below the book value of the shares.

Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima facie shareholders when the deeds of assignment were questioned. If the said deeds were to be annulled later on, respondents would still be considered shareholders of the corporation from the time of the assignment until the annulment of such contracts.

Second Issue: Mandamus Will NotIssue to Establish a Right

Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of respondent corporation to have the shares transferred to his name in the corporate books, to issue new certificates of stock and to deliver the corresponding dividends to him. 20

In order that a writ of mandamus may issue, it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the act required. It neither confers powers nor imposes duties and is never issued in doubtful cases. It is simply a command to exercise a power already possessed and to perform a duty already imposed. 21

In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention that he is the owner of the said shares is completely without merit. Quite the contrary and as already shown, he does not have any ownership rights at all. At the time petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg to stand on. At best, his contention was disputable and uncertain Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established.

Without Foreclosure andPurchase at Auction, PledgorIs Not the Owner of Pledged Shares

Petitioner initially argued that ownership of the shares pledged had passed to him, upon Respondents Sy Guiok and Sy Lim's failure to pay their respective loans. But on appeal, petitioner claimed that ownership over the shares had passed to him, not via the contracts of pledge, but by virtue of prescription and by respondents' subsequent acts which amounted to a novation of the contracts of pledge. We do not agree.

At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states:

The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with

the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim.

Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of clarity:

3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and "the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name, and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinaboveprovided; 22

There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code:

Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person.

No Ownershipby Prescription

Petitioner did not acquire the shares by prescription either. The period of prescription of any cause of action is reckoned only from the date the cause of action accrued.

Since a cause of action requires as an essential element not only a legal right of the plaintiff and a correlative obligation of the defendant, but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty." 23 Accordingly, a cause of action on a written contract accrues when a breach or violation thereof occurs.

Under the contracts of pledge, private respondents would have a right to ask for the redelivery of their certificates of stock upon payment of their debts to petitioner, consonant with Article 2105 of the Civil Code, which reads:

The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. 24

Thus, the right to recover the shares based on the written contract of pledge between petitioner and respondents would arise only upon payment of their respective loans. Therefore, the prescriptive period within which to demand the return of the thing pledged should begin to run only after the payment of the loan and a demand for the thing has been made, because it is only then that respondents acquire a cause of action for the return of the thing pledged.

Prescription should not begin to run on the action to demand the return of the thing pledged while the loan still exists. This is because the right to ask for the return of the thing pledged will not arise so long as the loan subsists. In the present case, the prescriptive period did not begin to run when the loan became due. On the other hand, it is petitioner's right to demand payment that may be in danger of prescription.

Petitioner contends that he can be deemed to have acquired ownership over the certificates of stock through extraordinary prescription, as provided for in Article 1132 of the Civil Code which states:

Art. 1132. The ownership of movables prescribes through uninterrupted possession for four years in good faith.

The ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition. . . . .

Petitioner's argument is untenable. What is required by Article 1132 is possession in the concept of an owner. In the present case, petitioner's possession of the stock certificates came about because

they were delivered to him pursuant to the contracts of pledge. His possession as a pledgee cannot ripen into ownership by prescription. As aptly pointed out by Justice Jose C. Vitug:

Acquisitive prescription is a mode of acquiring ownership by a possessor through the requisite lapse of time. In order to ripen into ownership, possession must be in the concept of an owner, public, peaceful and uninterrupted. Thus, possession with a juridical title, such as by a usufructory, a trustee, a lessee, agent or a pledgee, not being in the concept of an owner, cannot ripen into ownership by acquisitive prescription unless the juridical relation is first expressly repudiated and such repudiation has been communicated to the other party. 25

Petitioner expressly repudiated the pledge, only when he filed his Complaint and claimed that he was not a mere pledgee, but that he was already the owner of the shares. Based on the foregoing, petitioner has not acquired the certificates of stock through extraordinary prescription.

No Novationin Favor of Petitioner

Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor." 26 Novation of a contract must not be presumed. "In the absence of an express agreement, novation takes place only

when the old and the new obligations are incompatible on every point." 27

In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery of the certificates of stock covering the 600 shares, (b) petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any action to recover the shares since 1980.

Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the contract of pledge which reads:

2. The said certificates had been delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and interest thereonaccruing. 28

This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with Article 2093 of the Civil Code, 29 which requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement; and Article 2095, 30 which states that if the thing pledged are shares of stock, then the "instrument proving the right pledged" must be delivered to the creditor.

Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to the shares was not meant to relinquish ownership thereof. As stated by respondent corporation, the same was done pursuant to an agreement between the petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the civil

Code which provides:

It the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and the earnings of the right pledged.

Novation cannot be inferred from the mere fact that petitioner has not, since 1980, instituted any action to recover the shares. Such action is in fact premature, as the loan is still outstanding. Besides, as already pointed out, novation is never presumed or inferred.

No Dacion en Pagoin Favor of Petitioner

Neither can there be dacion en pago, in which the certificates of stock are deemed sold to petitioner, the consideration for which is the extinguishment of the loans and the accrued interests thereon. Dacion en pago is a form of novation in which a change takes place in the object involved in the original contract. Absent an explicit agreement, petitioner cannot simply presume dacion en pago.

Laches Nota Bar to Petitioner

Petitioner submits that "the inaction of the individual respondents with respect to the recovery of the shares of stock serves to bar them from

asserting rights over said shares on the basis of laches." 31

Laches has been defined as "the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it." 32

In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the time to demand payment of the debt. More important, under the contracts of pledge, petitioner could have foreclosed the pledges as soon as the loans became due. But for still unknown or unexplained reasons, he failed to do so, preferring instead to pursue his baseless claim to ownership.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. NO. 139802           December 10, 2002

VICENTE C. PONCE, petitioner, vs.ALSONS CEMENT CORPORATION, and FRANCISCO M. GIRON, JR., respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review seeks to annul the decision1 of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside the decision2 of the Securities and Exchange Commission (SEC) En Banc in SEC-AC No. 545 and reinstated the order3 of the Hearing Officer dismissing herein petitioner’s complaint. Also assailed is the CA’s resolution4 of

August 10, 1999, denying petitioner’s motion for reconsideration.

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint5 with the SEC for mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that:

x x x

5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation.

6. On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of Undertaking" and "Indorsement" whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. A copy of the said deed/indorsement is attached as Annex "A".

7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity).

8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex "B".

9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff.

10. Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiff’s right to secure the corresponding certificate of stock in his name.6

Attached to the complaint was the Deed of Undertaking and Indorsement7 upon which petitioner based his petition for mandamus. Said deed and indorsement read as follows:

DEED OF UNDERTAKING

KNOW ALL MEN BY THESE PRESENTS:

I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation.

(SGD.) VICENTE C. PONCE

February 8, 1968

CONFORME:

(SGD.) FAUSTO GAID

INDORSEMENT

I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE.

(SGD.) FAUSTO GAID

With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay him damages.8

Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that: (a) the complaint states no cause of action; mandamus is improper and not available to petitioner; (b) the petitioner is not the real party in interest; (c) the cause of action is barred by the statute of limitations; and (d) in any case, the petitioner’s cause of action is barred by laches.9 They argued, inter alia, that there being no allegation that the alleged "INDORSEMENT" was recorded in the books of the corporation, said indorsement by Gaid to the plaintiff of the shares of stock in question—assuming that the indorsement was in fact a transfer of stocks—was not valid against

third persons such as ALSONS under Section 63 of the Corporation Code.10 There was, therefore, no specific legal duty on the part of the respondents to issue the corresponding certificates of stock, and mandamus will not lie.11

Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13, 1992.

After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss in an Order dated February 29, 1996, which held that:

x x x

Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G. Gaid, or his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant corporation who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance with Section 37 of the old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant corporation was incorporated, as well as Section 64 of the present Corporation Code (Batas Pambansa Blg. 68), a stockholder who has fully paid for his subscription together with interest and expenses in case of

delinquent shares, is entitled to the issuance of a certificate of stock for his shares. According to paragraph 9 of the Complaint, no stock certificate was issued to Gaid.

Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder of the defendant corporation by demanding issuance of the certificates of stock in his name. This he cannot do, for two reasons: there is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or transfer. Indeed, nothing is alleged in the complaint on these two points.

x x x

In the present case, there is not even any indorsement of any stock certificate to speak of. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming the document has this effect, nevertheless there is neither any allegation nor any showing that it is recorded in the books of the defendant corporation, such recording being a prerequisite to the issuance of a stock certificate in favor of the transferee.12

Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce the petitioner’s rights as a stockholder, the Commission En Banc cited our ruling in Abejo vs. De

la Cruz, 149 SCRA 654 (1987) to the effect that:

xxx As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder". This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser’s right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure. xxx

Applying this principle in the case on hand, a transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights as a stockholder. Also, the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts.13

The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not the real party in interest.

x x x

As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares of stock of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him the rightful owner and holder of a stock certificate to be issued in his name. Moreover, defendant-appellees failed to show that the transferor nor his heirs have refuted the ownership of the transferee. Assuming these allegations to be true, the corporation has a mere ministerial duty to register in its stock and transfer book the shares of stock in the name of the plaintiff-appellant subject to the determination of the validity of the deed of assignment in the proper tribunal. 14

Their motion for reconsideration having been denied, herein respondents appealed the decision15 of the SEC En Banc and the resolution16 denying their motion for reconsideration to the Court of Appeals.

In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA, "the complaint for mandamus should be dismissed for failure to state a cause of action."17 petitioner’s motion for reconsideration was likewise denied in a resolution18 dated August 10, 1999.

Hence, the instant petition for review on certiorari alleging that:

I. … THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER

FAILED TO STATE A CAUSE OF ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE CORPORATION, CITING SECTION 63 OF THE CORPORATION CODE.

II. … THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF "ABEJO VS. DE LA CRUZ", 149 SCRA 654 AND "RURAL BANK OF SALINAS, INC., ET AL VS. COURT OF APPEALS, ET AL.", G.R. NO. 96674, JUNE 26, 1992.

III. … THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, "HAGER VS. BRYAN", 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK.19

At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause of action for a writ of mandamus.

Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus, when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock certificate need not spell out each

and every act that needs to be done by the corporate secretary, as a request for issuance of stock certificates necessarily includes a request for the recording of the transfer. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates.

Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have been issued even in the name of the original stockholder, Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS denied his request.

Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. Until the recording is made, the transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party in

interest, the real party in interest being Fausto Gaid since it is his name that appears in the records of the corporation. They conclude that petitioner’s cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS.

We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner had no cause of action, and that his petition for mandamus was properly dismissed.

There is no question that Fausto Gaid was an original subscriber of respondent corporation’s 239,500 shares. This is clear from the numerous pleadings filed by either party. It is also clear from the Amended Articles of Incorporation20 approved on August 9, 199521 that each share had a par value of P1.00 per share. And, it is undisputed that petitioner had not made a previous request upon the corporate secretary of ALSONS, respondent Francisco M. Giron Jr., to record the alleged transfer of stocks.

The Corporation Code states that:

SEC. 63. Certificate of stock and transfer of shares.–The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties,

until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned.22 As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.23 It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 6424 of the Corporation Code. This is the import of Section 63 which states that "No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred." The situation would be different if the

petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus.25

From the corporation’s point of view, the transfer is not effective until it is recorded. Unless and until such recording is made the demand for the issuance of stock certificates to the alleged transferee has no legal basis. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.26 In other words, the stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation is under no specific legal duty to issue stock certificates in the transferee’s name.

It follows that, as held by the Court of Appeals:

x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation, the private respondent has failed to state a cause of action.27

Petitioner insists that it is precisely the duty of the corporate secretary, when presented with the document of fully paid shares, to effect the transfer by recording the transfer in the stock and transfer book of the corporation and to issue stock certificates in the name of the transferee.

On this point, the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals, 28 where we held that:

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding the decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book in the names of private respondents. At all events, the registration is without prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question.

In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente’s name and to execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in

his name.

That cannot be said of this case. The deed of undertaking with indorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer, thus:

It appears, however, from the original as well as the amended petition, that this petitioner is not the registered owner of the stock which he seeks to have transferred, and except in so far as he alleges that he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan Electric Company, there is no allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand on the secretary of the Visayan Electric Company to make the transfer which petitioner seeks to have made through the medium of the mandamus of this court.

Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused

so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459),29 the mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand, because, under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general rule and especially under the above-cited statute, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer.30

In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer, while this case is one for issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. With more reason, in our view, a corporate secretary may not be compelled to issue stock certificates without such registration.31

Petitioner’s reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. In this case there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose between and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporation’s controlling 56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferee’s name. Finally, in Abejo we did not say that transfer of shares need not be recorded in

the books of the corporation before the transferee may ask for the issuance of stock certificates. The Court’s statement, that "there is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder among which is the stock purchaser’s right to secure the corresponding certificate in his name,"32 was addressed to the issue of jurisdiction, which is not pertinent to the issue at hand.

Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation that can be imposed upon the respondent corporate secretary, so as to justify the issuance of the writ of mandamus to compel him to perform the transfer of the shares to petitioner. The test of sufficiency of the facts alleged in a petition is whether or not, admitting the facts alleged, the court could render a valid judgment thereon in accordance with the prayer of the petition.33 This test would not be satisfied if, as in this case, not all the elements of a cause of action are alleged in the complaint.34 Where the corporate secretary is under no clear legal duty to issue stock certificates because of the petitioner’s failure to record earlier the transfer of shares, one of the elements of the cause of action for mandamus is clearly missing.

That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a

stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holder’s interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation.35 In fact, it rests on the will of the stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. In the present case, petitioner’s complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no cause of action sufficient for the issuance of the writ.

WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities and Exchange Commission En Banc in SEC-AC No. 545 and reinstated the order of the Hearing Officer, is hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.

xxvRepublic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L-19441             March 27, 1923

FUA CUN (alias Tua Cun), plaintiff-appellee, vs.RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION, defendants-appellants.

Araneta and Zaragoza for appellants.Canillas and Cardenas for appellee.

OSTRAND, J.:

It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash, for which a receipt was issued in the following terms:

This is to certify, That Chua Soco, a subscriber for five hundred shares of the capital stock of the China Banking Corporation at its par value of P100 per share, has paid into the Treasury of the Corporation, on account of said subscription and in accordance with its terms, the sum of twenty-five thousand pesos (P25,000), Philippine currency.

Upon receipt of the balance of said subscription in accordance with the terms of the calls of the Board of Directors, and surrender of this certificate, duly executed certificates for said five hundred shares of stock will be issued to the order of the subscriber.

It is expressly understood that the total number of shares specified in this receipt is subject to sale by the China Banking Corporation for the payment of any unpaid subscriptions, should the subscriber fail to pay the whole or any part of the balance of his subscription upon 30 days' notice issued therefor by the Board of Directors.

Witness our official signatures at Manila, P. I., this 25th day of August, 1920.

(Sgd.) MERVIN WEBSTERCashier

(Sgd.) DEE C. CHUANPresident

On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety days

and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua Soco, but was told to await action upon the matter by the Board of Directors.

In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The attachment was levied after the defendant bank had received notice of the facts that the receipt had been endorsed over to the plaintiff.

Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-half of the subscription price of five hundred shares Chua Soco in effect became the owner of two hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation; that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the sum of P5,000 in damages for wrongful attachment.

The trial court rendered judgment in favor of the plaintiff declaring that Chua Soco, through the payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which shares the plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering that the receipt be returned to said plaintiff.

From this judgment the defendants appeal.

Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment appealed from is in the main correct.

The claim of the defendant Banking Corporation upon which it brought the action in which the writ of attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct connection with the shares of stock in question. At common law a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375) and our attention has not been called to any statute creating such lien here. On the contrary, section 120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in accordance with law."

Section 35 of the United States National Banking Act of 1864 contains a similar provision and it has been held in various decisions of the United States Supreme Court that a bank organized under that Act can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws provide that the shares shall be transferable only on the books of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the

corporation. (Jones on Liens, 3d ed., sec. 384; First National Bank of South Bend vs. Lanier and Handy, 11 Wall., 369; Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and McMillan, 107 U.S., 676.) The reasons for this doctrine are obvious; if banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective.

Turning now to the rights of the plaintiff in the stock in question, it is argued that the interest held by Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. Though the courts have uniformly held that chattel mortgages on shares of stock and other choses in action are valid as between the parties, there is still much to be said in favor of the defendants' contention that the chattel mortgage here in question would not prevail over liens of third parties without notice; an equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will furnish constructive notice to third parties. As said by the court in the case of Spalding vs. Paine's Adm'r. (81 Ky., 416), in regard to a chattel mortgage of shares of stock:

These certificates of stock are in the pockets of the owner, and go with him where he may happen to locate, as choses in action, or evidence of his right, without any means on the part of those with whom he proposes to deal on the faith of such a security of ascertaining whether or not this stock is in pledge or mortgaged to others. He finds the name of the owner on the books of the company as a subscriber of paid-up stock, amounting to 180 shares, with the certificates in his possession, pays for these certificates their full value, and has

the transfer to him made on the books of the company, thereby obtaining a perfect title. What other inquiry is he to make, so as to make his investment certain and secure? Where is he to look, in order to ascertain whether or not this stock has been mortgaged? The chief office of the company may be at one place to-day and at another tomorrow. The owner may have no fixed or permanent abode, and with his notes in one pocket and his certificates of stock in the other — the one evidencing the extent of his interest in the stock of the corporation, the other his right to money owing him by his debtor, we are asked to say that the mortgage is effectual as to the one and inoperative as to the other.

But a determination of this question is not essential in the present case. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above mentioned reads:

For value received, I assign all my rights in these shares in favor of Mr. Tua Cun.

Manila, P. I., May 18, 1921.

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a conditional equitable assignment.

As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by virtue of the attachment. But the attachment was levied after the bank had received notice of the assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the latter. It follows that as against these rights the defendant bank holds no lien whatever.

As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for said five hundred shares in his favor."

The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the costs against the appellants Banking Corporation. So ordered.

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Johns, and Romualdez, JJ., concur.

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