Ang vs. Spouses Ang

A derivative suit must be dismissed where the complaint fails to show damage to the corporation, fails to allege exhaustion of all available intra-corporate remedies with particularity, and constitutes a nuisance or harassment suit under Section 1(b) of the Interim Rules of Procedure for Intra-Corporate Controversies. The real party in interest in a derivative suit is the corporation, and the stockholder is a mere nominal party; where the aggrieved party is a creditor rather than the corporation, the action is not a derivative suit.

Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered family corporation owned by the Ang family, with Juanito Ang and Roberto Ang as siblings and equal largest stockholders at 8,750 shares each. Juanito served as Vice President while Roberto was President; their respective spouses, Anecita and Rachel, served as Treasurer and Corporate Secretary. The dispute arose within the context of the Interim Rules of Procedure for Intra-Corporate Controversies, which took effect on 1 April 2001 and govern derivative suits filed by stockholders on behalf of corporations.

Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the Ang family, with Juanito Ang and Roberto Ang as siblings and equal largest stockholders at 8,750 shares each. Juanito served as Vice President while Roberto was President; their respective spouses, Anecita and Rachel, served as Treasurer and Corporate Secretary. On 31 July 1995, Nancy Ang, the sister of Juanito and Roberto, and her husband Theodore Ang, agreed to extend a loan to settle the obligations of SMBI and other corporations owned by the Ang family, specifically Bayshore Aqua Culture Corporation, Oceanside Marine Resources and JR Aqua Venture. Nancy and Theodore issued a check in the amount of $1,000,000.00 payable to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang." There was no written loan agreement in view of the close relationship between the parties. Part of the loan was also used to purchase real properties for SMBI, for Juanito, and for Roberto.

On 22 December 2005, SMBI increased its authorized capital stock to ₱10,000,000.00, with the Certificate of Increase of Capital Stock signed by Juanito, Anecita, Roberto, and Rachel as directors. Juanito claimed, however, that the increase was done in contravention of the Corporation Code, alleging that when he and Anecita left for Canada, the spouses Roberto and Rachel took over the active management of SMBI and manipulated the stock sharings between themselves at 50-50 without a valid board meeting. Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On 24 November 2008, Nancy and Theodore, through their counsel, sent a demand letter to both sets of spouses for payment of the principal amounting to $1,000,000.00 plus interest at ten percent per annum, for a total of $2,585,577.37. Roberto and Rachel responded on 5 January 2009, refusing to comply because they had not personally contracted a loan from Nancy and Theodore.

On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and Settlement Agreement and an Extra-Judicial Real Estate Mortgage, admitting that they, together with Roberto and Rachel, obtained the loan from Nancy and Theodore for $1,000,000.00 on 31 July 1995, and securing the loan with various properties including their fifty percent share over a parcel of land registered in the name of SMBI. A certain Kenneth C. Locsin signed on behalf of Nancy and Theodore under a Special Power of Attorney which was not attached to the instruments nor included in the records. Thereafter, on 29 January 2009, Juanito filed a "Stockholder Derivative Suit with prayer for an ex-parte Writ of Attachment/Receivership" before the RTC Bacolod, alleging that the intentional and malicious refusal of the spouses Roberto and Rachel to settle their 50% share of the total obligation would affect the financial viability of SMBI, and that he had been illegally excluded from management through force, violence and intimidation. The Complaint sought the issuance of an ex-parte writ of attachment and/or garnishment, placement of SMBI under receivership, enforcement of Juanito's right to participate in management, and an order compelling the spouses to render an accounting, pay fifty percent of the loan amounting to ₱60,114,673.62, and pay attorney's fees.

On the same date, the RTC Bacolod issued an Order granting the application for an ex-parte writ of attachment and break open order. Roberto and Rachel moved to quash the writ, claiming violation of their right to due process, alleging that the clerk of court had clandestinely, hurriedly and surreptitiously prepared the writ of attachment despite assurances that no writ would be issued. In her Verified Answer Ad Cautelam filed on 10 February 2009, Rachel prayed for dismissal of the Complaint, arguing that it was not a bona fide derivative suit but actually a collection suit since the real party in interest was not SMBI but Nancy and Theodore, and that the Complaint failed to allege that Juanito exerted all reasonable efforts to exhaust all intra-corporate remedies. During cross-examination, Juanito admitted that there was no prior demand for accounting or liquidation, no written objection to the increase of capital stock, and that the loan was extended by persons who are not stockholders of SMBI. Rachel then filed a Motion for Preliminary Hearing on Affirmative Defenses on 27 November 2009, arguing that in view of Juanito's admissions, the Complaint should be dismissed pursuant to Section 1 of the Interim Rules. Juanito opposed, citing the Court's ruling in Hi-Yield Realty, Inc. vs. Court of Appeals, arguing that the requirement for exhaustion of intra-corporate remedies is no longer needed when the corporation itself is under the complete control of the persons against whom the suit is filed. Rachel replied that Juanito's reliance on Hi-Yield was misplaced since Juanito was one of the biggest stockholders, a member of the Board of Directors, and even the vice-president of SMBI, and the evidence showed that he and his wife participated in the disbursement of SMBI's funds.

• Nature of the Action as Derivative Suit: Petitioner argued that based on the allegations of the complaint, the nature of the case is one of a derivative suit, and the Court of Appeals erred in ordering the dismissal of the Complaint on the ground that the case is not a derivative suit.
• Consideration of Evidence Aliunde: Petitioner argued that the Court of Appeals seriously erred in considering evidence aliunde, that is, other than the four corners of the complaint, in determining the nature of the complaint, in violation of the doctrine that jurisdiction is determined by law and the allegations of the complaint alone.
• Jurisdiction as Ordinary Civil Action: Petitioner argued that granting arguendo that the complaint is not a derivative suit but only an ordinary civil action, the Court of Appeals gravely erred in dismissing the petition entirely, when the Regional Trial Court has jurisdiction also over the case as an ordinary civil action and can just proceed to hear the same as such.
• Exhaustion of Intra-Corporate Remedies: Petitioner argued, citing Hi-Yield Realty, Inc. vs. Court of Appeals, that the requirement for exhaustion of intra-corporate remedies is no longer needed when the corporation itself is under the complete control of the persons against whom the suit is filed.
• Fraudulent Acts: Petitioner alleged that he and Anecita were deceived into signing checks to pay off bogus loans purportedly extended by Rachel's relatives in favor of SMBI, and that some of the checks were payable to cash and allegedly deposited in Rachel's personal account.

• Nature of the Action as Collection Suit: Respondent Rachel argued that the Complaint, although labelled as a derivative suit, is actually a collection suit since the real party in interest is not SMBI but Nancy and Theodore, as the cause of action pertains to the right of the spouses Theodore and Nancy Ang, as creditors, to collect the amount allegedly owed to them.
• Failure to Exhaust Intra-Corporate Remedies: Respondent argued that the Complaint failed to allege that Juanito exerted all reasonable efforts to exhaust all intra-corporate remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation to obtain the relief he desires, as required by the Interim Rules.
• Misplaced Reliance on Hi-Yield: Respondent argued that Juanito's reliance on the Hi-Yield case is misplaced because in that case the complaining stockholder was a minority stockholder, whereas Juanito is one of the biggest stockholders of SMBI, a member of its Board of Directors, and even the vice-president thereof, and the evidence showed that he and his wife participate in the disbursement of SMBI's funds.
• Violation of Due Process: Respondents claimed that the writ of attachment and break open order were issued in violation of their right to due process, alleging that the clerk of court clandestinely, hurriedly and surreptitiously prepared the writ of attachment despite assurances that no writ would be issued.

• Nature of the Action: Whether based on the allegations of the complaint, the nature of the case is one of a derivative suit or not.
• Consideration of Evidence Aliunde: Whether the Court of Appeals seriously erred in considering evidence aliunde, other than the four corners of the complaint, in determining the nature of the complaint, in violation of the doctrine that jurisdiction is determined by law and allegations of the complaint alone.
• Jurisdiction as Ordinary Civil Action: Whether, granting arguendo that the complaint is not a derivative suit but only an ordinary civil action, the Court of Appeals gravely erred in dismissing the petition entirely, when the Regional Trial Court has jurisdiction also over the case as an ordinary civil action and can just proceed to hear the same as such.

• Nature of the Action: No. The Complaint is not a derivative suit. A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporation's directors, officers or other insiders, and the real party in interest is the corporation, while the stockholder is a mere nominal party. The Complaint failed to show how the acts of Rachel and Roberto resulted in any detriment to SMBI, and the loan was a personal debt of the Ang brothers and their spouses, not a corporate obligation.
• Consideration of Evidence Aliunde: No reversible error. The Court upheld the CA-Cebu's finding that the Complaint is not a derivative suit, and the dismissal was proper under Section 1(b) of the Interim Rules as a nuisance or harassment suit.
• Jurisdiction as Ordinary Civil Action: No. The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a nuisance or harassment suit under Section 1(b) of the Interim Rules, which provides that in case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the case.

• Nature of the Action: The Court applied Section 1, Rule 8 of the Interim Rules, which imposes the following requirements for derivative suits: (1) the person filing the suit must be a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) he must have exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) no appraisal rights are available for the act or acts complained of; and (4) the suit is not a nuisance or harassment suit. The Complaint failed to show how the acts of Rachel and Roberto resulted in any detriment to SMBI. The check was issued to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang" and not SMBI. The proceeds of the loan were used for payment of the obligations of the other corporations owned by the Angs as well as the purchase of real properties for the Ang brothers. SMBI was never a party to the Settlement Agreement or the Mortgage, and was never named as a co-debtor or guarantor of the loan. Both instruments were executed by Juanito and Anecita in their personal capacity, and not in their capacity as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the obligation. The Court also noted that Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets, and cannot mortgage the same except in their capacity as directors or officers of SMBI. The Court further found insufficient evidence to suggest that Roberto and Rachel fraudulently and wrongfully removed Nancy as a stockholder, since Juanito and Anecita already knew as early as 2005 that Nancy was not listed as a stockholder, yet took four years to question her exclusion, which negates their allegation of fraud.
• Exhaustion of Intra-Corporate Remedies: The Complaint failed to allege that all available corporate remedies under the articles of incorporation, by-laws, laws or rules governing the corporation were exhausted, as required under the Interim Rules. No written demand was ever made for the board of directors to address Juanito's concerns. The Court, citing Yu vs. Yukayguan, held that a family corporation is not exempt from complying with the clear requirements and formalities of the rules for filing a derivative suit. Furthermore, there was no allegation that there was an attempt to remove Rachel or Roberto as director or officer of SMBI, as permitted under the Corporation Code and the by-laws of the corporation.
• Nuisance or Harassment Suit: The Court applied Section 1(b) of the Interim Rules, which prohibits nuisance and harassment suits and provides that in determining whether a suit is a nuisance or harassment suit, the court shall consider, among others: (1) the extent of the shareholding or interest of the initiating stockholder or member; (2) subject matter of the suit; (3) legal and factual basis of the complaint; (4) availability of appraisal rights for the act or acts complained of; and (5) prejudice or damage to the corporation, partnership, or association in relation to the relief sought. The Court found that Juanito, apart from being Vice President, owns the highest number of shares, equal to those owned by Roberto, and there appears to be no damage to SMBI if the loan extended by Nancy and Theodore remains unpaid. The CA-Cebu correctly concluded that a plain reading of the allegations in the Complaint would readily show that the case was mainly filed to collect a debt allegedly extended by the spouses Theodore and Nancy Ang to SMBI, and the aggrieved party is not SMBI but the spouses Theodore and Nancy Ang, who are not even stockholders.

• Derivative Suit — A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporation's directors, officers or other insiders. The real party in interest is the corporation, while the stockholder is a mere nominal party. The basis of a stockholder's suit is always one in equity, but it cannot prosper without first complying with the legal requisites for its institution. The Court applied this doctrine in finding that the Complaint was not a derivative suit because the aggrieved party was the creditor spouses Theodore and Nancy Ang, not SMBI.
• Requisites for Derivative Suits under Section 1, Rule 8 of the Interim Rules — The following requirements must be satisfied: (1) the person filing the suit must be a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) he must have exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) no appraisal rights are available for the act or acts complained of; and (4) the suit is not a nuisance or harassment suit. The Court applied these requisites in finding that the Complaint failed to allege exhaustion of intra-corporate remedies and failed to show damage to the corporation.
• Nuisance or Harassment Suits under Section 1(b) of the Interim Rules — Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others: (1) the extent of the shareholding or interest of the initiating stockholder or member; (2) subject matter of the suit; (3) legal and factual basis of the complaint; (4) availability of appraisal rights for the act or acts complained of; and (5) prejudice or damage to the corporation, partnership, or association in relation to the relief sought. In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the case. The Court applied this doctrine in affirming the dismissal of the Complaint.
• Family Corporation Not Exempt from Interim Rules — A family corporation is not exempt from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules which state that there is a distinction between family corporations and other types of corporations in the institution by a stockholder of a derivative suit. The Court applied this doctrine in rejecting Juanito's argument that exhaustion of intra-corporate remedies was unnecessary.

• "A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporation's directors, officers or other insiders." — This passage defines the nature of a derivative suit and establishes that the real party in interest is the corporation, which is the controlling principle for determining whether the Complaint qualified as a derivative suit.
• "The Complaint failed to show how the acts of Rachel and Roberto resulted in any detriment to SMBI. The CA-Cebu correctly concluded that the loan was not a corporate obligation, but a personal debt of the Ang brothers and their spouses." — This passage states the core ratio decidendi for finding that the Complaint was not a derivative suit, as the loan was personal and not a corporate obligation.
• "A family corporation is not exempt from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules which state that there is a distinction between family corporations and other types of corporations in the institution by a stockholder of a derivative suit." — This passage articulates the rule that family corporations must comply with the Interim Rules' requirements for derivative suits, rejecting the argument that control by the adverse parties excuses non-compliance.
• "Records show that Juanito, apart from being Vice President, owns the highest number of shares, equal to those owned by Roberto. Also, as explained earlier, there appears to be no damage to SMBI if the loan extended by Nancy and Theodore remains unpaid." — This passage supports the finding that the suit was a nuisance or harassment suit under Section 1(b) of the Interim Rules, considering the extent of shareholding and the absence of prejudice or damage to the corporation.

• Yu vs. Yukayguan, G.R. No. 177549, 18 June 2009, 589 SCRA 588 — Controlling precedent cited for the proposition that a stockholder's right to institute a derivative suit is impliedly recognized when the Corporation Code makes corporate directors or officers liable for damages suffered by the corporation, and that the suit is an action for specific performance of an obligation owed by the corporation to the stockholders. Also cited for the rule that a family corporation is not exempt from complying with the requirements of the Interim Rules.
• Hi-Yield Realty, Inc. vs. Court of Appeals, G.R. No. 168863, 23 June 2009, 590 SCRA 548 — Cited by petitioner for the proposition that the requirement for exhaustion of intra-corporate remedies is no longer needed when the corporation itself is under the complete control of the persons against whom the suit is filed; the Court implicitly distinguished this case in affirming the dismissal.
• Bitong vs. Court of Appeals, 354 Phil. 516 (1998) — Cited within Yu vs. Yukayguan for the proposition that stockholders may bring an action in the name of the corporation to hold directors and officers accountable since the directors or officers will never be willing to sue themselves.

• Section 1, Rule 8, Interim Rules of Procedure for Intra-Corporate Controversies — Imposes the requirements for derivative suits, including that the filing stockholder must have exerted all reasonable efforts and alleged the same with particularity in the complaint to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation. The Court applied this provision in finding that the Complaint failed to allege exhaustion of intra-corporate remedies.
• Section 1(b), Interim Rules of Procedure for Intra-Corporate Controversies — Prohibits nuisance and harassment suits and enumerates the factors the court shall consider in determining whether a suit is a nuisance or harassment suit, including the extent of shareholding, subject matter of the suit, legal and factual basis of the complaint, availability of appraisal rights, and prejudice or damage to the corporation. The Court applied this provision in affirming the dismissal of the Complaint.
• Section 23, Corporation Code — Provides that the corporate powers of all corporations shall be exercised by the board of directors or trustees. The Court cited this provision in explaining that directors or officers have the right to decide whether or not a corporation should sue.
• Section 36, Corporation Code — Provides that every corporation has the power and capacity to sue and be sued in its corporate name, and that corporate assets may be mortgaged by authorized directors or officers on behalf of the corporation as owner. The Court applied this provision in finding that Juanito and Anecita, as stockholders, are not co-owners of SMBI assets and cannot mortgage the same except in their capacity as directors or officers.
• Article 2085, Civil Code — Provides that for a mortgage to be valid, the mortgagor must be the absolute owner of the thing mortgaged. The Court applied this provision in finding that the mortgage over SMBI's property executed by Juanito and Anecita in their personal capacity cannot affect SMBI.

• Justice Arturo D. Brion
• Justice Mariano C. Del Castillo
• Justice Jose Portugal Perez
• Justice Estela M. Perlas-Bernabe