Balinghasay vs. Castillo

A contract between a corporation and its directors is voidable under Section 32 of the Corporation Code when the presence of the interested directors was necessary to constitute a quorum and their votes were necessary for approval, unless ratified by the vote of stockholders representing at least two-thirds of the outstanding capital stock with full disclosure; the business judgment rule does not protect directors who act in bad faith or with gross negligence in acquiring an interest adverse to the corporation.

Medical Center Parañaque, Inc. (MCPI) is a domestic corporation operating a hospital. In 1997, after concessions for auxiliary medical services expired, the Board of Directors awarded the operation of the ultrasound unit to a group of investors composed largely of Obstetrics-Gynecology doctors, nine of whom were also members of the Board of Directors. The group purchased ultrasound equipment worth ₱850,000.00 and operated the unit under an informal arrangement that was later formalized through a Memorandum of Agreement (MOA) in 1999, dividing gross income between the investors and the corporation.

• Medical Center Parañaque, Inc. (MCPI) is a domestic corporation organized in 1977 operating a hospital in Parañaque City.
• In 1997, after concessions for auxiliary services expired, the Board decided to provide laboratory, physical therapy, and pulmonary services directly, but awarded the ultrasound unit operation to a group of investors composed mostly of Obstetrics-Gynecology doctors.
• Nine of the petitioners were holders of Class A shares and Board Directors of MCPI, while other petitioners were Class B shareholders; all were part of the ultrasound investor group.
• The investors purchased a Hitachi ultrasound equipment worth ₱850,000.00 and began operations without a written contract initially.
• In the August 14, 1998 Board meeting, 12 of 13 directors were present, with 7 being ultrasound investors; the Board made a counter-offer regarding the operation but did not approve a formal agreement.
• In the February 5, 1999 Board meeting, 12 directors attended, 8 of whom were ultrasound investors; the Board approved and signed a Memorandum of Agreement (MOA) dividing gross income (60% to investors, 40% to MCPI, later changing to 55%-45%).
• Minority stockholders Castillo, Oscar, Flores, Navarro, and Templo, each holding 25 Class B shares, challenged the MOA through letters in 1999 and 2000, claiming it was prejudicial to MCPI.
• On March 22, 2001, respondents filed a derivative suit alleging violation of Section 31 of the Corporation Code.
• MCPI's financial statements for 1996-2000 showed available cash and cash equivalents of over ₱5 million each year, sufficient to purchase the ultrasound equipment.
• The MOA was submitted for ratification to stockholders in annual meetings from 2000 to 2003 but failed to obtain the required two-thirds vote.

• The MOA was an informal agreement addressing an urgent hospital necessity, motivated by good faith, and necessary because MCPI lacked funds to purchase the equipment due to its intent to buy adjacent property.
• The circumstances surrounding the purchase (transvaginal probe requirements by the Philippine Board of Obstetrics and Gynecology) justified the directors' actions and showed absence of bad faith.
• The business judgment rule bars courts from substituting their judgment for that of the board acting in good faith and in the corporation's interest.
• The MOA was merely voidable under Section 32 and had been ratified by MCPI through acceptance of benefits and by stockholders in the February 11, 2000 annual meeting.
• The derivative suit should be dismissed for failure to implead MCPI initially as an indispensable party.
• Attorney's fees should not be awarded as the directors acted in good faith and profit was not their primary consideration.

• The petition raises factual issues not proper for Rule 45 review, as it requires re-evaluation of evidence regarding circumstances surrounding the purchase and urgent necessity.
• The antecedents and circumstances raised by petitioners were not introduced as evidence during trial and are therefore fatal to their cause.
• MCPI had sufficient cash reserves (₱5-8 million annually from 1996-1998) to purchase the equipment, negating the claim of financial inability and showing bad faith or gross negligence.
• There was no quorum in the February 5, 1999 meeting because the 8 interested directors could not be counted toward quorum under Section 32 of the Corporation Code.
• The MOA was not ratified by two-thirds of the outstanding capital stock as required by Section 32, and repeated attempts from 2000-2003 failed.
• The business judgment rule does not apply when directors acquire an interest adverse to the corporation or act in bad faith.
• Respondents continuously questioned the MOA's validity, negating any claim of estoppel or implied ratification.

• Procedural: Whether the petition for review raises questions of law proper for resolution under Rule 45, or questions of fact requiring evidence re-evaluation.
• Substantive Issues:
  • Whether the MOA was validly approved by the Board of Directors considering quorum requirements under Section 32 of the Corporation Code.
  • Whether the MOA was validly ratified by the stockholders.
  • Whether the business judgment rule applies to shield the directors from liability.
  • Whether the directors are liable for accounting profits and payment of attorney's fees.

• Procedural: The Supreme Court held that the petition raises factual issues involving examination of probative value of evidence and circumstances surrounding the MOA's execution, which are improper for Rule 45 review; however, the Court affirmed the CA decision as no compelling grounds existed to apply exceptions to the general rule.
• Substantive: The Court affirmed the invalidity of the MOA, holding that: (1) under Section 32 of the Corporation Code, the presence of interested directors was necessary to constitute quorum and their votes were necessary for approval, making the contract voidable; (2) no valid ratification occurred as the MOA failed to obtain two-thirds vote of outstanding capital stock despite repeated attempts from 2000-2003; (3) the business judgment rule does not apply where directors acted in bad faith or gross negligence, as evidenced by MCPI's sufficient cash reserves to purchase the equipment itself; (4) the directors who were ultrasound investors acquired an interest adverse to the corporation and must account as trustees for all profits under Section 31; (5) attorney's fees of ₱200,000.00 were properly awarded as the directors' unjustified acts compelled respondents to litigate; and (6) to prevent unjust enrichment, the ultrasound investors retain ownership of the equipment they purchased.

• Dealings of Directors (Section 32, Corporation Code) — A contract between a corporation and its directors is voidable unless: (a) the director's presence was not necessary for quorum; (b) the director's vote was not necessary for approval; (c) the contract is fair and reasonable; and (d) for officers, previous board authorization exists. If the first two conditions are absent, ratification requires two-thirds vote of outstanding capital stock with full disclosure. In this case, the Court found the first two conditions absent and no valid ratification occurred.
• Quorum in Meetings with Interested Directors — Interested directors who stand to benefit from a contract cannot be counted toward the quorum required for approving such contract. The Court held that without the 8 interested directors present at the February 5, 1999 meeting, the remaining 4 disinterested directors could not constitute a quorum of the 12-member board.
• Business Judgment Rule — Courts will not interfere with corporate business decisions made in good faith and in the honest exercise of business judgment. However, the rule does not protect directors who act in bad faith, with gross negligence, or who acquire an interest adverse to the corporation.
• Unjust Enrichment (Article 22, Civil Code) — No person shall enrich himself at the expense of another without just cause. Applied here to allow the ultrasound investors to retain ownership of the equipment they purchased despite the MOA's invalidity, preventing MCPI from unjustly benefiting from the investors' ₱850,000.00 expenditure.

• "Quorum is defined as that number of members of a body which, when legally assembled in their proper places, will enable the body to transact its proper business. Majority, when required to constitute a quorum, means the greater number than half or more than half of any total."
• "It is clear that under the 'business judgment rule', the courts are barred from intruding into the business judgments of the corporation, when the same are made in good faith."
• "The power of the court to award attorney's fees under Article 2208 of the Civil Code demands factual, legal, and equitable justification; its basis cannot be left to speculation or conjecture."
• "Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him."

• Century Iron Works, Inc. v. Banas, G.R. No. 184116, June 19, 2013 — Cited for the distinction between questions of law and questions of fact in Rule 45 petitions, and the exceptions allowing review of factual issues.
• New City Builders, Inc. v. NLRC, 499 Phil. 207 (2005) — Cited for the enumeration of exceptions to the rule that only questions of law may be raised in Rule 45 petitions.
• Benedicto v. Villaflores, 646 Phil. 733 (2010) — Cited for the principle that attorney's fees are the exception rather than the rule and require explicit justification in the decision.
• Flores v. Spouses Lindo, Jr., 664 Phil. 210 (2011) — Cited for the definition and application of the principle against unjust enrichment under Article 22 of the Civil Code.
• Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013 — Cited for the application of 6% interest rate on monetary awards from finality of decision until full satisfaction.

• Section 31, Corporation Code (B.P. Blg. 68) — Governs liability of directors who acquire an interest adverse to the corporation; provides that such directors shall be liable as trustees and must account for profits which otherwise would have accrued to the corporation.
• Section 32, Corporation Code (B.P. Blg. 68) — Governs dealings of directors with the corporation; establishes conditions for validity of contracts between directors and the corporation, including quorum and voting requirements and ratification procedures.
• Article 22, New Civil Code — Provides the principle against unjust enrichment, requiring return of anything acquired without just or legal ground at another's expense.
• Article 2208, Civil Code — Governs the award of attorney's fees and specifies instances where such may be awarded.
• Rule 45, Rules of Court — Governs petitions for review on certiorari, limiting review to questions of law except in exceptional circumstances.