Chase vs. Buencamino, Sr. et al.

A minority stockholder’s derivative suit may result in a monetary judgment requiring a controlling director to account to the corporation for profits obtained through fraud and breach of trust, but dissolution of the corporation and removal of a majority stockholder from management are drastic remedies to be granted only when necessity is clear; they are not warranted where the corporation is a going concern and the suit is for the corporation’s benefit.

American Machinery and Parts Manufacturing, Inc. (Amparts) was a domestic corporation in which Dr. Victor Buencamino, Sr., William Cranker, and Elton W. Chase each held a one-third interest, with Buencamino serving as director, president, and general manager, Cranker as manager, and Chase as production manager and director. After Cranker sold his interest to Buencamino, Chase remained the sole minority stockholder while the Buencamino family controlled the majority. The case is a derivative suit brought by Chase for the benefit of Amparts against the Buencaminos and Francia, seeking removal from management, receivership, and dissolution.

Dr. Victor Buencamino, Sr., a Filipino, and William Cranker, an American, were business associates before 1954 and owned two firms, the Philippine American Machinery and Equipment Corporation (PAMEC), organized in 1947, and BUCRA, which stood for Buencamino and Cranker. Elton W. Chase owned Production Manufacturing Company of Portland, Oregon, USA, a corporation operating a machine shop and heat-treating plant for tractor parts. In 1954, the Highway Commission of the State of Oregon notified Chase that his factory would be in the path of a proposed highway, advised him to sell or face expropriation, and warned him to remove his plant within a year. Chase’s distributor Craig Carrol told him of a Dr. Buencamino of Manila interested in establishing a manufacturing plant in the Philippines; Carrol contacted Buencamino, who told him to contact his associate Cranker in the United States.

Negotiations between Chase and Cranker and Buencamino, in Manila and the United States, culminated in an agreement for the purchase of Chase’s factory and the establishment of a new Manila factory to be called Amparts. Under the agreement, Chase was to be paid $100,000 and given a one-third interest in Amparts, while Buencamino and Cranker would own the other two-thirds, one-third each; in exchange, Chase would transfer his tractor plant, ship his machineries to Manila at his expense, assume the costs of dismantling, preserving, and crating them for shipment, install them at the Amparts plant with the aid of five technicians, and serve as production manager. Amparts was formally organized on July 5, 1955 with an authorized capital stock of P4,000,000 divided into 4,000 shares with a par value of P1,000 each. The original subscription was P1,800,000, with Buencamino, Cranker, and Chase subscribing P600,000 each; because five incorporators were necessary, Buencamino and Cranker took in their respective wives. Chase had already shipped and installed his machineries at the Amparts plant in Pasig, Rizal. Amparts began operations with Dr. Buencamino as President, Cranker as Manager, and Chase as Production Manager. For some time the three maintained harmonious relations, but distrust later set in, and Chase tendered his resignation as Production Manager by letter dated March 28, 1957, which Buencamino and Cranker accepted by letter dated July 8, 1957.

On April 21, 1958, Chase, through his lawyer, sent a letter of demand to Buencamino and Cranker for breach of contract, unpaid salaries and expenses, and damages amounting to approximately P500,000 at the official rate of exchange, warning that suit would be filed unless the claims were satisfied within five days. Buencamino answered the next day that the claim was a surprise and that any claim Chase might have should be directed to Amparts, of which Chase himself was a one-third owner, and that the letter was misdirected. On May 23, 1958, Chase filed an action against Cranker in the Superior Court of Los Angeles seeking $150,000 as the alleged balance of the purchase price of his plant; that case died because Cranker left and was never reached by process. In August 1958, Cranker sold all his interest in Amparts to Dr. Buencamino. On August 20, 1960, Chase filed Civil Case No. 49346 before the Court of First Instance of Manila against Dr. Victor Buencamino, Sr., Victor Buencamino, Jr., Julio B. Francia, Dolores A. Buencamino, and the Cranker spouses, alleging various acts of fraud committed by Buencamino and Cranker: (a) Buencamino obtained stock partly without paying for it and partly with proceeds of blackmarket sales of Amparts dollars; (b) he purchased materials from Bertoni and Cotti of Italy for Amparts and inflated the invoice price from $122,250 to $387,933.36, sending the excess dollars abroad and selling them in the blackmarket for private gain; (c) he purchased land from the Province of Rizal for Amparts and resold part of it to himself for private gain; (d) he and Cranker bought a surplus building in Guam for $60,000 C.I.F. and sold it to Amparts for $187,500 for private gain; (e) he permitted third parties to use the Amparts dock at the Pasig River for his private gain; (f) he collected rentals for apartments he constructed even though they were no longer used by Amparts technicians; (g) he permitted the sale abroad of Amparts manufactured tractor parts at depressed prices; (h) he collected a mark-up interest on moneys borrowed from banks and advanced to Amparts; and (i) the Board Resolutions of May 13, 1960, which increased compensation of Buencamino’s relatives, gave him an increased mark-up on his advances, authorized his and his wife’s trip abroad, and authorized conversion of his credit for unpaid interest into Amparts stocks, were void. Defendants counterclaimed that Chase sold machineries to Amparts through Overseas, part of which, consisting of 24 pieces worth P264,000, were junk; that Chase maliciously spread false rumors against Amparts, induced its employees to leave, and engaged in competition with Amparts; that Chase spread false rumors against the integrity of defendants to embarrass and humiliate them and injure their reputation; that Chase took into the Philippines, through the shipment of his factory, his own personal effects, machineries, and materials, with freight expenses reaching P6,676.60; and that Chase should pay attorney’s fees, for all of which they claimed a monetary judgment.

After trial, the lower court found that Buencamino and Cranker committed the frauds and profited from them. Through overpricing, Amparts remitted to the United States $312,500 for Chase’s factory, but only $80,000 was paid to Chase at that time; the excess dollars were blackmarketed, and the peso proceeds went to pay the stock subscriptions in Amparts of Buencamino and his wife and Cranker and his wife. Through overpricing, Amparts also remitted $207,000 for forwarding costs, technical services, and promotional expenses, but forwarding costs had already been paid from the $312,500 remittances, and Chase was never paid his salary for one year or his promotional expenses; of the $207,000, only $15,000 was expended to pay Chase the balance due on the purchase of his factory totaling $100,000, and the excess remittances were blackmarketed, with the peso proceeds totaling P434,000 deposited in Buencamino’s bank account at the Philippine Trust Company. Through overpricing, Amparts further remitted $387,933.66 for tractor parts and a track press imported from Bertoni and Cotti, but only $212,250 was paid to Bertoni and Cotti; of the excess remittance, $117,000 was blackmarketed, realizing P391,200, which was deposited in Buencamino’s personal bank accounts at the Philippine Trust Company and People’s Bank. The lower court also found a fraudulent issuance of P1,200,000 fully paid-up Amparts shares without payment, which benefited only Buencamino, Cranker, and their families; this involved Amparts’ borrowing for the initial payment on their subscriptions, the charging of interest, the application of P570,000 from blackmarket sales to their subscriptions, and the acknowledgment of an indebtedness to Overseas Investment Co., Ltd. of $287,500 for the purchase price of Chase’s factory, later assigned and converted into P330,000 worth of fully paid shares and a P245,000 credit to Buencamino. The lower court rejected defenses that Buencamino was not yet manager and that Chase was estopped by his letter, his California suit, or his auditor’s failure to discover the anomalies, and held Buencamino guilty of breach of a legal obligation under Articles 1455 and 1891 of the New Civil Code, with solidary liability under Article 2194 if the appropriation of profits had been done with Cranker’s cooperation. It computed Buencamino’s accountability to Amparts at P1,970,200.

On the counterclaims, the lower court found Chase had helped a competitor contrary to his position of trust as director of Amparts and had spread rumors against Amparts and its management, and imposed damages of P500. It rejected Buencamino’s claims that Chase should refund the value of 24 pieces of machinery or the freight charges of P6,676.60, finding that the machinery was not used because Buencamino and Cranker decided not to engage in that kind of business and that the freight matter had been settled in a memorandum annexed to the minutes of the November 27, 1956 board meeting. On the remedy, the lower court held that it could not change management to Chase, especially because Chase had helped a competitor during the litigation; it could not dissolve Amparts because the action was derivative for the benefit of Amparts and Amparts could not be benefited by its extinction; and it could not oust Dr. Buencamino because he was not only manager but also two-thirds owner, so ouster would disenfranchise the majority owner, and Amparts was already a going concern after Cranker left. The most equitable solution was a monetary judgment for Amparts. The lower court also issued precautionary orders: on May 12, 1962, it gave Chase free access to Amparts and its records and required management decisions to be made known to him, with the right to object and with disputed decisions not to be enforced pending court resolution; on August 27, 1962, it clarified that Chase had five days from receipt of a management decision to object or be deemed to have waived objection.

• Ouster from Management: Plaintiff-appellant Chase argued that the lower court erred in not ordering the ouster of defendants from the management of Amparts notwithstanding its finding that defendant Buencamino was guilty of breach of a legal obligation and its sentence that he pay back his frauds.
• Dissolution and Return of Investment: Chase argued that the lower court erred in not awarding at least the dissolution of Amparts and the consequent return of his investment and participation in the business notwithstanding its finding of fraud against defendants.
• Accounting and Damages: Chase argued that the lower court erred in condemning defendants Buencamino to pay back Amparts only the proceeds from black-market sales of Amparts dollars, and in not including excess remittances of dollars, interests on loans, and other bank charges Amparts paid to make those excess remittances, and in failing to order Buencamino to render an accounting of his management.
• Rescission of Pasig Land Resale: Chase argued that the lower court erred in not ordering the rescission and resolution of the resale of the Pasig land by defendants to themselves.
• Other Frauds and Overprice: Chase argued that the lower court erred in not requiring defendants to account for the illegal overprice of the Forkner Hanger parts and for the other frauds committed by them.
• Counterclaim Damages: Chase argued that the lower court erred in finding him guilty of the two counts on the counterclaims and in condemning him to pay P500 as damages.

• Consent and Participation: Defendants argued that the lower court erred in not holding that plaintiff Chase was a party to and/or consented to the alleged fraudulent acts committed by Cranker and Buencamino.
• Knowledge of Private Arrangements: Defendants argued that the lower court erred in not holding that they, particularly Dr. Buencamino, were unaware of the private arrangements between Chase and Cranker as to the sale of Chase’s plant.
• Estoppel: Defendants argued that the lower court erred in not holding that Chase was in estoppel.
• Proof of Fraud and Excess Price: Defendants argued that the lower court erred in ruling that Chase had proven the alleged fraudulent acts and in requiring Dr. Buencamino to pay the corporation the alleged excess price.
• Chase as Defrauder: Defendants argued that the lower court erred in not holding that it was Chase who defrauded Dr. Buencamino.
• Assignment of Credit: Defendants argued that the lower court erred in voiding the assignment of credit.
• Breach of Trust: Defendants argued that the lower court erred in holding that Dr. Buencamino was guilty of breach of trust.
• Dollar Sales Liability: Defendants argued that the lower court erred in absolving Chase from responsibility for the alleged sale of dollars and in rendering judgment against Dr. Buencamino for the alleged proceeds of dollar sales; in holding Dr. Buencamino liable for the entire amount including Cranker’s share, assuming Cranker and Dr. Buencamino profited; and in charging Dr. Buencamino and Cranker twice for the same amounts.
• Bertoni and Cotti Profits: Defendants argued that the lower court erred in requiring Cranker and Dr. Buencamino to pay for the alleged profits on the Bertoni and Cotti deal.
• Lease Term: Defendants argued that the lower court erred in holding that the term of the lease of the building constructed by Dr. Buencamino was only seven years.
• Interest for Payment of Stock: Defendants argued that the lower court erred in ruling that Amparts was charged with interest for payment of stock.
• Counterclaims: Defendants argued that the lower court erred in not rendering judgment against Chase and in favor of defendants on the first, second, fourth, and fifth causes of action of the counterclaim, in not rendering judgment against Chase in favor of Amparts on the second cause of action, and in requiring Chase to pay only P500 on the third cause of action.

• Fraud and Breach of Trust: Whether Dr. Buencamino was guilty of fraud and/or breach of a legal obligation as would entitle plaintiff not only to a money judgment but also to dissolution of Amparts and/or removal of defendants Buencaminos from management.
• Dissolution and Removal from Management: Whether the finding of fraud and breach of trust justified the dissolution of Amparts and/or the removal of defendants Buencaminos from management.
• Counterclaims against Chase: Whether plaintiff Chase was himself guilty of fraud as would entitle defendants to recover on their counterclaims.
• Monetary Accountability and Accounting: Whether the lower court correctly held Dr. Buencamino liable to Amparts for P1,970,200 and related relief, and correctly rejected defendants’ challenges to the fraud findings and accounting.
• Other Fraud Allegations: Whether the lower court erred in its treatment of the other alleged frauds, including the Pasig land resale, Forkner Hanger overprice, lease term, interest on stock payment, and other counterclaim causes of action.

• Fraud and Breach of Trust: Yes. The trial court’s findings that Buencamino and Cranker committed fraud and breach of trust were upheld; Buencamino was liable to account to Amparts for P1,970,200 under Articles 1455 and 1891 of the New Civil Code.
• Dissolution and Removal from Management: No. Dissolution and removal of a majority stockholder from management are drastic remedies to be resorted to only when necessity is clear; the derivative suit was for Amparts’ benefit, Amparts would not benefit from extinction, Buencamino owned two-thirds, and Amparts was a going concern.
• Counterclaims against Chase: Yes, in part. Chase was held liable for P500 damages for helping a competitor and spreading rumors; the other counterclaim charges were dismissed or not sustained.
• Monetary Accountability and Accounting: Yes. The award of P1,970,200 with legal interest, the prohibition on collecting interest on the P300,000 subscription payment, the refund of interest already paid, and the lease termination after one year from finality were affirmed.
• Other Fraud Allegations: No. The lower court’s rulings on the Pasig land resale, hangar parts, docks, rentals, depressed-price sales, board resolutions, and other counterclaim causes of action were affirmed; the appealed decision was in accordance with law and evidence.

• Fraud and Breach of Trust: The Supreme Court began from the settled rule that conclusions and findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence and observe the demeanor of witnesses. After thoroughly reviewing the voluminous record, it was satisfied that the lower court had not overlooked factors of substance and value that might affect the result. The trial court’s findings of overpricing and blackmarketing in the Chase factory remittance, the forwarding and promotional expense remittance, and the Bertoni and Cotti transaction were corroborated by the testimony of Buencamino’s accountant Maximo Penas, bank accounts, letters of Cranker to the Bank of America bearing Buencamino’s initials, remittance receipts, and Amparts’ own books. The fraudulent issuance of P1,200,000 fully paid shares without payment, the use of P570,000 from blackmarket sales for subscriptions, and the conversion of the Overseas Investment credit into P330,000 fully paid shares and a P245,000 credit to Buencamino were likewise established. Buencamino’s defenses that he was not yet manager and that Chase was estopped were rejected; his long relationship with Cranker, his position as president and director, and his knowing benefit from the transactions made him liable. The lower court applied Articles 1455 and 1891 of the New Civil Code, and the total accountability was fixed at P1,970,200. The Supreme Court upheld these findings and conclusions.
• Dissolution and Removal from Management: The trial court found Chase guilty on two counterclaim counts, but those acts were performed during the litigation; when Chase came to court on August 20, 1960, he was an innocent party and Amparts was the victim of fraud. Nevertheless, management could not be changed to Chase because he had helped an Amparts competitor pendente lite. Dissolution could not be granted because the action was derivative for the benefit of Amparts, and Amparts could not be benefited by its extinction. Ouster of Dr. Buencamino was also improper: he was not only manager but two-thirds owner of Amparts, and ousting him would amount to disenfranchising the majority owner; Amparts was already picking up and was a going concern after Cranker left its direction to him. The most equitable and just solution was to limit the decision to a monetary judgment for the benefit of Amparts. The Supreme Court agreed that removal of a stockholder, especially a majority stockholder, from management and/or dissolution of a corporation in a minority stockholder’s suit is a drastic measure, to be resorted to only when necessity is clear, which was not the situation.
• Counterclaims against Chase: The lower court found it proved on the counterclaims that Chase had helped a competitor contrary to his position of trust as director of Amparts and had spread rumors against Amparts and its management. For these acts, it imposed damages of P500 in the absence of better proof. It rejected Buencamino’s claims that Chase should refund the value of 24 pieces of machinery or the freight charges of P6,676.60, because the machinery was not used due to Buencamino and Cranker’s decision not to engage in that business, and the freight matter had been settled in the November 27, 1956 board meeting memorandum. The Supreme Court affirmed.
• Monetary Accountability and Accounting: The Supreme Court upheld the lower court’s computation of P1,970,200, consisting of P570,000 from the sale of $285,000 on the blackmarket, P330,000 used in paying for subscription, P245,000 as alleged loans to Buencamino by Amparts, P434,000 from the sale of $140,000 on the blackmarket, and P391,200 from the sale of $117,000 on the blackmarket. It also affirmed the prohibition on Buencamino collecting interest on the P300,000 he paid on July 15, 1955 on the initial subscription and the refund of interest already paid with legal interest from the filing of the complaint. The lease on his apartment was declared terminated after one year from finality. The P500 damages against Chase were affirmed with legal interest from the filing of the counterclaim. Other charges and countercharges were dismissed, and no costs were imposed.
• Other Fraud Allegations: The trial court found nothing wrong with the resale of the Pasig land: Buencamino made no profit and Amparts was not prejudiced. The surplus hangar parts bought by PAMEC for P60,000 and sold to Amparts for P187,500 were found to be at a reasonable price, and the sale was approved by the board, including Chase. The use of Amparts’ docks by PAMEC and third parties was found not prejudicial because PAMEC did not charge Amparts for certain services and could charge for its crane and personnel. The sale of tractor parts at depressed prices was not proven to have enabled Buencamino to sell dollars in the blackmarket. The matters covered by the May 13, 1960 board resolutions—12% interest on Buencamino’s loans, increased salaries, travel expenses, and conversion of P100,000 unpaid interest into shares—were found not wrong. The Supreme Court affirmed the appealed decision as in accordance with law and evidence.

• Derivative Suit — A derivative suit is one filed by a minority stockholder on behalf of and for the benefit of the corporation. In this case, Chase sued as a minority stockholder for the benefit of Amparts. The Court held that because the action was derivative and for Amparts’ benefit, dissolution of Amparts was inappropriate: the corporation could not be benefited by its own extinction.
• Breach of Trust and Accounting by Corporate Officers — A director, president, and general manager who profits from corporate transactions through fraud or breach of a legal obligation must account to the corporation for those profits. The trial court, as upheld by the Supreme Court, applied Articles 1455 and 1891 of the New Civil Code and ordered Dr. Buencamino to pay Amparts P1,970,200.
• Trial Court Findings of Fact on Appeal — Conclusions and findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence and observe the demeanor of witnesses. The Supreme Court applied this rule in upholding the trial court’s findings of fraud and breach of trust.
• Dissolution and Removal of Corporate Officers as Drastic Remedies — The removal of a stockholder, especially a majority stockholder, from the management of a corporation and/or the dissolution of a corporation in a suit filed by a minority stockholder is a drastic measure. It should be resorted to only when necessity is clear. The Court found no such clear necessity because Amparts was a going concern, Buencamino owned two-thirds, and the suit was for Amparts’ benefit.
• Solidary Liability for Quasi-Delict — The trial court cited Article 2194 of the New Civil Code, stating that if the appropriation of profits was a quasi-delict done with Cranker’s cooperation, the liability would be solidary. The Supreme Court affirmed the monetary judgment without disturbing this basis.
• Estoppel in Derivative Suits — The trial court, as upheld by the Supreme Court, held that because Chase filed the case not for his personal benefit but for the benefit of Amparts, an estoppel against Chase would be out of place; to be valid as a defense, the estoppel must be against Amparts itself.

• "The removal of a stockholder (in this case a majority stockholder) from the management of the corporation and/or the dissolution of a corporation in a suit filed by a minority stockholder is a drastic measure. It should be resorted to only when the necessity is clear which is not the situation in the case at bar." — This states the ratio for denying dissolution and removal from management, limiting the remedy to a monetary judgment.
• "In this jurisdiction, it is a "fundamental and settled rule that conclusions and findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence, as well as to observe the demeanor of the witnesses while testifying in the case."" — This is the standard of review that underpinned the Supreme Court’s affirmance of the trial court’s factual findings.
• "We have reviewed the evidence on record thoroughly and We are satisfied that the lower court has not overlooked factors of substance and value which if considered, might affect the result of the case. We therefore uphold the following findings and conclusions of the lower court—" — This passage announces the Court’s independent review and its decision to uphold the lower court’s findings.
• "the Court therefore having in mind all these finds that the solution most equitable and just would be to limit its decision to imposing a monetary judgment upon the guilty parties for the benefit of Amparts." — This passage, quoted by the majority from the trial court, explains why the remedy was confined to a monetary judgment rather than dissolution or ouster.

• People vs. Grefiel, 125 SCRA 102 — Cited for the rule that findings of fact of the trial court are entitled to great weight on appeal and should not be disturbed absent strong and cogent reasons.
• People vs. Fernandez, 124 SCRA 248 — Cited for the same standard of review of trial court factual findings.
• Olango vs. Court of First Instance of Misamis Oriental, 121 SCRA 338 — Cited for the same standard.
• Chase vs. CFI-Manila, 18 SCRA 602 — Cited in the majority opinion in connection with the lower court’s precautionary measures protecting Chase’s rights and interests in Amparts.
• Chase vs. CFI of Manila, 124 Phil. 1128 — Cited in the concurring opinion regarding the trial court’s orders on receivership and Chase’s veto power.

• Article 1455, New Civil Code — Cited by the trial court, as upheld by the Supreme Court, as part of the basis for requiring Dr. Buencamino to surrender his gains from the fraudulent transactions.
• Article 1891, New Civil Code — Cited with Article 1455 under the broad principle of agency and trust to require Buencamino to account for profits obtained through breach of legal obligation.
• Article 2194, New Civil Code — Cited by the trial court for the proposition that if the appropriation of profits was a quasi-delict committed with Cranker’s cooperation, the liability would be solidary.

Makasiar, Abad Santos, and Escolin, JJ., concur. Concepcion, Jr., J., is on leave. Aquino, J., filed a separate concurring opinion, stating that he concurred in Justice Cuevas’ opinion, that Judge Gatmaitan’s decision was supported by law and evidence, and that the appeals should not be sustained; he also recited the trial court’s award of P1,970,200, the interest and refund orders, and the precautionary measures on Chase’s access and veto power.