De Erquiaga vs. Court of Appeals

The Court held that in a rescinded contract of sale, mutual restitution of the principal object and the purchase price should be simultaneous, but the restitution of their respective fruits (interest on the price and the fruits of the property) may be sequenced to avoid inequity. Specifically, the obligation of the seller to pay legal interest on the returned purchase price is conditioned upon, and must await, the buyer's rendering and court approval of an accounting of the fruits he received from the property during his possession.

Santiago de Erquiaga agreed to sell his 3,100 shares (100% ownership) in Erquiaga Development Corporation, which owned Hacienda San Jose, to Jose L. Reynoso for P900,000, later increased to P971,371.70 due to delayed payments. After Reynoso paid P410,000, Erquiaga transferred the shares and possession of the hacienda. Reynoso failed to pay the balance, prompting Erquiaga to rescind the sale and file a complaint for rescission in the Court of First Instance (CFI) of Sorsogon in 1970.

Santiago de Erquiaga sold his 3,100 shares in Erquiaga Development Corporation (owner of Hacienda San Jose) to Jose L. Reynoso for a total price of P971,371.70. After Reynoso paid P410,000, he received the shares and possession of the hacienda. He failed to pay the balance. Erquiaga rescinded the contract and sued for rescission. The CFI of Sorsogon rendered a final judgment in 1972 ordering rescission and mutual restitution: Reynoso to return the shares and account for fruits; Erquiaga to return the P410,000 with legal interest. During protracted execution proceedings, Reynoso died and was substituted by his heirs. The CFI issued an order in 1975 directing the heirs to deliver the remaining 1,600 shares and authorizing Erquiaga to vote all shares and call a stockholders' meeting. The heirs challenged this order via certiorari to the Court of Appeals.

The Reynoso heirs (petitioners) argued that the Court of Appeals erred in ordering the immediate payment of the P410,000 plus interest without first awaiting the accounting of the fruits from Hacienda San Jose, as this violated the law of the case and Article 1385 of the Civil Code. They contended the CA erroneously applied the Corporation Law by not recognizing their rights as shareholders pending the accounting. They also challenged the entry of judgment by the CA as improper.

Santiago de Erquiaga (private respondent) contended that the CFI orders during execution were valid and necessary to implement the final judgment. He argued that the Reynosos' refusal to deliver the shares and render an accounting justified the measures ordered, including allowing him to vote the shares to protect the corporate asset (the hacienda) from foreclosure by its creditor, the Development Bank of the Philippines.

• Procedural Issues: Whether the Court of Appeals properly entered judgment in CA-G.R. No. SP 04811, given that proceedings were previously suspended pending settlement negotiations.
• Substantive Issues:
  1. Whether the Court of Appeals erred in ordering the immediate return of the P410,000 purchase price with interest, without conditioning it on the prior or simultaneous accounting of the fruits from Hacienda San Jose.
  2. Whether the Court of Appeals erred in annulling the CFI order that authorized Erquiaga to vote the 3,100 shares and call a stockholders' meeting without prior transfer of the shares in the corporate books.

• Procedural: The Court found that the Court of Appeals' entry of judgment was precipitate and premature. The CA had suspended proceedings for settlement negotiations without setting a deadline, and then abruptly ordered entry of judgment. Since Erquiaga filed a timely motion for reconsideration and thereafter a petition for review, the CA decision was not yet final. The Court thus addressed the merits.
• Substantive:
  1. The Court partially agreed with the petitioners. It affirmed the CA's directive for the Clerk of Court to execute a deed of conveyance for the 1,600 shares if not delivered, as this followed the procedure under Section 10, Rule 39 of the Rules of Court. However, it modified the CA's ruling on the return of the purchase price. Citing Article 1385 of the Civil Code on rescission, the Court held that while the principal restitution (shares for price) should be simultaneous, the restitution of the fruits (interest on the price versus the hacienda's fruits) could be sequenced to avoid inequity. Thus, the payment of legal interest on the P410,000 (specifically, on the net amount of P348,000 after setting off the P62,000 damages) must await Reynoso's accounting of the fruits from the hacienda.
  2. The Court affirmed the CA's annulment of the CFI order allowing Erquiaga to vote the shares. It held that under Corporation Law (then Section 35 of the Corporation Law), a stockholder acquires voting rights only when shares are registered in his name in the corporate books. Until registration, the transferee cannot vote or be voted for. The CFI order allowing Erquiaga to vote unregistered shares was therefore invalid.

• Rescission under Article 1385 of the Civil Code — This doctrine provides that rescission creates the obligation to return the object of the contract with its fruits, and the price with its interest. The Court applied this to mandate mutual restitution but sequenced the restitution of fruits (interest and property income) to prevent inequity, conditioning the seller's payment of interest on the buyer's prior accounting of the property's fruits.
• Corporate Share Transfer and Voting Rights — The Court invoked the fundamental principle that voting rights in a corporation attach only to shares registered in the shareholder's name in the corporate books. An unregistered transferee, even if validly owning the shares as against the transferor, cannot exercise the rights of a stockholder, including voting, until registration is accomplished. This protects the corporation and ensures orderly corporate governance.

• "It is a fundamental rule in Corporation Law (Section 35) that a stockholder acquires voting rights only when the shares of stock to be voted are registered in his name in the corporate books." — This passage underscores the strict requirement for share registration to exercise corporate rights, which was central to annulling the trial court's order.
• "ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore." — The Court cited this provision as the legal foundation for ordering mutual restitution and for its modification of the Court of Appeals' decision to sequence the restitution of fruits.

N/A. The decision does not explicitly cite prior jurisprudence by case name, relying primarily on statutory provisions (Civil Code, Corporation Law, Rules of Court).

• Article 1385 of the Civil Code — Governs the effects of rescission, specifically the obligation of mutual restitution of the object and its fruits, and the price with its interest. The Court used this to structure the sequence of restitution.
• Section 35 of the Corporation Law (now Section 63 of the Revised Corporation Code) — Provides that shares of stock are transferable in the books of the corporation, and no transfer is valid except as between the parties until recorded. The Court relied on this to invalidate the trial court's order allowing an unregistered transferee to vote the shares.
• Section 10, Rule 39 of the Revised Rules of Court — Provides the procedure for executing judgments for the conveyance of land or property, including the appointment of a clerk of court to execute a deed if a party fails to comply. The Court of Appeals applied this by analogy to the conveyance of shares, which the Supreme Court affirmed.

N/A. The decision was rendered by a division with Justices Narvasa, Cruz, Gancayco, and Medialdea concurring with the ponente, Justice Grino-Aquino. No separate concurrences are noted.

N/A. The decision was unanimous. No dissenting opinions are recorded.