Everett vs. Asia Banking Corporation

A complaint in the nature of a bill of discovery for equitable relief may plead essential facts in the alternative when those facts are wholly within the defendant's knowledge and the plaintiff is too imperfectly informed to state them with certainty, and the shareholder derivative suit rule requiring demand on the board is excused when the corporation is under the complete control of the defendants.

Teal and Company was a domestic corporation organized in May 1919, engaged principally in the merchandising of automobiles, trucks, tractors, spare parts, and accessories, and in repair work, with its principal office in Manila. The plaintiffs — Harrie S. Everett, Cral G. Clifford, Ellis H. Teal, and George W. Robinson — were its principal stockholders, collectively holding 4,478 shares; the only other stockholder, Eric Barclay, held a single share. The Asia Banking Corporation was a foreign banking corporation licensed to transact only commercial banking business in the Philippine Islands, with its principal office in Manila. Since its organization, Teal and Company had conducted its banking business and financing almost exclusively through the Bank, and the officers of the Company had developed trust and confidence in the Bank's integrity and friendly intentions.

Teal and Company, a domestic corporation organized in May 1919 and engaged in the merchandising of automobiles, trucks, tractors, spare parts, and accessories, and in repair work, maintained its principal office in Manila. The plaintiffs — Harrie S. Everett, Cral G. Clifford, Ellis H. Teal, and George W. Robinson — were its principal stockholders, owning 4,478 shares; Eric Barclay, later a defendant, held one share. The Company conducted its banking business and financing almost exclusively through the Asia Banking Corporation, a foreign banking corporation licensed only for commercial banking in the Philippines, and over time the Company's officers developed trust and confidence in the Bank and its personnel.

In 1921, the Company became indebted to H.W. Peabody and Company in approximately P300,000 for tractors, plows, and parts that had been ordered and delivered. The Bank and other Manila banks held drafts accepted by the Company under Peabody's guarantee. The tractors proved unsalable due to a financial and agricultural depression, were returned to Peabody, and were eventually shipped back to the United States. While these events unfolded, the Company made payments through the Bank to Peabody amounting to at least P150,000. Separately, the Company had ordered another lot of tractors from Smith, Kirkpatrick and Co. under a commercial letter of credit from the Bank's New York office; before shipment, the Bank rescinded the credit and advised Smith, Kirkpatrick and Co. by telegraph to cancel the order. Nevertheless, Smith, Kirkpatrick and Co. shipped the tractors under D/A drafts, and upon their arrival in Manila, the Company — at the Bank's request and advice — accepted the drafts, stored the tractors in a Manila warehouse, and issued warehouse receipts. In or about March 1921, the Bank persuaded the Company, H.W. Peabody and Company, and Smith, Kirkpatrick and Co. to enter into a "creditors agreement" under which none would take action to collect debts from the Company for two years.

By December 29, 1922, the Company was indebted to the Bank in approximately P750,000, secured by a mortgage on its personal property and improvements on real estate held under a favorable ninety-nine-year lease. On that date, the Company was solvent and enjoying a large, growing, and lucrative business with valuable reputation and goodwill. Toward the end of 1922, the Bank, through its general manager Nicholas E. Mullen, represented to the Company's management that for mutual protection the Bank should temporarily obtain control of the Company's affairs, that the stockholders should place their shares in a voting trust held by the Bank, and that the Bank would finance the Company under its supervision and return the stock when the Company could resume independent operation or if the Bank discontinued operations under the trust. The Bank further represented that the voting trust should be executed without the creditors' knowledge to place the Bank in an advantageous position. Relying on the prior friendly relations and these representations, the plaintiffs signed and delivered a Voting Trust Agreement and a Memorandum of Agreement, both dated December 29, 1922, forming a single document.

Shortly after execution of the voting trust, Mullen, as voting trustee, removed every stockholder-director from the Company's board and substituted Bank employees and agents. No person who was a stockholder was thereafter permitted to serve as a director; none of the new directors had purchased any shares or paid any consideration for the stock underlying their assumed directorships. The new directors removed the Company's secretary, discharged the old managers and foremen loyal to the stockholders, and replaced them with individuals beholden to the Bank. The defendants thereafter conducted the Company's business without consulting the stockholders, denied them knowledge of the Company's affairs, gave new mortgages on Company property to the Bank, and permitted the Bank to foreclose and sell Company property in the Bank's sole interest. The Bank also brought suits against the Company in which the Company was not represented by anyone protecting its interests, so that the Bank effectively occupied the position of both plaintiff and defendant.

On or about August 18, 1923, defendants Mullen, Barclay, Mears, Macintosh, and Kelly — all then officers or employees of the Bank — filed articles of incorporation for the Philippine Motors Corporation with a capital stock of P25,000, of which P5,000 was alleged to have been subscribed and paid. The Bank then turned over all of the Company's business and assets to Philippine Motors Corporation, and with the connivance of the individual defendants acting in their dual capacity as directors of both corporations, permitted the new corporation to take possession of the Company's premises, goodwill, and business, and to collect the Company's debts for its own benefit. Plaintiffs demanded the return of their stock from the voting trustee; the demand was refused. The Bank also forestalled the plaintiffs' efforts to regain control by filing suit against plaintiff Everett based on an alleged falsification of the Company's books and by threatening proceedings against plaintiff Clifford for an alleged unpaid stock subscription that the Company's records showed did not exist.

Because the defendants concealed the facts, the plaintiffs pleaded in the alternative: either (a) Philippine Motors Corporation was a fictitious entity created by the Bank through its employees, in which case it had no legal existence because the Bank's license permitted only commercial banking, or (b) if the individual defendants created it with their own funds, the incorporation and subsequent operations constituted a fraud on the plaintiffs because the individual defendants exploited their positions as Bank employees and as directors of the Company. Plaintiffs sought injunction against transfer of Philippine Motors Corporation, cancellation of the voting trust, return of their shares and the Company's books and records, full discovery of all transactions, accounting for profits, and damages of not less than P500,000. Defendants demurred on four grounds: ambiguity and uncertainty, lack of legal capacity to sue, failure to state a cause of action, and misjoinder of parties. The Court of First Instance sustained the demurrer on all grounds, finding the complaint vague, that Teal and Company should have been joined as party plaintiff, that plaintiffs had no right to proceed against Philippine Motors Corporation, and that the investigation should be conducted by the Attorney-General, Insular Auditor, or Insular Treasurer. Plaintiffs declined to amend, and the case was dismissed.

• No Statutory Basis for Bills of Discovery: Respondents argued that there is no express provision in the Code of Civil Procedure for a proceeding such as the present, and that proceedings for discovery must therefore be considered limited to the taking of depositions under subsection 1 of section 355 of the Code and the compulsory attendance of witnesses by means of subpoena.
• Shareholder Derivative Suit Rule: Respondents argued that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, that the action must be brought by the Board of Directors, that Teal and Company should have been joined as a necessary party plaintiff, and that the plaintiff stockholders, not having made any demand on the Board to bring the action, were not the proper parties plaintiff.
• No Standing Against Philippine Motors Corporation: Respondents argued that the plaintiffs, not being stockholders in Philippine Motors Corporation, had no legal right to proceed against that corporation.
• Court Lacks Investigative Function: The lower court, adopting the respondents' position, held that the court could not be called upon to act as investigator of the facts and that such investigations fall within the duty of the interested party, the Attorney-General, the Insular Auditor, or the Insular Treasurer.

• Sufficiency of the Complaint: Whether a complaint that pleads essential facts partly in the alternative, and which suffers from duplicity and indirectness, states a sufficient cause of action when it is in effect a bill of discovery for equitable relief.
• Availability of Bills of Discovery: Whether the absence of an express statutory provision for bills of discovery in the Code of Civil Procedure precludes the remedy in Philippine jurisdiction.
• Proper Party Plaintiff: Whether the plaintiff stockholders, without first demanding that the Board of Directors institute the action, may sue in equity to redress wrongs done to the corporation when the corporation is under the complete control of the defendants.
• Standing to Proceed Against Philippine Motors Corporation: Whether the plaintiffs' references to and prayers concerning Philippine Motors Corporation are fatally defective because the plaintiffs are not stockholders of that corporation.
• Court's Authority to Order Discovery: Whether the investigation and discovery demanded in the complaint fall within the province of the courts or should instead be conducted by the Attorney-General, the Insular Auditor, or the Insular Treasurer.

• Sufficiency of the Complaint: No, the complaint is not fatally defective. Although it would be deficient as an ordinary action at law, it is in effect a bill of discovery for equitable relief, which permits considerable latitude in pleading, including alternative allegations of facts within the defendant's exclusive knowledge.
• Availability of Bills of Discovery: No, the absence of an express statutory provision does not preclude the remedy. The equity maxim that equity will not permit a wrong without a remedy still holds, and the Code of Civil Procedure is sufficiently broad and flexible to enable courts to apply all necessary remedies, both legal and equitable.
• Proper Party Plaintiff: Yes, the plaintiff stockholders are proper parties. The general rule requiring demand on the Board of Directors has an exception where the corporation is under the complete control of the principal defendants, rendering such demand useless; the law does not require litigants to perform useless acts.
• Standing to Proceed Against Philippine Motors Corporation: No, the objection rests on a misconception. The plaintiffs seek no judgment against Philippine Motors Corporation at this stage; references to it were inevitable in narrating the full history of transactions leading to the alleged loss of the plaintiffs' property.
• Court's Authority to Order Discovery: No, the lower court erred. That discovery such as that demanded in the action is one of the functions of a court of equity is so well established as to require no discussion.

• Sufficiency of the Complaint: The complaint, if measured by the standards of an ordinary action at law, would be deficient: it suffers from duplicity, the facts are not stated with certainty, and the statement is sometimes indirect and partly in the alternative. However, the action is not an ordinary action at law but in effect a bill of discovery, a proceeding primarily for equitable relief that may eventually develop into an action at law. In equity practice, considerable latitude in pleading is allowed because bills serve both discovery and relief; to search the conscience of the defendant, he is treated in the pleading somewhat as though placed upon the stand and examined as an unwilling witness. The minute and varied statements of probative facts, the anticipation of defenses, and the interrogatories become necessary in equity practice. Bearing in mind the purpose of the action, the complaint is sufficiently intelligible and free from ambiguity.

• Availability of Bills of Discovery: Counsel for the defendants contended that because no express provision in the Code of Civil Procedure authorizes bills of discovery, the remedy is limited to depositions under section 355 and compulsory attendance of witnesses by subpoena. But those means are not always available or adequate: they require a pending action with summons already served. Where facts essential to the plaintiff's cause of action are within the defendant's knowledge but the plaintiff is so imperfectly informed that he cannot state them with certainty — even on information and belief — he may know that one of two or more sets of facts is true without knowing which. In such circumstances, he cannot be required to plead with certainty facts he does not definitely believe to be true, yet he must state them in some form to file his complaint. The proper procedure is to state the facts within his knowledge with certainty and to plead the doubtful facts in the alternative, calling upon the defendant to make full disclosure. That is what the plaintiffs did here. The absence of an express statutory provision does not signify the remedy does not exist; the maxim that equity will not permit a wrong without a remedy still holds, and the Code of Civil Procedure, if properly interpreted, is sufficiently broad and flexible to enable courts to apply all necessary remedies, both legal and equitable.

• Proper Party Plaintiff: The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation — requiring the action to be brought by the Board of Directors — has exceptions. It is alleged in the complaint and, through the demurrer, admitted that Teal and Company is under the complete control of the principal defendants. In those circumstances, a demand upon the Board of Directors to institute and effectively prosecute an action would have been useless, and the law does not require litigants to perform useless acts. The Court cited Exchange Bank of Wewoka vs. Bailey, Fleming and Hewins vs. Black Warrior Copper Co., Wickersham vs. Crittenden, Glenn vs. Kittaning Brewing Co., and Hawes vs. Contra Costa Water Company in support of this exception.

• Standing to Proceed Against Philippine Motors Corporation: The lower court's conclusion that the plaintiffs, not being stockholders in Philippine Motors Corporation, had no legal right to proceed against it rests on a misconception of the character of the action. In this proceeding, the plaintiffs were required to set forth in full the history of the various transactions that eventually led to the alleged loss of their property, and in making full disclosure, references to Philippine Motors Corporation were inevitable. Notably, the plaintiffs seek no judgment against the corporation itself at this stage of the proceedings.

• Court's Authority to Order Discovery: The lower court erred in holding that the investigation of the transactions referred to in the complaint is not within the province of the courts but should be conducted by some other agency. That discovery, such as that demanded in the present action, is one of the functions of a court of equity is so well established as to require no discussion.

• Bill of Discovery and Latitude in Equitable Pleading — In proceedings that are in effect bills of discovery for equitable relief, considerable latitude in the manner of stating facts in pleadings is allowed. The minute and varied statements of probative facts, the charge to anticipate a defense, and the interrogatories become necessary because bills serve both discovery and relief, and the defendant is treated in the pleading somewhat as though placed upon the stand and examined as an unwilling witness. The Court applied this doctrine to hold that the plaintiffs' complaint, though deficient as an ordinary action at law, was sufficiently intelligible and free from ambiguity when judged as a bill of discovery.

• Alternative Pleading for Facts Within Defendant's Exclusive Knowledge — Where facts essential to the plaintiff's cause of action are within the defendant's knowledge but the plaintiff is so imperfectly informed that he cannot state them with certainty — even on information and belief — the plaintiff may plead those doubtful facts in the alternative, stating the facts within his own knowledge with certainty and calling upon the defendant to make full disclosure. The plaintiff cannot be required to plead with certainty facts he does not definitely believe to be true. The Court applied this doctrine to the plaintiffs' alternative allegations regarding whether Philippine Motors Corporation was a fictitious entity of the Bank or a fraudulent creation of the individual defendants.

• Exception to the Shareholder Derivative Suit Rule — Demand Excused as Useless — The general rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, and that the action must be brought by the Board of Directors, has an exception where the corporation is under the complete control of the principal defendants. In such circumstances, a demand upon the Board to institute and effectively prosecute the action would be useless, and the law does not require litigants to perform useless acts. The Court applied this exception because the complaint — admitted through the demurrer — alleged that the Company was under the complete control of the defendants.

• Equity Will Not Permit a Wrong Without a Remedy — The absence of an express statutory provision for a particular equitable remedy does not necessarily signify that the remedy does not exist in the jurisdiction. The Code of Civil Procedure, if properly interpreted, is sufficiently broad and flexible to enable courts to apply all necessary remedies, both legal and equitable. The Court invoked this maxim to reject the argument that bills of discovery were unavailable for lack of an express statutory provision.

• "But we are not here dealing with a complaint in an action at law; this is in effect a bill of discovery and the proceeding is primarily one for equitable relief, though it may eventually develop into an action at law." — This passage defines the character of the action and establishes that equitable pleading standards, not those governing ordinary actions at law, govern the sufficiency of the complaint.

• "The maxim of equity that 'Equity will not permit a wrong without a remedy' still holds good, and our liberal Code of Civil Procedure is, if properly interpreted, sufficiently broad and flexible to enable the courts to apply all necessary remedies, both legal and equitable." — This passage articulates the Court's rationale for recognizing bills of discovery despite the absence of an express statutory provision, grounding the remedy in equitable principle rather than specific codal text.

• "it is obvious that a demand upon the Board of Directors to institute an action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts." — This passage states the ratio decidendi for excusing the demand requirement in shareholder derivative suits when the corporation is under the defendants' control.

• "In such circumstances the plaintiff cannot, of course, state any of the facts with certainty and it stands to reason that he cannot be required to plead with certainty facts which he does not definitely believe to be true." — This passage establishes the doctrinal basis for alternative pleading when essential facts lie exclusively within the defendant's knowledge.

• Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246 — Cited in support of the exception to the shareholder derivative suit rule, specifically that demand on the board is excused when the corporation is under the control of the defendants.
• Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1 — Cited for the same proposition as Exchange Bank of Wewoka vs. Bailey.
• Wickersham vs. Crittenden, 106 Cal., 329 — Cited for the same proposition.
• Glenn vs. Kittaning Brewing Co., 259 Pa., 510 — Cited for the same proposition.
• Hawes vs. Contra Costa Water Company, 104 U.S., 450 — Cited for the same proposition; this is the leading American case establishing the shareholder derivative suit rule and its exceptions.

• Code of Civil Procedure, section 355 (subsection 1) — Referenced by defendants as the exclusive means of discovery, limited to the taking of depositions and compulsory attendance of witnesses by subpoena. The Court held this provision insufficient to cover all situations where discovery is needed, particularly where the plaintiff cannot file a complaint without first obtaining discovery of facts within the defendant's exclusive knowledge.
• Equity Maxim: "Equity will not permit a wrong without a remedy" — Invoked by the Court as the foundational principle supporting the availability of bills of discovery in Philippine jurisdiction despite the absence of an express statutory provision, and as the basis for interpreting the Code of Civil Procedure as sufficiently broad and flexible to provide all necessary remedies, both legal and equitable.

Avanceña, C.J., Street, Villamor, Johns, Romualdez, and Villa-Real, JJ., concurred.