Forest Hells Golf and Country Club, Inc. vs. Fil-Estate Properties, Inc.

A derivative suit vests jurisdiction in the Regional Trial Court acting as a special commercial court, and the complaint must allege with particularity that the stockholder exhausted all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation, that no appraisal rights are available for the acts complained of, and that the suit is not a nuisance or harassment suit. Failure to plead these requisites renders the derivative action dismissible on its face.

Kingsville Construction and Development Corporation and Kings Properties Corporation owned parcels of land in Antipolo, Rizal earmarked for development into Forest Hills Residential Estates and Golf and Country Club. On 31 March 1993, they entered into a project agreement with Fil-Estate Properties, Inc., under which FEPI undertook to finance and develop the property. FEPI was also tasked to incorporate petitioner Forest Hills Golf and Country Club, Inc. and to perform development and construction work as full payment for its subscription to the club’s authorized capital stock. The remaining shares were to be retained by Kingsville in exchange for the land. On 10 July 1995, FEPI assigned its rights and obligations to respondent Fil-Estate Golf Development, Inc. On 19 July 1996, Rainier L. Madrid purchased two Class “A” shares and applied for club membership. The construction of the second 18-hole golf course was delayed for years, prompting Madrid’s demands to the board of directors to sue the developers. The board refused to act.

• The Project Agreement and the Corporate Setup: On 31 March 1993, Kingsville Construction and Development Corporation and Kings Properties Corporation entered into a project agreement with respondent FEPI to develop land in Antipolo, Rizal into Forest Hills Residential Estates and Golf and Country Club. FEPI undertook to finance the development and to incorporate petitioner FHGCCI. Its obligation to perform development and construction work served as full payment for its subscription to the club’s authorized capital stock of 3,600 shares. The remaining shares were retained by Kingsville in exchange for the land used in the golf course. On 10 July 1995, FEPI assigned its rights and obligations under the project agreement to respondent FEGDI, a related corporation.

• Madrid’s Membership and the Unfinished Project: On 19 July 1996, Rainier L. Madrid purchased two Class “A” shares at the secondary price of ₱380,000.00 each and applied for membership. The construction of the second 18-hole golf course and the adjunct country club facilities suffered substantial delays beyond the stipulated completion date of September 2000.

• Demand on the Board and Refusal to Sue: Madrid sent two demand letters dated 29 October 2009 and 15 March 2010 to the board of directors of FHGCCI, urging them to initiate legal action against FEPI and FEGDI to compel completion of the project. The board failed or refused to act.

• Filing of the Derivative Suit: On 21 April 2010, Madrid, acting in a derivative capacity on behalf of FHGCCI, filed a Complaint for Specific Performance with Damages against FEPI and FEGDI before the RTC of Antipolo City, Branch 74. The complaint was expressly denominated as a derivative suit, alleging that the board of directors suffered from a conflict of interest due to interlocking directorships with the respondent corporations and that they deliberately refused to sue to maintain control as an “Old Boys Club.”

• Respondents’ Defense: In their Answer, FEPI and FEGDI asserted that the complaint did not state a cause of action as it failed to identify the contractual or legal basis of their alleged obligation; that no prior demand had been made upon them; that the suit did not qualify as a proper derivative action because FHGCCI had not exhausted intra-corporate remedies; and that the board of directors were indispensable parties who had not been impleaded.

• Proposed Amendment: FHGCCI sought leave to amend its complaint to implead KPC and Kingsville as additional defendants and to include Madrid as a plaintiff in his personal capacity. Respondents opposed the amendment.

• Derivative Suits Not Always Intra-Corporate: Petitioner FHGCCI admitted that the complaint was a derivative suit but argued that not all derivative suits involve intra-corporate controversies. The action was one for specific performance to enforce a project agreement between KPC, Kingsville, and the respondents, filed against FEPI and FEGDI as developers rather than as stockholders.

• Absence of Intra-Corporate Relations: Petitioner contended that the causes of action did not concern intra-corporate relations among stockholders and corporate officials; the mere fact that FEGDI was a stockholder did not convert the case into an intra-corporate controversy.

• Misapplication of Precedent: The RTC erroneously applied Reyes v. Hon. RTC of Makati without adequately explaining why the facts of the case constituted an intra-corporate dispute.

• Lack of Cause of Action and Prematurity: Respondents maintained that FHGCCI had no cause of action because no contract or legal basis was presented, and the suit was premature for failure to make a prior demand upon respondents FEPI and FEGDI.

• Defective Derivative Suit: Respondents argued that the complaint was not a proper derivative suit due to FHGCCI’s failure to exhaust all remedies available under the articles of incorporation and by-laws, and because the board of directors, as indispensable parties, were not impleaded.

• Intra-Corporate Controversy: Respondents insisted that the allegations in the complaint demonstrated that FHGCCI was suing FEPI and FEGDI not only as developers but also as stockholders, thereby rendering the action an intra-corporate controversy over which the regular RTC had no jurisdiction. The dismissal for lack of jurisdiction was therefore proper.

• Jurisdiction over the Derivative Suit: Whether the derivative suit for specific performance falls within the exclusive jurisdiction of the special commercial courts as an intra-corporate controversy.

• Compliance with Requisites for a Derivative Suit: Whether the complaint, on its face, satisfied the pleading requirements for a valid derivative action under the Interim Rules of Procedure Governing Intra-Corporate Controversies.

• Jurisdiction over the Derivative Suit: The derivative suit fell under the exclusive jurisdiction of special commercial courts. Jurisdiction is determined by the material allegations of the complaint. FHGCCI’s complaint repeatedly alleged interlocking directorships, conflict of interest, bad faith on the part of its board of directors, and that respondent FEGDI was a shareholder whose subscription shares were paid through the development works. These intertwined intra-corporate issues were unavoidable in the specific performance case. Moreover, a derivative suit, by its nature as a remedy of minority shareholders against the abuses of the majority, necessarily touches upon the internal affairs of a corporation. Section 1(a), Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies expressly includes derivative suits among cases governed by its provisions. Following Gonzales v. GJH Land, Inc., if a commercial case is wrongly raffled to a regular RTC branch, the proper recourse is to refer it to the nearest RTC with a designated special commercial court.

• Compliance with Requisites for a Derivative Suit: The complaint failed to comply with the mandatory requisites under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. Madrid, as the suing stockholder, did not allege with particularity that he exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, or rules governing the corporation; that no appraisal rights were available for the acts complained of; and that the suit was not a nuisance or harassment suit. The mere allegation that demand letters were sent to the board and went unheeded was insufficient to satisfy the exhaustion requirement. Because the complaint on its face failed to meet the threshold pleading standards, referring the case to a special commercial court would have been a waste of time, and dismissal was warranted.

• Derivative Suit as a Remedy: A derivative suit is an equitable remedy designed as a principal defense of minority shareholders against the abuses of the majority. The corporation is the real party in interest, and the suing stockholder is a mere nominal party. Its purpose requires it to touch upon the internal affairs of the corporation.

• Requisites for a Valid Derivative Suit (Rule 8, Section 1, Interim Rules of Procedure Governing Intra-Corporate Controversies): A stockholder or member may bring a derivative action provided: (1) the plaintiff was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) the plaintiff 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 to obtain the relief desired; (3) no appraisal rights are available for the act or acts complained of; and (4) the suit is not a nuisance or harassment suit. Additionally, the complaint must state that it is brought on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join.

• Exhaustion Rule: The exhaustion requirement aims to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought have failed. A general allegation of unheeded demand letters does not substitute for the required particularity.

• Jurisdiction over Intra-Corporate Controversies: Upon the enactment of RA 8799 (Securities Regulation Code), jurisdiction over intra-corporate disputes, including derivative suits, vests in RTCs designated as special commercial courts pursuant to A.M. No. 00-11-03-SC.

• Referral Procedure for Misraffled Commercial Cases (Gonzales v. GJH Land, Inc.): If a commercial case is wrongly raffled to a regular RTC branch, and the RTC has no internal branch designated as a Special Commercial Court, the case should be referred to the nearest RTC with a designated Special Commercial Court branch within the judicial region for redocketing and assignment.

• “A derivative action is a suit by a shareholder to enforce a corporate cause of action x x x on behalf of the corporation in order to protect or vindicate [its] rights [when its] officials refuse to sue, or are the ones to be sued, or hold control of [it].” — The Court restated the definition of a derivative suit, sourced from Hi-Yield Realty, Inc. v. Court of Appeals, to underscore that such an action inherently concerns corporate governance.

• “[F]or a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit.” — This passage from Chua v. Court of Appeals was invoked to emphasize the strict pleading standard.

• “The purpose for this rule is ‘to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.’” — The rationale behind the exhaustion requirement, quoted from Yu v. Yukayguan, was used to reject the sufficiency of mere demand letters.

• Hi-Yield Realty, Inc. v. Court of Appeals, 608 Phil. 350 (2009) — Cited for the definition of a derivative suit and the principle that the power to sue is lodged with the board of directors, subject to the equitable remedy of a derivative action.

• Yu v. Yukayguan, 607 Phil. 581 (2009) — Relied upon for the rule that jurisdiction over derivative suits and intra-corporate disputes under RA 8799 is vested in special commercial courts, and for the exhaustive list of pleading requisites for a derivative suit.

• Reyes v. Hon. RTC of Makati, Br. 142, 583 Phil. 591 (2008) — The relationship and nature of controversy tests were applied by the trial court, though petitioner contested its relevance.

• Chua v. Court of Appeals, 485 Phil. 644 (2004) — Cited for the requirement that the complaint must explicitly state the derivative nature of the action and its representative character.

• Gonzales v. GJH Land, Inc., G.R. No. 202664, November 10, 2015 — Provided the guidelines for referring a commercial case that has been misraffled to a non-special commercial court branch.

• Republic Act No. 8799 (The Securities Regulation Code) — Conferred jurisdiction over intra-corporate disputes upon Regional Trial Courts designated as special commercial courts.

• A.M. No. 00-11-03-SC (November 21, 2000) — The Supreme Court resolution designating certain RTC branches as special commercial courts to hear intra-corporate controversies.

• Interim Rules of Procedure Governing Intra-Corporate Controversies, A.M. No. 01-2-04-SC (March 13, 2001), Rule 1, Section 1(a) — Defines the cases covered, expressly including derivative suits among those governed by the special rules.

• Interim Rules of Procedure Governing Intra-Corporate Controversies, Rule 8, Section 1 — Enumerates the four essential requisites that must be pled by a stockholder bringing a derivative action.

Carpio, J. (Chairperson), and Leonen, J., concurred. Brion, J., and Mendoza, J., were on leave.