Makati Stock Exchange, Inc. vs. Campos

A pleading fails to state a cause of action when it merely asserts the existence of a right and a correlative obligation without stating the legal basis or source of such right and obligation; a practice or custom, absent a law converting it into an enforceable right, is not a source of legally demandable obligation.

The case arose from a resolution passed by the Makati Stock Exchange (MKSE) Board of Directors on June 3, 1993, excluding the respondent, a former Chairman Emeritus and surviving incorporator, from participating in Initial Public Offering (IPO) allocations. The exclusion was allegedly motivated by the board's desire to prevent the shares from benefiting a third party with whom they had pending disqualification cases.

• On February 10, 1994, respondent Miguel V. Campos filed a petition with the Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange Commission (SEC) in SEC Case No. 02-94-4678 against the Makati Stock Exchange, Inc. (MKSE) and its directors.
• Respondent sought: (1) nullification of the MKSE Board Resolution dated June 3, 1993, which allegedly deprived him of his right to participate equally in the allocation of Initial Public Offerings (IPOs); (2) delivery of the IPO shares he was allegedly deprived of, for which he would pay IPO prices; and (3) payment of P2 million as moral damages, P1 million as exemplary damages, and P500,000.00 as attorney's fees.
• Respondent alleged that he was the only surviving incorporator of MKSE who maintained his membership and had served as Governor from 1977 to the present and as President from 1972 to 1976 and again from 1988 to the present.
• In 1989, the MKSE general membership passed a resolution amending the Articles of Incorporation to create the position of "Chairman Emeritus" for respondent, to be occupied during his lifetime regardless of continued membership, with the privilege to attend all membership and Board of Governors meetings.
• Respondent claimed that as an active member and Chairman Emeritus, he had always enjoyed the right given to all other members to participate equally in IPOs of corporations, wherein normally 25% of IPO shares are divided equally between the two stock exchanges and then divided equally among their members.
• On June 3, 1993, the MKSE Board of Directors passed a resolution stopping the allocation of IPOs to respondent, allegedly because these shares were benefiting Gerardo O. Lanuza, Jr., who had filed cases against the individual respondents for their disqualification as board members.
• On February 14, 1994, the SICD issued a Temporary Restraining Order, and on March 10, 1994, granted a Writ of Preliminary Injunction enjoining petitioners from implementing the June 3, 1993 resolution.
• On March 11, 1994, petitioners filed a Motion to Dismiss on grounds of mootness, lack of jurisdiction, and failure to state a cause of action, which was denied by the SICD on May 4, 1994.
• The SEC en banc subsequently nullified the SICD orders and dismissed respondent's petition.
• The Court of Appeals reversed the SEC en banc and reinstated the case.
• Respondent died on May 7, 2001 and was substituted by his surviving spouse, Julia Ortigas Vda. de Campos.

• The SEC en banc did not commit grave abuse of discretion amounting to lack or excess of jurisdiction when it dismissed the petition because on its face, it failed to state a cause of action.
• The grant of IPO allocations in favor of respondent was a mere accommodation given to him by the Board of Directors of the Makati Stock Exchange, Inc., and not a legally enforceable right.
• The Court of Appeals erred in holding that the SEC en banc committed grave abuse of discretion when it made an extended inquiry and proceeded to make a determination as to the truth of respondent's allegations and used evidence adduced during the hearing on the application for the writ of preliminary injunction to determine the existence or validity of a stated cause of action.
• IPO allocations granted to brokers are not to be bought by the brokers for themselves but are to be distributed to the investing public; hence, respondent's claim for damages is illusory and his petition constitutes a nuisance suit.

• The petition filed with the SEC sufficiently states a cause of action as it alleges a violation of his right to equal participation in IPO allocations.
• As Chairman Emeritus and active member of MKSE, he has a vested right to participate equally in the IPO allocations of the Exchange.
• The SEC en banc committed grave abuse of discretion amounting to lack or excess of jurisdiction when it dismissed the petition and when it considered extraneous evidence beyond the allegations of the petition in determining the existence of a cause of action.

• Procedural Issues: Whether the Court of Appeals committed reversible error in granting the petition for certiorari and nullifying the SEC en banc orders dated May 31, 1995 and August 14, 1995.
• Substantive Issues: Whether the petition filed with the SEC SICD sufficiently stated a cause of action; Whether the respondent had a legally enforceable right to participate in Initial Public Offering allocations.

• Procedural: The Supreme Court granted the petition for review on certiorari, reversed the Decision of the Court of Appeals dated February 11, 1997 and its Resolution dated May 18, 1999, and reinstated the Orders dated May 31, 1995 and August 14, 1995 of the Securities and Exchange Commission en banc. The Court held that while the SEC en banc may have erred in considering extraneous evidence in granting the motion to dismiss, such discussion was merely superfluous and obiter dictum since the dismissal was proper on the ground of failure to state a cause of action.
• Substantive: The petition failed to state a cause of action because although it alleged a right to subscribe to IPOs and a correlative obligation on the part of petitioners, it utterly failed to lay down the source or basis of such right and obligation. A right and obligation must be rooted in law, contract, quasi-contract, delict, or quasi-delict. The petition merely quoted the 1989 resolution creating the position of Chairman Emeritus, but this resolution did not mention any right to IPO allocations. The allocation of IPO shares was merely alleged to be a "practice" or "custom," which is generally not a source of a legally demandable or enforceable right absent a law converting it into such.

• Cause of Action — Defined as the act or omission by which a party violates a right of another; requires three essential elements: (1) the legal right of the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or omission of the defendant in violation of said legal right.
• Hypothetical Admission Rule — In testing the sufficiency of facts alleged in a complaint, the defendant is regarded as having hypothetically admitted all the averments thereof; the test is whether or not, admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer thereof.
• Practice or Custom as Source of Right — A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right, unless converted into such by law.
• Ultimate Facts vs. Conclusions — A pleading should state the ultimate facts essential to the rights of action or defense asserted, as distinguished from mere conclusions of fact or conclusions of law.

• "A cause of action is the act or omission by which a party violates a right of another."
• "Right and obligation are legal terms with specific legal meaning."
• "The mere assertion of a right and claim of an obligation in an initiatory pleading, whether a Complaint or Petition, without identifying the basis or source thereof, is merely a conclusion of fact and law."
• "A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right."
• "Private respondent Campos has failed to establish the basis or authority for his alleged right to participate equally in the IPO allocations of the Exchange."

• Fil-Estate Golf and Development, Inc. v. Court of Appeals — Cited for the test of sufficiency of facts in a complaint and the hypothetical admission rule.
• Abad v. Court of First Instance of Pangasinan — Cited for the distinction between ultimate facts and conclusions of fact or law in pleadings.
• Arco Metal Products Co., Inc. v. Samahan ng mga Manggagawa sa Arco Metal-NAFLU — Cited to distinguish how company practice can become enforceable in labor cases due to Article 100 of the Labor Code prohibiting diminution of benefits, which has no equivalent in the instant case.

• Revised Rules of Court, Rule 2, Section 2 — Defines cause of action as the act or omission by which a party violates a right of another.
• Civil Code, Article 1156 — Defines obligation as a juridical necessity to give, to do or not to do.
• Civil Code, Article 1157 — Enumerates the sources of obligations as law, contracts, quasi-contracts, acts or omissions punished by law, and quasi-delicts.
• Labor Code, Article 100 — Cited in passing regarding the prohibition on elimination or diminution of benefits in labor cases, distinguishing why company practice becomes enforceable in that specific context.