Mathay vs. The Consolidated Bank and Trust Company

A class suit requires that the subject matter of the controversy be one of common or general interest to many persons and that the persons be so numerous as to make it impracticable to bring them all before the court; the complaint must allege the existence of these facts, including the number of persons in the alleged class. A several interest in distinct portions of the subject matter, even if involving a common question of law, does not constitute the common or general interest required for a class suit, and may at most justify a permissive joinder under Section 6, Rule 3.

Consolidated Mines, Inc. (CMI) was a corporation organized under Philippine laws. On March 28, 1962, at a regular stockholders' meeting, CMI stockholders passed a resolution authorizing the organization of the Consolidated Bank and Trust Company with an authorized capital of ₱20,000,000, entitling all legally qualified CMI stockholders to subscribe to the Bank's capital stock at par value in proportion to their CMI shareholdings as of a date to be fixed by the Board of Directors (subsequently fixed as January 15, 1963). The resolution further provided that failure to exercise the subscription right within thirty days would result in an ipso facto waiver in favor of the Interim Board of Organizers or their assignees. The President and members of the CMI Board of Directors constituted themselves as the Interim Board of Organizers and sent circular letters with "Pre-Incorporation Agreement to Subscribe" forms to CMI stockholders.

On March 28, 1962, at a regular stockholders' meeting of Consolidated Mines, Inc. (CMI), the stockholders passed a resolution authorizing the organization of the Consolidated Bank and Trust Company (the Bank) with an authorized capital of ₱20,000,000. The resolution provided that the organization would be undertaken by a Board of Organizers composed of the President and members of the CMI Board of Directors, and that all legally qualified CMI stockholders would be entitled to subscribe to the Bank's capital stock at par value in the same extent and amount as their respective CMI shareholdings as shown in the stock books on a date to be fixed by the Board (subsequently set as January 15, 1963). The right to subscribe had to be exercised within thirty days from that date; failure to do so would result in an ipso facto waiver of the subscription right in favor of the Interim Board of Organizers or their assignees. The resolution also authorized the CMI Board of Directors to declare a "special dividend" that subscribing stockholders could apply toward payment of their subscriptions.

On or about November 20, 1962, the Board of Organizers sent circular letters with "Pre-Incorporation Agreement to Subscribe" forms to CMI stockholders, specifying that subscriptions had to be made between December 4, 1962 and January 15, 1963, and reiterating the ipso facto waiver provision. Plaintiffs-appellants Ismael Mathay, Josefina Mathay, Diogracias T. Reyes, and S. Ador Dionisio, together with other CMI stockholders, accomplished and filed their respective Pre-Incorporation Agreements to Subscribe and paid their subscriptions in full. On June 25, 1963, the Board of Organizers caused the execution of the Articles of Incorporation of the Bank, indicating an original subscription of 50,000 shares worth ₱5,000,000 subscribed and paid only by six of the individual defendants-appellees — Antonio P. Madrigal, Jose P. Madrigal, Simon R. Paterno, Fermin Z. Caram, Jr., Claudio Teehankee, and Wilfredo C. Tecson — thereby excluding the plaintiffs-appellants and other CMI subscribing stockholders who had already subscribed. The paid-in capital was subsequently raised to ₱8,000,000 as required by the Monetary Board, and the individual defendants-appellees caused the issuance of an additional 30,000 shares worth ₱3,000,000, again subscribed and paid entirely by themselves or entities they chose, to the exclusion of the plaintiffs-appellants and other CMI subscribing stockholders.

On December 24, 1963, plaintiffs-appellants filed a class suit in the Court of First Instance of Manila as Civil Case No. 55810, alleging six causes of action. Under the first cause of action, they claimed that the individual defendants-appellees unlawfully acquired stockholdings in the Bank in excess of what they were lawfully entitled to, in violation of law and in breach of trust and the contractual agreement embodied in the March 28, 1962 resolution, and that the defendants held such shares in trust for the plaintiffs and other CMI subscribing stockholders. They prayed that the subscriptions and shareholdings acquired by the individual defendants-appellees, to the extent that the plaintiffs and other CMI stockholders had been deprived of their right to subscribe, be annulled and transferred to the plaintiffs and other CMI subscribing stockholders. The second cause of action alleged that on August 28, 1963, certain defendants-appellees falsely certified the calling of a special stockholders' meeting without notice to the plaintiffs, amended the Articles of Incorporation to increase the number of directors from six to seven, and filled the new position with defendant Alfonso Juan Olondriz. The third through sixth causes of action claimed actual, moral, and exemplary damages, and attorney's fees.

On February 7, 1964, the defendants-appellees (except Caram, Jr.) moved to dismiss on the grounds that the plaintiffs had no legal standing to maintain the class suit, the complaint did not state a sufficient cause of action, and the complaint regarding the increase in directors stated no cause of action. Some CMI stockholders, including Concepcion Zuluaga et al. and Carlos Moran Sison et al., filed separate manifestations opposing and disauthorizing the suit. On March 5, 1964, at the Bank's regular annual meeting, 986 out of 1,663 attending stockholders ratified and confirmed all the actuations of the organizers-directors. On March 21, 1964, the trial court granted the motion to dismiss, holding that the class suit could not be maintained because the complaint did not show that the plaintiffs were sufficiently numerous and representative, and that the complaint failed to state a cause of action.

• Common Interest in Subject Matter: Petitioners argued that the propriety of a class suit should be determined by the common interest in the subject matter of the controversy, and that such common interest existed in the instant case, consisting not only in the recovery of the shares of which they were unlawfully deprived but also in divesting the individual defendants-appellees of control of the Bank.
• Representative Character: Petitioners maintained that the test for legal standing in a class suit was not one of number but whether the interest of the party was representative of the persons in whose behalf the suit was instituted, and that their interests were not antagonistic to those of the group they represented.
• Insufficiency of Number Not Ground for Dismissal: Petitioners contended that insufficiency of number in a class suit was not a ground for dismissal under Rules 16 and 17, and that the court should have treated the suit as a permissive joinder action under Section 6, Rule 3 of the Rules of Court.
• Sufficiency of Cause of Action: Petitioners argued that the allegations in paragraph 15 of the complaint — that defendants-appellees unlawfully acquired stockholdings in excess of what they were lawfully entitled to, in violation of law and in breach of trust and contractual agreement — constituted a valid and sufficient cause of action, and that only the allegations in the complaint should have been considered in determining whether a cause of action was stated.
• Common Question of Law or Fact: Petitioners insisted that a class suit could be maintained even if the interests were several, as long as there was a common question of law or fact and a common relief was sought, citing American authorities on spurious class actions under Federal Rule 23(a)(3).

• Insufficient Number and Representation: Respondents argued that the four plaintiffs-appellants, owning only 8 out of 80,000 shares, could not be considered numerous and representative of 1,500 stockholders, and that even adding the four intervenors would not change the situation, as two intervenors could not sue without their husbands' consent.
• Failure to Allege Numerosity in Complaint: Respondents maintained that the complaint itself must allege facts showing that the plaintiffs were sufficiently numerous and representative, and that the complaint did not even allege how many other CMI stockholders were similarly situated.
• Disavowal by Other Stockholders: Respondents stressed that the withdrawal of one plaintiff, the disclaimers by other CMI stockholders, and the disauthorization by 986 out of 1,663 stockholders attending the annual meeting negated any pretension that the plaintiffs were sufficiently numerous and representative.
• No Common or General Interest: Respondents contended that the plaintiffs did not have the common or general interest required by the Rules of Court, as each CMI subscribing stockholder had a legal interest only in his respective proportion of shares and none with regard to shares claimed by another.
• No Cause of Action Stated: Respondents argued that the complaint failed to allege that plaintiffs were natural-born Filipino citizens qualified to subscribe to the Bank's capital stock, that the averments of having "subscribed" and being "denied the right to subscribe" were inconsistent, that there was no allegation that certificates of stock had not been issued for shares already subscribed and paid, that the complaint failed to show the existence of any trust, and that the complaint did not allege that plaintiffs had paid or offered to pay for the shares allegedly pertaining to them.

• Class Suit — Numerosity and Representativeness: Whether the complaint sufficiently alleged that the plaintiffs were sufficiently numerous and representative to maintain a class suit under Section 12, Rule 3 of the Rules of Court.
• Class Suit — Common or General Interest: Whether the interest of the CMI subscribing stockholders in the waived shares of the Bank constituted a common or general interest in the subject matter of the controversy as required for a class suit.
• Cause of Action — Ultimate Facts: Whether the complaint stated ultimate facts sufficient to constitute a cause of action, or whether it relied on conclusions of law rather than ultimate facts.

• Class Suit — Numerosity and Representativeness: No. The complaint did not allege the number of CMI subscribing stockholders so that the court could determine whether the members of the class were so numerous as to make it impracticable to bring them all before the court, as explicitly required by Section 12, Rule 3.
• Class Suit — Common or General Interest: No. The interest of each CMI subscribing stockholder in the waived shares was several, not common or general; each had a right only to his respective portion of the stocks, and no one had any right to or interest in the stock to which another was entitled.
• Cause of Action — Ultimate Facts: No. The complaint alleged conclusions of law rather than ultimate facts, failed to aver that plaintiffs were qualified to become bank stockholders, and failed to allege facts from which a trust relationship could be logically inferred.

• Class Suit — Numerosity and Representativeness: Section 12, Rule 3 of the Rules of Court requires that the court make sure the parties actually before it are sufficiently numerous and representative so that all interests are fully protected. The necessary elements for a class suit are (1) that the subject matter be of common or general interest to many persons, and (2) that such persons be so numerous as to make it impracticable to bring them all before the court. The complaint must allege the existence of the class and the number of persons in the alleged class. The complaint in this case declared that it was a class suit but did not state the number of CMI subscribing stockholders, making it impossible for the trial court to determine numerosity or adequacy of representation. Furthermore, the withdrawal of one plaintiff, the disclaimers by other stockholders, and the disauthorization by 986 of 1,663 stockholders at the annual meeting completely negated the pretension of numerosity and representativeness.

• Class Suit — Common or General Interest: The phrase "subject matter of the action" refers to the physical facts, things, or property in relation to which the suit is prosecuted, not the wrong committed by the defendant. Jurisprudence has consistently held that a class suit does not lie where each party has a determinable interest only in his respective portion of the subject matter to the exclusion of others. In this case, each CMI subscribing stockholder had a right, if any, only to his respective proportion of the waived stocks; no one had any right to or interest in the stock to which another was entitled. Separate wrongs to separate persons, even if committed by similar means and pursuant to a single plan, do not alone create a common or general interest. Petitioners' reliance on American authorities regarding spurious class actions was unavailing, because the spurious class action under Federal Rule 23(a)(3) is merely a permissive joinder device provided in Section 6, Rule 3 of the Philippine Rules, not a true class suit. The right to subscribe to waived shares is analogous to the right of preemption, which is personal to each stockholder; while a stockholder may sue to compel issuance of his proportionate share, he may not maintain a representative action on behalf of other similarly situated stockholders.

• Cause of Action — Ultimate Facts: A cause of action requires (1) a legal right in the plaintiff, (2) a correlative duty in the defendant, and (3) an act or omission violating that right with consequential injury. The complaint must state ultimate facts, not conclusions of law; a motion to dismiss for failure to state a cause of action hypothetically admits only facts well pleaded, not conclusions of law. The complaint failed to allege that plaintiffs were natural-born Filipino citizens qualified to become bank stockholders — a condition precedent to the subscription right under the March 28, 1962 resolution and Monetary Board regulations. The allegation that plaintiffs "subscribed" did not by necessary implication show they possessed the required qualifications. The complaint did not allege the amount of shares to which plaintiffs claimed entitlement, making it impossible to determine whether the waived stocks fell within the extent and amount of their CMI shareholdings. The allegation that defendants held shares "in trust" for plaintiffs was a conclusion of law, as no facts were averred from which the court could logically infer the existence of a trust; the waiver clause's effect was a matter of legal interpretation, not ultimate fact. The allegations that defendants "unlawfully acquired" stockholdings "in violation of law and in breach of trust" were likewise conclusions of law. The second cause of action's allegations that the special meeting was "falsely certified," the seventh directorship was "illegally created," and the appointee was "not competent or qualified" were also conclusions of law. The third through sixth causes of action, being dependent on the first, were likewise fatally defective.

• Requisites of a Class Suit — Section 12, Rule 3 of the Rules of Court requires two elements for a class suit: (1) the subject matter of the controversy must be one of common or general interest to many persons, and (2) the persons must be so numerous that it is impracticable to bring them all before the court. The complaint must allege the existence of the class and the number of persons in the alleged class. The court applied this by finding that the complaint failed to allege the number of CMI subscribing stockholders and that the interest of each stockholder in the waived shares was several, not common or general.

• Common or General Interest Distinguished from Several Interest — A common or general interest in the subject matter requires that the interest be shared in the same specific thing, not merely that separate persons suffered separate wrongs by similar means or pursuant to a single plan. The Court applied this by holding that each CMI subscribing stockholder's claim to his proportionate share of the waived stocks was a several interest, analogous to the right of preemption, which is personal to each stockholder.

• Spurious Class Action as Permissive Joinder — The spurious class action under Federal Rule 23(a)(3), which allows a class suit where the right is several but there is a common question of law or fact and common relief is sought, corresponds to permissive joinder under Section 6, Rule 3 of the Philippine Rules of Court, not to a true class suit under Section 12. The Court distinguished the American authorities cited by petitioners as pertaining to permissive joinder rather than class suits.

• Ultimate Facts vs. Conclusions of Law in Pleadings — A complaint must state ultimate facts constituting the cause of action, not conclusions of law. A motion to dismiss for failure to state a cause of action hypothetically admits only facts well pleaded and inferences fairly deducible therefrom, not allegations of conclusions of law. Allegations of trust, unlawful acts, breach of duty, or characterization of instruments are conclusions of law unless accompanied by facts from which the court can reach the result by natural reasoning. The Court applied this by finding that the complaint's allegations of trust, unlawful acquisition, and violation of law were conclusions of law unsupported by ultimate facts.

• Elements of a Cause of Action — A cause of action consists of three elements: (1) a legal right in the plaintiff, (2) a correlative legal duty in the defendant, and (3) an act or omission of the defendant in violation of the plaintiff's right with consequential injury. The Court applied this by finding that the complaint failed to establish the first element because it did not allege facts showing that plaintiffs were qualified to subscribe, and therefore could not establish the second or third elements.

• "An action does not become a class suit merely because it is designated as such in the pleadings. Whether the suit is or is not a class quit depends upon the attending facts, and the complaint, or other pleading initiating the class action should allege the existence of the necessary facts, to wit, the existence of a subject matter of common interest, and the existence of a class and the number of persons in the alleged class" — This passage states the requirement that the complaint itself must allege the facts necessary to establish a class suit, including the number of persons in the alleged class, enabling the court to determine numerosity and adequacy of representation.

• "Separate wrongs to separate persons, although committed by similar means and even pursuant to a single plan, do not alone create a 'common' or 'general' interest in those who are wronged so as to entitle them to maintain a representative action." — This passage articulates the principle that a common question of law or a common scheme of wrongdoing does not suffice to create the common or general interest required for a class suit, distinguishing several interests from common interests.

• "The right to preemption, it has been said, is personal to each stockholder, and while a stockholder may maintain a suit to compel the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a representative action on behalf of other stockholders who are similarly situated." — This passage draws the analogy between the stockholder's right of preemption and the subscription right at issue, establishing that such rights are personal and cannot form the basis of a representative suit.

• "If from the facts in evidence, the result can be reached by that process of natural reasoning adopted in the investigation of truth, it becomes an ultimate fact, to be found as such. If, on the other hand, resort must be had to the artificial processes of the law, in order to reach a final determination, the result is a conclusion of law." — This passage provides the test for distinguishing ultimate facts from conclusions of law in pleadings, a critical principle for determining whether a complaint states a cause of action.

• Rallonza vs. Evangelista, 15 Phil. 531 — Cited as authority that a class suit does not lie where separate portions of the same parcel are occupied and claimed individually by different parties to the exclusion of each other, illustrating that determinable, undivided interests do not constitute common or general interest.
• Valencia vs. City of Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096 — Followed for the proposition that a class suit does not lie in an action for recovery of amounts representing surcharges collected from some 30,000 customers, where each plaintiff was entitled only to the return of what he had personally paid, demonstrating that several interests do not satisfy the common interest requirement.
• Berses vs. Villanueva, 25 Phil. 473 — Cited for the holding that a class suit would not lie against 319 defendants individually occupying different portions of land, where each defendant had an interest only in his particular portion, reinforcing the distinction between common interest in a single thing and distinct interests in separate things.
• Niembra vs. Director of Lands, L-20084, July 17, 1964, 11 SCRA 525 — Cited for the proposition that where no sufficient representative parties had been joined, dismissal by the trial court of an action purported to be a class suit was correct.
• Uy Chao vs. De la Rama Steamship Co., Inc., L-14495, September 29, 1962, 6 SCRA 69 — Cited for the rule that the sufficiency of a complaint, when challenged in a motion to dismiss, must be determined exclusively on the basis of the facts alleged therein.
• Ma-ao Sugar Central Co., Inc. vs. Barrios, 79 Phil. 666 — Cited for the definition and essential elements of a cause of action: a legal right in the plaintiff, a correlative duty in the defendant, and an act or omission violating that right with consequential injury.

• Section 12, Rule 3, Rules of Court — Governs class suits, requiring that the subject matter be of common or general interest to many persons and that the parties be so numerous as to make it impracticable to bring them all before the court, with the court ensuring that the parties before it are sufficiently numerous and representative. Applied to hold that the complaint failed to allege the number of CMI subscribing stockholders and that the interest in waived shares was several, not common.
• Section 6, Rule 3, Rules of Court — Governs permissive joinder of parties. Applied to distinguish the American spurious class action, which involves several rights with a common question of law or fact, as corresponding to permissive joinder rather than a true class suit.
• Section 1(g), Rule 16, Rules of Court — Provides that a motion to dismiss may be made on the ground that the complaint states no cause of action. Applied to test the sufficiency of the complaint exclusively on the basis of the complaint itself.
• Section 3, Rule 6, Rules of Court — Requires that the complaint state the ultimate facts constituting the plaintiff's cause of action. Applied to hold that the complaint's allegations of trust, unlawful acquisition, and violation of law were conclusions of law, not ultimate facts.

Fernando, Barredo, Fernandez, and Aquino, JJ., concurred. Antonio, J., took no part.