Nunga, Jr. vs. Nunga III

A sale of shares of stock in a rural bank to a person who is not a citizen of the Philippines is void ab initio for being contrary to the mandatory provisions of Section 4 of Republic Act No. 7353, which requires that the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines. A subsequent law granting new rights cannot be applied retroactively when it would prejudice or impair a vested right acquired by another person prior to the law's effectivity.

Petitioners Francisco R. Nunga, Jr. (Francisco Jr.) and Victor D. Nunga (Victor) are father and son, while respondent Francisco N. Nunga III (Francisco III) is Francisco Jr.'s nephew. All were stockholders of the Rural Bank of Apalit, Inc. (RBA), a rural bank organized under Republic Act No. 7353, which mandates that the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines. Francisco Jr. was a naturalized citizen of the United States of America. The dispute arose from a double sale of the same shares of stock by stockholder Jesus Gonzalez to both Francisco Jr. and Francisco III, and the cases were originally filed with the Securities and Exchange Commission (SEC) before being transferred to the Regional Trial Court pursuant to Administrative Circular AM No. 00-11-03.

Petitioners Francisco R. Nunga, Jr. (Francisco Jr.) and his son Victor D. Nunga (Victor), together with respondent Francisco N. Nunga III (Francisco III), Francisco Jr.'s nephew, were stockholders of the Rural Bank of Apalit, Inc. (RBA). At the RBA's Annual Stockholders' Meeting on 30 January 1996, stockholder Jesus Gonzalez made known his intention to sell his shareholdings. Victor informed his father, who was then in the United States, and Francisco Jr. instructed Victor to inquire about the terms of the sale. After negotiations, Gonzalez agreed to sell his shares to Francisco Jr.

On 19 February 1996, Gonzalez executed a Contract to Sell in favor of Francisco Jr. covering seven stock certificates representing a total of 1,992 shares, for a total consideration of P200,000.00, with P50,000.00 payable upon execution and the balance of P150,000.00 due on 28 February 1996. On the same date, Victor gave the initial payment of P50,000.00 to Gonzalez, who handed over Stock Certificates No. 105, No. 152, and No. 166. For the remaining certificates in RBA's possession, Gonzalez issued a letter to the RBA Corporate Secretary, Isabel Firme, instructing her to turn over the remaining certificates to Victor. Firme gave Victor Stock Certificate No. 181 but stated that Stock Certificates No. 5 and No. 36 could no longer be located. The Contract to Sell was notarized only on 28 February 1996.

Before Francisco Jr. and Victor could pay the balance, Gonzalez entered into another contract involving the same shares. On 27 February 1996, Gonzalez executed a Deed of Assignment of his RBA shares in favor of Francisco III, who paid the full purchase price of P300,000.00 using a BPI Family Bank Check, evidenced by an acknowledgment receipt signed by Gonzalez and witnessed by his wife. Since the stock certificates were already in Victor's possession, Gonzalez wrote Victor a letter demanding that he surrender the certificates to Francisco III.

The next day, 28 February 1996, Francisco Jr. arrived from the United States and, together with Victor, proceeded to Gonzalez's residence to pay the balance of P150,000.00. Gonzalez informed them that he had already sold the shares to Francisco III. After discussion, Gonzalez accepted the balance and signed the dorsal portion of the stock certificates to endorse them to Francisco Jr., also executing a Deed of Absolute Sale in favor of Francisco Jr. On the same day, Francisco III delivered the Deed of Assignment to Firme, and on 1 March 1996, Firme wrote Victor demanding compliance with Gonzalez's letter. Victor refused and instead demanded that the sale to Francisco Jr. be entered in the Corporate Book of Transfer, which Firme rejected.

Consequently, on 14 March 1996, Victor filed a Petition with the SEC against Francisco III and Firme (SEC Case No. 03-96-5288), and Francisco III filed a Complaint against Gonzalez, Francisco Jr., and Victor (SEC Case No. 03-96-5292). The cases were consolidated and eventually transferred to the RTC. The RTC ruled in favor of petitioners in Commercial Case No. 018, holding that Francisco Jr. had a better right over the shares because the Contract to Sell was executed prior to the Deed of Assignment, and that Francisco Jr. was qualified to own the shares under Republic Act No. 8179. The Court of Appeals reversed, holding that the sale to Francisco Jr. was void for violating Republic Act No. 7353, and that Republic Act No. 8179 could not be applied retroactively.

• Validity of the Sale: Petitioners contended that the consummated sale of the RBA shares by Gonzalez to Francisco Jr. gave the latter a superior right over the same, since the transaction complied with all the elements of a valid sale.
• No Prohibition in Republic Act No. 7353: Petitioners claimed that there was no provision in Republic Act No. 7353, prior to its amendment, which explicitly prohibited any transfer of shares to individuals who were not Philippine citizens, or which declared such a transfer void, and that there was an implied recognition by the legislature that declaring such acts void would be more disadvantageous and harmful to the purposes of the law.
• Retroactive Application of Republic Act No. 8179: Petitioners argued that the passage of Republic Act No. 8179 cured whatever legal infirmity there may have been in the purchase by Francisco Jr., as it expressly creates and declares for the first time a substantive right, and may therefore be given retroactive effect.
• No Vested Right of Francisco III: Petitioners maintained that the Deed of Assignment between Francisco III and Gonzalez did not confer upon Francisco III a vested interest that could be impaired by the retroactive application of Republic Act No. 8179, since the Deed was executed later in time and the check issued for its payment was never encashed, making the contract inexistent for lack of consideration.
• Damages: Petitioners argued that the Court of Appeals erred in awarding damages to Francisco III and in withdrawing the award of nominal damages to petitioners by the trial court.

• Disqualification of Francisco Jr.: Francisco III argued that the RTC erred in ruling that Francisco Jr. had a better right over the disputed shares, considering that the prior contract was a mere contract to sell, and that the sale to Francisco Jr., a naturalized American citizen, was void for violating Republic Act No. 7353.
• Bad Faith Finding: Francisco III argued that the RTC erred in finding that the Deed of Assignment in his favor was executed in bad faith, as it was not supported by any of the evidence presented by the parties.
• Prospective Application of Republic Act No. 8179: Francisco III argued that the RTC erred in giving retroactive effect to Republic Act No. 8179, which took effect only on 16 April 1996, after Francisco Jr. entered into the contracts with Gonzalez, and that the statute cannot benefit Francisco Jr. because its application would prejudice Francisco III's vested right over the shares acquired through the Deed of Assignment on 27 February 1996.

• Validity of the Sale: Whether the Court of Appeals erred in declaring the sale of the shares of stock of Gonzalez to Francisco Jr. null and void ab initio on the basis of the alleged disqualification of Francisco Jr. under Republic Act No. 7353.
• Vested Right of Francisco III: Whether the Court of Appeals gravely erred in holding that Francisco III has a vested right to the shares of stock of Gonzalez, which would be impaired by the retroactive application of Republic Act No. 8179.
• Award of Damages: Whether the Court of Appeals gravely erred in awarding damages to Francisco III and withdrawing the award of nominal damages to petitioners by the trial court.

• Validity of the Sale: Yes. The sale of the shares to Francisco Jr. was void ab initio. Section 4 of Republic Act No. 7353 categorically provides that only citizens of the Philippines can own and hold, directly or indirectly, the capital stock of a rural bank, and Francisco Jr. was a naturalized American citizen at the time of the sale.
• Vested Right of Francisco III: Yes. Francisco III had acquired vested rights to the disputed shares by virtue of the Deed of Assignment executed in his favor on 27 February 1996. Republic Act No. 8179 cannot be applied retroactively because it would prejudice or impair Francisco III's vested rights.
• Award of Damages: No. The Court of Appeals correctly denied moral and exemplary damages to Francisco III for lack of proof of entitlement, and correctly awarded P20,000.00 as attorney's fees. The RTC had not awarded nominal damages to petitioners in the first place.

• Validity of the Sale: Section 4 of Republic Act No. 7353 explicitly provides that "the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines," subject only to exceptions for corporations organized primarily to hold equities in rural banks and Filipino-controlled domestic banks. The Supreme Court cited Bulos, Jr. vs. Yasuma, which disqualified a foreigner from owning capital stock in the Rural Bank of Parañaque on the same basis. It was undisputed that Francisco Jr. was already a naturalized citizen of the United States when Gonzalez executed the Contract to Sell and the Deed of Absolute Sale in his favor. Consequently, the acquisition by Francisco Jr. of the disputed RBA shares violated the clear and mandatory dictum of Republic Act No. 7353. A contract that violates the law is null and void ab initio and vests no rights and creates no obligations; it produces no legal effect at all. It is irrelevant that the terms of the Contract to Sell had been fully complied with and performed by the parties, and that a Deed of Absolute Sale was already executed, because a void agreement will not be rendered operative by the parties' alleged performance of their respective prestations.
• Vested Right of Francisco III: While it is true that a law creating new rights may be given retroactive effect, the same can only be made possible if the new right does not prejudice or impair any vested right. Francisco III, who is undeniably a citizen of the Philippines and fully qualified to own shares in a Philippine rural bank, had acquired vested rights to the disputed shares by virtue of the Deed of Assignment executed in his favor by Gonzalez on 27 February 1996. The Contract to Sell between Gonzalez and Francisco Jr. was void and without force and effect for being contrary to law, so it cannot be the basis of a superior right. Republic Act No. 8179 cannot be applied retroactively because it would prejudice Francisco III's vested rights.
• Award of Damages: Francisco III failed to establish his entitlement to moral damages in view of the absence of proof that he endured physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, or any similar injury. Exemplary damages were not warranted because Francisco III was not able to prove that he was entitled to moral, temperate, or compensatory damages, and exemplary damages cannot be considered a matter of right. The contention that the Court of Appeals erred in withdrawing the award of nominal damages to petitioners was utterly misleading, as the RTC had not awarded any nominal damages in favor of petitioners in the first place. However, since Francisco III was indeed compelled to litigate and incur expenses to protect his interests, the award of P20,000.00 as attorney's fees, plus costs of suit, was sustained.

• Mandatory Citizenship Requirement for Rural Bank Ownership — Section 4 of Republic Act No. 7353 requires that the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines, subject only to the exceptions stated in the same provision. A sale of rural bank shares to a non-citizen is void ab initio for being contrary to a mandatory and prohibitory law, pursuant to Article 5 of the Civil Code.
• Prospective Application of Laws — Under Article 4 of the Civil Code, laws shall have no retroactive effect unless the contrary is provided. Settled exceptions include when the statute is curative or remedial in nature, or when it creates new rights. However, a law creating new rights may be given retroactive effect only if the new right does not prejudice or impair any vested right.
• Void Contracts Produce No Legal Effect — A contract that violates the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all, and a void agreement will not be rendered operative by the parties' alleged performance (partial or full) of their respective prestations.
• Exemplary Damages Require Prior Entitlement to Other Damages — Under Article 2234 of the Civil Code, while the amount of exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate, or compensatory damages before the court may consider whether exemplary damages should be awarded.

• "With exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under Section 12-C of Republic Act 337, as amended, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock." — This is the controlling statutory provision from Section 4 of Republic Act No. 7353, which the Court applied to declare the sale to Francisco Jr. void.
• "While it is true that a law creating new rights may be given retroactive effect, the same can only be made possible if the new right does not prejudice or impair any vested right." — This states the exception to the exception to the rule on prospective application of laws, which the Court applied to deny retroactive effect to Republic Act No. 8179.
• "A contract that violates the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all." — This articulates the principle that a void agreement cannot be rendered operative by the parties' performance, which the Court applied to reject petitioners' claim of a superior right based on the earlier Contract to Sell.

• Bulos, Jr. vs. Yasuma, G.R. No. 164159, 17 July 2007, 527 SCRA 727 — Controlling precedent interpreting Section 4 of Republic Act No. 7353, on the basis of which the Court disqualified a foreigner from owning capital stock in a rural bank; applied to disqualify Francisco Jr. from acquiring the disputed shares.
• Frivaldo vs. Commission on Elections, 327 Phil. 521, 556 (1996) — Cited for the settled exceptions to the general rule on prospective application of laws, including when the statute is curative or remedial in nature, or when it creates new rights.
• Rattan Art & Decorations, Inc. vs. Collector of Internal Revenue, 121 Phil. 605, 611 (1965) — Cited for the principle that a law creating new rights may be given retroactive effect only if the new right does not prejudice or impair any vested right.
• Chavez vs. Presidential Commission on Good Government, 366 Phil. 863, 868-869 (1999) — Cited for the principle that a contract that violates the law is null and void ab initio and vests no rights and creates no obligations.
• Expertravel and Tours, Inc. vs. Court of Appeals, G.R. No. 152392, 26 May 2005, 459 SCRA 147, 162 — Cited for the requisites for entitlement to moral damages.

• Section 4, Republic Act No. 7353 (The Rural Banks Act of 1992) — The provision requiring that the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines; the Court applied this to declare the sale to Francisco Jr., a naturalized American citizen, void ab initio.
• Section 9, Republic Act No. 8179 (An Act to Further Liberalize Foreign Investment) — The provision granting former natural-born citizens of the Philippines the same investment rights as Filipino citizens in rural banks; the Court held that this could not be applied retroactively to validate the sale because it would prejudice Francisco III's vested rights.
• Article 4, Civil Code of the Philippines — Provides that laws shall have no retroactive effect unless the contrary is provided; the Court applied this as the general rule, subject to the exceptions discussed.
• Article 5, Civil Code of the Philippines — Provides that acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity; the Court applied this to declare the sale to Francisco Jr. void.
• Article 2208, Civil Code of the Philippines — Provides for the recovery of attorney's fees when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; the Court applied this to sustain the award of P20,000.00 as attorney's fees to Francisco III.
• Article 2229, Civil Code of the Philippines — Defines exemplary damages as imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages; the Court applied this to deny exemplary damages for lack of prior entitlement to other damages.
• Article 2232, Civil Code of the Philippines — Provides that in contracts and quasi-contracts, exemplary damages may be awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner; the Court applied this to deny exemplary damages.
• Article 2233, Civil Code of the Philippines — Provides that exemplary damages cannot be considered a matter of right; the Court applied this in denying exemplary damages.
• Article 2234, Civil Code of the Philippines — Provides that while the amount of exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate, or compensatory damages before the court may consider whether exemplary damages should be awarded; the Court applied this to deny exemplary damages.

Consuelo Ynares-Santiago (Chairperson), Ma. Alicia Austria-Martinez, Antonio Eduardo B. Nachura, and Ruben T. Reyes.

N/A — No dissenting opinions were noted in the case text.