Republic Bank vs. Cuaderno

A stockholder may maintain a derivative suit for and in behalf of the corporation without prior demand on the board when the directors are the alleged wrongdoers or are controlled by them, and a complaint alleging that corporate funds are being wasted or diverted to shield a director from criminal prosecution states a cause of action; the allegations must be accepted as true on a motion to dismiss for failure to state a cause of action.

Damaso Perez was a stockholder of Republic Bank, a Philippine banking corporation domiciled in Manila. Pablo Roman was alleged to be chairman of the Bank’s Board of Directors and of its Executive Loan Committee. Miguel Cuaderno was a former Governor of the Central Bank and member of the Monetary Board, while Bienvenido Dizon was a former president of the Philippine National Bank and a member of the Monetary Board from 1961 to 1962. The dispute implicated the General Banking Act, the Anti-Graft and Corrupt Practices Act (Republic Act No. 5019), and the Central Bank’s supervisory authority over the Bank.

Damaso Perez was a stockholder of Republic Bank, a Philippine banking corporation domiciled in Manila. Pablo Roman was alleged to be chairman of the Bank’s Board of Directors and of its Executive Loan Committee. Perez complained to the Monetary Board of the Central Bank against alleged frauds committed by Roman. According to the complaint, from 1957 to 1959 Roman, in grave abuse of his fiduciary duty and in connivance with other officials of the Republic Bank, fraudulently granted or caused to be granted loans to fictitious and non-existing persons and to close friends, relatives, and/or employees who were in reality their dummies, on the basis of fictitious and inflated appraised values of real estate properties. The loans amounted to almost P4 million.

Acting on the complaint, Miguel Cuaderno, then Governor of the Central Bank, and the Monetary Board ordered an investigation, which was carried out by Bank Examiners. They and the Superintendent of Banks of the Central Bank reported that certain mortgage loans amounting to P2,303,400.00 were granted in violation of sections 77, 78, and 88 of the General Banking Act. Acting on those reports, the Monetary Board ordered a new Board of Directors of the Republic Bank to be elected; the election was done and subsequently approved by the Monetary Board. On January 5, 1960, the Monetary Board accepted Roman’s offer to put up adequate security for the questioned loans, and such security was made a condition for the resumption of the Bank’s normal operations.

Subsequently, the Central Bank, through Governor Cuaderno, referred to special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of the Banking Act reported by the Superintendent of Banks for investigation and prosecution, but no information was filed up to the time of Cuaderno’s retirement in 1961. Other similar frauds were later discovered.

To neutralize the impending action against him, Roman engaged Cuaderno as technical consultant at a compensation of P12,500.00 per month and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank. The Board of Directors, composed of individuals personally selected and chosen by Roman, allegedly connived and confederated in approving the appointment and selection of Cuaderno and Dizon. Perez alleged that this action was motivated by bad faith and without intention to protect the interest of the Republic Bank, but was prompted to protect Roman from criminal prosecution. The appointment of Cuaderno and his acceptance of the position of technical consultant were alleged to be immoral, anomalous, and illegal, and his compensation highly unconscionable, because court actions involving Cuaderno’s actuations as Governor and member or chairman of the Monetary Board were still pending. Dizon, as a member of the Monetary Board from 1961 to 1962, exercised supervision over the Republic Bank; his selection as chairman of the Bank’s Board after he was forced to resign from the presidency of the Philippine National Bank and from membership in the Monetary Board, and within one year thereafter, was alleged to violate option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act. Both Cuaderno and Dizon were alleged to be alter egos of Roman. The Monetary Board was about to approve the appointments and would do so unless enjoined.

Perez instituted a derivative suit for and in behalf of the Republic Bank. Paragraph 6 of the complaint expressly pleaded that he filed the suit without any further demand on the Board of Directors because such formal demand would be a futile formality, since the members of the Board were personally chosen by Roman himself. The complaint prayed for a writ of preliminary injunction to prevent the Monetary Board from confirming the appointments, to prevent the Board of Directors from recognizing Cuaderno as technical consultant and Dizon as chairman, and to prevent Roman from appointing or selecting officers or directors of the Bank. It also sought a permanent injunction; a declaration that Cuaderno’s appointment and compensation were unconscionable, immoral, illegal, and void; a declaration that Dizon’s selection violated Section 3, sub-paragraph (d) of Republic Act No. 5019 and was illegal and void; a declaration that Roman had no right to select alter egos to manage the Bank; an order for Cuaderno and Dizon to return all amounts received with 6% interest, or for Roman to refund such amounts and pay damages; and attorney’s fees, litigation expenses, and costs.

• Derivative Suit and Futility of Demand: Plaintiff-appellant maintained that the action was a derivative suit for and in behalf of Republic Bank and that no prior demand on the Board of Directors was required because such demand would be futile, the members of the Board having been personally chosen by Pablo Roman.
• Cause of Action for Corporate Waste: Plaintiff-appellant alleged that Roman, as chairman of the Board and Executive Loan Committee, fraudulently granted loans to fictitious persons and dummies based on inflated appraisals, and that Cuaderno and Dizon were appointed or selected to shield Roman from criminal prosecution, resulting in unlawful wastage or diversion of corporate funds.
• Invalid Appointments and Compensation: Plaintiff-appellant sought to declare Cuaderno’s appointment as technical consultant at P12,500.00 per month unconscionable, immoral, illegal, and void, and Dizon’s selection as chairman violative of Section 3, sub-paragraph (d) of Republic Act No. 5019.
• Injunctive and Monetary Relief: Plaintiff-appellant prayed for preliminary and permanent injunctions against the confirmation or recognition of the appointments and for the return or refund of compensation, damages, attorney’s fees, litigation expenses, and costs.
• Opposition to Dismissal: Plaintiff-appellant opposed the motions to dismiss, contending that the complaint stated a cause of action and that the derivative suit was proper.

• No Valid Cause of Action: Defendants moved to dismiss on the ground that the complaint stated no valid cause of action against the individual movants.
• Lack of Legal Capacity: Defendants contended that the plaintiff-relator lacked legal capacity to sue.
• Non-Exhaustion of Intra-Corporate Remedies: Defendants argued that the plaintiff failed to exhaust intra-corporate remedies and was not authorized by the corporation to bring suit in its behalf.
• Corporate Acts Not Subject to Stockholder Interference: Defendants mainly controverted the right of the plaintiff to question the appointment and selection of Cuaderno and Dizon, contending that these were corporate acts with which a stockholder cannot interfere.
• Quo Warranto: Defendant Bienvenido Dizon contended that the action amounted to a quo warranto proceeding.

• Dismissal for Failure to State a Cause of Action: Whether the trial court erred in dismissing the complaint for failure to state a cause of action.
• Derivative Suit and Futility of Demand: Whether plaintiff-stockholder could institute a derivative suit for and in behalf of Republic Bank without prior demand on its Board of Directors.
• Corporate Party and Misjoinder: Whether the corporation must be made a party defendant and whether misjoinder or absence of other stockholders warranted dismissal.
• Quo Warranto: Whether the action was in the nature of quo warranto.
• Pendency of Other Actions: Whether the pendency of eight other cases between practically the same parties justified dismissal.

• Dismissal for Failure to State a Cause of Action: No. The order dismissing the complaint was reversed; the complaint alleged facts constituting a cause of action for the Bank, including unlawful wastage or diversion of corporate funds and breach of trust.
• Derivative Suit and Futility of Demand: Yes. A stockholder may sue derivatively when officials refuse to sue, are the ones sued, or control the corporation; demand was excused as futile because the directors were Roman’s nominees and creatures.
• Corporate Party and Misjoinder: The corporation should be made a party to bind it and bar relitigation; the side on which it appears is not important, and the trial court may direct amendment; misjoinder is not a ground to dismiss under Revised Rule 3, sec. 11.
• Quo Warranto: No. Plaintiff did not claim title to Dizon’s position; the suit sought to prevent waste or diversion of corporate funds.
• Pendency of Other Actions: No. Dismissal was not justified; the cause of action was not included in the other cases, dismissal was not sought on that ground, and amendment after responsive pleading is discretionary.

• Dismissal for Failure to State a Cause of Action: On a motion to dismiss for failure to state a cause of action, the facts pleaded in the complaint are deemed accepted by the moving defendants. The test is whether the court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint; if the court doubts the truth of the averments, it must not dismiss but require an answer and proceed to trial. The complaint alleged that Cuaderno and Dizon were appointed or selected solely to protect Roman from criminal prosecution, by a Board composed of Roman’s creatures and nominees. Those facts constituted a cause of action for the Bank because the moneys disbursed to Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds; the Bank had no interest in shielding Roman, and the directors approving the appointments would be committing a breach of trust. The Bank could therefore sue to nullify the appointments, enjoin disbursement of its funds, and recover amounts paid for that purpose. Citations: Angeles vs. Santos; Paminsan vs. Costales; Blay vs. Batangas Transportation Co.; De Jesus vs. Belarmino; Valencia & Co. vs. Layug; Piñero vs. Enriquez; Dimayuga vs. Dimayuga.
• Derivative Suit and Futility of Demand: Although corporate acts are normally not subject to stockholder interference, Philippine jurisprudence allows an individual stockholder to institute a derivative or representative suit on behalf of the corporation to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In such actions, the stockholder is a nominal party and the corporation is the real party in interest. Perez neither alleged nor vindicated his own individual interest but the interest of Republic Bank and the damage caused to it; the action was expressly for and in behalf of the Bank, and demand was futile because the directors were Roman’s nominees and creatures. The fact that no other stockholder joined was irrelevant, and the smallness of Perez’s holdings was no ground to deny relief. Citations: Pascual vs. Del Saz Orozco; Everett vs. Asia Banking Corp.; Angeles vs. Santos; Evangelista vs. Santos; Ashwander vs. TVA.
• Corporate Party and Misjoinder: The corporation should be made a party in a derivative suit so that the judgment binds it and bars future relitigation. English practice makes the corporation a party plaintiff, while United States practice leans toward making it a party defendant; either method has objections. What matters is that the corporation is a party. The trial court had power to direct amendments of the pleadings by adding or dropping parties as required in the interest of justice under Revised Rule 3, section 11, and misjoinder of parties is not a ground to dismiss.
• Quo Warranto: The contention that the action was one of quo warranto was rejected. Perez did not claim title to Dizon’s position as head of the Bank’s board of directors. The suit was aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect Roman from criminal prosecution and not to carry on the corporation’s bank business. Whether the allegations were true had to be determined after due hearing.
• Pendency of Other Actions: The trial court’s additional ground of pendency of eight other lawsuits between practically the same parties did not justify dismissal. There was no pretense that the cause of action in the present case was already included in any of the other pending cases, and dismissal was not sought on the ground of pendency of another action between the same parties. Amendment of a complaint after a responsive pleading is filed rests upon the discretion of the party and the court. The case could not be dismissed merely because the cause of action could be incorporated in the pending cases.

• Derivative Suit — A stockholder may institute a derivative or representative suit on behalf of the corporation to protect or vindicate corporate rights when the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. The stockholder is a nominal party; the corporation is the real party in interest. In this case, Perez’s suit was for and in behalf of Republic Bank, alleging frauds against the Bank and seeking to nullify appointments and recover funds; hence it was a proper derivative suit.
• Futility of Intra-Corporate Demand — Prior demand on the board is excused when it would be futile, as where the directors are the alleged wrongdoers or are controlled by them. The complaint expressly pleaded that demand would be futile because the Board members were personally chosen by Roman; this permitted the derivative suit.
• Sufficiency of Complaint on Motion to Dismiss for Failure to State a Cause of Action — Facts pleaded in the complaint are deemed accepted by defendants who move to dismiss for failure to state a cause of action. The test is whether the court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint. If the court doubts the truth of the facts, it must not dismiss but require an answer and trial. Applied: the complaint’s allegations of unlawful wastage or diversion of corporate funds and breach of trust stated a cause of action.
• Corporation as Party in Derivative Suit — The corporation should be made a party to make the judgment binding upon it and bar future relitigation. Whether it appears as plaintiff or defendant is not important; the trial court may direct amendment of pleadings to add or drop parties in the interest of justice, and misjoinder of parties is not a ground to dismiss. Applied: the trial court could order the corporation’s inclusion rather than dismiss.
• Quo Warranto Distinguished from Derivative Suit — An action is not quo warranto where the plaintiff does not claim title to the office or position but seeks to prevent waste or diversion of corporate funds. Applied: Perez did not claim Dizon’s chairmanship; he sought to stop payments to officers allegedly appointed to shield Roman.
• Pendency of Other Actions and Amendment — Dismissal is not justified merely because the cause of action could be incorporated in other pending cases; pendency of another action must be invoked as a ground, and amendment after a responsive pleading is discretionary. Applied: the trial court’s reliance on eight pending cases did not justify dismissal.
• Smallness of Stockholdings — The smallness of a plaintiff’s stockholdings is no ground for denying relief in a derivative suit. Applied: Perez’s holdings did not bar his suit.

• "Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation." — States the derivative-suit rule and its exceptions, which is the core basis for allowing Perez to sue for and in behalf of Republic Bank.
• "Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss the complaint for failure to state a cause of action. This is the cardinal principle in the matter." — States the standard governing the motion to dismiss, which required the trial court to accept the complaint’s allegations as true.
• "There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos, supra.)." — Applies the sufficiency-of-complaint rule to the facts and explains why the complaint stated a corporate cause of action.

• Pascual vs. Del Saz Orozco, 19 Phil. 82, 85 — Cited for the rule that a stockholder may bring a derivative suit on behalf of the corporation.
• Everett vs. Asia Banking Corp., 45 Phil. 518 — Cited for the same derivative-suit principle.
• Angeles vs. Santos, 64 Phil. 697 — Cited for derivative suit and for the Bank’s right to sue to nullify appointments, enjoin disbursement, and recover funds paid for unauthorized purposes.
• Evangelista vs. Santos, 86 Phil. 388, 394 — Cited for derivative suit and futility of intra-corporate demand.
• Ashwander vs. TVA, 80 L. Ed. 688 — Cited for the rule that the smallness of plaintiff’s holdings is no ground for denying relief.
• Paminsan vs. Costales, 28 Phil. 487; Blay vs. Batangas Transportation Co., 80 Phil. 373; De Jesus vs. Belarmino, 95 Phil. 366; Valencia & Co. vs. Layug, CA-G.R. No. L-11060, May 23, 1958; Piñero vs. Enriquez, 84 Phil. 774; Dimayuga vs. Dimayuga, 96 Phil. 366 — Cited for the rule that facts pleaded are deemed accepted on a motion to dismiss for failure to state a cause of action and that doubt as to their truth requires trial.

• Revised Rule 3, sec. 11 — Misjoinder of parties is not a ground to dismiss an action; the trial court may direct the amendment of pleadings by adding or dropping parties as required in the interest of justice. Applied to the question of making the corporation a party in the derivative suit.
• Section 3, sub-paragraph (d), Republic Act No. 5019 (Anti-Graft and Corrupt Practices Act) — Plaintiff alleged that Dizon’s selection as chairman violated this provision; the Court did not resolve the merits but held the complaint stated a cause of action.
• Sections 77, 78, and 88, General Banking Act — Plaintiff alleged that certain mortgage loans amounting to P2,303,400.00 were granted in violation of these sections; these allegations formed part of the factual basis of the complaint but were not resolved on the merits.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez, and Castro, JJ., concurred. Makalintal, J., took no part.