Reyes vs. Regional Trial Court of Makati

Jurisdiction over the subject matter of a case is conferred by law and is determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims asserted therein. A complaint that seeks the determination and distribution of successional rights to the shareholdings of a deceased person, rather than the enforcement of corporate rights and obligations, does not fall within the jurisdiction of a special commercial court under Section 5 of P.D. No. 902-A, even if it is denominated as a derivative suit for accounting of corporate funds.

Oscar C. Reyes and Rodrigo C. Reyes are two of the four children of the spouses Pedro and Anastacia Reyes, who together with their children owned shares of stock in Zenith Insurance Corporation, a domestic family corporation. Pedro died in 1964 and his estate was judicially partitioned among his heirs in the 1970s, but no similar settlement and partition was made with respect to Anastacia's estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively. When Republic Act No. 8799 took effect, the Securities and Exchange Commission's exclusive and original jurisdiction over cases enumerated in Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court designated as a special commercial court.

Oscar C. Reyes and Rodrigo C. Reyes are two of the four children of the spouses Pedro and Anastacia Reyes, who together with their children owned shares of stock of Zenith Insurance Corporation, a domestic family corporation. Pedro died in 1964 and his estate was judicially partitioned among his heirs in the 1970s, but no similar settlement and partition was made with respect to Anastacia's estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively.

On May 9, 2000, Zenith and Rodrigo filed a complaint with the Securities and Exchange Commission against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it was "a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an accounting of the funds and assets of ZENITH INSURANCE CORPORATION which are now or formerly in the control, custody, and/or possession of respondent [Oscar] and to determine the shares of stock of deceased spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were not collated and taken into account in the partition, distribution, and/or settlement of the estate of the deceased spouses, for which he should be ordered to account for all the income from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and respective shares." In his Answer with Counterclaim, Oscar denied the charge that he illegally acquired the shares of Anastacia, asserting that he purchased the subject shares with his own funds from the unissued stocks of Zenith, and that the suit was not a bona fide derivative suit because the requisites therefor had not been complied with. He questioned the SEC's jurisdiction to entertain the complaint because it pertained to the settlement of the estate of Anastacia Reyes.

When R.A. No. 8799 took effect, the SEC's exclusive and original jurisdiction over cases enumerated in Section 5 of P.D. No. 902-A was transferred to the RTC designated as a special commercial court, and the records of Rodrigo's SEC case were turned over to the RTC, Branch 142, Makati, docketed as Civil Case No. 00-1553. On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit, claiming that the complaint was a mere nuisance or harassment suit that should be dismissed under the Interim Rules of Procedure for Intra-Corporate Controversies, and that it was not a bona fide derivative suit as it partook of the nature of a petition for settlement of estate of the deceased Anastacia that was outside the jurisdiction of a special commercial court. The RTC denied the motion in part, declaring that the complaint disclosed two causes of action: a derivative suit for accounting of the funds and assets of the corporation, and an action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by Oscar, its accounting and the corresponding delivery of these shares to the parties' brothers and sisters. The RTC ruled that the latter was not a derivative suit and should properly be threshed out in a petition for settlement of estate, and that only the derivative suit consisting of the first cause of action would be taken cognizance of by the court.

Oscar went to the CA on a petition for certiorari, prohibition, and mandamus, praying that the RTC Order be annulled and set aside and that the trial court be prohibited from continuing with the proceedings. The appellate court affirmed the RTC Order and denied the petition in its Decision dated May 26, 2004, and likewise denied Oscar's motion for reconsideration in a Resolution dated October 21, 2004. Oscar then came before the Supreme Court on a petition for review on certiorari under Rule 45.

• Nuisance or Harassment Suit: Petitioner Oscar argued that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim Rules of Procedure of Intra-Corporate Controversies.
• Not a Bona Fide Derivative Suit: Petitioner argued that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial court.
• Prayer for Relief: Petitioner prayed for the setting aside and annulment of the CA decision and resolution, and the dismissal of Rodrigo's complaint before the RTC.

N/A — The decision does not recount the respondents' arguments in a manner that can be separately summarized.

• Jurisdiction of Special Commercial Courts: Whether the trial court, sitting as a special commercial court, has jurisdiction over the subject matter of Rodrigo's complaint.
• Fraudulent Devices and Schemes: Whether the allegations of fraud in the complaint were stated with sufficient particularity to bring the controversy within the special commercial court's jurisdiction under Section 5(a) of P.D. No. 902-A.
• Intra-Corporate Controversy — Relationship Test: Whether an intra-corporate relationship exists between the parties that would characterize the case as an intra-corporate dispute under Section 5(b) of P.D. No. 902-A.
• Intra-Corporate Controversy — Nature of Controversy Test: Whether the nature of the controversy is one that may be classified as an intra-corporate dispute.
• Derivative Suit: Whether the complaint satisfies the requisites for the existence of a derivative suit.

• Jurisdiction of Special Commercial Courts: No. The RTC, sitting as a special commercial court, has no jurisdiction to hear Rodrigo's complaint since what is involved is the determination and distribution of successional rights to the shareholdings of Anastacia Reyes. Jurisdiction over the subject matter of a case is conferred by law and is determined by the allegations of the complaint.
• Fraudulent Devices and Schemes: No. The charges of fraud against Oscar were not properly supported by the required factual allegations; they were not statements of ultimate facts but mere conclusions of law, and no corporate power or office was alleged to have facilitated the transfer of the shares.
• Intra-Corporate Controversy — Relationship Test: No. Insofar as the subject shares of stock are concerned, Rodrigo cannot be considered a stockholder of Zenith because his interest as an heir is inchoate and unrecorded; consequently, no intra-corporate relationship exists.
• Intra-Corporate Controversy — Nature of Controversy Test: No. The complaint is about the protection and enforcement of successional rights; the controversy it presents is purely civil rather than corporate, and the "derivative suit for accounting" is only an incident to the action for determination of shares of the deceased spouses.
• Derivative Suit: No. Rodrigo is not a shareholder with respect to the shareholdings originally belonging to Anastacia, he has not alleged exhaustion of intra-corporate remedies with the required particularity, and no injury to the corporation was alleged.

• Jurisdiction of Special Commercial Courts: The Court relied on the judicial principle that "jurisdiction over the subject matter of a case is conferred by law and is determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims asserted therein." The Court examined the allegations of the complaint to determine whether they fall within the terms of the law defining the court's jurisdiction, and found that the complaint failed both the relationship test and the nature of the controversy test under Section 5 of P.D. No. 902-A.

• Fraudulent Devices and Schemes: The Court applied Section 5, Rule 8 of the Revised Rules of Court, which provides that in all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity. The Court found that the complaint's allegations of fraud were "largely conclusions of law that, without supporting statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action." The Court further held that "not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring the case within the special commercial court's jurisdiction. To fall within this jurisdiction, there must be sufficient nexus showing that the corporation's nature, structure, or powers were used to facilitate the fraudulent device or scheme." In this case, Oscar was alleged to have acted as an individual and without reference to his corporate personality. The Court noted that in cases governed by the Interim Rules of Procedure on Intra-Corporate Controversies, a bill of particulars is a prohibited pleading, so it is essential for the complaint to show on its face what are claimed to be the fraudulent corporate acts.

• Intra-Corporate Controversy — Relationship Test: The Court applied the two-tier test for determining whether a case involves an intra-corporate controversy, as adopted in Speed Distribution, Inc. vs. Court of Appeals: (a) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy. Under the relationship test, the Court found that Rodrigo holds shares in Zenith in two capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of the heirs of Anastacia with respect to the 136,598 shares registered in her name. What is material is Rodrigo's interest as an heir, since the subject matter centers on the shares belonging to Anastacia. The Court applied Article 777 of the Civil Code, declaring that successional rights are transmitted from the moment of death of the decedent, and Article 1078, providing that the whole estate of the decedent is, before its partition, owned in common by the heirs. However, the Court held that this status as co-owners does not immediately and necessarily make them stockholders of the corporation; unless and until there is compliance with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders. The Court distinguished Abejo vs. Dela Cruz and TCL Sales Corporation vs. Court of Appeals, where the transferees held definite and uncontested titles to a specific number of shares, making registration a mere formality. In the present case, each heir holds only an undivided, inchoate interest subject to the outcome of a settlement proceeding. The Court concluded that Rodrigo must hurdle two obstacles before he can be considered a stockholder: first, he must prove that there are shareholdings that will be left to him and his co-heirs, determinable only in a settlement of the decedent's estate; second, he must register the transfer of the shares allotted to him to make it binding against the corporation.

• Intra-Corporate Controversy — Nature of Controversy Test: The Court held that "the body rather than the title of the complaint determines the nature of an action." The Court read only one cause of action alleged in the complaint: the "derivative suit for accounting" was only an incident to the "action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the parties' brothers and sisters." The Court noted that the complaint contained no sufficient allegation that justified the need for an accounting other than to determine the extent of Anastacia's shareholdings for purposes of distribution. The controversy arose from the parties' relationship as heirs of Anastacia and not as shareholders of Zenith; Rodrigo was enforcing his rights as a co-heir and not as a stockholder. The Court held that the RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition, and distribute the estate of a deceased. Citing Natcher vs. Court of Appeals, the Court stated that "matters which involve settlement and distribution of the estate of the decedent fall within the exclusive province of the probate court in the exercise of its limited jurisdiction." The Court also cited Coca vs. Pangilinan for the proposition that the probate court may decide questions of title or ownership where the interested parties are all heirs, or the question is one of collation or advancement.

• Derivative Suit: The Court applied the requisites for a derivative suit: (a) the party bringing suit should be a shareholder during the time of the act or transaction complained of; (b) the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief, but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation. The Court found that Rodrigo failed all three requisites: he was not a shareholder with respect to Anastacia's shares; paragraph 8 of the complaint, alleging that "as members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted all legal means of resolving the dispute," hardly satisfied the requirement of exhaustion of remedies within the corporate setting; and no injury, actual or threatened, was alleged to have been done to the corporation, since the wrongful transfer, if any, did not affect the capital stock or the assets of Zenith.

• Jurisdiction Determined by Allegations of the Complaint — Jurisdiction over the subject matter of a case is conferred by law and is determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims asserted therein. The Court applied this principle to determine that the RTC's special commercial court jurisdiction could not be invoked where the complaint's allegations, read as a whole, presented a purely civil controversy over successional rights.

• Relationship Test — Under the relationship test, an intra-corporate controversy exists where the dispute arises out of intra-corporate or partnership relations between the corporation and its stockholders, between stockholders themselves, or between the corporation and the State. The Court applied this test and found that Rodrigo could not be considered a stockholder with respect to Anastacia's shares because his interest as an heir was inchoate and unrecorded, and therefore no intra-corporate relationship existed.

• Nature of the Controversy Test — Under the nature of the controversy test, the incidents of the intra-corporate relationship must be considered to ascertain whether the controversy itself is intra-corporate; the controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties' correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy, or if there will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists. The Court applied this test and found that the complaint was about the protection and enforcement of successional rights, a purely civil matter.

• Two-Tier Test for Intra-Corporate Controversy — To determine whether a case involves an intra-corporate controversy, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy. The first element requires that the controversy arise out of intra-corporate or partnership relations; the second requires that the dispute be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, the case does not involve an intra-corporate controversy. The Court applied this combined test and found that Rodrigo's complaint failed both elements.

• Inchoate Rights of Heirs to Shares of Deceased Stockholder — Upon the death of a stockholder, her children acquire legal title to her estate, including her shareholdings, and are deemed co-owners thereof prior to partition. However, this status as co-owners does not immediately and necessarily make them stockholders of the corporation; unless and until there is compliance with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders. The right of the heirs to specific, distributive shares of inheritance will not be determined until all the debts of the estate of the decedent are paid; whether there will be residue remains to be seen. The Court applied this doctrine to hold that Rodrigo's interest in Anastacia's shares was inchoate and could not support the existence of an intra-corporate relationship.

• Derivative Suit Requisites — The requisites for a derivative suit are: (a) the party bringing suit should be a shareholder during the time of the act or transaction complained of, the number of shares not being material; (b) the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief, but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation; the wrongdoing or harm having been or being caused to the corporation and not to the particular stockholder bringing the suit. The Court applied these requisites and found that Rodrigo's complaint failed all three.

• "Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring the case within the special commercial court's jurisdiction. To fall within this jurisdiction, there must be sufficient nexus showing that the corporation's nature, structure, or powers were used to facilitate the fraudulent device or scheme." — This passage articulates the controlling standard for invoking special commercial court jurisdiction under Section 5(a) of P.D. No. 902-A, requiring a nexus between the alleged fraud and the corporation's nature, structure, or powers.

• "The body rather than the title of the complaint determines the nature of an action." — This passage states the principle that the substance of the complaint, not its denomination, determines the nature of the action and consequently the court's jurisdiction.

• "In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia's shares) are concerned – Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-corporate relationship exists that would serve as basis to bring this case within the special commercial court's jurisdiction under Section 5(b) of PD 902-A, as amended." — This passage states the Court's conclusion under the relationship test, holding that an heir with an inchoate, unrecorded interest in a deceased stockholder's shares cannot invoke intra-corporate jurisdiction.

• "Matters which involve settlement and distribution of the estate of the decedent fall within the exclusive province of the probate court in the exercise of its limited jurisdiction." — This passage, quoted from Natcher v. Court of Appeals, establishes that disputes over the settlement and distribution of a decedent's estate, including the determination of shareholdings, belong to the probate court and not to a special commercial court.

• Speed Distribution, Inc. vs. Court of Appeals, G.R. No. 149351, March 17, 2004, 425 SCRA 691 — Controlling precedent for the two-tier test for determining whether a case involves an intra-corporate controversy, requiring concurrence of the status or relationship of the parties and the nature of the question that is the subject of their controversy. Also cited for the principle that jurisdiction is determined by the allegations of the complaint.

• Union Glass & Container Corp. vs. SEC, G.R. No. 64013, November 28, 1983, 126 SCRA 31 — Cited for the enumeration of the types of relationships embraced under Section 5(b) of P.D. No. 902-A, including relationships among stockholders themselves.

• DMRC Enterprises vs. Esta del Sol Mountain Reserve, Inc., G.R. No. 57936, September 28, 1984, 132 SCRA 293 — Cited as the case that introduced the nature of the controversy test, holding that it is not the mere existence of an intra-corporate relationship that gives rise to an intra-corporate controversy.

• Abejo vs. Dela Cruz, G.R. No. L-63558, May 19, 1987, 149 SCRA 654 — Distinguished; in that case, the transferee held definite and uncontested title to a specific number of shares, making registration a mere formality in confirming status as a stockholder, unlike the present case where the heir's interest was inchoate.

• TCL Sales Corporation vs. Court of Appeals, G.R. No. 129777, January 5, 2001, 349 SCRA 35 — Distinguished on the same ground as Abejo; the transferee there had established prima facie ownership over the shares, unlike the present case.

• Natcher vs. Court of Appeals, G.R. No. 133000, October 2, 2001, 366 SCRA 385 — Cited for the principle that matters involving settlement and distribution of the estate of the decedent fall within the exclusive province of the probate court in the exercise of its limited jurisdiction.

• Coca vs. Pangilinan, G.R. No. L-27082, January 21, 1978, 81 SCRA 278 — Cited for the proposition that the probate court is competent to decide questions of ownership where the interested parties are all heirs, or the question is one of collation or advancement, or the parties consent to the assumption of jurisdiction.

• Santos vs. Liwag, G.R. No. L-24238, November 28, 1980, 101 SCRA 327 — Cited for the rule that allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that, without supporting statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action.

• Abad vs. CFI Pangasinan, G.R. No. 58507-08, February 26, 1992, 206 SCRA 567 — Cited for the application of Section 5, Rule 8 of the Revised Rules of Court requiring that circumstances constituting fraud or mistake be stated with particularity.

• Section 5, P.D. No. 902-A — Enumerates the cases over which the SEC (now the RTC acting as a special commercial court) exercises exclusive jurisdiction, including devices or schemes amounting to fraud (paragraph a) and controversies arising out of intra-corporate or partnership relations (paragraph b). The Court applied this provision to determine whether Rodrigo's complaint fell within the special commercial court's jurisdiction.

• Section 5.2, R.A. No. 8799 — Transferred the SEC's jurisdiction over all cases enumerated under Section 5 of P.D. No. 902-A to the courts of general jurisdiction or the appropriate Regional Trial Court. The Court applied this provision to establish the RTC's authority as a special commercial court over intra-corporate controversies.

• Section 63, Corporation Code — Governs the certificate of stock and transfer of shares, providing that no transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. The Court applied this provision to hold that the heirs of Anastacia, whose interest was inchoate and unrecorded, could not be considered stockholders of Zenith.

• Article 777, Civil Code — Declares that successional rights are transmitted from the moment of death of the decedent. The Court applied this provision to establish that upon Anastacia's death, her children acquired legal title to her estate, including her shareholdings.

• Article 1078, Civil Code — Provides that where there are two or more heirs, the whole estate of the decedent is, before its partition, owned in common by such heirs, subject to the payment of debts of the deceased. The Court applied this provision to establish the heirs' status as co-owners, which, however, did not make them stockholders.

• Section 5, Rule 8, Revised Rules of Court — Requires that in all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity. The Court applied this provision to find that the complaint's allegations of fraud were mere conclusions of law.

• Rule 1, Section 8(2), Interim Rules of Procedure on Intra-Corporate Controversies — Prohibits the filing of a bill of particulars in cases governed by the Interim Rules. The Court applied this provision to hold that it was essential for the complaint to show on its face what are claimed to be the fraudulent corporate acts.

• Section 2, Rule 90, Revised Rules of Court — Contemplates properties of the decedent held by one of the heirs, providing that questions as to advancement made or alleged to have been made by the deceased to any heir may be heard and determined by the court having jurisdiction of the estate proceedings. The Court cited this provision to support its holding that the dispute over Anastacia's shares should be resolved in estate proceedings.

Quisumbing, J. (Chairperson), Corona, J., Carpio Morales, J., and Velasco, Jr., J., concurred in the decision.

N/A — No dissenting opinions are noted in the provided text.