Spouses Hiteroza vs. Cruzada

Under the Interim Rules, a judgment in an intra-corporate case before pre-trial is valid only after submission of the parties' pre-trial briefs, except in default or in disputes exclusively involving inspection of corporate books under Rule 7; and a receiver or management committee may be appointed only upon a showing of imminent danger of both dissipation, loss, wastage, or destruction of assets and paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public.

Christ's Achievers Montessori, Inc. is a non-stock, non-profit corporation operating a school in San Jose del Monte, Bulacan. Sps. Hiteroza and Charito Cruzada are incorporators, members, and trustees of the school, together with Alberto Cruzada and Jaina R. Salangsang. The dispute is governed by the Interim Rules of Procedure for Intra-Corporate Controversies, including Rule 4 on pre-trial and Rule 9 on management committees and receivers.

On February 25, 2010, Sps. Hiteroza filed a Complaint for a derivative suit with prayer for the creation of a management committee, the appointment of a receiver, and a claim for damages against Charito, the President and Chairman of the school. They alleged that Charito employed schemes and acts resulting in dissipation, loss, or wastage of the school's assets that, if left unchecked, would likely cause paralysis of the school operations, amounting to fraud and misrepresentation detrimental and prejudicial to the school's interests. The alleged schemes were that Charito (a) lied about the school's financial status and concealed its real income, with discrepancies in the reported and actual number of enrolled students and missing funds due to fraud; (b) refused the Sps. Hiteroza's request to examine the corporate and financial records and to account for receipts and expenses, and refused to conduct regular and special annual board meetings and the election of officers; (c) allowed the school's debt with Unitrust Development Bank, secured by the Sps. Hiteroza's three lots used as the school site, to balloon from ₱2,000,000.00 to ₱7,512,492.24 due to late or non-payment, contrary to her assurance that the loan was back to ₱2,000,000.00; (d) faked SEC reportorial requirements by filing General Information Sheets for 2006 and 2008 falsely stating that annual members' meetings were held, and filed an Amended Articles of Incorporation using the old signature page without the Sps. Hiteroza's consent, and forged Cynthia's signature in the school's financial statements; (e) caused the illegal transfer of Jaina's membership to her son Jerameel S. Cruzada despite the bylaws' nontransferability rule and Jaina's Alzheimer's disease; (f) maintained a wealth and lifestyle not corresponding to her and her husband's monthly earnings of ₱10,000.00 and ₱8,000.00, including a house and lot in Marilao, Bulacan costing around ₱3,000,000.00 and an Isuzu Crosswind Sportivo costing around ₱1,200,000.00; and (g) used the school premises as her family's personal quarters without paying rent and used school funds for their utility bills.

Charito filed her belated Answer dated April 12, 2010 and argued that the complaint was a nuisance and harassment suit. She averred that the Sps. Hiteroza's real motive was to access and secure the school's income and that they professed concern for the school only after almost ten years. She claimed that her family's house was in a low-cost subdivision and that their car was obtained through hard work, not fraud. She argued that the serious situation test in Pryce Corporation vs. China Banking Corporation for the appointment of a management committee or receiver was not satisfied because the complaint failed to show a serious and imminent danger of dissipation, loss, wastage, or destruction of assets and paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public, and the necessity to preserve their rights and interests. She claimed that the school's improvement negated the accusation of mismanagement. On the right of inspection, she claimed that a derivative suit was not the proper remedy because the right of inspection is the stockholder's personal right and the cause of action is individual. She further claimed that the derivative suit requirements were not complied with because there was no allegation that the Sps. Hiteroza exhausted all available remedies under the Articles of Incorporation and By-Laws, and that the complaint had no allegation of earnest efforts towards a compromise, a jurisdictional requirement considering that the parties are siblings.

On May 14, 2010, the RTC rendered a decision directing Charito to allow the Sps. Hiteroza or their duly authorized representative to have access to, inspect, examine, and secure copies of books of accounts and other pertinent records of the school, recognizing their right as stockholders under Sections 74 and 75 of the Corporation Code. The RTC noted that the complaint contained no evidence yet to support the allegations of fraud or misrepresentation. No pre-trial conference was conducted and the parties did not submit their respective pre-trial briefs before the May 14, 2010 RTC decision. The Sps. Hiteroza's inspection of the school's corporate books was conducted on June 14 to 15, 2010. On September 21, 2010, they filed a Report on the Inspection of Corporate Documents (1st Report), alleging that despite demand Charito did not produce all the documents for inspection and that, from the available documents, they discovered misuse, wrong declaration or recording of funds, and missing funds amounting to fraud or misrepresentation detrimental to the school's interests; they reiterated their prayer for a management committee and receiver. Charito filed a Comment on the 1st Report claiming that it was a motion for reconsideration, a prohibited pleading under Rule 15 of the Rules of Court, and that the appointment of a management committee or receiver is a provisional remedy that could not be obtained after no appeal was filed and the May 14, 2010 RTC decision lapsed to finality; she admitted during the hearing before the RTC that not all documents were presented for inspection. The RTC then issued an Order directing the inspection of the school's books of account.

On January 17, 2011, the Sps. Hiteroza filed a 2nd Report on the Inspection of Corporate Documents and reiterated their prayer for a management committee and receiver, alleging that Charito again refused to produce the school's main bank accounts records and that their accountants found, based on the declared amounts in the corporate books, total unaccounted income of ₱27,446,989.35 for 2000 to 2009. The RTC issued an Order dated March 3, 2011 referring the dispute for mediation at the Philippine Mediation Center, Bulacan Office; the parties appeared but no settlement was reached. On November 9, 2011, the Sps. Hiteroza filed a Manifestation with Motion reiterating their prayer for the appointment of a rehabilitation receiver and/or management committee. On March 16, 2012, the RTC issued an Order appointing Atty. Rafael Chris F. Teston as the school's receiver in view of the inability of the parties to work out an amicable settlement and in order to enable the RTC to ascertain the veracity of the claim of the Sps. Hiteroza that Charito had unjustifiably failed and refused to comply with the final decision dated May 14, 2010.

• Finality of the May 14, 2010 RTC Decision: Petitioner Sps. Hiteroza argued that the CA erred in treating the May 14, 2010 RTC decision as a final judgment because it is preliminary, merely granting a remedy by way of a mode of discovery, i.e., inspection of corporate documents, books, and records, and does not address all of the causes of action in the complaint.
• Non-compliance with the Inspection Order: Petitioner argued that Charito had not fully complied with the May 14, 2010 RTC decision because she refused to open the school's other corporate books and records for inspection.
• Dissipation and Indebtedness: Petitioner argued that the reports extensively showed dissipation of the school's assets and funds and that the school is heavily indebted to the bank, thus warranting the appointment of a receiver.

• Nuisance and Motive: Respondent Charito argued that the complaint was a nuisance and harassment suit, and that the Sps. Hiteroza's real motive was to access and secure the school's income, having professed concern only after almost ten years.
• No Serious Situation: Respondent argued that the "serious situation test" in Pryce Corporation vs. China Banking Corporation for the appointment of a management committee or receiver was not satisfied because the complaint failed to show a serious and imminent danger of dissipation, loss, wastage, or destruction of assets and paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public, and the necessity to preserve their rights and interests.
• Mismanagement Negated: Respondent claimed that the school's improvement negated the accusation of mismanagement.
• Improper Remedy and Derivative Suit Requisites: Respondent argued that a derivative suit was not the proper remedy for the right of inspection because it is the stockholder's personal right and the cause of action is individual; the derivative suit requirements were not complied with because there was no allegation of exhaustion of remedies under the Articles of Incorporation and By-Laws.
• Earnest Efforts: Respondent argued that the complaint had no allegation of earnest efforts towards a compromise, a jurisdictional requirement considering that the parties are siblings.

• Finality of the May 14, 2010 RTC Decision: Whether the May 14, 2010 RTC Decision is a final judgment.
• Appointment of a Receiver: Whether the CA correctly nullified the RTC Order directing the appointment of a receiver.

• Finality of the May 14, 2010 RTC Decision: No. The May 14, 2010 RTC Decision is not a final judgment because the case was not ripe for decision; no pre-trial was conducted and no pre-trial briefs were submitted, and Rule 7 of the Interim Rules does not apply because the complaint did not exclusively involve inspection of corporate books.
• Appointment of a Receiver: Yes. The CA correctly nullified the RTC Order; a receiver may be appointed only upon proof of imminent danger of both dissipation, loss, wastage, or destruction of assets and paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public.

• Finality of the May 14, 2010 RTC Decision: Section 4, Rule 4 of the Interim Rules allows a judgment before pre-trial only after submission of the parties' pre-trial briefs, and Section 1, Rule 4 makes pre-trial mandatory. Except in default, the RTC must conduct pre-trial and receive pre-trial briefs before rendering judgment in intra-corporate disputes. Rule 7 dispenses with pre-trial only for disputes exclusively involving the rights of stockholders or members to inspect books and records and/or be furnished financial statements under Sections 74 and 75 of the Corporation Code. Here, the complaint did not exclusively involve inspection; it also alleged Charito's fraud and misrepresentation in the school's management. No pre-trial conference was conducted and no pre-trial briefs were submitted before the May 14, 2010 RTC decision. The decision was therefore premature and not a final judgment.
• Appointment of a Receiver: The question of whether the CA correctly nullified the receiver's appointment is a question of fact not within the authority of the SC to decide, and the factual issue was not ventilated before the RTC because the case did not reach pre-trial. Section 1, Rule 9 of the Interim Rules requires imminent danger of both (1) dissipation, loss, wastage, or destruction of assets or other properties and (2) paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public. Section 2, Rule 9 refers to the same application sufficient in form and substance, so the Section 1 requisites apply to both a management committee and a receiver. Villamor, Jr. vs. Umale and Sy Chim vs. Sy Siy Ho & Sons, Inc. confirm that both requisites must concur and that receivership is an extraordinary and drastic remedy to be exercised with care and caution. The RTC appointed the receiver based on the parties' inability to settle and to ascertain Charito's compliance with the May 14, 2010 decision, not on the Section 1, Rule 9 requisites. The RTC itself stated in its May 14, 2010 decision that there was yet no evidence to support the allegations of fraud and misrepresentation. The CA therefore correctly found grave abuse of discretion and nullified the appointment.

• Final Judgment in Intra-Corporate Cases — Under the Interim Rules, a judgment before pre-trial may be rendered only after submission of the parties' pre-trial briefs, except in default; Rule 7's exception applies only to disputes exclusively involving the right to inspect corporate books and records and/or be furnished financial statements under Sections 74 and 75 of the Corporation Code. The SC applied this to hold that the May 14, 2010 RTC decision was not final because no pre-trial or pre-trial briefs preceded it and the complaint included fraud and mismanagement allegations beyond inspection.
• Requisites for a Receiver or Management Committee — Section 1, Rule 9 of the Interim Rules requires the confluence of two requisites: (1) imminent danger of dissipation, loss, wastage, or destruction of assets or other properties; and (2) imminent danger of paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public. The SC held that both requisites apply to the appointment of a receiver as well as the creation of a management committee, and that the RTC appointed the receiver without sufficient evidence of either.
• Receivership as an Extraordinary and Drastic Remedy — A management committee or receiver is an extraordinary and drastic remedy to be exercised with care and caution, only when the Interim Rules requirements are shown and legal or other remedies are inadequate or ineffectual. The SC applied this to affirm the CA's nullification of the receiver's appointment.
• Mandatory Pre-trial — Pre-trial is mandatory in intra-corporate cases under the Interim Rules, and the RTC cannot render judgment before pre-trial except in default or under Rule 7's limited inspection exception. The SC applied this to find the May 14, 2010 RTC decision premature.

• "The May 14, 2010 RTC decision is not a final judgment since the case is not ripe for decision. No pre-trial has been conducted pursuant to the Interim Rules and the parties have not submitted their pre-trial briefs." — The SC's core holding on why the RTC decision did not attain finality.
• "The conduct of a pre-trial is mandatory under the Interim Rules." — The SC used this to support its conclusion that the May 14, 2010 RTC decision was premature.
• "The requirements in Section 1, Rule 9 of the Interim Rules apply to both the creation of a management committee and/or the appointment of a receiver." — The SC resolved that the same requisites govern both remedies.
• "Thus, the creation and appointment of a management committee and a receiver is an extraordinary and drastic remedy to be exercised with care and caution; and only when the requirements under the Interim Rules are shown." — The SC emphasized that receivership is not a routine remedy and must satisfy the Interim Rules.

• Villamor, Jr. vs. Umale, G.R. No. 172843, September 24, 2014, 736 SCRA 325 — Relied on for the rule that Section 1, Rule 9 applies to both receivers and management committees and that the two requisites must concur.
• Sy Chim vs. Sy Siy Ho & Sons, Inc., G.R. No. 164958, January 27, 2006, 480 SCRA 465 — Relied on for the same confluence requirement and the rationale that receivership is an extraordinary and drastic remedy.
• Recto vs. Escaler, S.J., 648 Phil. 399 (2010) — Cited for the mandatory nature of pre-trial under the Interim Rules.

• Section 4, Rule 4, Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-04-SC) — Allows judgment before pre-trial only after submission of pre-trial briefs; applied to hold the May 14, 2010 RTC decision premature.
• Section 1, Rule 4, Interim Rules — Makes pre-trial conference mandatory; applied because no pre-trial was conducted before the May 14, 2010 RTC decision.
• Rule 7, Interim Rules — Dispenses with pre-trial only for disputes exclusively involving the rights of stockholders or members to inspect books and records and/or be furnished financial statements under Sections 74 and 75 of the Corporation Code; held inapplicable because the complaint included fraud and mismanagement allegations.
• Section 1, Rule 9, Interim Rules — Requires imminent danger of both dissipation, loss, wastage, or destruction of assets or other properties and paralysis of business operations prejudicial to minority stockholders, parties-litigants, or the general public; applied to nullify the receiver's appointment.
• Section 2, Rule 9, Interim Rules — Refers to an application sufficient in form and substance, the same application referred to in Section 1; applied to hold that Section 1's requisites govern receivers as well as management committees.
• Sections 74 and 75, Corporation Code of the Philippines (Batas Pambansa Blg. 68) — Govern the right to inspect corporate books and records and to be furnished financial statements; the RTC directed inspection under these provisions, and Rule 7's exception refers to disputes exclusively involving these rights.
• Section 7, Rule 2, Interim Rules — Provides the default exception to the pre-trial requirement; noted by the SC in stating that pre-trial is mandatory except in cases of default.