Torres, Jr. vs. Court of Appeals

Formal substitution of a deceased party is not required where the heirs and claimants to the estate are already voluntarily participating in the proceedings, thereby satisfying the due process purpose of the substitution rule; a majority stockholder cannot unilaterally rescind deeds of assignment of property to a corporation for a slight breach such as a shortage of 972 shares out of 225,972; and entries in the stock and transfer book made by a person other than the corporate secretary are invalid, such that nominees whose share transfers were not properly recorded cannot be elected as directors.

The late Manuel A. Torres, Jr. (Judge Torres) was the majority stockholder of Tormil Realty & Development Corporation, holding 100,120 shares or 57.21% of outstanding capital stock, while private respondents — his nieces and nephews, being the children of his deceased brother Antonio A. Torres — constituted the minority stockholders. Despite his controlling interest, Judge Torres held only one seat on the nine-member board of directors, leaving him vulnerable to being outvoted by the minority. In 1984, he adopted an "estate planning" scheme to achieve substantial tax savings, assigning various real properties and corporate shares to Tormil in exchange for 225,972 Tormil shares, but only 225,000 shares remained unsubscribed, creating a shortage of 972 shares. Judge Torres had also instituted Special Proceedings No. M-1768 before the RTC of Makati for the ante-mortem probate of his holographic will, naming petitioner Edgardo D. Pabalan as sole executor and administrator of his estate — proceedings opposed by the same private respondents who are his nieces and nephews.

The late Manuel A. Torres, Jr. (Judge Torres) was the majority stockholder of Tormil Realty & Development Corporation, holding 100,120 shares or 57.21% of the outstanding capital stock, while serving as Director, President, and Chairman of the Board. Private respondents — Antonio P. Torres, Jr., Ma. Cristina T. Carlos, Ma. Luisa T. Morales, and Dante D. Morales — were the children of Judge Torres' deceased brother Antonio A. Torres and constituted the minority stockholders. Despite his controlling interest, Judge Torres held only one seat on the nine-member board, leaving him at the mercy of the minority in board decision-making.

In 1984, Judge Torres adopted an "estate planning" scheme to achieve substantial tax savings. Under this scheme, he assigned to Tormil various real properties he owned and his shares of stock in other corporations in exchange for 225,972 Tormil Realty shares. Between July 13 and August 29, 1984, ten deeds of assignment were executed, covering properties in Quezon City, Manila, Makati, and Pasay City, as well as shares in El Hogar Filipino, Manila Jockey Club, San Miguel Corporation, China Banking Corporation, Ayala Corporation, and Ayala Fund. The assigned properties were duly recorded in Tormil's inventory of assets, and the revenues generated were entered in the corporation's books. All assigned parcels of land were registered with the respective Registers of Deeds in Tormil's name, except for those located in Makati and Pasay City. At the time of the assignments, however, only 225,000 Tormil shares remained unsubscribed, all of which were issued to Judge Torres, creating a shortage of 972 shares.

Due to the insufficient number of shares and the alleged refusal of private respondents to approve the needed increase in authorized capital stock, Judge Torres on September 11, 1986 revoked the two deeds of assignment covering the Makati and Pasay City properties. Private respondents subsequently discovered that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano Tobias — then General Manager and legal counsel of Tormil, respectively — had formed a new corporation called "Torres-Pabalan Realty and Development Corporation," to which Judge Torres conveyed the same Makati and Pasay City properties he had earlier transferred to Tormil. On March 31, 1987, private respondents filed a complaint with the SEC (SEC Case No. 3153) to compel Judge Torres to deliver the revoked deeds and cause registration of the titles in Tormil's name.

The second controversy arose from the 1987 annual stockholders meeting scheduled for March 25, 1987. To remedy the lopsided board composition, Judge Torres assigned one share each to petitioners Tobias, Jocson, Jurisprudencia, Azura, and Pabalan as "qualifying shares" for the sole purpose of electing them to the board as his nominees. The assigned shares were covered by stock certificates bearing inscriptions stating that the assignee held the share merely as trustee of Judge Torres and for the sole purpose of qualifying as director. On March 25, 1987, the annual stockholders meeting was held. After heated arguments and a confrontation between the factions, Judge Torres and his group moved to the residence of Ma. Jacinta Torres in San Miguel Village, Makati, where the meeting resumed with the SEC observers in attendance. The following were nominated and elected as directors: Manuel Torres, Jr., Ma. Jacinta Torres, Edgardo Pabalan, Graciano Tobias, Rodolfo Jocson, Jr., Melvin Jurisprudencia, Augustus Cesar Azura, Josefina Torres, and Dante Morales. On April 10, 1987, private respondents filed SEC Case No. 3161 to annul the election, alleging that the assignment of qualifying shares violated the minority stockholders' right of pre-emption under the corporation's articles and by-laws. The two SEC cases were consolidated.

• Procedural Due Process: Petitioners argued that the Court of Appeals rendered a full-length decision without the evidence and original records of SEC-AC No. 339 being transmitted to it, depriving petitioners of procedural due process. They contended that the Court of Appeals had given due course to the petition — as evidenced by its grant of a restraining order and writ of preliminary injunction, its requirement of simultaneous memoranda, and its rendering of a decision on the merits — and that under SC Circular No. 1-91, the original records should have been forwarded upon the petition being given due course.
• Substitution of Parties: Petitioners maintained that the SEC en banc's July 19, 1993 decision was void for having been rendered without proper substitution of the deceased Judge Torres, as mandated by Section 17, Rule 3 of the Revised Rules of Court. They argued that the SEC should have granted their motions to suspend proceedings pending appointment of a legal representative by the RTC of Makati, where the probate of Judge Torres' will was pending.
• Rescission of Deeds of Assignment: Petitioners contended that SEC Case No. 3153 involved a situation where performance was impossible as contemplated under Article 1191 of the Civil Code, not a mere case of lesion or inadequacy of cause under Article 1355, as erroneously characterized by the SEC. They argued that Judge Torres validly revoked the deeds of assignment covering the Makati and Pasay City properties because Tormil failed to deliver the full 225,972 shares due to him.
• Validity of Qualifying Share Transfers: Petitioners argued that the assignment of qualifying shares did not partake of a real transfer or conveyance of shares requiring stringent recording requirements. They asserted that there was substantial compliance because Judge Torres himself entered the assignments in the stock and transfer book on March 6, 1987, and the entries were confirmed on March 8, 1987 by petitioner Azura, who was appointed Assistant Corporate Secretary. Petitioners contended that it would have been futile to require the regular corporate secretary, who belonged to the opposing faction, to make the entries.

• Pre-emption Rights: Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the assignment of shares to them violated the minority stockholders' right of pre-emption as provided in the corporation's articles and by-laws.
• Revocation of Deeds: Private respondents contended that Judge Torres' unilateral revocation of the deeds of assignment covering the Makati and Pasay City properties was invalid, and that the properties had been conveyed to a newly formed corporation (Torres-Pabalan Realty and Development Corporation) in breach of his obligations to Tormil.

• Procedural Due Process: Whether the Court of Appeals violated petitioners' right to procedural due process by rendering a decision without the original records of SEC-AC No. 339 being transmitted to it.
• Substitution of Parties: Whether the SEC and Court of Appeals decisions are null and void for having been rendered without the formal substitution of the deceased Judge Torres as required by Section 17, Rule 3 of the Revised Rules of Court.
• Rescission of Contracts: Whether Judge Torres validly rescinded the deeds of assignment covering the Makati and Pasay City properties under Article 1191 of the Civil Code on the ground that performance became impossible due to the shortage of 972 shares.
• Validity of Stock Transfers: Whether the assignment of qualifying shares to petitioners was valid despite the entries in the stock and transfer book having been made by Judge Torres himself rather than by the corporate secretary, as required by Section 74 of the Corporation Code.

• Procedural Due Process: No. The Court of Appeals did not give due course to the petition, and the transmittal of original records is discretionary under Revised Administrative Circular No. 1-95. The Court of Appeals decided the case on the basis of uncontroverted facts and admissions in the pleadings.
• Substitution of Parties: No. Formal substitution was not necessary because the same parties contesting the representation of Judge Torres' estate in the probate proceedings were already voluntarily participating before the SEC and the Court of Appeals, thereby satisfying the due process purpose of the substitution rule.
• Rescission of Contracts: No. The shortage of 972 shares out of 225,972 is not a substantial and fundamental breach that would defeat the object of the parties in making the agreement. Rescission will not be permitted for a slight or casual breach.
• Validity of Stock Transfers: No. Entries in the stock and transfer book made by Judge Torres himself — not by the corporate secretary — are invalid. Being a family corporation is not an exemption from the mandatory provisions of the Corporation Code.

• Procedural Due Process: The issuance of a restraining order and writ of preliminary injunction, and the requirement of simultaneous memoranda, do not indicate that the petition was given due course. The office of an injunction is merely to preserve the status quo. The matter of giving due course lies in the discretion of the court. SC Circular No. 1-91 has been replaced by Revised Administrative Circular No. 1-95, which clarifies that the Court of Appeals "may require" the transmittal of records — making it discretionary, not mandatory. The Court of Appeals decided the case on the basis of uncontroverted facts and admissions contained in the pleadings — the petition, comment, reply, rejoinder, and memoranda filed by the parties — without needing the original records.

• Substitution of Parties: The purpose behind the rule on substitution of parties is the protection of the right of every party to due process — to ensure that the deceased party continues to be properly represented through a duly appointed legal representative. In this case, that purpose was substantially fulfilled despite the lack of formal substitution, because both proceedings (the SEC case and the probate proceedings) involved virtually the same parties fighting over the representation of Judge Torres' estate. Petitioner Pabalan was named sole executor and administrator in Judge Torres' will, while private respondents opposed the probate and sought their own appointment. Since both parties claimed interests over the estate, whoever would be appointed legal representative would not be a stranger to the case, having voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having thoroughly participated. Moreover, when Judge Torres died on April 3, 1991, the SEC en banc had already fully heard the parties and only evaluation and rendition of judgment remained. Petitioners filed their motions to suspend only after more than two years from Judge Torres' death, and their counsel was remiss in his duty under Section 16, Rule 3 to inform the court promptly of the death. Suspending the proceedings to await the probate court's decision would have caused undue delay and a denial of justice. The decision of the SEC en banc, as affirmed by the Court of Appeals, served to protect and preserve Judge Torres' estate. The principle of negotiorum gestio does not apply because it covers abandoned or neglected property or business, which was not the situation here.

• Rescission of Contracts: The shortage of 972 shares is not a valid ground for the unilateral revocation of the deeds of assignment. Tormil had substantially performed its obligation, having issued all 225,000 unsubscribed shares to Judge Torres. The first two stock certificate issuances were in satisfaction of the properties being revoked (Makati and Pasay). Citing Universal Food Corp. vs. CA, the Court reiterated that rescission will not be permitted for a slight or casual breach, but only for a substantial and fundamental breach that would defeat the very object of the parties in making the agreement. The shortage of 972 shares is not such a breach. Article 1355 of the Civil Code provides that lesion or inadequacy of cause shall not invalidate a contract absent fraud, mistake, or undue influence. Furthermore, the shortage should have been applied logically to the last assignment — Judge Torres' Ayala Fund shares executed on August 29, 1984 — rather than to the Makati and Pasay properties assigned on July 13 and 24, 1984, the consideration for which had been duly paid or fulfilled.

• Validity of Stock Transfers: Section 74 of the Corporation Code mandates that the corporate secretary is the custodian of corporate records and keeps the stock and transfer book, making proper entries therein. In this case, the stock and transfer book was not kept by the corporate secretary, Ma. Cristina T. Carlos, but by Judge Torres himself, and not at the principal office of the corporation but at his residence. Entries made by Judge Torres on March 8, 1987 of an alleged transfer of nominal shares to Pabalan and company cannot be given valid effect. Since the entries are invalid, Pabalan and company cannot be considered stockholders of record, and being non-stockholders, they cannot be elected as directors. The fact that Judge Torres held 81.28% of the outstanding capital stock does not license him to arrogate unto himself a duty lodged with the corporate secretary. The brewing family discord should have placed Judge Torres on his guard to ensure compliance with legal requirements. Petitioners could have availed of legal remedies — such as a suit to compel the corporate secretary to perform her duty — instead of taking the law into their own hands. All corporations, big or small, must abide by the Corporation Code; being a family corporation is not an exemption.

• Substitution of Deceased Parties (Rule 3, Section 17) — The rule on substitution of parties requires that upon the death of a party in an action that survives, the court shall order the legal representative or heirs of the deceased to appear and be substituted within thirty days. The purpose is to protect the right of every party to due process by ensuring the deceased continues to be properly represented. The general rule is that failure to substitute renders the trial and judgment null and void for lack of jurisdiction over the persons of the legal representative or heirs. Exception recognized in this case: Formal substitution is not necessary when the heirs themselves voluntarily appeared, participated in the case, and presented evidence in defense of the deceased, because the due process purpose of the rule is thereby satisfied. Where the same parties contesting representation of the estate in probate proceedings are already participating in the case, the estate is fully protected and formal substitution is dispensed with.

• Rescission of Contracts (Article 1191, Civil Code) — The power to rescind is implied in reciprocal obligations in case one obligor fails to comply. However, rescission will not be permitted for a slight or casual breach, but only for a substantial and fundamental breach that would defeat the very object of the parties in making the agreement. A shortage of 972 shares out of 225,972 does not constitute a substantial and fundamental breach. Under Article 1355, lesion or inadequacy of cause shall not invalidate a contract absent fraud, mistake, or undue influence.

• Custody of Stock and Transfer Book (Section 74, Corporation Code) — The corporate secretary is the custodian of corporate records, including the stock and transfer book, and must make proper entries therein. The stock and transfer book must be kept at the principal office of the corporation. Entries made by a person other than the corporate secretary — even if that person is the majority stockholder, president, and chairman of the board — are invalid. Without valid entries, the transferee cannot be considered a stockholder of record and cannot be elected as a director. All corporations, including family corporations, must comply with the Corporation Code; no special practices or exemptions are permitted.

• "The need for substitution of heirs is based on the right to due process accruing to every party in any proceeding." — This passage, quoting from Vda. de Salazar vs. CA, articulates the constitutional foundation of the substitution rule and explains why the exception applies when heirs voluntarily participate.

• "The general rule is that rescission of a contract will not be permitted for a slight or carnal breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement." — This formulation, cited from Universal Food Corp. vs. CA, defines the threshold for rescission under Article 1191 and was applied to reject the claim that a shortage of 972 shares justified unilateral revocation of deeds of assignment.

• "All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law." — This passage establishes the principle that the Corporation Code applies uniformly to all corporations regardless of size or familial character, foreclosing any argument for relaxed compliance based on a corporation's family nature.

• Vda. de Salazar vs. CA, 250 SCRA 305 (1995) — Followed. The Court relied on this case for the proposition that formal substitution of heirs is not necessary when the heirs themselves voluntarily appeared, participated in the case, and presented evidence in defense of the deceased. The Court applied this exception to uphold the validity of the SEC and Court of Appeals decisions despite the lack of formal substitution of Judge Torres.

• Universal Food Corp. vs. CA — Followed. Cited for the doctrine that rescission of a contract will not be permitted for a slight or casual breach, but only for a substantial and fundamental breach that would defeat the very object of the parties. Applied to hold that the shortage of 972 shares did not justify rescission of the deeds of assignment.

• Ferreia vs. Vda. de Gonzales, 104 Phil. 143 — Cited through Moran's Comments on the Rules of Court for the general rule that trial and judgment rendered without substitution of a deceased party are null and void for lack of jurisdiction over the persons of the legal representative or heirs.

• Section 17, Rule 3, Revised Rules of Court — Governs substitution of a deceased party. The Court held that its purpose — protection of due process — was substantially fulfilled in this case because the same parties contesting the estate's representation were already participating in the proceedings, making formal substitution unnecessary.

• Section 16, Rule 3, Revised Rules of Court — Imposes on counsel the duty to inform the court promptly of a party's death, incapacity, or incompetency. The Court noted that petitioners' counsel was remiss in this duty, as it was private respondents who informed the SEC of Judge Torres' death.

• Article 1191, Civil Code — Provides the power to rescind obligations in reciprocal ones in case of non-compliance. The Court held that the shortage of 972 shares did not constitute a substantial and fundamental breach warranting rescission.

• Article 1355, Civil Code — Provides that lesion or inadequacy of cause shall not invalidate a contract absent fraud, mistake, or undue influence. Applied to reject the characterization of the share shortage as a ground for invalidating the deeds of assignment.

• Article 2144, Civil Code — Governs negotiorum gestio (voluntary management of another's business). The Court agreed with petitioners that this principle does not apply, as it covers abandoned or neglected property or business, which was not the situation here.

• Section 74, Corporation Code — Requires the corporate secretary to keep the stock and transfer book at the principal office of the corporation. The Court held that entries made by Judge Torres himself, rather than by the corporate secretary, were invalid, rendering the nominees non-stockholders and ineligible for election as directors.

• SC Circular No. 1-91 and Revised Administrative Circular No. 1-95 — Govern appeals from quasi-judicial agencies to the Court of Appeals. The Court held that under Revised Administrative Circular No. 1-95, which replaced Circular No. 1-91, the transmittal of original records is discretionary on the Court of Appeals, not mandatory.

Bellosillo, Vitug, and Hermosisima, Jr., JJ., concurred.