Turner vs. Lorenzo Shipping Corporation

A dissenting stockholder's cause of action to enforce the appraisal right and demand payment for shares under Section 82 of the Corporation Code only accrues when the corporation possesses unrestricted retained earnings sufficient to cover the payment at the time of demand; the absence of such earnings at the time of filing the complaint renders the action prematurely brought and dismissible, and the subsequent existence of earnings during the pendency of the case cannot cure this defect.

Lorenzo Shipping Corporation, a domestic corporation engaged primarily in cargo shipping activities, decided to amend its Articles of Incorporation to remove stockholders' pre-emptive rights to newly issued shares. Philip and Elnora Turner, stockholders holding 1,010,000 shares, voted against this amendment and exercised their appraisal right under the Corporation Code, demanding payment for their shares based on book value. A dispute arose regarding the valuation of the shares and the corporation's obligation to pay, leading to the constitution of an appraisal committee and subsequent litigation.

• The petitioners held 1,010,000 shares of stock in Lorenzo Shipping Corporation, a domestic corporation engaged in cargo shipping activities.
• In June 1999, the respondent corporation decided to amend its articles of incorporation to remove stockholders' pre-emptive rights to newly issued shares of stock.
• The petitioners voted against the amendment and demanded payment of their shares at P2.276 per share based on book value, totaling P2,298,760.00.
• The respondent refused the demand, insisting that the market value of P0.41 per share should apply since its shares were listed in the Philippine Stock Exchange, and stating that payment could only be made if the corporation had unrestricted retained earnings, which it did not have at the time.
• Pursuant to Section 82 of the Corporation Code, the parties constituted an appraisal committee composed of Reynaldo Yatco (petitioners' nominee), Atty. Antonio Acyatan (respondent's nominee), and Leo Anoche of Asian Appraisal Company, Inc. (third member and chairman).
• On October 27, 2000, the appraisal committee reported its valuation of P2.54 per share, for an aggregate value of P2,565,400.00 for the petitioners' shares.
• The petitioners demanded payment based on the committee's valuation plus 2% monthly penalty from the date of original demand, as well as reimbursement of professional fees advanced to the appraisers.
• In a letter dated January 2, 2001, the respondent refused payment, explaining that under the Corporation Code, dissenting stockholders could only be paid when the corporation had unrestricted retained earnings to cover the fair value, and citing Financial Statements showing a deficit of P72,973,114.00 as of December 31, 1999.
• On January 22, 2001, the petitioners filed a suit for collection and damages in the Regional Trial Court (RTC) of Makati City, docketed as Civil Case No. 01-086.
• On June 26, 2002, the petitioners filed a motion for partial summary judgment, claiming that the respondent had accumulated unrestricted retained earnings of P11,975,490.00 as of March 31, 2002, evidenced by its Financial Statement for the quarter ending March 31, 2002.
• The case was transferred to Branch 46 of the RTC in Manila due to the principal office of the respondent being located there, pursuant to the Interim Rules of Procedure on Intra-Corporate Controversies.
• On October 23, 2002, the RTC (Judge Artemio Tipon) granted the motion for partial summary judgment, ruling that the unrestricted retained earnings did not need to exist at the time of demand and that the fair value must be paid if earnings existed later.
• On November 22, 2002, the RTC denied the respondent's motion for reconsideration and granted the petitioners' motion for immediate execution.
• On November 28, 2002, the RTC issued a writ of execution, which was partially enforced.
• The respondent filed a petition for certiorari in the Court of Appeals, which issued a temporary restraining order.
• On March 4, 2003, the Court of Appeals granted the petition for certiorari, nullified the RTC orders and writs, and dismissed Civil Case No. 01-086 without prejudice, holding that the Turners' right of action had not accrued when they filed the complaint because the respondent had no unrestricted retained earnings at that time.

• The RTC did not act with grave abuse of discretion amounting to lack or excess of jurisdiction in granting the motion for partial summary judgment and motion for immediate execution, hence the Court of Appeals erred in granting certiorari.
• The Court of Appeals erred in ordering the dismissal of the case when the petition for certiorari merely sought the annulment of the orders granting partial summary judgment and immediate execution.
• The unrestricted retained earnings existing as of March 31, 2002 (when the motion for partial summary judgment was filed) were sufficient to cover the payment, and the law does not require such earnings to exist at the time of the original demand.
• The appraisal committee's valuation was final and binding under Section 82 of the Corporation Code, and the respondent's refusal to pay despite the existence of retained earnings constituted a violation of their rights.
• The respondent's recourse to certiorari was improper because the granting of the motion for partial summary judgment constituted only an error of law correctible by appeal, not an error of jurisdiction.

• The petitioners had no cause of action when they filed the complaint on January 22, 2001, because the corporation had no unrestricted retained earnings at that time (having a deficit of P72,973,114.00 as of December 31, 1999).
• Under Section 82 of the Corporation Code, payment to dissenting stockholders is conditional upon the existence of unrestricted retained earnings to cover such payment; this requirement is based on the trust fund doctrine.
• The RTC gravely abused its discretion in granting summary judgment because no right of action existed at the time the action was commenced; a suit cannot be maintained if no right existed at the time of filing, even if such right accrued thereafter.
• The trust fund doctrine requires that corporate assets be preserved for the payment of creditors, and no distribution to stockholders can be made without first paying corporate debts.
• The writ of execution was improperly issued because the partial summary judgment was not a final judgment under Rule 39 of the Rules of Court.

• Procedural Issues:
  • Whether the Regional Trial Court acted with grave abuse of discretion amounting to lack or excess of jurisdiction in granting the motion for partial summary judgment and motion for immediate execution.
  • Whether the Court of Appeals erred in dismissing the case when the petition for certiorari only sought the annulment of specific orders.
  • Whether certiorari was the proper remedy or should the respondent have resorted to appeal.
• Substantive Issues:
  • Whether the petitioners had a cause of action for the enforcement of their appraisal right at the time they filed the complaint on January 22, 2001.
  • Whether the existence of unrestricted retained earnings subsequent to the filing of the complaint cures the lack of cause of action at the time of commencement of the suit.

• Procedural:
  • The RTC acted with grave abuse of discretion amounting to lack of jurisdiction in taking cognizance of the complaint and granting the partial summary judgment and writ of execution, because the complaint was prematurely filed without an existing cause of action.
  • The Court of Appeals did not err in dismissing the case despite the petition for certiorari targeting only specific orders; the dismissal was the proper remedy because the action was commenced before the cause of action accrued.
  • Certiorari was the proper remedy because the RTC committed an error of jurisdiction, not merely an error of law, by exercising jurisdiction over a case without an existing cause of action.
• Substantive:
  • The petitioners did not have a cause of action when they filed the complaint on January 22, 2001, because the respondent had no unrestricted retained earnings at that time to cover the payment for the shares.
  • Under Section 82 of the Corporation Code, the appraisal right is subject to the legal condition that no payment shall be made unless the corporation has unrestricted retained earnings in its books to cover such payment; this requirement is based on the trust fund doctrine which protects corporate creditors by ensuring that corporate assets are not distributed to stockholders until corporate debts are paid.
  • A cause of action requires the existence of a legal right, a correlative duty, and an act or omission in violation of that right; here, the respondent had no legal duty to pay because the condition precedent (existence of unrestricted retained earnings) was not met at the time of filing.
  • The subsequent existence of unrestricted retained earnings (as of March 31, 2002 and June 26, 2002) did not cure the lack of cause of action at the commencement of the suit; an action commenced before the cause of action has accrued is prematurely brought and should be dismissed, and the defect cannot be remedied by the acquisition or accrual of a cause of action while the action is pending.

• Appraisal Right — The right of a dissenting stockholder to demand payment of the fair value of his shares when he votes against certain fundamental corporate changes (such as amendments to articles of incorporation) under Section 81 of the Corporation Code. This right is subject to the condition that the corporation must have unrestricted retained earnings sufficient to cover the payment, as provided in Section 82.
• Trust Fund Doctrine — The principle that the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred over stockholders in the distribution of corporate assets. This doctrine supports the statutory requirement that no payment shall be made to dissenting stockholders unless the corporation has unrestricted retained earnings to cover such payment, ensuring that corporate funds are not depleted to the prejudice of creditors.
• Cause of Action — The act or omission by which a party violates a right of another, consisting of: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative legal duty of the defendant to respect such right; and (c) an act or omission by the defendant in violation of the plaintiff's right. A cause of action must exist at the commencement of the suit.
• Prematurely Brought Action — An action commenced before the cause of action has accrued, which should be dismissed because the plaintiff has no valid and subsisting cause of action at the time of commencement. The defect cannot be cured by the acquisition or accrual of a cause of action while the action is pending.

• "The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors."
• "Subject to certain qualifications, and except as otherwise provided by law, an action commenced before the cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of action accrues after the action is commenced and while it is pending is of no moment."
• "Unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible."
• "There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void."

• Surigao Mine Exploration Co., Inc. v. Harris — Cited as controlling precedent establishing the rule that an action commenced before the cause of action has accrued is prematurely brought and should be dismissed, and that the defect cannot be cured by subsequent accrual of the cause of action.
• Boman Environment Development Corporation v. Court of Appeals — Cited for the proposition that the trust fund doctrine regards corporate assets as equity in trust for the payment of corporate creditors, and that creditors are preferred over stockholders in the distribution of corporate assets.
• Philippine American General Insurance Co. Inc. v. Sweet Lines, Inc. — Cited for the principle that before an action can properly be commenced, all essential elements of the cause of action must be in existence, and all valid conditions precedent must be performed or complied with before commencing the action.
• Lao v. Court of Appeals — Cited to support the rule that a complaint whose cause of action has not yet accrued cannot be cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action during the pendency of the action.
• Young v. Court of Appeals — Cited as reiterating the rule in Surigao Mine Exploration regarding prematurely brought actions.

• Section 81 of the Corporation Code (B.P. Blg. 68) — Defines the instances when appraisal right may be exercised by dissenting stockholders, including amendments to articles of incorporation that change or restrict stockholder rights.
• Section 82 of the Corporation Code (B.P. Blg. 68) — Governs the procedure for exercising appraisal rights, including the formation of an appraisal committee, the finality of the appraisers' findings, and the condition that no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment.
• Section 83 of the Corporation Code (B.P. Blg. 68) — Provides that if the dissenting stockholder is not paid within 30 days after the award, his voting and dividend rights shall immediately be restored.
• Section 41 of the Corporation Code (B.P. Blg. 68) — Recognizes the power of a stock corporation to purchase its own shares for legitimate corporate purposes, including paying dissenting or withdrawing stockholders, provided the corporation has unrestricted retained earnings.
• Section 1, Rule 2 of the Rules of Court — Requires that every ordinary civil action must be based on a cause of action.
• Section 2, Rule 2 of the Rules of Court — Defines cause of action as the act or omission by which a party violates a right of another.
• Section 5, Rule 1 of the Rules of Court — Defines when an action is commenced for purposes of determining the existence of a cause of action at the time of filing.