-
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.
TAYAG, ancillary administrator-appellee, vs. BENGUET CONSOLIDATED,
INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for
oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the
domiciliary administrator, the County Trust Company of New York,
United States of America, of the estate of the deceased Idonah
Slade Perkins, who died in New York City on March 27, 1960, to
surrender to the ancillary administrator in the Philippines the
stock certificates owned by her in a Philippine corporation,
Benguet Consolidated, Inc., to satisfy the legitimate claims of
local creditors, the lower court, then presided by the Honorable
Arsenio Santos, now retired, issued on May 18, 1964, an order of
this tenor: "After considering the motion of the ancillary
administrator, dated February 11, 1964, as well as the opposition
filed by the Benguet Consolidated, Inc., the Court hereby (1)
considers as lost for all purposes in connection with the
administration and liquidation of the Philippine estate of Idonah
Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet
Consolidated, Inc., (2) orders said certificates cancelled, and (3)
directs said corporation to issue new certificates in lieu thereof,
the same to be delivered by said corporation to either the
incumbent ancillary administrator or to the Probate Division of
this Court."1
From such an order, an appeal was taken to this Court not by the
domiciliary administrator, the County Trust Company of New York,
but by the Philippine corporation, the Benguet Consolidated, Inc.
The appeal cannot possibly prosper. The challenged order represents
a response and expresses a policy, to paraphrase Frankfurter,
arising out of a specific problem, addressed to the attainment of
specific ends by the use of specific remedies, with full and ample
support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of
appellant Benguet Consolidated, Inc., Idonah Slade Perkins, who
died on March 27, 1960 in New York City, left among others, two
stock certificates covering 33,002 shares of appellant, the
certificates being in the possession of the County Trust Company of
New York, which as noted, is the domiciliary administrator of the
estate of the deceased.2 Then came this portion of the
-
appellant's brief: "On August 12, 1960, Prospero Sanidad
instituted ancillary administration proceedings in the Court of
First Instance of Manila; Lazaro A. Marquez was appointed ancillary
administrator, and on January 22, 1963, he was substituted by the
appellee Renato D. Tayag. A dispute arose between the domiciary
administrator in New York and the ancillary administrator in the
Philippines as to which of them was entitled to the possession of
the stock certificates in question. On January 27, 1964, the Court
of First Instance of Manila ordered the domiciliary administrator,
County Trust Company, to "produce and deposit" them with the
ancillary administrator or with the Clerk of Court. The domiciliary
administrator did not comply with the order, and on February 11,
1964, the ancillary administrator petitioned the court to "issue an
order declaring the certificate or certificates of stocks covering
the 33,002 shares issued in the name of Idonah Slade Perkins by
Benguet Consolidated, Inc., be declared [or] considered as
lost."3
It is to be noted further that appellant Benguet Consolidated,
Inc. admits that "it is immaterial" as far as it is concerned as to
"who is entitled to the possession of the stock certificates in
question; appellant opposed the petition of the ancillary
administrator because the said stock certificates are in existence,
they are today in the possession of the domiciliary administrator,
the County Trust Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the
stock certificates cannot be declared or considered as lost.
Moreover, it would allege that there was a failure to observe
certain requirements of its by-laws before new stock certificates
could be issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal
lacks merit. The challenged order constitutes an emphatic
affirmation of judicial authority sought to be emasculated by the
wilful conduct of the domiciliary administrator in refusing to
accord obedience to a court decree. How, then, can this order be
stigmatized as illegal?
As is true of many problems confronting the judiciary, such a
response was called for by the realities of the situation. What
cannot be ignored is that conduct bordering on wilful defiance, if
it had not actually reached it, cannot without undue loss of
judicial prestige, be condoned or tolerated. For the law is not so
lacking in flexibility and resourcefulness as to preclude such a
solution, the more so as deeper reflection would make clear its
being buttressed by indisputable principles and supported by the
strongest policy considerations.
It can truly be said then that the result arrived at upheld and
vindicated the honor of the judiciary no less than that of the
country. Through this challenged order, there is thus dispelled the
atmosphere of contingent frustration brought about by the
persistence of
-
the domiciliary administrator to hold on to the stock
certificates after it had, as admitted, voluntarily submitted
itself to the jurisdiction of the lower court by entering its
appearance through counsel on June 27, 1963, and filing a petition
for relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart
vitality and effectiveness to what was decreed. For without it,
what it had been decided would be set at naught and nullified.
Unless such a blatant disregard by the domiciliary administrator,
with residence abroad, of what was previously ordained by a court
order could be thus remedied, it would have entailed, insofar as
this matter was concerned, not a partial but a well-nigh complete
paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the
power of the appellee ancillary administrator to gain control and
possession of all assets of the decedent within the jurisdiction of
the Philippines. Nor could it. Such a power is inherent in his duty
to settle her estate and satisfy the claims of local creditors.5 As
Justice Tuason speaking for this Court made clear, it is a "general
rule universally recognized" that administration, whether principal
or ancillary, certainly "extends to the assets of a decedent found
within the state or country where it was granted," the corollary
being "that an administrator appointed in one state or country has
no power over property in another state or country."6
It is to be noted that the scope of the power of the ancillary
administrator was, in an earlier case, set forth by Justice
Malcolm. Thus: "It is often necessary to have more than one
administration of an estate. When a person dies intestate owning
property in the country of his domicile as well as in a foreign
country, administration is had in both countries. That which is
granted in the jurisdiction of decedent's last domicile is termed
the principal administration, while any other administration is
termed the ancillary administration. The reason for the latter is
because a grant of administration does not ex proprio vigore have
any effect beyond the limits of the country in which it is granted.
Hence, an administrator appointed in a foreign state has no
authority in the [Philippines]. The ancillary administration is
proper, whenever a person dies, leaving in a country other than
that of his last domicile, property to be administered in the
nature of assets of the deceased liable for his individual debts or
to be distributed among his heirs."7
It would follow then that the authority of the probate court to
require that ancillary administrator's right to "the stock
certificates covering the 33,002 shares ... standing in her name in
the books of [appellant] Benguet Consolidated, Inc...." be
respected is equally beyond question. For appellant is a Philippine
corporation owing full allegiance
-
and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of
Internal Revenue8 finds application. "In the instant case, the
actual situs of the shares of stock is in the Philippines, the
corporation being domiciled [here]." To the force of the above
undeniable proposition, not even appellant is insensible. It does
not dispute it. Nor could it successfully do so even if it were so
minded.
2. In the face of such incontrovertible doctrines that argue in
a rather conclusive fashion for the legality of the challenged
order, how does appellant, Benguet Consolidated, Inc. propose to
carry the extremely heavy burden of persuasion of precisely
demonstrating the contrary? It would assign as the basic error
allegedly committed by the lower court its "considering as lost the
stock certificates covering 33,002 shares of Benguet belonging to
the deceased Idonah Slade Perkins, ..."9 More specifically,
appellant would stress that the "lower court could not "consider as
lost" the stock certificates in question when, as a matter of fact,
his Honor the trial Judge knew, and does know, and it is admitted
by the appellee, that the said stock certificates are in existence
and are today in the possession of the domiciliary administrator in
New York."10
There may be an element of fiction in the above view of the
lower court. That certainly does not suffice to call for the
reversal of the appealed order. Since there is a refusal,
persistently adhered to by the domiciliary administrator in New
York, to deliver the shares of stocks of appellant corporation
owned by the decedent to the ancillary administrator in the
Philippines, there was nothing unreasonable or arbitrary in
considering them as lost and requiring the appellant to issue new
certificates in lieu thereof. Thereby, the task incumbent under the
law on the ancillary administrator could be discharged and his
responsibility fulfilled.
Any other view would result in the compliance to a valid
judicial order being made to depend on the uncontrolled discretion
of the party or entity, in this case domiciled abroad, which thus
far has shown the utmost persistence in refusing to yield
obedience. Certainly, appellant would not be heard to contend in
all seriousness that a judicial decree could be treated as a mere
scrap of paper, the court issuing it being powerless to remedy its
flagrant disregard.
It may be admitted of course that such alleged loss as found by
the lower court did not correspond exactly with the facts. To be
more blunt, the quality of truth may be lacking in such a
conclusion arrived at. It is to be remembered however, again to
borrow from Frankfurter, "that fictions which the law may rely upon
in the pursuit of legitimate ends have played an important part in
its development."11
-
Speaking of the common law in its earlier period, Cardozo could
state fictions "were devices to advance the ends of justice, [even
if] clumsy and at times offensive."12 Some of them have persisted
even to the present, that eminent jurist, noting "the quasi
contract, the adopted child, the constructive trust, all of
flourishing vitality, to attest the empire of "as if" today."13 He
likewise noted "a class of fictions of another order, the fiction
which is a working tool of thought, but which at times hides itself
from view till reflection and analysis have brought it to the
light."14
What cannot be disputed, therefore, is the at times
indispensable role that fictions as such played in the law. There
should be then on the part of the appellant a further refinement in
the catholicity of its condemnation of such judicial technique. If
ever an occasion did call for the employment of a legal fiction to
put an end to the anomalous situation of a valid judicial order
being disregarded with apparent impunity, this is it. What is thus
most obvious is that this particular alleged error does not carry
persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster
the above contention by its invoking one of the provisions of its
by-laws which would set forth the procedure to be followed in case
of a lost, stolen or destroyed stock certificate; it would stress
that in the event of a contest or the pendency of an action
regarding ownership of such certificate or certificates of stock
allegedly lost, stolen or destroyed, the issuance of a new
certificate or certificates would await the "final decision by [a]
court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such
occasion to apply such by-law. It is admitted that the foreign
domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial ... who
is entitled to the possession of the stock certificates ..." Even
if such were not the case, it would be a legal absurdity to impart
to such a provision conclusiveness and finality. Assuming that a
contrariety exists between the above by-law and the command of a
court decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the
Constitution overrides a statute, to which, however, the judiciary
must yield deference, when appropriately invoked and deemed
applicable. It would be most highly unorthodox, however, if a
corporate by-law would be accorded such a high estate in the jural
order that a court must not only take note of it but yield to its
alleged controlling force.
The fear of appellant of a contingent liability with which it
could be saddled unless the appealed order be set aside for its
inconsistency with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly constitutes a valid
defense,
-
assuming that such apprehension of a possible court action
against it could possibly materialize. Thus far, nothing in the
circumstances as they have developed gives substance to such a
fear. Gossamer possibilities of a future prejudice to appellant do
not suffice to nullify the lawful exercise of judicial
authority.
4. What is more the view adopted by appellant Benguet
Consolidated, Inc. is fraught with implications at war with the
basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law...."16 It owes its
life to the state, its birth being purely dependent on its will. As
Berle so aptly stated: "Classically, a corporation was conceived as
an artificial person, owing its existence through creation by a
sovereign power."17As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the Dartmouth
College decision defined a corporation precisely as "an artificial
being, invisible, intangible, and existing only in contemplation of
law."18
The well-known authority Fletcher could summarize the matter
thus: "A corporation is not in fact and in reality a person, but
the law treats it as though it were a person by process of fiction,
or by regarding it as an artificial person distinct and separate
from its individual stockholders.... It owes its existence to law.
It is an artificial person created by law for certain specific
purposes, the extent of whose existence, powers and liberties is
fixed by its charter."19 Dean Pound's terse summary, a juristic
person, resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the
basic theme of which to quote from Friedmann, "is the reality of
the group as a social and legal entity, independent of state
recognition and concession."21 A corporation as known to Philippine
jurisprudence is a creature without any existence until it has
received the imprimatur of the state according to law. It is
logically inconceivable therefore that it will have rights and
privileges of a higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield obedience to acts of
its state organs, certainly not excluding the judiciary, whenever
called upon to do so.
As a matter of fact, a corporation once it comes into being,
following American law still of persuasive authority in our
jurisdiction, comes more often within the ken of the judiciary than
the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune
from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast upon
it.
-
To assert that it can choose which court order to follow and
which to disregard is to confer upon it not autonomy which may be
conceded but license which cannot be tolerated. It is to argue that
it may, when so minded, overrule the state, the source of its very
existence; it is to contend that what any of its governmental
organs may lawfully require could be ignored at will. So
extravagant a claim cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans
Affairs,22 it was shown that in a guardianship proceedings then
pending in a lower court, the United States Veterans Administration
filed a motion for the refund of a certain sum of money paid to the
minor under guardianship, alleging that the lower court had
previously granted its petition to consider the deceased father as
not entitled to guerilla benefits according to a determination
arrived at by its main office in the United States. The motion was
denied. In seeking a reconsideration of such order, the
Administrator relied on an American federal statute making his
decisions "final and conclusive on all questions of law or fact"
precluding any other American official to examine the matter anew,
"except a judge or judges of the United States court."23
Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower
court. Thus: "We are of the opinion that the appeal should be
rejected. The provisions of the U.S. Code, invoked by the
appellant, make the decisions of the U.S. Veterans' Administrator
final and conclusive when made on claims property submitted to him
for resolution; but they are not applicable to the present case,
where the Administrator is not acting as a judge but as a litigant.
There is a great difference between actions against the
Administrator (which must be filed strictly in accordance with the
conditions that are imposed by the Veterans' Act, including the
exclusive review by United States courts), and those actions where
the Veterans' Administrator seeks a remedy from our courts and
submits to their jurisdiction by filing actions therein. Our
attention has not been called to any law or treaty that would make
the findings of the Veterans' Administrator, in actions where he is
a party, conclusive on our courts. That, in effect, would deprive
our tribunals of judicial discretion and render them mere
subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our
judiciary to accept as final and conclusive, determinations made by
foreign governmental agencies. It is infinitely worse if through
the absence of any coercive power by our courts over juridical
persons within our jurisdiction, the force and effectivity of their
orders could be made to depend on the whim or caprice of alien
entities. It is difficult to imagine of a situation more offensive
to the dignity of the bench or the honor of the country.
-
Yet that would be the effect, even if unintended, of the
proposition to which appellant Benguet Consolidated seems to be
firmly committed as shown by its failure to accept the validity of
the order complained of; it seeks its reversal. Certainly we must
at all pains see to it that it does not succeed. The deplorable
consequences attendant on appellant prevailing attest to the
necessity of negative response from us. That is what appellant will
get.
That is all then that this case presents. It is obvious why the
appeal cannot succeed. It is always easy to conjure extreme and
even oppressive possibilities. That is not decisive. It does not
settle the issue. What carries weight and conviction is the result
arrived at, the just solution obtained, grounded in the soundest of
legal doctrines and distinguished by its correspondence with what a
sense of realism requires. For through the appealed order, the
imperative requirement of justice according to law is satisfied and
national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos,
the Judge of the Court of First Instance, dated May 18, 1964, is
affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc.
ANTONIA TORRES, assisted by her husband, ANGELO TORRES; and
EMETERIA BARING, petitioners, vs. COURT OF APPEALS and MANUEL
TORRES,respondents.
D E C I S I O N
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences
of their acts. That the terms of a contract turn out to be
financially disadvantageous to them will not relieve them of their
obligations therein. The lack of an inventory of real property will
not ipso facto release the contracting partners from their
respective obligations to each other arising from acts executed in
accordance with their agreement.
The Case
-
The Petition for Review on Certiorari before us assails the
March 5, 1998 Decision[1] Second Division of the Court of
Appeals[2] (CA) in CA-GR CV No. 42378 and its June 25, 1998
Resolution denying reconsideration. The assailed Decision affirmed
the ruling of the Regional Trial Court (RTC) of Cebu City in Civil
Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court,
finding for the defendant and against the plaintiffs, orders the
dismissal of the plaintiffs complaint. The counterclaims of the
defendant are likewise ordered dismissed. No pronouncement as to
costs.[3]
The Facts
Sisters Antonia Torres and Emeteria Baring, herein petitioners,
entered into a "joint venture agreement" with Respondent Manuel
Torres for the development of a parcel of land into a subdivision.
Pursuant to the contract, they executed a Deed of Sale covering the
said parcel of land in favor of respondent, who then had it
registered in his name. By mortgaging the property, respondent
obtained from Equitable Bank a loan ofP40,000 which, under the
Joint Venture Agreement, was to be used for the development of the
subdivision.[4] All three of them also agreed to share the proceeds
from the sale of the subdivided lots.
The project did not push through, and the land was subsequently
foreclosed by the bank.
According to petitioners, the project failed because of
respondents lack of funds or means and skills. They add that
respondent used the loan not for the development of the
subdivision, but in furtherance of his own company, Universal
Umbrella Company.
On the other hand, respondent alleged that he used the loan to
implement the Agreement. With the said amount, he was able to
effect the survey and the subdivision of the lots. He secured the
Lapu Lapu City Councils approval of the subdivision project which
he advertised in a local newspaper. He also caused the construction
of roads, curbs and gutters. Likewise, he entered into a contract
with an engineering firm for the building of sixty low-cost housing
units and actually even set up a model house on one of the
subdivision lots. He did all of these for a total expense of
P85,000.
Respondent claimed that the subdivision project failed, however,
because petitioners and their relatives had separately caused the
annotations of adverse claims on the title to the land, which
eventually scared away prospective buyers. Despite his
-
requests, petitioners refused to cause the clearing of the
claims, thereby forcing him to give up on the project.[5]
Subsequently, petitioners filed a criminal case for estafa
against respondent and his wife, who were however acquitted.
Thereafter, they filed the present civil case which, upon
respondent's motion, was later dismissed by the trial court in an
Order dated September 6, 1982. On appeal, however, the appellate
court remanded the case for further proceedings. Thereafter, the
RTC issued its assailed Decision, which, as earlier stated, was
affirmed by the CA.
Hence, this Petition.[6]
Ruling of the Court of Appeals
In affirming the trial court, the Court of Appeals held that
petitioners and respondent had formed a partnership for the
development of the subdivision. Thus, they must bear the loss
suffered by the partnership in the same proportion as their share
in the profits stipulated in the contract. Disagreeing with the
trial courts pronouncement that losses as well as profits in a
joint venture should be distributed equally,[7] the CA invoked
Article 1797 of the Civil Code which provides:
Article 1797 - The losses and profits shall be distributed in
conformity with the agreement. If only the share of each partner in
the profits has been agreed upon, the share of each in the losses
shall be in the same proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive
such share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also
receive a share in the profits in proportion to his capital.
The Issue
Petitioners impute to the Court of Appeals the following
error:
x x x [The] Court of Appeals erred in concluding that the
transaction x x x between the petitioners and respondent was that
of a joint venture/partnership, ignoring outright
-
the provision of Article 1769, and other related provisions of
the Civil Code of the Philippines.[8]
The Courts Ruling
The Petition is bereft of merit.
Main Issue: Existence of a Partnership
Petitioners deny having formed a partnership with respondent.
They contend that the Joint Venture Agreement and the earlier Deed
of Sale, both of which were the bases of the appellate courts
finding of a partnership, were void.
In the same breath, however, they assert that under those very
same contracts, respondent is liable for his failure to implement
the project. Because the agreement entitled them to receive 60
percent of the proceeds from the sale of the subdivision lots, they
pray that respondent pay them damages equivalent to 60 percent of
the value of the property.[9]
The pertinent portions of the Joint Venture Agreement read as
follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City,
Philippines, this 5th day of March, 1969, by and between MR. MANUEL
R. TORRES, x x x the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES,
and MISS EMETERIA BARING, x x x the SECOND PARTY:
W I T N E S S E T H:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST
PARTY, this property located at Lapu-Lapu City, Island of Mactan,
under Lot No. 1368 covering TCT No. T-0184 with a total area of
17,009 square meters, to be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of:
TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, upon the
execution of this contract for the property entrusted by the SECOND
PARTY, for sub-division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants
and promises herein contained the respective parties hereto do
hereby stipulate and agree as follows:
-
ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x
dated March 5, 1969, in the amount of TWENTY FIVE THOUSAND FIVE
HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine
Currency, for 1,700 square meters at ONE [PESO] & FIFTY CTVS.
(P1.50) Philippine Currency, in favor of the FIRST PARTY, but the
SECOND PARTY did not actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST
PARTY, the necessary amount of TWENTY THOUSAND (P20,000.00) pesos,
Philippine currency, for their personal obligations and this
particular amount will serve as an advance payment from the FIRST
PARTY for the property mentioned to be sub-divided and to be
deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND
PARTY, the interest and the principal amount involving the amount
of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until
the sub-division project is terminated and ready for sale to any
interested parties, and the amount of TWENTY THOUSAND (P20,000.00)
pesos, Philippine currency, will be deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in
the sub-division project should be paid by the FIRST PARTY,
exclusively and all the expenses will not be deducted from the
sales after the development of the sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided
into SIXTY PERCENTUM 60% for the SECOND PARTY and FORTY PERCENTUM
40% for the FIRST PARTY, and additional profits or whatever income
deriving from the sales will be divided equally according to the x
x x percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property
involved will start the work and all improvements upon the adjacent
lots will be negotiated in both parties['] favor and all sales
shall [be] decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to
get back the property mentioned provided the amount of TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the
SECOND PARTY, will be paid in full to the FIRST PARTY, including
all necessary improvements spent by the FIRST PARTY, and the FIRST
PARTY will be given a grace period to turnover the property
mentioned above.
That this AGREEMENT shall be binding and obligatory to the
parties who executed same freely and voluntarily for the uses and
purposes therein stated.[10]
-
A reading of the terms embodied in the Agreement indubitably
shows the existence of a partnership pursuant to Article 1767 of
the Civil Code, which provides:
ART. 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Under the above-quoted Agreement, petitioners would contribute
property to the partnership in the form of land which was to be
developed into a subdivision; while respondent would give, in
addition to his industry, the amount needed for general expenses
and other costs. Furthermore, the income from the said project
would be divided according to the stipulated percentage. Clearly,
the contract manifested the intention of the parties to form a
partnership.[11]
It should be stressed that the parties implemented the contract.
Thus, petitioners transferred the title to the land to facilitate
its use in the name of the respondent. On the other hand,
respondent caused the subject land to be mortgaged, the proceeds of
which were used for the survey and the subdivision of the land. As
noted earlier, he developed the roads, the curbs and the gutters of
the subdivision and entered into a contract to construct low-cost
housing units on the property.
Respondents actions clearly belie petitioners contention that he
made no contribution to the partnership. Under Article 1767 of the
Civil Code, a partner may contribute not only money or property,
but also industry.
Petitioners Bound by Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties
not only to what has been expressly stipulated, but also to all
necessary consequences thereof, as follows:
ART. 1315. Contracts are perfected by mere consent, and from
that moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good
faith, usage and law.
It is undisputed that petitioners are educated and are thus
presumed to have understood the terms of the contract they
voluntarily signed. If it was not in consonance with their
expectations, they should have objected to it and insisted on the
provisions they wanted.
-
Courts are not authorized to extricate parties from the
necessary consequences of their acts, and the fact that the
contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their
obligations. They cannot now disavow the relationship formed from
such agreement due to their supposed misunderstanding of its
terms.
Alleged Nullity of the Partnership Agreement
Petitioners argue that the Joint Venture Agreement is void under
Article 1773 of the Civil Code, which provides:
ART. 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if an inventory of said property
is not made, signed by the parties, and attached to the public
instrument.
They contend that since the parties did not make, sign or attach
to the public instrument an inventory of the real property
contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to
protect third persons. Thus, the eminent Arturo M. Tolentino states
that under the aforecited provision which is a complement of
Article 1771,[12] the execution of a public instrument would be
useless if there is no inventory of the property contributed,
because without its designation and description, they cannot be
subject to inscription in the Registry of Property, and their
contribution cannot prejudice third persons. This will result in
fraud to those who contract with the partnership in the belief [in]
the efficacy of the guaranty in which the immovables may consist.
Thus, the contract is declared void by the law when no such
inventory is made. The case at bar does not involve third parties
who may be prejudiced.
Second, petitioners themselves invoke the allegedly void
contract as basis for their claim that respondent should pay them
60 percent of the value of the property.[13] They cannot in one
breath deny the contract and in another recognize it, depending on
what momentarily suits their purpose. Parties cannot adopt
inconsistent positions in regard to a contract and courts will not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not
prevent courts from considering the Joint Venture Agreement an
ordinary contract from which the parties rights and obligations to
each other may be inferred and enforced.
Partnership Agreement Not the Result of an Earlier Illegal
Contract
-
Petitioners also contend that the Joint Venture Agreement is
void under Article 1422[14] of the Civil Code, because it is the
direct result of an earlier illegal contract, which was for the
sale of the land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly
states that the consideration for the sale was the expectation of
profits from the subdivision project. Its first stipulation states
that petitioners did not actually receive payment for the parcel of
land sold to respondent. Consideration, more properly denominated
as cause, can take different forms, such as the prestation or
promise of a thing or service by another.[15]
In this case, the cause of the contract of sale consisted not in
the stated peso value of the land, but in the expectation of
profits from the subdivision project, for which the land was
intended to be used. As explained by the trial court, the land was
in effect given to the partnership as [petitioners] participation
therein. x x x There was therefore a consideration for the sale,
the [petitioners] acting in the expectation that, should the
venture come into fruition, they [would] get sixty percent of the
net profits.
Liability of the Parties
Claiming that respondent was solely responsible for the failure
of the subdivision project, petitioners maintain that he should be
made to pay damages equivalent to 60 percent of the value of the
property, which was their share in the profits under the Joint
Venture Agreement.
We are not persuaded. True, the Court of Appeals held that
petitioners acts were not the cause of the failure of the
project.[16] But it also ruled that neither was respondent
responsible therefor.[17] In imputing the blame solely to him,
petitioners failed to give any reason why we should disregard the
factual findings of the appellate court relieving him of fault.
Verily, factual issues cannot be resolved in a petition for review
under Rule 45, as in this case. Petitioners have not alleged, not
to say shown, that their Petition constitutes one of the exceptions
to this doctrine.[18] Accordingly, we find no reversible error in
the CA's ruling that petitioners are not entitled to damages.
WHEREFORE, the Petition is hereby DENIED and the challenged
Decision AFFIRMED. Costs against petitioners.
SO ORDERED.
-
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO
AZUL LAND, INC., respondents.
D E C I S I O N
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency,
under the direct general supervision of the Office of the
President,[1] with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent
laws. Among its inumerable functions, and one of the most
important, is the supervision of all corporations, partnerships or
associations, who are grantees or primary franchise and/or a
license or permit issued by the government to operate in the
Philippines.[2] Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock
Exchange, Inc. is the issue in the case at bar.
In this Petition for Review of Certiorari, petitioner assails
the resolution of the respondent Court of Appeals, dated June 27,
1996, which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc. to be listed
in its stock market, thus paving the way for the public offering of
PALIs shares.
The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public in order
to raise funds allegedly to develop its properties and pay its
loans with several banking institutions. In January, 1995, PALI was
issued a Permit to Sell its shares to the public by the Securities
and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its
shares through the Philippine Stock Exchange, Inc. (PSE), for which
purpose it filed with the said stock exchange an application to
list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a
perusal of PALIs application, recommended to the PSEs Board of
Governors the approval of PALIs listing application.
On February 14, 1996, before it could act upon PALIs
application, the Board of Governors of PSE received a letter from
the heirs of Ferdinand E. Marcos, claiming that the late President
Marcos was the legal and beneficial owner of certain properties
forming part of the Puerto Azul Beach Hotel and Resort Complex
which PALI claims to be
-
among its assets and that the Ternate Development Corporation,
which is among the stockholders of PALI, likewise appears to have
been held and continue to be held in trust by one Rebecco Panlilio
for then President Marcos and now, effectively for his estate, and
requested PALIs application to be deferred. PALI was requested to
comment upon the said letter.
PALIs answer stated that the properties forming part of Puerto
Azul Beach Hotel and Resort Complex were not claimed by PALI as its
assets. On the contrary, the resort is actually owned by Fantasia
Filipina Resort, Inc. and the Puerto Azul Country Club, entities
distinct from PALI. Furthermore, the Ternate Development
Corporation owns only 1.20% of PALI. The Marcoses responded that
their claim is not confined to the facilities forming part of the
Puerto Azul Hotel and Resort Complex, thereby implying that they
are also asserting legal and beneficial ownership of other
properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol
Gunigundo of the Presidential Commission on Good Government (PCGG)
requesting for comments on the letter of the PALI and the Marcoses.
On March 4, 1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining the
Marcoses from, among others, further impeding, obstructing,
delaying or interfering in any manner by or any means with the
consideration, processing and approval by the PSE of the initial
public offering of PALI. The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil Case
No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of
Governors of the PSE reached its decision to reject PALIs
application, citing the existence of serious claims, issues and
circumstances surrounding PALIs ownership over its assets that
adversely affect the suitability of listing PALIs shares in the
stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to
the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the
SECs attention the action taken by the PSE in the application of
PALI for the listing of its shares with the PSE, and requesting
that the SEC, in the exercise of its supervisory and regulatory
powers over stock exchanges under Section 6(j) of P.D. No. 902-A,
review the PSEs action on PALIs listing application and institute
such measures as are just and proper and under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the
PSE, attaching thereto the letter of PALI and directing the PSE to
file its comments thereto within five days from its receipt and for
its authorized representative to appear for an inquiry on the
matter. On April 22, 1996, the PSE submitted a letter to the SEC
containing its comments to the April 11, 1996 letter of PALI.
-
On April 24, 1996, the SEC rendered its Order, reversing the
PSEs decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioners
authority and jurisdiction under Section 3 of the Revised
Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the
Presidential Decree No. 902-A, the decision of the Board of
Governors of the Philippine Stock Exchange denying the listing of
shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE
is hereby ordered to immediately cause the listing of the PALI
shares in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it deems
necessary for the protection of the investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on
April 29, 1996, which was, however denied by the Commission in its
May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to consider its order dated April 24, 1996, and
in the light of recent developments on the adverse claim against
the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the
investing public. In this regard, PALI is hereby ordered to amend
its registration statements filed with the Commission to
incorporate the full disclosure of these material facts and
information.
Dissatisfied with this ruling, the PSE filed with the Court of
Appeals on May 17, 1996 a Petition for Review (with application for
Writ of Preliminary Injunction and Temporary Restraining Order),
assailing the above mentioned orders of the SEC, submitting the
following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES
OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE
DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALIS LISTING APPLICATION;
-
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR
ALLOWING FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND
WHICH FORM PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED
AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE
DUE PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for
Review and subsequently, a Comment and Motion to Dismiss. On June
10, 1996, PSE filed its Reply to Comment and Opposition to Motion
to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its
Resolution dismissing the PSEs Petition for Review. Hence, this
Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction
and authority to look into the decision of the petitioner PSE,
pursuant to Section 3[3] of the Revised Securities Act in relation
to Section 6(j) and 6(m)[4] of P.D. No. 902-A, and Section 38(b)[5]
of the Revised Securities Act, and for the purpose of ensuring fair
administration of the exchange. Both as a corporation and as a
stock exchange, the petitioner is subject to public respondents
jurisdiction, regulation and control. Accepting the argument that
the public respondent has the authority merely to supervise or
regulate, would amount to serious consequences, considering that
the petitioner is a stock exchange whose business is impressed with
public interest. Abuse is not remote if the public respondent is
left without any system of control. If the securities act vested
the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and the
power to alter and supplement rules of the exchange in the listing
or delisting of securities, then the law certainly granted to the
public respondent the plenary authority over the petitioner; and
the power of review necessarily comes within its authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SECs ruling to the
effect that:
x x x the Philippine Stock Exchange has acted in an arbitrary
and abusive manner in disapproving the application of PALI for
listing of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied with the Listing
Rules and full disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as
-
compared to the IPOs of other companies similarly that were
allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALIs
properties were even less serious than the claims against the
assets of the other companies in that, the assertions of the
Marcoses that they are owners of the disputed properties were not
substantiated enough to overcome the strength of a title to
properties issued under the Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of competent
jurisdiction seeking to nullify PALIs ownership over the disputed
properties, neither has the government instituted recovery
proceedings against these properties. Yet the import of PSEs
decision in denying PALIs application is that it would be PALI, not
the Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the
Military/Naval Reservation does not inspire belief. The point is,
the PALI properties are now titled. A property losses its public
character the moment it is covered by a title. As a matter of fact,
the titles have long been settled by a final judgment; and the
final decree having been registered, they can no longer be
re-opened considering that the one year period has already passed.
Lastly, the determination of what standard to apply in allowing
PALIs application for listing, whether the discretion method or the
system of public disclosure adhered to by the SEC, should be
addressed to the Securities Commission, it being the government
agency that exercises both supervisory and regulatory authority
over all corporations.
On August 15, 1996, the PSE, after it was granted an extension,
filed an instant Petition for Review on Certiorari, taking
exception to the rulings of the SEC and the Court of Appeals.
Respondent PALI filed its Comment to the petition on October 17,
1996. On the same date, the PCGG filed a Motion for Leave to file a
Petition for Intervention. This was followed up by the PCGGs
Petition for Intervention on October 21, 1996. A supplemental
Comment was filed by PALI on October 25, 1997. The Office of the
Solicitor General, representing the SEC and the Court of Appeals,
likewise filed its Comment on December 26, 1996. In answer to the
PCGGs motion for leave to file petition for intervention, PALI
filed its Comment thereto on January 17, 1997, whereas the PSE
filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to
the comments of respondent PALI (October 17, 1996) and the
Solicitor General (December 26, 1996). On may 16, 1997, PALI filed
its Rejoinder to the said consolidated reply of PSE.
-
PSE submits that the Court of Appeals erred in ruling that the
SEC had authority to order the PSE to list the shares of PALI in
the stock exchange. Under presidential decree No. 902-A, the powers
of the SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised Securities
Act are specifically enumerated, and these do not include the power
to reverse the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the countrys
security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in
turn are given more lee-way in making the decision whether or not
to allow corporations to offer their stock to the public through
the stock exchange. This is in accord with the business judgment
rule whereby the SEC and the courts are barred from intruding into
business judgments of corporations, when the same are made in good
faith. The said rule precludes the reversal of the decision of the
PSE to deny PALIs listing application, absent a showing a bad faith
on the part of the PSE. Under the listing rule of the PSE, to which
PALI had previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing. Thus, even
if an issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or reject the
issuers listing application if the PSE determines that the listing
shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over
sequestered corporations, nor with corporations whose properties
are under sequestration. A reading of Republic of the Philippines
vs. Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that
the properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol Development
Corporation (MSDC), are under sequestration by the PCGG, and the
subject of forfeiture proceedings in the Sandiganbayan. This ruling
of the Court is the law of the case between the Republic and the
TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and
April 4, 1988.
It is, likewise, intimidated that the Court of Appeals sanction
that PALIs ownership over its properties can no longer be
questioned, since certificates of title have been issued to PALI
and more than one year has since lapsed, is erroneous and ignores
well settled jurisprudence on land titles. That a certificate of
title issued under the Torrens System is a conclusive evidence of
ownership is not an absolute rule and admits certain exceptions. It
is fundamental that forest lands or military reservations are
non-alienable. Thus, when a title covers a forest reserve or a
government reservation, such title is void.
PSE, likewise, assails the SECs and the Court of Appeals
reliance on the alleged policy of full disclosure to uphold the
listing of the PALIs shares with the PSE, in the
-
absence of a clear mandate for the effectivity of such policy.
As it is, the case records reveal the truth that PALI did not
comply with the listing rules and disclosure requirements. In fact,
PALIs documents supporting its application contained
misrepresentations and misleading statements, and concealed
material information. The matter of sequestration of PALIs
properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALIs
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the marking of a
corporate entity, its functions as the primary channel through
which the vessels of capital trade ply. The PSEs relevance to the
continued operation and filtration of the securities transactions
in the country gives it a distinct color of importance such that
government intervention in its affairs becomes justified, if not
necessary. Indeed, as the only operational stock exchange in the
country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the
countrys economy.
Due to this special nature of stock exchanges, the countrys
lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges.[6]
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be
fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is
enough authority to uphold the SECs challenged control authority
over the petitioner PSE even as it provides that the Commission
shall have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees of
primary franchises and/or a license or permit issued by the
government to operate in the Philippines The SECs regulatory
authority over private corporations encompasses a wide margin of
areas, touching nearly all of a corporations concerns. This
authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the
state.
The SECs power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as necessary or
incidental to the carrying out of the SECs express power to insure
fair dealing in securities traded upon a stock exchange or to
ensure the fair administration of such exchange.[7] It is,
likewise, observed that the principal function of the SEC is the
supervision and control over corporations, partnerships and
associations with the end in view that investment in these entities
may be encouraged
-
and protected, and their activities pursued for the promotion of
economic development.[8]
Thus, it was in the alleged exercise of this authority that the
SEC reversed the decision of the PSE to deny the application for
listing in the stock exchange of the private respondent PALI. The
SECs action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange. This is in
line with the SECs mission to ensure proper compliance with the
laws, such as the Revised Securities Act and to regulate the sale
and disposition of securities in the country.[9] As the appellate
court explains:
Paramount policy also supports the authority of the public
respondent to review petitioners denial of the listing. Being a
stock exchange, the petitioner performs a function that is vital to
the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the
economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can dictate
which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own
rules liberally as it may please. Petitioner can either allow or
deny the entry to the market of securities. To repeat, the
monopoly, unless accompanied by control, becomes subject to abuse;
hence, considering public interest, then it should be subject to
government regulation.
The role of the SEC in our national economy cannot be minimized.
The legislature, through the Revised Securities Act, Presidential
Decree No. 902-A, and other pertinent laws, has entrusted to it the
serious responsibility of enforcing all laws affecting corporations
and other forms of associations not otherwise vested in some other
government office.[10]
This is not to say, however, that the PSEs management
prerogatives are under the absolute control of the SEC. The PSE is,
after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSEs
main concerns, as such, is still the generation of profit for its
stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts
with third persons, and to perform all other legal acts within its
allocated express or implied powers.
A corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives
no constitutional immunities and perquisites appropriate to such
body.[11] As to its corporate and management decisions, therefore,
the state will
-
generally not interfere with the same. Questions of policy and
of management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to
substitute their judgment for the judgment of the board of
directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable
by the courts.[12]
Thus, notwithstanding the regulatory power of the SEC over the
PSE, and the resultant authority to reverse the PSEs decision in
matters of application for listing in the market, the SEC may
exercise such power only if the PSEs judgment is attended by bad
faith. In board of Liquidators vs. Kalaw,[13] it was held that bad
faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It means a breach of a known duty through some
motive or interest of ill will, partaking of the nature of
fraud.
In reaching its decision to deny the application for listing of
PALI, the PSE considered important facts, which in the general
scheme, brings to serious question the qualification of PALI to
sell its shares to the public through the stock exchange. During
the time for receiving objections to the application, the PSE heard
from the representative of the late President Ferdinand E. Marcos
and his family who claim the properties of the private respondent
to be part of the Marcos estate. In time, the PCGG confirmed this
claim. In fact, an order of sequestration has been issued covering
the properties of PALI, and suit for reconveyance to the state has
been filed in the Sandiganbayan Court. How the properties were
effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private respondent
PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious
doubt as to the integrity of PALI as a stock issuer. The petitioner
was in the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the general public.
The purpose of the Revised Securities Act, after all, is to give
adequate and effective protection to the investing public against
fraudulent representations, or false promises, and the imposition
of worthless ventures.[14]
It is to be observed that the U.S. Securities Act emphasized its
avowed protection to acts detrimental to legitimate business,
thus:
The Securities Act, often referred to as the truth in securities
Act, was designed not only to provide investors with adequate
information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to
obtain capital through honest presentation against competition form
crooked promoters and to prevent fraud in the sale of securities.
(Tenth Annual Report, U.S. Securities and Exchange Commission, p.
14).
-
As has been pointed out, the effects of such an act are chiefly
(1) prevention of excesses and fraudulent transactions, merely by
requirement of that details be revealed; (2) placing the market
during the early stages of the offering of a security a body of
information, which operating indirectly through investment services
and expert investors, will tend to produce a more accurate
appraisal of a security. x x x. Thus, the Commission may refuse to
permit a registration statement to become effective if it appears
on its face to be incomplete or inaccurate in any material respect,
and empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to
include any untrue statement of a material fact or to omit to state
any material fact required to be stated therein or necessary to
make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has
established its name and goodwill, and it has the right to protect
such goodwill by maintaining a reasonable standard of propriety in
the entities who choose to transact through its facilities. It was
reasonable for PSE, therefore, to exercise its judgment in the
manner it deems appropriate for its business identity, as long as
no rights are trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of
government absolutism in a thing of the past, and should remain
so.
The observation that the title of PALI over its properties is
absolute and can no longer be assailed is of no moment. At this
juncture, there is the claim that the properties were owned by the
TDC and MSDC and were transferred in violation of sequestration
orders, to Rebecco Panlilio and later on to PALI, besides the claim
of the Marcoses that such properties belong to Marcos estate, and
were held only in trust by Rebecco Panlilio. It is also alleged by
the petitioner that these properties belong to naval and forest
reserves, and therefore beyond private dominion. If any of these
claims is established to be true, the certificates of title over
the subject properties now held by PALI may be disregarded, as it
is an established rule that a registration of a certificate of
title does not confer ownership over the properties described
therein to the person named as owner. The inscription in the
registry, to be effective, must be made in good faith. The defense
of indefeasibility of a Torrens Title does not extend to a
transferee who takes the certificate of title with notice of a
flaw.
In any case, for the purpose of determining whether PSE acted
correctly in refusing the application of PALI, the true ownership
of the properties of PALI need not be determined as an absolute
fact. What is material is that the uncertainty of the properties
ownership and alienability exists, and this puts to question the
qualification of PALIs public offering. In sum, the Court finds
that the SEC had acted arbitrarily in arrogating unto itself the
discretion of approving the application for listing in the PSE
of
-
the private respondent PALI, since this is a matter addressed to
the sound discretion of the PSE, a corporate entity, whose business
judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the SEC is not
for the Court to determine, but is left to the sound discretion of
the Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under
Section 3 thereof, gives the SEC the power to promulgate such rules
and regulations as it may consider appropriate in the public
interest for the enforcement of the said laws. The second paragraph
of Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall
be promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A, on the
other hand, provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over the
securities market as a whole, and as such, is given ample authority
in determining appropriate policies. Pursuant to this regulatory
authority, the SEC has manifested that it has adopted the policy of
full material disclosure where all companies, listed or applying
for listing, are required to divulge truthfully and accurately, all
material information about themselves and the securities they sell,
for the protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with
this, a fact is deemed material if it tends to induce or otherwise
effect the sale or purchase of its securities.[15] While the
employment of this policy is recognized and sanctioned by laws,
nonetheless, the Revised Securities Act sets substantial and
procedural standards which a proposed issuer of securities must
satisfy.[16] Pertinently, Section 9 of the Revised Securities Act
sets forth the possible Grounds for the Rejection of the
registration of a security:
- - The Commission may reject a registration statement and
refuse to issue a permit to sell the securities included in such
registration statement if it finds that - -
(1) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue statement
of a material fact or omits to state a material facts required to
be stated therein or necessary to make the statements therein not
misleading; or
(2) The issuer or registrant - -
(i) is not solvent or not is sound financial condition;
-
(ii) has violated or has not complied with the provisions of
this Act, or the rules promulgated pursuant thereto, or any order
of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in the public
interest and for the protection of investors, impose before the
security can be registered;
(iv) had been engaged or is engaged or is about to engaged in
fraudulent transactions;
(v) is in any was dishonest of is not of good repute; or
(vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary or government
rules and regulations.
(3) The enterprise or the business of the issuer is not shown to
be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or principal
stockholder of the issuer is disqualified to such officer, director
or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction
of the Commission that the sale of its security would not work to
the prejudice to the public interest or as a fraud upon the
purchaser or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the
lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the Securities
and Exchange Commission. This measure was meant to protect the
interest of the investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration
of securities is, therefore, untenable. At it is, the Court finds
that the private respondent PALI, on at least two points (nos. 1
and 5) has failed to support the propriety of the issue of its
shares with unfailing clarity, thereby lending support to the
conclusion that the PSE acted correctly in refusing the listing of
PALI in its stock exchange. This does not discount the effectivity
of whatever method the SEC, in the exercise of its vested
authority, chooses in setting the standard for public offerings of
corporations wishing to do so. However, the SEC must recognize and
implement the mandate of the law, particularly the Revised
Securities Act, the provisions of which cannot be amended or
supplanted my mere administrative issuance.
-
In resum, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances attendant to this
case.
ACCORDINGLY, in view of the foregoing considerations, the Court
hereby GRANTS the Petition for Review on Certiorari. The decisions
of the Court of Appeals and the Securities and Exchage Commission
dated July 27, 1996 and April 24, 1996, respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED,
affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land,
Inc.
SO ORDERED.
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager
of the Leyte Metropolitan Water District (LMWD), Tacloban City,
petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN,
Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional
Director of COA Region VIII, respondents.
D E C I S I O N
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the Commission on
Audits (COA) Resolution dated 3 January 2000 and the Decision dated
30 January 2001 denying the Motion for Reconsideration. The COA
denied petitioner Ranulfo C. Felicianos request for COA to cease
all audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District (LMWD). The COA also denied petitioners
request for COA to refund all auditing fees previously paid by
LMWD.
Antecedent Facts
-
A Special Audit Team from COA Regional Office No. VIII audited
the accounts of LMWD. Subsequently, LMWD received a letter from COA
dated 19 July 1999 requesting payment of auditing fees. As General
Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COAs Regional Director that the water district could not
pay the auditing fees. Petitioner cited as basis for his action
Sections 6 and 20 of Presidential Decree 198 (PD 198)[2], as well
as Section 18 of Republic Act No. 6758 (RA 6758). The Regional
Director referred petitioners reply to the COA Chairman on 18
October 1999.
On 19 October 1999, petitioner wrote COA through the Regional
Director asking for refund of all auditing fees LMWD previously
paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D.
Gangans Resolution dated 3 January 2000 denying his requests.
Petitioner filed a motion for reconsideration on 31 March 2000,
which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition.
Attached to the petition were resolutions of the Visayas
Association of Water Districts (VAWD) and the Philippine
Association of Water Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit
jurisdiction over local water districts in Davao City Water
District v. Civil Service Commission and Commission on Audit,[3] as
follows:
The above-quoted provision [referring to Section 3(b) PD 198]
definitely sets to naught petitioners contention that they are
private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the Board of
Directors belong to the local executives of the local subdivision
unit where such districts are located. In contrast, the members of
the Board of Directors or the trustees of a private corporation are
elected from among members or stockholders thereof. It would not be
amiss at this point to emphasize that a private corporation is
created for the private purpose, benefit, aim and end of its
members or stockholders. Necessarily, said members or stockholders
should be given a free hand to choose who will compose the
governing body of their corporation. But this is not the case here
and this clearly indicates that petitioners are not private
corporations.
The COA also denied petitioners request for COA to stop charging
auditing fees as well as petitioners request for COA to refund all
auditing fees already paid.
-
The Issues
Petitioner contends that COA committed grave abuse of discretion
amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following
issues for resolution:
1. Whether a Local Water District (LWD) created under PD 198, as
amended, is a government-owned or controlled corporation subject to
the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs
certified public accountants from auditing local water districts;
and
3. Whether Section 18 of RA 6758 prohibits the COA from charging
government-owned and controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws[4] mandate COA to audit all
government agencies, including government-owned and controlled
corporations (GOCCs) with original charters. An LWD is a GOCC with
an original charter. Section 2(1), Article IX-D of the Constitution
provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power,
authority and duty to examine, audit, and settle all accounts
pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to,
the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices that have been
granted fiscal autonomy under this Constitution; (b) autonomous
state colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the government, which are required by
law or the granting institution to submit to such audit as a
condition of subsidy or equity. However, where the internal control
system of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-audit, as
are necessary and appropriate to correct the deficiencies. It shall
keep the general accounts of the Government and, for
-
such period as may be provided by law, preserve the vouchers and
other supporting papers pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government
agencies or instrumentalities, but also to government-owned and
controlled corporations with original charters as well as other
government-owned or controlled corporations without original
charters.
Whether LWDs are Private or Government-Owned and Controlled
Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks
for a re-examination of a doctrine backed by a long line of cases
culminating in Davao City Water District v. Civil Service
Commission[5] and just recently reiterated in De Jesus v.
Commission on Audit.[6] Petitioner maintains that LWDs are not
government-owned and controlled corporations with original
charters. Petitioner even argues that LWDs are private
corporations. Petitioner asks the Court to consider certain
interpretations of the applicable laws, which would give a new
perspective to the issue of the true character of water
districts.[7]
Petitioner theorizes that what PD 198 created was the Local
Waters Utilities Administration (LWUA) and not the LWDs. Petitioner
claims that LWDs are created pursuant to and not created directly
by PD 198. Thus, petitioner concludes that PD 198 is not an
original charter that would place LWDs within the audit
jurisdiction of COA as defined in Section 2(1), Article IX-D of the
Constitution. Petitioner elaborates that PD 198 does not create
LWDs since it does not expressly direct the creation of such
entities, but only provides for their formation on an optional or
voluntary basis.[8] Petitioner adds that the operative act that
creates an LWD is the approval of the Sanggunian Resolution as
specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the
fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created
under a general law. The second refers to government-owned or
controlled corporations created by special charters. Section 16,
Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide
for the formation, organization, or regulation of private
corporations. Government-owned or controlled
-
corporations may be created or established by special charters
in the interest of the common good and subject to the test of
economic viability.
The Constitution emphatically prohibits the creation of private
corporations except by a general law applicable to all citizens.[9]
The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave
certain individuals, families or groups special privileges denied
to other citizens.[10]
In short, Congress cannot enact a law creating a private
corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a
general law. If the corporation is private, it must necessarily
exist under a general law. Stated differently, only corporations
created under a general law can qualify as private corporations.
Under existing laws, that general law is the Corporation Code,[11]
except that the Cooperative Code governs the incorporation of
cooperatives.[12]
The Constitution authorizes Congress to create government-owned
or controlled corporations through special charters. Since private
corporations cannot have special charters, it follows that Congress
can create corporations with special charters only if such
corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are
not created under the Corporation Code. LWDs are not registered
with the Securities and Exchange Commission. Section 14 of the
Corporation Code states that [A]ll corporations organized under
this code shall file with the Securities and Exchange Commission
articles of incorporation x x x. LWDs have no articles of
incorporation, no incorporators and no stockholders or members.
There are no stockholders or members to elect the board directors
of LWDs as in the case of all corporations registered with the
Securities and Exchange Commission. The local mayor or the
provincial governor appoints the directors of LWDs for a fixed term
of office. This Court has ruled that LWDs are not created under the
Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been
excluded from the coverage of the CSC are those corporations
created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the
contrary, they were created pursuant to a special law and are
governed primarily by its provision.[13] (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special
charter. Since under the Constitution only government-owned or
controlled corporations may have special charters, LWDs can validly
exist only if they are government-owned or controlled. To claim
that LWDs are private corporations with a special charter is to
admit that their existence is constitutionally infirm.
-
Unlike private corporations, which derive their legal existence
and power from the Corporation Code, LWDs derive their legal
existence and power from PD 198. Sections 6 and 25 of PD 198[14]
provide:
Section 6. Formation of District. This Act is the source of
authorization and power to form and maintain a district. For
purposes of this Act, a district shall be considered as a
quasi-public corporation performing public service and supplying
public wants. As such, a district shall exercise the powers, rights
and privileges given to private corporations under existing laws,
in addition to the powers granted in, and subject to such
restrictions imposed, under this Act.
(a) The name of the local water district, which shall include
the name of the city, municipality, or province, or region thereof,
served by said system, followed by the words Water District.
(b) A description of the boundary of the district. In the case
of a city or municipality, such boundary may include all lands
within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks
and/or sewerage facilities managed, operated by or under the
control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district
is formed, which shall include those purposes outlined in Section 5
above.
(e) The names of the initial directors of the district with the
date of expiration of term of office for each.
(f) A statement that the district may only be dissolved on the
grounds and under the conditions set forth in Section 44 of this
Title.
(g) A statement acknowledging the powers, rights and obligations
as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that
the local legislative body has the power to dissolve, alter or
affect the district beyond that specifically provided for in this
Act.
If two or more cities, municipalities or provinces, or any
combination thereof, desire to form a single district, a similar
resolution shall be adopted in each city, municipality and
province.
-
x x x
Sec. 25. Authorization. The district may exercise all the powers
which are expressly granted by this Title or which are necessarily
implied from or incidental to the powers and purposes herein
stated. For the purpose of carrying out the objectives of this Act,
a district is hereby granted the power of eminent domain, the
exercise thereof shall, however, be subject to review by the
Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198,
which expressly confers on LWDs corporate powers. Section 6 of PD
198 provides that LWDs shall exercise the powers, rights and
privileges given to private corporations under existing laws.
Without PD 198, LWDs would have no corporate powers. Thus, PD 198
constitutes the special enabling charter of LWDs. The ineluctable
conclusion is that LWDs are government-owned and controlled
corporations with a special charter.
The phrase government-owned and controlled corporations with
original charters means GOCCs created under special laws and not
under the general incorporation law. There is no difference between
the term original charters and special charters. The Court
clarified this in National Service Corporation v. NLRC[15] by
citing the deliberations in the Constitutional Commission, as
follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original
proposed amendment to now read as follows: including
government-owned or controlled corporations WITH ORIGINAL CHARTERS.
The purpose of this amendment is to indicate that government
corporations such as the GSIS and SSS, which have original
charters, fall within the ambit of the civil service. However,
corporations which are subsidiaries of these chartered agencies
such as the Philippine Airlines, Manila Hotel and Hyatt are
excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee
say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term
original charters, what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of
Congress, or by special law.
MR. FOZ. And not under the general corporation law.
-
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the
Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the
general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service
Commission,[16] the Court re