G.R. No. 185664 - Balinghasay vs. Castillo

Case Summary (G.R. No. 185664)

Petitioner and Respondent Roles

Petitioners included nine directors who were also ultrasound investors and other shareholders who participated in acquiring and operating the ultrasound equipment. Respondents were minority stockholders and MCPI (real party in interest) who filed a derivative suit alleging directors’ conflict of interest, invalid approval of the MOA and recovery of profits and damages under the Corporation Code.

Key Dates and Procedural Posture

Ultrasound unit operations and equipment purchase began in 1997.
MOA between MCPI and ultrasound investors executed February 5, 1999 (effective sharing changes April 1, 1999).
Derivative suit filed March 22, 2001; amended complaint admitted October 12, 2001.
RTC dismissed the amended complaint (Decision dated March 22, 2005).
Court of Appeals reversed and declared the MOA invalid (Decision dated May 23, 2008) and denied reconsideration (Resolution dated December 12, 2008).
Supreme Court rendered its decision on April 8, 2015 (applying the 1987 Constitution as governing law because the decision date is after 1990).

Applicable Law and Doctrines Identified

1987 Philippine Constitution (governing constitutional framework for cases decided after 1990).
Corporation Code: Section 31 (liability of directors for willful or grossly negligent acts and for acquiring interests adverse to the corporation) and Section 32 (voidability and ratification conditions for contracts with directors).
Derivative suit rules (Interim Rules of Procedure for Intra-Corporate Controversies and the principle that the corporation is the real party in interest).
Business judgment rule (courts defer to board decisions made in good faith and honest judgment), with its limits when directors have adverse interests.
Civil Code Article 22 (prohibition against unjust enrichment).
Standards for awarding attorney’s fees under Article 2208 of the Civil Code and pertinent jurisprudence (Benedicto v. Villaflores; Nacar v. Gallery Frames on interest).

Factual Background – Purchase, Operation and MOA

Before 1997 MCP contracted out several services by concession; when concessions expired MCPI elected to provide services internally except ultrasound. A group of investors, mainly Ob-Gyne doctors (some of whom were MCPI directors and shareholders), pooled funds to purchase a Hitachi EUB-200 C ultrasound unit costing P850,000 and operated the unit. The Board initially awarded operation to this group but no written contract was in place until the MOA dated February 5, 1999. The MOA provided for a sharing scheme (initially 60% to investors/40% to MCPI, adjusted to 55%/45% on April 1, 1999) and contemplated eventual transfer of ownership to MCPI.

Allegations and Early Challenges

Opposition arose when a director (Flores) wrote counsel and later manifested his view that the MOA was prejudicial and illegal. Respondents alleged that directors who were ultrasound investors approved or participated in the MOA despite being interested parties, thereby violating fiduciary duties and incurring liability under Section 31 and making the MOA voidable under Section 32. They sought annulment of the MOA, accounting and disgorgement of profits, damages and attorney's fees via a derivative action.

Trial Court Findings (RTC)

The RTC dismissed the amended complaint, concluding that MCPI had impliedly ratified the MOA by accepting or retaining benefits from it; that MCPI’s boards from 1998–2000 did not pursue legal action and thus estoppel had arisen from inaction; that the MOA’s sharing terms were fair and reasonable; and that the business judgment rule precluded judicial substitution of board discretion where exercised in good faith. The RTC quantified income shares showing MCPI had received a substantial net share.

Court of Appeals Decision

The CA reversed the RTC, declaring the MOA invalid. Key CA findings included: (1) quorum and voting irregularities because directors who were ultrasound investors constituted a majority of those present at critical meetings (making their presence necessary for quorum and their votes necessary for approval); (2) absence of ratification by a two-thirds vote of outstanding capital stock with full disclosure as required by Section 32; (3) failure of the interested directors to inhibit themselves from voting and disclosing interest, resulting in liability under Section 31 and trustee-accountability for profits that otherwise would have accrued to MCPI; (4) CA found the MOA not ratified despite attempts to submit it to stockholders; (5) CA denied moral and exemplary damages but awarded disgorgement of profits and P200,000 attorney’s fees to respondents.

Issues Raised on Supreme Court Review

Petitioners urged that: (1) the CA erred by ignoring the emergency and informal circumstances justifying the MOA; (2) the MOA was an informal, good-faith response to urgent hospital need; (3) the business judgment rule should shield the directors’ conduct; and (4) the award of attorney’s fees was unjustified. Respondents countered that petitioners did not introduce evidence of necessity at trial, MCPI had sufficient cash to buy the equipment, estoppel did not apply because respondents repeatedly questioned validity, and ratification attempts failed.

Standard of Review and Evidentiary Considerations

The Supreme Court emphasized that this Rule 45 petition principally raised factual issues—contradictory fact findings between RTC and CA—and that Rule 45 ordinarily does not permit re-assessment of factual evidence except in exceptional circumstances. The Court found no exceptional basis to re-evaluate the factual record; petitioners had failed to introduce at trial the contemporaneous evidence of necessity and circumstances they now relied upon, rendering such defenses untimely and unproven.

Supreme Court Analysis on Quorum, Ratification and Business Judgment Rule

The Court agreed with the CA’s factual findings: the presence and votes of interested directors were necessary to constitute quorum and to approve the MOA in the relevant meetings; the MOA lacked ratification by two-thirds of outstanding capital stock with full disclosure; and MCPI’s audited financial statements showed sufficient cash to have purchased the equipment, undermining the claim of corporate inability. Because directors acquired interests adverse to the corporation and failed to disclose or inhibit, the business judgment rule did not shield them; corporate fiduciary duties and statutory safeguards under Sections 31 and 32 controlled.

Rationale on Derivative Suit Compliance and Estoppel

The Court found that respondents properly alleged a derivative action and complied with procedural requisites (including efforts to exhaust intra-corporate remedies). The Court rejected estoppel and acquiescence contentions where records showed repeated challenges and failed ratification attempts; mere retention of benefits did not incontrovertibly establish ratification in light of continuing protests and failed stockholder votes.

Attorney’s Fees and Equitable Considerations

The Court upheld the CA’s award of P200,000 in attorney’s fees, finding the appellate court stated factual and equitable reasons—petitioners’ unjustified acts and delay caused the respondents to litigate. The Court referred to the established principle that attorney’s fees are exceptional and require explicit legal and equitable justification, which the CA provided.

Unjust Enrichment and Modification on Equipment Ownership

To avoid unjust enrichment, the Supreme Court modified the CA disposition: although the MOA was invalid and petitioners must account for and return to MCPI all net income that should have accrued from the ultrasound operations (from 1997 to present), th

Case Syllabus (G.R. No. 185664)

Case Citation and Basic Disposition

Supreme Court Decision reported at 757 Phil. 612, Third Division, G.R. No. 185664, April 08, 2015 (Decision delivered April 8, 2015; original received May 5, 2015).
Petition for Review on Certiorari assails Court of Appeals Decision dated May 23, 2008 and Resolution dated December 12, 2008 in CA-G.R. SP No. 89279.
The Supreme Court DENIED the petition, AFFIRMED the Court of Appeals' decision and resolution, with CLARIFICATIONS and MODIFICATIONS specified in the ruling.

Parties and Roles

Petitioners: Angeles P. Balinghasay, Renato M. Bernabe, Alodia L. Del Rosario, Catalina T. Funtila, Teresita L. Gayanilo, Rustico A. Jimenez, Arceli P. Jo, Esmeralda D. Medina, Cecilia S. Montalban, Virgilio R. Oblepias, Carmencita R. Parreao, Emma L. Reyes, Reynaldo L. Savet, Serapio P. Taccad, Vicente I. Valdez, Salvacion F. Villamora, and Dionisia M. Villareal (Villareal represented her deceased husband Dr. Humberto Villareal).
Respondents/plaintiffs in the derivative suit: Cecilia Castillo, Oscar del Rosario (Oscar), Arturo S. Flores, Xerxes Navarro, Maria Antonia A. Templo, and Medical Center ParaAaque, Inc. (MCPI).
Corporate actors: MCPI is the corporation operating Medical Center ParaAaque (MCP), organized in 1977.
Relationship among parties: Several petitioners were Board Directors and holders of Class A shares; other petitioners held Class B shares; respondents (except MCPI) were minority stockholders each holding 25 Class B shares.

Factual Background — Services and Concessions

Prior to 1997, MCP’s laboratory, physical therapy, pulmonary and ultrasound services were provided through concessions to independent entities.
When concessions expired in 1997, MCPI decided to provide those services itself except ultrasound.
In 1997 the Board awarded operation of the ultrasound unit to a group of investors (ultrasound investors), largely Ob-Gyne doctors, who held Class A or Class B shares; nine petitioners were among these and were Board Directors.
The ultrasound investors pooled funds to purchase a Hitachi EUB-200 C ultrasound machine costing P850,000.00 and operated it; operation initially lacked a written contract.

Board Deliberations, MOA and Terms

August 14, 1998 Board meeting: 12 of 13 (or 11) directors present; seven were ultrasound investors; Board made a counter-offer regarding operation—no formal approval of MOA then.
February 5, 1999 Board meeting: 12 directors present; eight were ultrasound investors; a Memorandum of Agreement (MOA) was entered on February 5, 1999 and signed by MCPI President Bernabe and ultrasound representative Oblepias.
MOA principal terms: gross income from ultrasound services, minus sonologists’ professional fees, divided between ultrasound investors and MCPI at 60%/40%; effective April 1, 1999, division revised to 55% to ultrasound investors and 45% to MCPI; ownership of the ultrasound machine was to be eventually transferred to MCPI.
The MOA was not immediately covered by a formal written contract prior to the MOA signing and approval process described.

Pre-Litigation Challenges and Attempts at Ratification

October 6, 1999: Arturo S. Flores wrote MCPI counsel challenging Board approval of the MOA as prejudicial to MCPI’s interest.
February 7, 2000: Flores formally manifested to MCPI Board and President his view that the MOA was illegal and could not be validly ratified.
Stockholders’ meetings in years 2000–2003 contained efforts to ratify the MOA by stockholders but such attempts allegedly failed to achieve required two-thirds ratification.
Respondents repeatedly sought copies of the MOA from MCPI Board and continued to question its validity.

Procedural History — Trial Court

March 22, 2001: Respondents filed a derivative suit in the RTC of ParaAaque City (Civil Case No. CV-01-0140) against the petitioners for violation of Section 31 of the Corporation Code, seeking annulment of the MOA, accounting and refund of profits, damages and attorney’s fees.
Petitioners answered and filed counterclaims, arguing non-joinder of MCPI as indispensable party and contending under Section 32 of the Corporation Code the MOA was voidable and had been ratified or was not timely challenged.
September 11, 2001: Respondents filed an Amended Complaint to implead MCPI as plaintiff; RTC admitted the amended complaint on October 12, 2001.
March 22, 2005: RTC Decision dismissed respondents’ amended complaint, finding implied ratification, estoppel by MCPI for accepting benefits from the MOA, fairness of the sharing agreement, and application of the business judgment rule; RTC noted MCPI’s net shares from 1997–1999 were P1,567,699.78 while ultrasound investors received P803,723.00.

Court of Appeals Decision and Reasoning

May 23, 2008: Court of Appeals reversed the RTC and declared the MOA invalid.
CA findings on quorum and approval:
- Quorum defined; depending on whether the Board had 13 or 11 directors, majority would be seven or six.
- August 14, 1998 meeting: 12 directors present; seven were ultrasound investors; only a counter-offer was agreed—MOA not approved there.
- February 5, 1999 meeting: 12 directors present; eight were ultrasound investors; without the votes of ultrasound-investor directors, no valid decision could have been made; presence/votes of said directors were necessary to constitute quorum and to approve MOA.
- MCPI President Dr. Bernabe and Oblepias, who signed MOA, were both ultrasound investors, undermining board approval.
CA held MOA lacked valid Board approval and had not been ratified by two-thirds vote of outstanding capital stock with full disclosure of adverse interests.
CA concluded petitioners/directors who approved and benefited from the MOA acquired interests adverse to MCPI, were liable as trustees, and must account for profits that would otherwise have accrued to MCPI.
CA applied Section 31 (liability for directors who acquire interest adverse to corporation) and Section 32 (conditions for voidability/ratification), and found business judgment rule inapplicable because of directors’ adverse interest and failure to disclose or inhibit.
CA relied on audited MCPI financial statements (1996–1998) showing available cash/cash equivalents (1996: P5,479,242.00; 1997: P5,509,058.51; 1998: P8,662,909.00) to support that MCPI could have purchased equipment itself.
CA quantified ultrasound investors’ net share for 1997–2001 as P4,417,573.81 and ordered accounting and return of profits; awarded attorney’s fees of P200,000.00 to respondents; denied moral and exemplary damages on the basis that moral damages cannot be awarded to a cor