Case Summary (G.R. No. 206649)
Factual Background
The project commenced from a March 31, 1993 project agreement by which Kingsville Construction and Development Corporation and Kings Properties Corporation engaged Fil-Estate Properties, Inc. to finance and develop parcels in Antipolo into Forest Hills Residential Estates and Golf and Country Club. Under the agreement, FEPI agreed to incorporate Forest Hells Golf and Country Club, Inc. with authorized stock of 3,600 shares and to perform development work as full payment for its subscription; Kingsville was to retain remaining shares in exchange for land used for the golf course. In July 1995, FEPI assigned its rights and obligations to Fil-Estate Golf Development, Inc.. Rainier L. Madrid purchased two Class “A” shares and sought membership in July 1996.
Complaint and Core Allegations
Madrid, in a derivative capacity for Forest Hells Golf and Country Club, Inc., filed a Complaint for specific performance with damages alleging that respondents failed to complete the second 18-hole golf course and adjunct country club facilities despite contractual obligations. The Complaint asserted that the club’s board of directors consisted of interlocking directors who were founder shareholders and majority controllers of FEPI and FEGDI, that the board refused or failed to sue the developers because of conflicts of interest and bad faith, and that such inaction prejudiced the corporation and its members. The Complaint sought completion of the 36-hole golf course, an accounting of work done and work-in-progress, and related relief.
Procedural History in the Regional Trial Court
Respondents filed an Answer with compulsory counterclaim denying liability and raising defenses including lack of cause of action, absence of prior demand, failure to exhaust intra-corporate remedies, and nonimpleader of the board of directors as indispensable parties. Petitioner moved to amend the Complaint to implead Kings Properties Corporation and Kingsville and to add Madrid in his personal capacity; respondents opposed. On May 14, 2012, the RTC applied the relationship and nature of controversy tests from Reyes v. Hon. RTC of Makati, Br. 142 and dismissed the Complaint for lack of jurisdiction because the branch was not a designated special commercial court. The motion for leave to amend was deemed moot. The RTC denied reconsideration on February 1, 2013.
Issue Presented to the Supreme Court
The sole issue presented was whether the ordinary civil action for specific performance with damages, filed by petitioner in derivative form to enforce the project agreement against respondents, was cognizable by the regular RTC branch or properly filed with the designated special commercial court (RTC-Binangonan, Branch 70) as an intra-corporate controversy.
Petitioner’s Contentions
Petitioner admitted that it denominated the action a derivative suit but argued that not all derivative suits involve intra-corporate controversies. Petitioner maintained that the suit sought to enforce the project agreement against respondents in their capacity as developers, not primarily as stockholders of the club. Petitioner asserted that the causes of action did not concern intra-corporate relations among stockholders and corporate officials and contended that the RTC erred in treating the case as involving intra-corporate controversy under Reyes.
Respondents’ Contentions
Respondents renewed the defenses raised below: absence of a contractual instrument presented with the Complaint, prematurity for failure of prior demand, noncompliance with intra-corporate remedies and by-laws, and failure to implead the board as indispensable parties. They contended that the Complaint itself revealed that FEPI and FEGDI were shareholders and that the claims were intertwined with intra-corporate matters, thus bringing the action within the jurisdiction of special commercial courts.
Jurisdictional and Doctrinal Standards Applied
The Court reiterated that jurisdiction is defined by law and is determined by the material allegations of the complaint. It observed that upon enactment of RA No. 8799, jurisdiction over intra-corporate disputes, including derivative suits, lay with RTC branches designated as special commercial courts pursuant to A.M. No. 00-11-03-SC. The Court cited the scope of the Interim Rules of Procedure Governing Intra-Corporate Controversies, A.M. No. 01-2-04-SC, which expressly covered derivative suits and controversies arising out of intra-corporate relations, and set forth the requisites for derivative actions in Rule 8, Section 1 of those Interim Rules.
Court’s Analysis of the Complaint’s Allegations
The Court examined the Complaint’s prefatory allegations and found explicit assertions that the club’s board was controlled by interlocking directors who were founder shareholders and majority controllers of FEPI and FEGDI, that the board acted in bad faith and in conflict of interest to avoid suing the developers, and that this inaction injured the corporation and its members. The Court concluded that these allegations showed unavoidable entanglement of intra-corporate controversies with the claim for specific performance and accounting. The Court held that the mere denomination of the suit as derivative and the substance of the Complaint required dismissal in a non-special commercial branch for lack of jurisdiction.
Requirements for a Valid Derivative Suit and Their Application
The Court reviewed the substantive requisites under Rule 8, Section 1 of the Interim Rules: that the plaintiff was a stockholder at the time of the acts and at filing; that the plaintiff had exerted all reasonable efforts to exhaust intra-corporate remedies and alleged such with particularity; that no appraisal rights were available; and that the suit was not a nuisance or harassment suit. The Court found that while the Compl
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Case Syllabus (G.R. No. 206649)
Parties and Posture
- Forest Hells Golf and Country Club, Inc. was the corporate plaintiff, sued through Rainier L. Madrid in a derivative capacity as shareholder and club member.
- Fil-Estate Properties, Inc. and Fil-Estate Golf Development, Inc. were the corporate respondents and alleged developers and shareholders of the club.
- The case arose from Civil Case No. 10-9042 before the Regional Trial Court, Branch 74, Antipolo City, and reached the Court by a Petition for Review on Certiorari under Rule 45.
Key Factual Allegations
- The parties entered a project agreement on March 31, 1993 for development of land in Antipolo into Forest Hills Residential Estates and Golf and Country Club.
- FEPI was tasked to incorporate FHGCCI and to perform development work as payment for its subscription to the club’s capital stock, and it later assigned these rights to FEGDI.
- Rainier L. Madrid purchased two Class “A” shares on July 19, 1996 and paid a membership fee.
- Madrid sent demand letters dated October 29, 2009 and March 15, 2010 requesting the FHGCCI board to sue the developers to complete the second 18-hole golf course, but the board allegedly refused to act due to interlocking directorships and conflict of interest.
- The complaint alleged interlocking directorships, founder’s shares retained by certain founders, bad faith by the board, and that FEPI/FEGDI were simultaneously developers and shareholders whose failure to complete the project prejudiced the corporation and its members.
Procedural History
- Madrid, in a derivative capacity for FHGCCI, filed a Complaint for Specific Performance with Damages on April 21, 2010 in RTC Antipolo.
- FEPI and FEGDI answered and raised defenses including lack of cause of action, failure of prior demand, failure to exhaust intra-corporate remedies, and failure to implead the board.
- The RTC issued an Order on May 14, 2012 dismissing the case for lack of jurisdiction and ordered refiling before the special commercial court in Binangonan, Rizal.
- The RTC denied reconsideration in its February 1, 2013 Order.
- The petition to the Court assailed the foregoing RTC Orders.
Issue Presented
- Whether the ordinary civil action for specific performance filed derivatively by FHGCCI against FEPI and FEGDI was cognizable by the regular RTC branch or was a matter within the jurisdiction of the special commercial court for intra-corporate controversies.
Petitioner Arguments
- FHGCCI admitted it filed a derivative suit but contended that not all derivative suits involve intra-corporate controversies.
- FHGCCI argued the suit sought to enforce the project agreement as a developer obligation and thus was not essentially an intra-corporate controversy concerning relations among stockholders or corporate officers.
- FHGCCI asserted the RTC erred in applying Reyes v. Hon. RTC of Makati,