Title
Interport Resources Corp. vs. Securities Specialist, Inc.
Case
G.R. No. 154069
Decision Date
Jun 6, 2016
Interport refused SSI's payment for Oceanic shares post-merger, despite valid assignment. SC ruled Interport liable for shares' value but denied exemplary damages and attorney’s fees.
subscription agreements
shares of stocks
exemplary damages
A

Case Summary (G.R. No. 154069)

Factual Background

In January 1977 Oceanic Oil & Mineral Resources, Inc. executed subscription agreements covering 5,000,000 shares with R.C. Lee Securities, Inc., under which R.C. Lee paid twenty-five percent and left seventy-five percent unpaid, giving rise to Oceanic Subscription Agreements Nos. 1805 and 1808–1811. On July 28, 1978 Oceanic merged into Interport Resources Corporation, with Interport as the surviving corporation and an exchange of Oceanic shares for Interport shares. In April 1979 Securities Specialist, Inc. (SSI) received the Oceanic subscription agreements and official receipts showing twenty-five percent payment, the subscription agreements having been delivered to SSI through stock assignments indorsed in blank by R.C. Lee.

Tender of Payment and Rejection by Interport

On February 8, 1989 Interport called for the full payment of subscription receivables, with a March 15, 1989 deadline. SSI tendered payment for the unpaid seventy-five percent balance through stockbrokers and later directly to Interport, but Interport refused to honor the Oceanic subscriptions and to accept SSI’s tender on the ground that the Oceanic subscription agreements should have been converted to Interport shares. SSI sought proof of any board resolution requiring conversion and obtained from the SEC a negative response that no such resolution appeared in SEC records. Interport, however, issued the 5,000,000 shares to R.C. Lee, relying on its registration of R.C. Lee as owner in its books and an affidavit by R.C. Lee’s president that no transfers had been made.

Administrative Complaint and SEC Hearing Officer Decision

On October 6, 1989 SSI filed a complaint with the SEC alleging fraud and collusion between Interport and R.C. Lee and praying for delivery of the 5,000,000 shares and damages. The Hearing Officer of the SEC’s Securities Investigation and Clearing Department rendered judgment on October 25, 1994 ordering Interport to deliver the five million shares to SSI or to pay their market value, and ordering both respondents jointly and severally to indemnify SSI P500,000 as temperate damages, P500,000 as exemplary damages, and P300,000 for litigation expenses and attorney’s fees, plus costs.

SEC En Banc Modification

On appeal to the SEC En Banc the award was modified. The En Banc held that SSI had paid only twenty-five percent of the subscriptions while R.C. Lee had paid the seventy-five percent balance and that it would be inequitable to order delivery or full payment without requiring SSI to pay the unpaid balance. The En Banc therefore ordered delivery only to the extent of twenty-five percent of the shares, or the value thereof, and deleted the award of temperate damages as speculative, but maintained exemplary damages in the amount of P500,000 and litigation expenses including attorney’s fees of P300,000, joint and several against both respondents.

Court of Appeals Proceedings

Interport sought relief in the Court of Appeals which affirmed the SEC En Banc decision on February 11, 2002 and denied its motion for reconsideration on June 25, 2002. The CA sustained the SEC’s relief ordering delivery to SSI of twenty-five percent of the shares or their value and the monetary awards.

Issues on Supreme Court Appeal

Interport assigned errors to the Court of Appeals, challenging (1) the factual finding that Interport was liable to deliver twenty-five percent of the 5,000,000 shares or to pay their value; (2) the award of exemplary damages of P500,000; and (3) the award of attorney’s fees of P300,000. The dispositive legal questions framed were whether Interport was liable to deliver the Oceanic shares or their value to SSI under Subscription Agreements Nos. 1805 and 1808–1811 and whether SSI was entitled to exemplary damages and attorney’s fees.

Parties’ Contentions on Liability

Interport contended that R.C. Lee, having paid the seventy-five percent balance to Interport and having been issued the corresponding stock certificates, should be held liable to SSI for the twenty-five percent interest, not Interport, and that Interport had relied on its records and Section 74 of the Corporation Code in issuing stock certificates to R.C. Lee. SSI maintained that R.C. Lee had validly assigned its subscription agreements to SSI, that the assignment operated as a novation by substitution of debtor under Article 1293, Civil Code, and that SSI properly tendered payment and notified Interport, thus obliging Interport to accept SSI’s tender and to recognize the assignment.

Supreme Court Disposition

The Supreme Court partially granted the petition for review and affirmed the CA decision subject to modification. The Court ordered Interport Resources Corporation to accept SSI’s tender of the seventy-five percent unpaid balance, to deliver 5,000,000 shares and issue corresponding stock certificates to SSI upon receipt of that payment, to cancel the stock certificates issued to R.C. Lee corresponding to those 5,000,000 shares, and to reimburse R.C. Lee the amounts it paid representing the seventy-five percent balance. In the alternative, if delivery and issuance were no longer possible, Interport was ordered to pay SSI the market value of the 5,000,000 shares at the time of promulgation of the decision. The Supreme Court deleted the awards for exemplary damages and attorney’s fees for lack of merit and made no pronouncement on costs.

Legal Reasoning on Novation and Assignment

The Court agreed with the SEC that the assignment of the subscription agreements operated as a novation by substitution of debtor under Article 1293, Civil Code, thereby extinguishing R.C. Lee’s obligation to Interport and making SSI the new debtor obliged to pay the seventy-five percent balance. The Court noted that novation by substitution requires the consent of or notice to the creditor and accepted that Interport was sufficiently notified when SSI tendered payment. The Court applied the principles distinguishing extinctive and modificatory novation and found that the assignment extinguished R.C. Lee’s rights and obligations under the subscription agreements insofar as Interport was concerned, thereby invalidating the issuance of stock certificates to R.C. Lee in the absence of a contractual agreement between R.C. Lee and Interport.

Analysis of Corporation Code Registration Rule

The Court addressed Section 63, Corporation Code, which makes transfers of shares valid as between parties only upon recording in the corporation’s books, and recognized that ordinarily a transfer not recorded in the stock and transfer book is non-existent as far as the corporation is concerned. The Court nevertheless declined to permit Interport to rely on formal registration where Interport had unduly refused to recognize the assignment and had thereby been put on notice. The Court relied on the rule that the right to have a transfer registered arises from the time of transfer but the cause of action accrues only after demand and refusal to record the transfer, and found that SSI acted with sufficient dispatch once Interport refused SSI’s tender on March 15, 1989 and SSI filed its complaint on October 6, 1989.

Damages and Attorney’s Fees: Rationale for Deletion

The Court rejected the award of exemplary damages and attorney’s fees. It explained that exemplary damages under Article 2229, Civil Co

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