G.R. No. 97816 - Merrill Lynch Futures, Inc. vs. Court of Appeals

Case Summary (G.R. No. 97816)

Factual Background

ML FUTURES filed suit in the RTC (complaint dated November 23, 1987) against the Laras to recover US$84,836.27 (balance after set-off), exemplary damages, and attorney’s fees, following alleged losses in index futures transactions executed on U.S. exchanges. The complaint alleged that since September 28, 1983 the Laras maintained a futures account (Account No. 138-12161) with ML FUTURES and placed orders through MLPI in the Philippines. ML FUTURES asserted that the Laras were aware MLPI was not a futures broker licensed by the Philippine SEC and that MLPI merely serviced plaintiff’s customers.

Procedural History

Preliminary attachment issued ex parte on December 2, 1987.
The Laras moved to dismiss (Dec. 18, 1987) on two grounds: (1) ML FUTURES had no legal capacity to sue (because it was doing business in the Philippines without a license), and (2) the complaint did not state a cause of action because the Laras’ transactions had been with Merrill Lynch Pierce Fenner & Smith, Inc. rather than with ML FUTURES (accompanied by documentary annexes).
The RTC sustained the motion to dismiss and discharged the attachment (Order Jan. 12, 1988), denying reconsideration (Feb. 29, 1988). The Court of Appeals affirmed (Nov. 27, 1990) finding ML FUTURES was doing business in the Philippines without a license and therefore could not maintain suit under Section 133 of the Corporation Code. The Supreme Court granted certiorari review.

Issues Presented to the Supreme Court

Whether the documentary annexes appended by the Laras to the motion to dismiss (but not formally authenticated or offered) were admissible.
Whether ML FUTURES was denied procedural due process in the proceedings below.
Whether the annexes, if admissible, established that ML FUTURES was doing business in the Philippines without a license and/or that ML FUTURES was not the real party in interest.

Governing Legal Standards and Statutes

Section 133, Corporation Code (prohibits foreign corporations transacting business in the Philippines without a license from maintaining or intervening in any action in Philippine courts).
Rule 16 Secs. 1(d) and 1(g), Rules of Court (motions to dismiss for lack of capacity and failure to state a cause of action).
Rule 133 Sec. 7, Rules of Court (permitting evidence by affidavits, depositions, or oral testimony when motions are based on facts not appearing of record).
Republic Act No. 5455, Section 1 (definition and scope, including what constitutes “doing business” such as soliciting orders, opening offices, appointing representatives domiciled in the Philippines, and acts implying continuity of commercial dealings).
Doctrine of estoppel to deny corporate existence applied in Philippine jurisprudence and in the comparative authorities cited.

Admissibility of Annexed Documents and Proper Procedure on Motion to Dismiss

The Court distinguished the two grounds for dismissal: failure to state a cause of action (a question resolved from the face of the complaint, where extraneous evidence is impermissible) and lack of legal capacity to sue (a question that may rest on facts outside the complaint and therefore may be supported by evidence under Rule 133 Sec. 7). Because the Laras’ motion asserted lack of capacity based on extrinsic facts (i.e., that their transactions were with another corporation and that ML FUTURES was transacting business without a Philippine license), the annexed documents were relevant to that contention. The Supreme Court noted that ML FUTURES did not contest the authenticity of the annexed documents in the trial court; having failed to challenge authenticity or request formal identification/authentication, ML FUTURES could not now validly claim denial of due process purely on technical evidentiary grounds. The Court held that reception of the annexes in resolving the capacity issue was proper.

Due Process Considerations

ML FUTURES argued it was denied due process because the documents attached to the motion to dismiss were not formally authenticated or offered in evidence. The Supreme Court rejected that claim: the nature of the proceeding and the parties’ conduct (ML FUTURES admitted or implicitly accepted the documents’ genuineness in its pleadings and arguments) meant ML FUTURES had adequate opportunity to meet or controvert the evidence. The Court declined to give precedence to technical form over substantive fairness where the party had not timely objected.

Findings on Doing Business, Capacity to Sue, and Real Party in Interest

Both lower courts and the SEC had found that ML FUTURES had transacted business in the Philippines through its local correspondent (MLPI) and that MLPI was not licensed as a commodity futures trading advisor. The Court recognized those factual findings and the SEC’s determination (and the CA’s affirmation). Nonetheless, the Supreme Court emphasized that the ultimate question for adjudication was whether, in equity and on the merits, the Laras were estopped from invoking ML FUTURES’ lack of license as a defense to payment given the long-term commercial relationship and receipt of benefits.

Doctrine of Estoppel and Its Application Here

The Court reviewed the applicable estoppel doctrine: a party who has contracted or otherwise dealt with a corporation as a corporate entity is ordinarily estopped to deny its corporate existence or capacity in actions relating to those dealings, particularly where the party has received benefits from the dealings. The Court found the record showed prolonged and mutually beneficial dealings spanning several years, including monetary advantages received by the Laras (e.g., credits applied against their account). Given these facts, principles of equity and fairness made it inappropriate to allow the Laras to avoid their asserted indebtedness on the sole ground that ML FUTURES (and/or its Philippine correspondent) lacked the requisite Philippine license. Whether estoppel in fact applies here — and whether ML FUTURES was the real party in interest entitled to relief — are issues that require full hearing and determination on the merits.

Rationale for Reversal and Remand

The Supreme Court concluded that the threshold issues (capacity, real party in interest, and applicability of estoppel) were not properly resolved by dismissal without a full hearing on the merits. Although the record supported a finding that ML FUTURES had transacted business in the Philippines through an unlicensed Philippine correspondent, equity and established doctrines of estoppel meant the Laras’ defense could not be accepted as a matter of law without substantive adjudication. Consequently, the Court reversed the Court of Appeals and ordered the RTC to reinstate the case and conduct hearings to determine (a) whether the Laras are liable to ML FUTURES and in what amount, (

Case Syllabus (G.R. No. 97816)

Case Citation and Court

286 PHIL. 988, Second Division, G.R. No. 97816, July 24, 1992.
Decision authored by Chief Justice Narvasa.
Case arose from Civil Case No. Q-52360 in the Regional Trial Court, Quezon City, Branch 84, presided by Hon. Teodoro P. Regino.
Appeal to the Court of Appeals docketed as CA-G.R. CV No. 16478; decision of the Court of Appeals promulgated November 27, 1990; Resolution dated March 7, 1991 noted.
Appeal to the Supreme Court by certiorari from the Court of Appeals decision.

Parties

Petitioner: Merrill Lynch Futures, Inc. (ML FUTURES).
- Described in plaintiff's complaint as “a non-resident foreign corporation, not doing business in the Philippines, duly organized and existing under and by virtue of the laws of the state of Delaware, U.S.A.”
- Described as a “futures commission merchant duly licensed to act as such in the futures markets and exchanges in the United States,” functioning as a broker executing orders on U.S. futures exchanges.
Respondents / Defendants below: Spouses Pedro M. Lara and Elisa G. Lara (the Laras).
Other entities referenced: Merrill Lynch Philippines, Inc. (MLPI), formerly registered and known as Merrill Lynch, Pierce, Fenner & Smith Philippines, Inc.; Merrill Lynch Pierce Fenner & Smith, Inc. (a distinct U.S. entity referenced by defendants).

Factual Background (as alleged and admitted)

On September 28, 1983, ML FUTURES alleges it entered into a Futures Customer Agreement with the Lara Spouses (Account No. 138-12161) to act as their broker for purchase and sale of futures contracts in the U.S.
Orders to buy and sell futures contracts allegedly were transmitted to ML FUTURES by the Laras through the facilities of Merrill Lynch Philippines, Inc., described as a Philippine corporation “servicing plaintiff’s customers.”
The Laras admitted they “have been actively trading in futures contracts in U.S. futures exchanges from 1983 to 1987,” trading in stock index futures for approximately four years (the Laras claimed seven years in some submissions).
Regular accounting and remittances (crediting or debiting) allegedly took place between the Laras and ML FUTURES during the relevant period.
A loss of US$160,749.69 was alleged by ML FUTURES to have been incurred in respect of three transactions involving index futures.
ML FUTURES alleged it set off the defendants’ loss against US$75,913.42 then owing by ML FUTURES to the Laras, leaving a balance due by the Laras of US$84,836.27, which ML FUTURES sought to recover.
The Laras refused to pay, alleging the transactions were null and void because MLPI, the Philippine company servicing plaintiff’s accounts, had no license to operate as a commodity and/or financial futures broker.

Plaintiff’s (ML FUTURES) Complaint and Relief Sought

Filed November 23, 1987, seeking:
- Preliminary attachment against defendants’ properties up to at least P2,267,139.50.
- Judgment after trial for:
  - Philippine peso equivalent of US$84,836.27 at applicable exchange rate on payment, with legal interest from date of demand until full payment;
  - Exemplary damages of at least P500,000.00; and
  - Attorney’s fees and litigation expenses as proven at trial.
ML FUTURES described its business and defined a “futures contract” in the complaint.
ML FUTURES attached and relied on account documentation, including a printed form of “Merrill Lynch Futures, Inc.” signed by the Laras when opening the account and disclosure language regarding funds and that transactions would be governed by laws outside the Philippines where transactions take place.

Defendants’ Motion to Dismiss — Grounds and Documentary Exhibits

Motion to dismiss filed December 18, 1987, on ground that:
- (1) Plaintiff ML FUTURES “had no legal capacity to sue” because it was prohibited from maintaining actions in Philippine courts for transacting business in the Philippines without license; and
- (2) Complaint states no cause of action because ML FUTURES was not the real party in interest — the Laras alleged all transactions had been with Merrill Lynch Pierce Fenner & Smith, Inc. and not with ML FUTURES.
Defendants attached eight (8) agreements, receipts, reminders, and other documents (Annexes A to H) on standard printed forms of Merrill Lynch Pierce Fenner & Smith, Inc., and later submitted additional documents (Annexes J to R), some referring to Account No. 138-12161.
The motion alleged ML FUTURES had been doing business in the Philippines without appropriate license at least for the last four (4) years.

Plaintiff’s Opposition and Rejoinder

ML FUTURES opposed the motion to dismiss:
- Noted defendants’ admission that trading occurred on U.S. exchanges and queried how plaintiff could be “doing business in the Philippines” if trading was made in the U.S.
- Pointed to printed disclosure forms signed by the Laras indicating “This Commodity Trading Advisor (Merrill Lynch, Pierce, Fenner & Smith Philippines, Inc.) is prohibited by the Philippine Securities and Exchange Commission from accepting funds in the trading advisor’s name from a client of Merrill Lynch Futures, Inc. for trading commodity interests. All funds in this trading program must be placed with Merrill Lynch Futures, Inc.”
- Emphasized language that legal relationships would be governed by laws outside the Philippines where sale and purchase transactions take place.
- Asserted that defendants should not introduce evidence in a motion to dismiss based on failure to state a cause of action; argued that attached documents (if considered evidence) were immaterial because they referred to a different account number (138-12136) while defendants’ account was 138-12161; claimed defendants had lied about never being informed of MLPI’s lack of license; invoked unclean hands against the defendants.
Defendants’ reply reasserted lack of awareness that MLPI lacked license, said they learned this fact from SEC inquiries and the Court of Appeals decision in Merrill Lynch Philippines, Inc. v. Securities & Exchange Commission, CA-G.R. No. 10821-SP, Nov. 19, 1987; submitted additional documents asserting that many referred to Account No. 138-12161.

Procedural Acts in Trial Court

Preliminary attachment issued ex parte on December 2, 1987; defendants served summons.
Trial Court promulgated Order sustaining the motion to dismiss on January 12, 1988, dismissed the case, and discharged the writ of preliminary attachment.
Trial Court denied ML FUTURES’ motion for reconsideration by Order dated February 29, 1988.
ML FUTURES appealed to the Cou