Title
Spouses Yu vs. Yukayguan
Case
G.R. No. 177549
Decision Date
Jun 18, 2009
Two families, Yu and Yukayguan, dispute ownership of corporate shares and allege fund misappropriation in Winchester, Inc. Supreme Court dismisses claims due to procedural noncompliance and lack of evidence.
misappropriation of funds
properties
dismissal of complaint
A

Case Summary (G.R. No. 177549)

Factual Background

Respondents filed a verified derivative Complaint on October 15, 2002 alleging that petitioners, who together with respondents were stockholders of Winchester Industrial Supply, Inc., misappropriated corporate funds and falsified corporate records. The Complaint recited that petitioner Anthony subscribed to 1,000 shares at incorporation and that those shares were paid with respondent Joseph’s money, rendering Anthony a mere trustee; that Anthony ceded shares to various persons but remained trustee of 200 shares in his name; that Winchester bought back other incorporators’ shares in 1985 and later those shares were sold to various third parties and to certain parties among the petitioners and respondents; and that petitioners exercised control over corporate operations while understating sales, charging personal expenses to the corporation, withdrawing stock without payment, and excluding respondent Joseph from financial management despite his corporate title as Secretary and Treasurer. The reliefs prayed included declaration of Joseph’s ownership of 200 shares, inspection of corporate books, an accounting and reimbursement for alleged misappropriations, damages, appointment of a Management Committee, freezing corporate funds, and attorney’s fees.

Trial Court Proceedings

Petitioners answered on November 13, 2002 with a compulsory counterclaim and attached Anthony’s affidavit denying trustee status and asserting that Anthony paid paid-up capital from personal and conjugal funds. Petitioners also moved to dismiss under Rule 16, Section 1(j), asserting respondents failed to comply with conditions precedent for filing a derivative suit and for inspection. The RTC conducted hearings on the management committee application, the parties engaged in mediation, and they reached an amicable settlement that led to partial distribution of inventories and real properties and a corporate resolution dissolving Winchester as of January 4, 2003. Respondents later repudiated the settlement and sought pre-trial. On August 26, 2004 the RTC, by agreement of counsel, directed the parties to file simultaneous memoranda for judgment based on the pleadings, affidavits, and other evidence. Respondents attached a supplemental affidavit and additional documentary evidence to their memorandum; petitioners objected to the belated submissions.

RTC Decision

The RTC rendered a Decision dated November 10, 2004 dismissing respondents’ Complaint for lack of merit. The court found that respondents failed to comply with the requisites for a derivative suit under Rule 8 of the Interim Rules and likewise failed to meet the requirements for inspection under Rule 7 of those rules. The RTC observed that respondent Joseph, as corporate secretary, was the custodian of corporate books and that a court order for inspection was unnecessary; it also denied the accounting claim because Winchester engaged an audit firm whose audited statements Joseph described as true, and it dismissed claims for damages and petitioners’ counterclaim for lack of proof of bad faith.

Court of Appeals Decision of February 15, 2006

On appeal the Court of Appeals affirmed the RTC on February 15, 2006. The appellate court agreed that respondents did not comply with the mandatory provisions of the Interim Rules, specifically Rule 2, Section 4(3), Rule 8, Section 1(2), and Rule 7, Section 2, which require particularized allegations of attempted exhaustion of intra-corporate remedies and of prior demand for inspection. The CA also held respondent Joseph’s supplemental affidavit and annexes inadmissible because they were submitted only with the memorandum and were not part of the pre-trial submissions, invoking Rule 2, Section 8 of the Interim Rules which generally bars affidavits and documentary evidence not attached to the appropriate pleading or pre-trial brief except in narrowly defined circumstances. The CA concluded that respondents’ belated presentation of evidence warranted dismissal for failure of proof and for procedural laxity, and it affirmed the RTC decision with costs against respondents.

Motion for Reconsideration and Court of Appeals Remand

Respondents filed a motion for reconsideration with the Court of Appeals, asserting they had exhausted intra-corporate remedies and that the supplemental affidavit was admissible. The CA granted the motion for oral argument and, after conference, ordered the parties to submit any amicable settlement. The parties did not finalize a settlement and submitted position papers. In their position paper respondents alleged, without documentary proof in the appellate record, that they had filed a petition for dissolution with the SEC and that the SEC approved dissolution. On July 18, 2006 the Court of Appeals granted reconsideration and sua sponte remanded the case to the RTC to take “necessary proceedings in resolving with deliberate dispatch any and all corporate concerns towards final settlement,” citing Section 122 of the Corporation Code, the Supreme Court’s pronouncements in Clemente et. al. v. Court of Appeals, the transfer of SEC cases to the RTC under Republic Act No. 8799, and administrative transfers pursuant to A.M. No. 00-8-10-SC. Petitioners’ motion for reconsideration of that remand was denied on April 19, 2007.

Issues Presented to the Supreme Court

Petitioners sought relief under Rule 45, Rules of Court, raising primarily that the Court of Appeals exceeded its jurisdiction and acted beyond the issues raised on reconsideration by converting a derivative suit into liquidation proceedings and remanding the case for distribution of corporate assets; that the remand violated the summary and mandatory nature of the Interim Rules for intra-corporate controversies; and that the CA resolutions failed to state facts and law supporting the remand and were thus null and void. Petitioners emphasized that the CA relied on extraneous matters not pleaded before the RTC or raised in respondents’ petition and motion for reconsideration.

Supreme Court Ruling and Disposition

The Supreme Court granted the petition. The Court reversed and set aside the Court of Appeals Resolutions dated July 18, 2006 and April 19, 2007, and affirmed the Court of Appeals Decision of February 15, 2006 which had affirmed the RTC’s dismissal. The Supreme Court held that the CA erred in remanding the derivative suit for liquidation and final distribution of assets because liquidation proceedings under Section 122, Corporation Code are distinct from derivative suits and the CA lacked factual proof that dissolution and liquidation had properly occurred. The Court ordered no costs.

Legal Basis and Reasoning

The Court reiterated that a derivative suit is a suit by a shareholder to enforce a corporate cause of action when corporate officials refuse to sue, are the ones to be sued, or control the corporation; the corporation remains a necessary party and the relief granted benefits the corporation. The power to sue ordinarily resides with the board, and a stockholder’s derivative remedy is equitable and an extraordinary remedy that requires strict compliance with procedural prerequisites. The Interim Rules, specifically Rule 8, Sec. 1, require that the plaintiff-stockholder: (1) was a stockholder when the acts complained of occurred and when the action was filed; (2) exerted all reasonable efforts and alleged with particularity in the complaint the exhaustion of all remedies available under the articles, by-laws, laws or rules governing the corporation; (3) show that no appraisal rights are available; and (4) show that the suit is not a nuisance or harassment. The Court found respondents’ averments—consisting of Joseph’s attempts to talk to Anthony—to be insufficient to constitute the exhaustion of intra-corporate remedies with particularity. The Court rejected the notion that family status of the corporation excuses compliance with the Rule 8 requisites.

The Court further explained that liquidation and winding up after corporate dissolution are governed by Section 122, Corporation Code, which contemplates continuance of corporate personality for three years to settle affairs, and which permits liquidation by the board, by trustees to whom assets are conveyed, or by an SEC-appointed receiver. Liquidation is therefore a different procedural and substantive regime from a derivative suit. The CA improperly converted the derivative suit into liquidation proceedings without pleadings or proof establishing dissolution or entitlement to liquidation. The Court emphasized the burden of proof rule: respondents who alleged dissolution before the CA bore the duty to produce the petition and the SEC certificate of dissolution, which they did no

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