G.R. No. 157479 - Turner vs. Lorenzo Shipping Corp.

Case Summary (G.R. No. 157479)

Factual Background

The petitioners owned one million ten thousand (1,010,000) shares of stock in Lorenzo Shipping Corporation, a domestic cargo shipping corporation. In June 1999 the respondent moved to amend its articles of incorporation to remove stockholders' pre-emptive rights. The petitioners voted against the amendment and within thirty days demanded payment for their shares, initially asserting a book-value rate of P2.276 per share for an aggregate P2,298,760.00. The respondent contended that fair value should be the market price of P0.41 per share, and insisted that payment could be made only if it had unrestricted retained earnings in its books; its financial statements for fiscal year 1999 showed a deficit of P72,973,114.00 as of December 31, 1999. The parties convened an appraisal committee under Section 82 of the Corporation Code, which on October 27, 2000 fixed the fair value at P2.54 per share, aggregating P2,565,400.00. The petitioners demanded payment of that award, plus contractual penalties and reimbursement of appraisal expenses; the respondent refused by letter dated January 2, 2001 citing lack of unrestricted retained earnings.

Trial Court Proceedings

The petitioners filed suit in the RTC, Makati City, docketed Civil Case No. 01-086, on January 22, 2001. They later moved for partial summary judgment, alleging that the respondent had unrestricted retained earnings of P11,975,490.00 as of March 31, 2002 and that the appraisal committee's award was final. The respondent opposed, maintaining that the determination of unrestricted retained earnings should be made at fiscal year-end and that no cause of action existed because no unrestricted retained earnings existed at the time the complaint was filed. The case was re-raffled and ultimately transferred to Branch 46 of the RTC, Manila, pursuant to the Interim Rules on Intra-Corporate Controversies. After a conference which the petitioners' counsel did not attend, Judge Artemio Tipon granted partial summary judgment, reasoning that the appraisal award was final under Section 82, that the respondent’s quarterly financial statement showed retained earnings of P11,975,490.00 as of March 21, 2002, and that the statute did not require retained earnings to exist at the time of demand. The respondent filed a motion for reconsideration, and on November 22, 2002 the trial court denied reconsideration, granted the petitioners' motion for immediate execution, and on November 28, 2002 issued a writ of execution.

Court of Appeals Proceedings

The respondent commenced a special civil action for certiorari in the Court of Appeals, alleging that Judge Tipon gravely abused his discretion because the respondent had no unrestricted retained earnings at the time the complaint was filed and therefore the petitioners had no cause of action; the respondent further argued that the partial summary judgment was not final and thus not subject to execution. The CA issued a temporary restraining order which briefly enjoined enforcement, but the writ of execution had been partially enforced and the TRO lapsed without a preliminary injunction. On March 4, 2003 the CA rendered judgment granting the petition for certiorari, nullifying the questioned orders and corresponding writs of garnishment, and ordering Civil Case No. 02-104692 dismissed without prejudice to refiling. The CA held that the petitioners’ right to payment was subject to the statutory condition that the corporation must have unrestricted retained earnings to cover the payment, and that no such earnings existed when the complaint was filed; consequently the petitioners’ cause of action had not yet accrued and the RTC had exceeded its jurisdiction in entertaining the complaint.

Issues Presented to the Supreme Court

The petitioners asked the Supreme Court to review the CA decision on certiorari, advancing principally that: (one) the CA erred in finding that the RTC acted beyond its jurisdiction in granting partial summary judgment and immediate execution; (two) the CA erred in ordering dismissal of the entire case when the respondent's petition targeted only specific orders; and (three) the CA decided substantive questions not presented or decided incorrectly as a matter of law. The respondent maintained the CA ruling that the cause of action did not exist when the complaint was filed because the respondent lacked unrestricted retained earnings at that time.

Parties' Contentions on Accrual and Remedy

The petitioners contended that the subsequent existence of unrestricted retained earnings cured any defect and that the RTC properly granted summary judgment and execution. They further argued that certiorari was not the proper remedy because the trial court’s rulings involved errors correctible by appeal. The respondent countered that under Section 41 and the appraisal right provisions of the Corporation Code payment to dissenting stockholders may be made only from unrestricted retained earnings; because no such funds existed when the complaint was filed, no correlative legal duty to pay then existed and thus no cause of action had accrued. The respondent urged that the CA properly invoked certiorari to correct acts in excess of jurisdiction.

Ruling of the Supreme Court

The Supreme Court denied the petition for review on certiorari and affirmed the decision of the Court of Appeals promulgated March 4, 2003 in C.A.-G.R. SP No. 74156. The Supreme Court held that the Court of Appeals correctly concluded that the RTC exceeded its jurisdiction in entertaining the petitioners' complaint, in granting partial summary judgment, and in issuing the writ of execution. The petitioners were ordered to pay the costs of suit.

Legal Basis and Reasoning

The Court began by reciting the statutory schema governing dissenting stockholders. It noted that Section 81 recognizes the appraisal right when certain corporate actions prejudicially change stockholder rights; Section 82 prescribes the demand, appraisal procedure, and the finality of the appraisers' award; Section 41 conditions a corporation’s power to acquire its own shares, including to pay dissenting shareholders, upon the existence of unrestricted retained earnings sufficient to cover the purchase. The trust fund doctrine undergirds that restriction by treating corporate assets as a fund for the payment of creditors, thereby prohibiting distributions that prejudice creditors. The Court emphasized that a cause of action is comprised of three elements: a legal right in favor of the plaintiff, a correlative legal duty of the defendant, and an act or omission violating that right with resultant injury. While the petitioners had an appraisal right and the award was final, the legal duty of the respondent to pay did not arise unt

Case Syllabus (G.R. No. 157479)

Parties and Procedural Posture

Philip Turner and Elnora Turner were dissenting stockholders and plaintiffs who sought payment for their shares after opposing a charter amendment.
Lorenzo Shipping Corporation was the respondent corporation that refused payment on the ground of lack of unrestricted retained earnings.
The petitioners filed Civil Case No. 01-086 in the Regional Trial Court on January 22, 2001 seeking collection and damages.
The RTC granted the petitioners' motion for partial summary judgment and ordered immediate execution, which was partially enforced.
Lorenzo Shipping Corporation filed a petition for certiorari in the Court of Appeals, which issued a TRO and later annulled the RTC orders and dismissed the case.
The petitioners sought review on certiorari before the Supreme Court from the CA decision in C.A.-G.R. SP No. 74156.

Key Factual Allegations

The petitioners owned 1,010,000 shares of Lorenzo Shipping Corporation.
In June 1999 the corporation amended its articles to remove stockholders' pre-emptive rights, prompting the petitioners to dissent.
The petitioners demanded payment at P2.276 per share, totaling P2,298,760.00, based on book value.
The respondent proposed market value at P0.41 per share, totaling P414,100.00, and refused higher payments.
An appraisal committee fixed fair value at P2.54 per share, totaling P2,565,400.00, in a report dated October 27, 2000.
Lorenzo Shipping Corporation's financial statements showed a deficit of P72,973,114.00 as of December 31, 1999 and later showed unrestricted retained earnings of P11,975,490.00 as of March 21, 2002.

Statutory Framework

The stockholder appraisal right is provided by Section 81, Corporation Code.
The appraisal mechanism and payment rule are prescribed in Section 82, Corporation Code.
The prohibition on payment absent sufficient surplus is stated in Section 41, Corporation Code and reiterated in Section 82, Corporation Code.
Suspension of rights and procedures for surrendering certificates are governed by Section 83 and Section 86, Corporation Code.
Pleading and procedural prerequisites derive from Section 1, Rule 2; Section 5, Rule 1; and Section 1, Rule 15, Rules of Court.

Appraisal Committee and Valuation

The appraisal committee consisted of three disinterested appraisers nominated by the parties and a third member chosen by them, as required by Section 82, Corporation Code.
The committee rendered a majority award setting fair value at P2.54 per share on October 27, 2000.
The petitioners demanded payment based on the appraisal award and sought penalties and reimbursement of appraisal fees.
The corporation refused payment citing lack of unrestricted retained earnings on its books at the time of demand.

Procedural History Below

The petitioners filed a motion for partial summary judgment on June 26, 2002 asserting the respondent had unrestricted retained earnings of P11,975,490.00 as of March 31, 2002.
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