Case Summary (G.R. No. L-23475)
Key Dates and Milestones
Corporate action to amend articles (removing pre-emptive rights): June 1999. Appraisal committee award: October 27, 2000 (P2.54/share). Respondent’s refusal letters and financial statement showing deficit as of December 31, 1999: respondent communicated on August 20, 2000 and January 2, 2001. Complaint filed by petitioners in the RTC: January 22, 2001 (Civil Case No. 01-086). Petitioners’ motion for partial summary judgment: June 26, 2002 (asserting unrestricted retained earnings of P11,975,490 as of March 31, 2002). RTC orders granting partial summary judgment and immediate execution: October–November 2002 (writ of execution issued November 28, 2002). CA issued TRO and later rendered decision: March 4, 2003 (nullifying RTC orders and dismissing the case). Supreme Court resolution: petition for review denied (final affirmation of CA), consistent with the 1987 Constitution framework.
Factual Background and Valuation Process
The Turners voted against Lorenzo Shipping Corporation’s proposed amendment removing stockholders’ pre-emptive rights and exercised their appraisal right. The parties could not agree on fair value; they formed a three-member appraisal committee under Section 82 of the Corporation Code. The committee’s majority fixed fair value at P2.54 per share (aggregate P2,565,400). The Turners demanded payment based on that award plus contractual penalties and reimbursement of appraisal fees. Lorenzo Shipping refused payment, asserting (i) the fair value it considered appropriate was the market price immediately preceding the corporate action, and (ii) statutory payment to dissenting stockholders may be made only if the corporation has unrestricted retained earnings to cover the payment—at the time of demand the respondent’s financial statements showed a deficit of P72,973,114 as of December 31, 1999.
Procedural Course and RTC Rulings
The Turners filed a collection suit in the RTC (initially in Makati, later transferred to Manila per intra-corporate rules). They later moved for partial summary judgment, asserting that by March 31, 2002 the respondent had unrestricted retained earnings of P11,975,490 and that the appraisal committee’s valuation was final. The RTC (Judge Tipon) granted partial summary judgment, reasoning that Section 82 does not require unrestricted retained earnings to exist at the time of the demand; rather, if unrestricted retained earnings later exist, the corporation must pay, and payment may properly be ordered so long as payment would not prejudice creditors. The RTC denied respondent’s motion for reconsideration and granted the Turners’ motion for immediate execution; a writ of execution was issued and partially enforced.
Court of Appeals’ Decision and Rationale
The CA issued a TRO and, on full consideration, held that the Turners’ cause of action was premature when the complaint was filed on January 22, 2001 because Lorenzo Shipping had no unrestricted retained earnings at that time. Applying the trust fund doctrine and statutory provisions, the CA emphasized that Section 82 conditions payment to dissenting stockholders upon the corporation having unrestricted retained earnings sufficient to cover the payment. The CA concluded that the Turners’ appraisal right existed but their right of action to enforce payment had not accrued until the corporation actually had unrestricted retained earnings. The CA relied on Supreme Court precedents construing accrual of causes of action: an action commenced before accrual is prematurely brought and should be dismissed; accrual during pendency does not cure the initial absence of a cause of action. The CA therefore nullified the RTC orders and writs of garnishment and dismissed the action without prejudice to refiling when the prerequisite condition (unrestricted retained earnings) is present.
Supreme Court’s Review and Holding
The Supreme Court denied the petition for review and affirmed the CA. The Court reiterated statutory appraisal mechanisms (Sections 81–86 and Section 41 on power to acquire own shares) and the trust fund doctrine that underpins the restriction requiring unrestricted retained earnings before paying dissenting stockholders. The Court held that the RTC exceeded jurisdiction by entertaining a complaint that lacked a subsisting cause of action at the time of filing. Under the Rules of Court, an ordinary civil action must be based on a cause of action existing at commencement; because Lorenzo Shipping had no unrestricted retained earnings when the Turners filed suit, there was no correlative legal duty on the corporation at that time to pay — the third essential element for a cause of action (an act or omission violating a right with resulting damage) was missing. The Court emphasized settled precedent that subsequent accrual of a cause of action while an action is pending does not cure an action that was prematurely brought. The Court further found that dismissal of the entire case, not merely annulment of the execution-related orders, was appropriate and proper under the circumstances.
Legal Principles Applied
- Appraisal right:
Case Syllabus (G.R. No. L-23475)
Case Summary and Core Question
- Petitioners Philip Turner and Elnora Turner (the Turners) sought judicial enforcement of their appraisal/dissenting stockholder rights to be paid the fair value of their shares following a corporate amendment that they opposed.
- The principal legal question: whether the dissenting stockholders’ cause of action to collect payment for their shares had accrued at the time they filed suit given the absence of unrestricted retained earnings in the corporation’s books at that time.
- The Supreme Court was asked to review, on certiorari, the Court of Appeals’ annulment of Regional Trial Court (RTC) orders that had granted partial summary judgment and immediate execution in favor of the Turners.
Parties, Corporate Context and Valuation Dispute
- Petitioners: Philip Turner and Elnora Turner, holding an aggregate of 1,010,000 shares of Lorenzo Shipping Corporation (LSC).
- Respondent: Lorenzo Shipping Corporation, a domestic corporation primarily engaged in cargo shipping activities whose shares were listed on the Philippine Stock Exchange.
- Corporate action contested: June 1999 amendment to the articles of incorporation removing stockholders’ pre-emptive rights to newly issued shares.
- Petitioners voted against the amendment and exercised appraisal/dissent rights, demanding payment for their shares.
Specific Valuations Presented by the Parties
- Petitioners’ initial demand: P2.276 per share based on book value, amounting to P2,298,760.00 in total.
- Respondent’s asserted market valuation: P0.41 per share (market value on the date before the action), amounting to P414,100.00 total; respondent argued payment could only be made if it had unrestricted retained earnings, which it then lacked.
- Appraisal Committee valuation (three-man committee): P2.54 per share, aggregating to P2,565,400.00 for the petitioners; reported October 27, 2000.
- Petitioners later demanded payment based on the appraisal committee’s P2.54/share award, plus a 2% per month penalty from original demand date, and reimbursement of professional fees advanced to appraisers.
Appraisal Committee Composition and Report
- Composition: Reynaldo Yatco (petitioners’ nominee); Atty. Antonio Acyatan (respondent’s nominee); Leo Anoche of Asian Appraisal Company, Inc. (third member and chairman).
- Authority: constituted pursuant to Section 82 of the Corporation Code.
- Outcome: majority award fixing fair value at P2.54 per share (Oct. 27, 2000); RTC later treated the appraisal committee’s majority award as final for purposes of summary judgment under Section 82.
Respondent’s Financial Position and Refusal to Pay
- Respondent’s formal refusals: Letter dated August 20, 2000 (informing payment only if unrestricted earnings exist) and letter dated January 2, 2001 (stating financial statements for fiscal year 1999 showed a deficit of P72,973,114.00 as of December 31, 1999).
- Respondent’s position for litigation: maintained that no payment could lawfully be made without unrestricted retained earnings on the books to cover the payment; asserted lack of cause of action at the time the complaint was filed.
Initial Court Action and Venue Matters
- Petition for collection and damages filed by the Turners in RTC Makati on January 22, 2001, docketed Civil Case No. 01-086.
- Case initially assigned to Branch 132; motion for partial summary judgment filed June 26, 2002, asserting that respondent had unrestricted retained earnings of P11,975,490.00 evidenced by financial statements as of the quarter ending March 31, 2002.
- Re-raffling and transfers: case transmitted for re-raffling to Makati special commercial courts (Branch 142) for intra-corporate disputes; ultimately transferred to RTC Branch 46 in Manila (Judge Artemio Tipon) pursuant to Interim Rules of Procedure on Intra-Corporate Controversies because the principal office of respondent was in Manila.
RTC Proceedings, Orders and Execution
- Conference set on October 23, 2002 (petitioners’ counsel did not attend); Judge Tipon thereafter issued order granting petitioners’ motion for partial summary judgment.
- RTC reasoning: Section 82 provides that the appraisers’ majority findings “shall be final,” and the only statutory restriction on payment is that the corporation must have unrestricted retained earnings to cover payment; the court construed that unrestricted retained earnings need not exist at the time of demand so long as, later, such retained earnings exist and creditors would not be prejudiced.
- RTC referenced respondent’s quarterly financial statement showing retained earnings of P11,975,490 (RTC cited March 21, 2002).
- Petitioners filed motion for immediate execution and to strike respondent’s motion for reconsideration (arguing Sec. 8 of Interim Rules prohibited such reconsideration); Judge Tipon denied respondent’s motion for reconsideration (filed Nov. 12, 2002), granted immediate execution on Nov. 22, 2002.
- Writ of execution issued by RTC on November 28, 2002 and partially enforced before appellate intervention.
Respondent’s Special Civil Action for Certiorari in the Court of Appeals
- Respondent contested RTC’s orders by petition for certiorari in the CA, asserting:
- Grave abuse of discretion in granting summary judgment because LSC had no retained earnings at the time the complaint was filed, so no right of action then existed; citing the rule that if no right existed when the action was commenced the suit cannot be maintained even if the right accrues later.
- Grave abuse in issuing writ of execution because partial summary judgment was not a final judgment under Sec. 1 Rule 39 of the Rules of Court and thus not subject to execution per Supreme Court precedent in Province of Pangasinan v. Court of Appeals.
- The CA issued a temporary restraining order enjoining petitioners from enforcing the writ of execution; the TRO lapsed without issuance of a writ of preliminary injunction, at which point enforcement resumed and had been partially carried out already.
- CA decision promulgated March 4, 2003 in C.A.-G.R. SP No. 74156 (Lorenzo Shipping Corp. v. Hon. Artemio S. Tipon, et al.), annulled RTC’s orders and dismissed Civil Case No. 02-104692 (docketing/identification in CA decision), holding petitioners’ cause of action for enforcement of payment had not yet accrued when complaint was filed due to absence of unrestricted retained earnings.
CA’s Key Legal Reasoning and Authorities Cited
- Restated statutory restriction: “no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment.”
- Doctrine invoked: trust fund doctrine — corporate capital stock, property and assets are regarded as equity in trust for payment of corporate c