G.R. No. 149338 - Unlad Resources Development Corporation vs. Dragon

Case Summary (G.R. No. 149338)

Key Dates and Procedural Posture

MOA executed: December 29, 1981.
Complaint for rescission filed in RTC Makati: July 3, 1987.
RTC Decision: judgment in favor of respondents, rescinding MOA, ordering return of control and specified monetary sums, appointment of Bangko Sentral ng Pilipinas (BSP) Director for Rural Banks as receiver, and awarding damages and attorney’s fees.
Court of Appeals (CA) affirmed RTC Decision (Decision dated November 29, 2000; reconsideration denied Aug. 2, 2001).
Petitioners filed Petition for Review under Rule 45 to the Supreme Court; the Supreme Court denied the petition and affirmed CA and RTC decisions.

Applicable Law

1987 Philippine Constitution (decision date post-1990: governmental framework implicit).
Presidential Decree No. 902-A, Section 5(b) (jurisdiction of the Securities and Exchange Commission over intra-corporate disputes) — historical context.
Republic Act No. 8799 (Securities Regulation Code) — transferred certain jurisdiction from SEC to RTC effective 2000.
Civil Code provisions cited: Articles 1144 (prescription for written contracts, ten years), 1191 (rescission of reciprocal obligations), 1381–1389 (rescissible contracts and rescission generally), 1385 (effect of rescission and restitution), 2217, 2220, 2233, and 2208 (moral/exemplary damages; attorney’s fees).
Central Bank (Bangko Sentral ng Pilipinas) Circular No. 741, Section 26, and Manual of Regulations Section 3379 (permitted allied undertakings of rural banks).

Terms of the Memorandum of Agreement (MOA)

Petitioners (Unlad Resources) agreed to invest P4,800,000 in the Rural Bank as additional equity by subscribing to shares (minimum subscription described as P480,000 in the record, reflecting typographical inconsistency) and to pay P1,200,000 immediately as paid-in capital upon signing.
Respondents (as controlling stockholders) agreed to transfer control and management of the Rural Bank to Unlad Resources and its nominees upon signing.

Factual Developments: Transfer of Control and Bank Transactions

Respondents allege they complied by transferring control and management to Unlad Resources and its nominees; petitioners allegedly failed to subscribe/pay the agreed amounts despite repeated demands.
In August 1984 the Unlad Resources Board authorized leasing a mango plantation in Naic, Cavite; the Rural Bank (lessee) leased from Helena Z. Benitez (lessor). Management of the plantation was undertaken by Unlad Commodities, Inc. under a management contract allocating 80% of net profits to Unlad Commodities and 20% to the Bank; permanent improvements were to revert to lessor at lease end.
BSP examination found the plantation undertaking not inherently connected with bona fide rural banking operations and that exposure to the project amounted to P475,371.57 or 25.76% of the bank’s capital and surplus.

Procedural History Before Regulatory Agencies

Respondents filed a complaint with the SEC seeking rescission, damages and appointment of a management committee; the SEC dismissed the complaint for lack of jurisdiction because RTC action was pending. The SEC noted the dispute involved contractual determination (rescission) which lies with the RTC.

Issues Raised by Petitioners on Appeal to the Supreme Court

Trial court lacked jurisdiction because the issues were intra-corporate and thus within SEC exclusive jurisdiction at the time.
The action for rescission had prescribed under Article 1389 (four-year period for actions for rescission).
Petitioners had fully complied with their MOA obligations and performance became impossible due to respondents’ failure to increase authorized capital, which respondents approved; alternatively, rescission should require mutual restitution of total contributions.
Awards of moral and exemplary damages and attorney’s fees lack factual or legal basis; attorney’s fees cannot be awarded in absence of stipulation unless allowed by exception.

Respondents’ Position on Appeal

Respondents maintain they transferred control as required and repeatedly demanded petitioners’ compliance; petitioners did not subscribe or pay.
Respondents emphasize the bank’s injurious diversion of funds into the mango plantation project, linking the project to dissipation of assets and breach of fiduciary duties by petitioners who held overlapping interests in the entities involved.
Respondents rely on RTC findings and the CA affirmation; they argue petitioners are estopped from questioning jurisdiction (citing Tijam v. Sibonghanoy) and contend Article 1144 (ten-year prescription) governs rescission here.

Supreme Court’s Conclusion on Jurisdiction

The Supreme Court held that the main cause of action — rescission of the MOA — is within the jurisdiction of trial courts despite involving directors of the same corporation; rescission is not per se an intra-corporate matter that must be exclusively adjudicated by the SEC.
The historical jurisdictional allocation to the SEC under P.D. 902-A did not divest the regular courts of all corporate-related disputes; jurisprudence supports that not all disputes involving corporations automatically fall under SEC exclusive jurisdiction.
Moreover, R.A. No. 8799 (Securities Regulation Code) transferred to the RTC the SEC’s former jurisdiction over intra-corporate disputes effective 2000, further confirming RTC jurisdiction over such cases. The SEC had itself dismissed the respondents’ complaint for lack of jurisdiction given the pending RTC action. The Court thus found RTC jurisdiction proper and rejected petitioners’ jurisdictional challenge.

Supreme Court’s Ruling on Prescription

Petitioners’ invocation of Article 1389 (four-year prescription for actions for rescission) was rejected. Article 1389 pertains to rescissible contracts as defined in Articles 1380–1381 (rescissible contracts such as those entered into by guardians, in fraud of creditors, etc.). The MOA here was not a rescissible contract under Article 1381.
The applicable prescription is Article 1144 (ten years for actions upon a written contract). The Court applied the accrual principle: the right of action accrues when breach occurs. Filing on July 3, 1987 was within ten years of the MOA (Dec. 29, 1981) and thus timely.

Supreme Court’s Findings on Performance and Rescission

The Court found petitioners failed to perform their obligations under the MOA. Petitioners’ claimed impossibility of performance (due to insufficient increase in authorized capital) did not absolve them of responsibility; respondents’ acknowledgment of the capital limitation did not excuse petitioners from exacting fulfillment or seeking rescission earlier under Article 1191.
Under Article 1191, reciprocal obligations imply the power of rescission where one obligor fails to comply; the injured party may choose fulfillment or rescission with damages. Respondents elected rescission, and the Court deemed rescission appropriate given petitioners’ nonperformance.

Mutual Restitution and Effect of Rescission

Rescission under Article 1191 triggers mutual restitution pursuant to Article 1385: the parties must restore the things which were the object of the contract, with fruits and price with interest, insofar as restitution is possible and subject to the rights of bona fide third parties.
Consequently, the RTC’s order requiring Unlad Resources to return control and management and the Rural Bank to return P1,003,070.00 was consistent with the obligation of mutual restitution. The Court affirmed that rescissio

Case Syllabus (G.R. No. 149338)

Court, Citation, and Case Number

Supreme Court of the Philippines, Third Division.
Reported at 582 Phil. 61.
G.R. No. 149338.
Decision promulgated July 28, 2008.
Petition for Review on Certiorari under Rule 45 seeking reversal of Court of Appeals (CA) Decision dated November 29, 2000 and CA Resolution dated August 2, 2001 in CA-G.R. CV No. 54226.

Parties

Petitioners: Unlad Resources Development Corporation; Unlad Rural Bank of Noveleta, Inc.; Unlad Commodities, Inc.; Helena Z. Benitez; Conrado L. Benitez II.
Respondents/Plaintiffs below: Renato P. Dragon; Tarcisius R. Rodriguez; Vicente D. Casas; Romulo M. Virata; Flaviano Perdito; Teotimo Benitez; Elena Benitez; Rolando Suarez.
Judge and justices involved in lower and appellate rulings identified in the record.

Procedural History

December 29, 1981: Memorandum of Agreement executed between respondents (as controlling stockholders of Rural Bank of Noveleta) and petitioner Unlad Resources, represented by Helena Z. Benitez.
May 20, 1987: Unlad Rural Bank wrote respondents regarding Central Bank approval to retire DBP-held preferred shares and notices for subscription.
July 3, 1987: Respondents filed Complaint for rescission of the agreement, return of control and management of the Rural Bank, and damages before the Regional Trial Court (RTC) of Makati City, Branch 61.
RTC rendered Decision ordering rescission of the Memorandum of Agreement, return of control and management of the Rural Bank to plaintiffs, return of P1,003,070.00 by Unlad Rural Bank of Noveleta, appointment of Director for Rural Banks of Bangko Sentral ng Pilipinas as Receiver, and multiple monetary awards against Unlad Resources Development Corporation including actual, moral, exemplary damages and attorney’s fees.
Petitioners appealed to the Court of Appeals; respondents’ Motions to Dismiss were denied; CA, in Decision dated November 29, 2000, dismissed the appeal for lack of merit and affirmed the RTC Decision in all respects.
CA denied petitioners’ motion for reconsideration in Resolution dated August 2, 2001.
Petitioners filed petition for review before the Supreme Court.

Stated Facts (as found by the Court of Appeals and detailed in the record)

Memorandum of Agreement dated December 29, 1981:
- Respondents, as controlling stockholders of Rural Bank of Noveleta, to allow Unlad Resources to invest P4,800,000.00 in the Rural Bank as additional equity.
- Unlad Resources to subscribe to a minimum of P480,000.00 (sic) common or preferred non-voting shares with total par value of P4,800,000.00 and to pay immediately P1,200,000.00 as paid-in capital upon signing.
- Respondents to transfer control and management over the Rural Bank to Unlad Resources upon signing.
Respondents allege they complied immediately with transfer of control and management and the bank was renamed Unlad Rural Bank of Noveleta, Inc.
Respondents allege Unlad Resources failed and refused to invest P4,800,000.00 and to pay the P1,200,000.00 immediate infusion despite repeated demands.
August 10, 1984: Unlad Resources Board Resolution No. 84-041 authorized leasing of a mango plantation in Naic, Cavite.
- Bank, as lessee, entered into Contract of Lease with Helena Z. Benitez as lessor.
- Management of plantation undertaken by Unlad Commodities, Inc. (UCI), subsidiary of Unlad Resources, under a Management Contract: UCI to receive 80% of net profits; Bank to receive 20%.
- Agreement that at end of lease period the Rural Bank shall turn over to lessor all permanent improvements introduced by it on the plantation.
Respondents complained that the mango plantation project resulted in bank expenses amounting to P475,371.57, equal to 25.76% of capital and surplus, and that Central Bank found the undertaking not inherently connected with bona fide rural banking operations and not within the allied undertakings permitted by Central Bank Circular No. 741 and Manual of Regulations.
Respondents (except Tarcisius Rodriguez) filed complaint with Securities and Exchange Commission (SEC) seeking rescission, damages, appointment of management committee; SEC dismissed for lack of jurisdiction due to pendency before RTC.
Respondents objected to the Rural Bank’s notice for subscription to retired DBP-held preferred shares on grounds that a sinking fund already existed and retirement would deprive the bank of a cheap source of funds.

RTC Decision (dispositive excerpts and orders)

RTC declared the Memorandum of Agreement dated December 29 (date misprinted as 1991 in dispositive) rescinded.
Ordered Unlad Resources Development Corporation to immediately return control and management over the Rural Bank to plaintiffs/respondents.
Ordered Unlad Rural Bank of Noveleta, Inc. to return to defendants (sic) the sum of P1,003,070.00.
Appointed Director for Rural Banks of Bangko Sentral ng Pilipinas as Receiver of the Rural Bank.
Enjoined Unlad Rural Bank of Noveleta, Inc. from placing the retired DBP-held preferred shares available for subscription and ordered them placed under a sinking fund.
Ordered Unlad Resources Development Corporation to pay plaintiffs:
- Actual compensatory damages: P4,601,765.38;
- Moral damages: P500,000.00;
- Exemplary and corrective damages: P100,000.00;
- Attorney’s fees: P100,000.00;
- Plus costs of suit.

Court of Appeals Proceedings and Rulings

CA dismissed petitioners’ appeal for lack of merit and affirmed the RTC Decision in all respects in Decision dated November 29, 2000.
Petitioners’ motion for reconsideration to the CA was denied in Resolution dated August 2, 2001.

Issues Presented by Petitioners to the Supreme Court

Trial court and CA committed reversible error: trial court lacked jurisdiction because issues are intra-corporate in nature and therefore within SEC exclusive original jurisdiction under P.D. 902-A Section 5(b).
Action for rescission had prescribed under Article 1389 of the Civil Code which provides a four-year prescriptive period for actions to claim rescission.
Petitioners claimed full compliance with the Memorandum of Agreement; performance became legally and factually impossible due to limitation in Rural Bank’s authorized capital stock (increased only to P5 million), which could not accommodate the proposed P4.8 million subscription.
Rescission should not have been ordered without corresponding order for restitution of parties’ total contributions and/or investments in the Rural Bank.
Awards of moral and exemplary damages and attorney’s fees lacked factual and legal bases; attorney’s fees not recoverable absent stipulation.

Respondents’ Countercontentions

Respondents assert they complied with their obligation to transfer control and management immediately after signing but that petitioners failed to fulfill their obligations despite repeated demands.
Respondents allege petitioners’ mismanagement and dissipation through the mango plantation project and other acts diverted bank assets for petitioners’ gain; Central Bank found the project not within allowed undertakings and noted total exposure of P475,371.57 or 25.76% of capital and surplus.
Respondents relied on SEC dismissal for lack of jurisdiction and on Tijam v. Sibonghanoy to argue petitioners estopped from questioning jurisdiction.
Respondents argued Article 1144 is the applicable prescriptive provision (10 years) rather than Article 1389 (4 years).
Respondents asserted the trial court and CA findings that petitioners failed to comply with the Agreement are no longer assailable in the present Petition and that awards of moral