Title
Yong vs. Tiu
Case
G.R. No. 144476
Decision Date
Feb 1, 2002
Dispute between Ong and Tiu Groups over rescission of a Pre-Subscription Agreement for FLADC investments, citing mutual breaches of reciprocal obligations.
rescission
liquidation
restitution
A

Case Summary (G.R. No. 144476)

Factual Background

The Tiu group wholly owned FLADC, the developer and owner of the Masagana Citimall in Pasay City, which in 1994 was encumbered by a P190,000,000 loan from the Philippine National Bank. The Ong group was invited to invest to stabilize FLADC’s finances. The parties executed a Pre-Subscription Agreement on August 15, 1994. Under that agreement the Ongs would subscribe to one million shares for P100,000,000 in cash, while the Tius would contribute properties by deeds of assignment and increase their subscription to complete parity in shareholdings and corporate positions.

Pre-Subscription Agreement Terms

The Pre-Subscription Agreement provided that the parties maintain equal shareholdings and parity in corporate control. The Ongs agreed to pay P100,000,000 for one million shares at P100 par value. The Tius agreed to contribute specified properties with agreed valuations, including a four-storey building assigned by Intraland Resources Development Corporation, a 1,902.30 square meter parcel assigned by Masagana Telamart, Inc., and a 151 square meter parcel described in the records. The agreement contemplated that the Ongs’ cash and certain FLADC funds would be used to liquidate the PNB indebtedness.

Events Leading to the Dispute

The parties executed corporate amendments and some deeds of assignment. FLADC’s PNB loan was settled, but not strictly in the manner provided by the Pre-Subscription Agreement: the Ongs paid P100,000,000 and advanced an additional P70,000,000; the Tius advanced P20,000,000 which they contemporaneously borrowed from the Ongs. Controversy arose when the Ongs allegedly refused to credit Masagana Telamart with shares commensurate with its property contribution, did not credit the Tius for the 151 square meter parcel, and prevented Tiu family members from exercising the duties of Vice-President and Treasurer. The Tius then unilaterally rescinded the Pre-Subscription Agreement on February 23, 1996 and sought SEC confirmation of the rescission.

SEC Proceedings and Orders

The SEC Hearing Officer confirmed rescission and ordered cancellation of the Ongs’ one million share subscription and restitution of P170,000,000, among other reliefs. On omnibus reconsideration, a Hearing Officer modified the treatment of the P70,000,000 paid by the Ongs by declaring it a liability or advance of FLADC and validating interest payments thereon. The SEC En Banc confirmed rescission but reversed the omnibus order insofar as it treated the P70,000,000 as an advance rather than as a premium on capital, and ordered FLADC to return P170,000,000 to the Ongs and other monetary adjustments. Both groups appealed the SEC En Banc order to the Court of Appeals.

Court of Appeals Proceedings and Decision

The Court of Appeals affirmed the SEC En Banc’s confirmation of rescission but modified reliefs. It ordered liquidation of FLADC in accordance with the parties’ actual cash and property contributions and directed distribution of remaining assets and management control to the Tiu group, subject to returning each group’s respective contributions. The Court of Appeals resolved that the P70,000,000 constituted an advance made by the Ongs to FLADC, not a premium, and denied interest on it because the parties did not agree at the time it was advanced that it would bear interest. The court fixed obligations for payment of the P70,000,000 by FLADC and the P20,000,000 loan by the Tius.

Issues Presented on Appeal

The consolidated petitions raised multiple issues, chief among them: whether rescission under Art. 1191 of the New Civil Code applied to the Pre-Subscription Agreement; whether rescission was barred because third persons acquired rights over the subject matter; whether the breaches were substantial and fundamental; which party violated the agreement and in what manner; whether FLADC should be liquidated or only restitution ordered; the character of the P70,000,000 (advance versus premium); entitlement to interest on the P20,000,000 and P70,000,000; and whether the Court of Appeals erred in crediting the Tius with shares for the 151 square meter parcel.

Parties’ Principal Contentions

The Ong group argued that rescission under Art. 1191 was inapplicable because the Pre-Subscription Agreement did not create reciprocal obligations, that rescission could not proceed because third persons lawfully possessed corporate assets, that any breach by the Ongs was not substantial and fundamental, and that they were entitled to interest and damages. The Tiu group contended that the agreement contained reciprocal obligations arising simultaneously, that the Ongs prevented the Tius from performing corporate functions and failed to credit property contributions, that rescission was appropriate, that the P70,000,000 should be treated as paid-in surplus or premium, and that the Court of Appeals erred by ordering liquidation beyond simple restitution.

Supreme Court’s Analysis on Rescission and Reciprocity

The Court held that the Court of Appeals correctly applied Art. 1191. The Pre-Subscription Agreement created concurrent reciprocal obligations: simultaneous subscriptions, payments, and assumptions of corporate positions and management rights. The Court distinguished prior precedent cited by the Ongs and found that reciprocity existed because each party’s obligations were correlative and arose upon execution of the agreement. The Court further observed that the Ongs were estopped from denying applicability of Art. 1191 when they invoked the same provision as a basis to seek specific performance.

Supreme Court’s Analysis on Third-Party Possession and FLADC’s Status

The Court rejected the Ongs’ reliance on Art. 1385 to contend that rescission was barred by third-party possession. The Court found that the things which were the object of the Pre-Subscription Agreement were in the possession of the parties and that FLADC, though not named in the agreement, was deemed a party by virtue of stipulations pour autrie under Art. 1311, because the parties deliberately conferred a benefit upon FLADC which it accepted.

Findings on Violations by the Ongs and the Tius

The Court agreed with the factual findings of the tribunals below that the Ongs prevented the Tius from assuming the duties of Vice-President and Treasurer. Evidence showed delays, half-hearted provision of executive offices, the Ongs’ servicing of corporate bank accounts without remittance, and even criminal complaints filed against Mr. Tiu, all of which demonstrated exclusion of the Tius from corporate management. The Court held that this exclusion constituted a substantial and fundamental breach justifying rescission. The Court also agreed that the Ongs should have credited Masagana Telamart, Inc. with 300,000 shares upon execution of the deed of assignment and delivery of the owner’s duplicate title and possession, because the deed assigned obligations to the assignee to effect transfer and, under principles of contract interpretation and Art. 1370, the assignee (FLADC) bore costs such as taxes and registration expenses.

Findings on the 151 Square Meter Parcel and Credit to the Tius

The Court corrected the Court of Appeals on one point and held that the Tius should be credited with 49,800 shares for the 151 square meter parcel. The Court accepted the Tius’ showing that the parcel had been acquired on their account prior to the Pre-Subscription Agreement and that transfer directly from the vendor to FLADC did not prejudice the Ongs. The Lichaucos, who executed the deed to FLADC, were not asserting any claim to be credited; thus credit should run to the party who expected to and did receive the benefit under the agreement, namely the Tius.

Characterization of the P70,000,000 and Allocation of Taxes

The Court sustained the Court of Appeals’ conclusion that the Ongs’ P70,000,000 constituted an advance or liability of FLADC rather than a premium on capital. The Court found that the Pre-Subscription Agreement expressed an intention that the Ongs would pay P100,000,000 for one million shares at P100 par and that treating the P70,000,000 as premium would novate the agreement a

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