582 Phil. 61
NACHURA, J.:
On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein petitioner) Unlad Resources, through its Chairman[,] Helena Z. Benitez[,] entered into a Memorandum of Agreement wherein it is provided that [respondents], as controlling stockholders of the Rural Bank [of Noveleta] shall allow Unlad Resources to invest four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional equity. On the other hand, [petitioner] Unlad Resources bound itself to invest the said amount of 4.8 million pesos in the Rural Bank; upon signing, it was, likewise, agreed that [petitioner] Unlad Resources shall subscribe to a minimum of four hundred eighty thousand pesos (P480,000.00) (sic) common or preferred non-voting shares of stock with a total par value of four million eight hundred thousand pesos (P4,800,000.00) and pay up immediately one million two hundred thousand pesos (P1,200,000.00) for said subscription; that the [respondents], upon the signing of the said agreement shall transfer control and management over the Rural Bank to Unlad Resources. According to the [respondents], immediately after the signing of the agreement, they complied with their obligation and transferred control of the Rural Bank to Unlad Resources and its nominees and the Bank was renamed the Unlad Rural Bank of Noveleta, Inc. However, [respondents] claim that despite repeated demands, Unlad Resources has failed and refused to comply with their obligation under the said Memorandum of Agreement when it did not invest four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional equity and, likewise, it failed to immediately infuse one million two hundred thousand pesos (P1,200,000.00) as paid in capital upon signing of the Memorandum of Agreement.On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of Makati City, Branch 61 a Complaint[4] for rescission of the agreement and the return of control and management of the Rural Bank from petitioners to respondents, plus damages. After trial, the RTC rendered a Decision,[5] the dispositive portion of which provides:
On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources passed Resolution No. 84-041 authorizing the President and the General Manager to lease a mango plantation situated in Naic, Cavite. Pursuant to this Resolution, the Bank as [lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as [lessor]. The management of the mango plantation was undertaken by Unlad Commodities, Inc., a subsidiary of Unlad Resources[,] under a Management Contract Agreement. The Management Contract provides that Unlad Commodities, Inc. would receive eighty percent (80%) of the net profits generated by the operation of the mango plantation while the Bank's share is twenty percent (20%). It was further agreed that at the end of the lease period, the Rural Bank shall turn over to the lessor all permanent improvements introduced by it on the plantation.
x x x x
On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central Bank's approval to retire its [Development Bank of the Philippines] preferred shares in the amount of P219,000.00 and giving notice for subscription to proportionate shares. The [respondents] objected on the grounds that there is already a sinking fund for the retirement of the said DBP-held preferred shares provided for annually and that it could deprive the Rural Bank of a cheap source of fund. (sic)
[Respondents] alleged compliance with all of their obligations under the Memorandum of Agreement in that they have transferred control and management over the Rural bank to the [petitioners] and are ready, willing and able to allow [petitioners] to subscribe to a minimum of four hundred eighty thousand (P480,000.00) (sic) common or preferred non-voting shares of stocks with a total par value of four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank. However, [petitioners] have failed and refused to subscribe to the said shares of stock and to pay the initial amount of one million two hundred thousand pesos (P1,200,000.00) for said subscription.[3]
Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to Dismiss and, subsequently, a Supplemental Motion to Dismiss, which were both denied. Later, however, the CA, in a Decision dated November 29, 2000, dismissed the appeal for lack of merit and affirmed the RTC Decision in all respects. Petitioners' motion for reconsideration was denied in CA Resolution dated August 2, 2001.
- The Memorandum of Agreement dated 29 December 1991 (sic) is hereby declared rescinded and:
(a) Defendant Unlad Resources Development Corporation is hereby ordered to immediately return control and management over the Rural Bank of Noveleta, Inc. to Plaintiffs; and
(b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to Defendants the sum of One Million Three Thousand Seventy Pesos (P1,003,070.00)- The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby appointed as Receiver of the Rural Bank;
- Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired DBP-held preferred shares available for subscription and the same is hereby ordered to be placed under a sinking fund;
- Defendant Unlad Resources Development Corporation is hereby ordered to pay plaintiffs the following:
(a) actual compensatory damages amounting to Four Million Six Hundred One Thousand Seven Hundred Sixty- Five and 38/100 Pesos (P4,601,765.38);
(b) moral damages in the amount of Five Hundred Thousand Pesos (P500,000.00);
(c) exemplary and corrective damages in the amount of One Hundred Thousand Pesos (P100,000.00); and
(d) attorney's fees in the sum of (P100,000.00), plus cost of suit.
SO ORDERED.[6]
Nowhere in said decree do we find even so much as an [intimation] that absolute jurisdiction and control is vested in the Securities and Exchange Commission in all matters affecting corporations. To uphold the respondent's arguments would remove without legal imprimatur from the regular courts all conflicts over matters involving or affecting corporations, regardless of the nature of the transactions which give rise to such disputes. The courts would then be divested of jurisdiction not by reason of the nature of the dispute submitted to them for adjudication, but solely for the reason that the dispute involves a corporation. This cannot be done.[9]It is well to remember that the respondents had actually filed with the SEC a case against the petitioners which, however, was dismissed for lack of jurisdiction due to the pendency of the case before the RTC.[10] The SEC's Order dismissing the respondents' complaint is instructive:
From the foregoing allegations, it is apparent that the present action involves two separate causes of action which are interrelated, and the resolution of which hinges on the very document sought to be rescinded. The assertion that the defendants failed to comply with their contractual undertaking and the claim for rescission of the contract by the plaintiffs has, in effect, put in issue the very status of the herein defendants as stockholders of the Rural Bank. The issue as to whether or not the defendants are stockholders of the Rural Bank is a pivotal issue to be determined on the basis of the Memorandum of Agreement. It is a prejudicial question and a logical antecedent to confer jurisdiction to this Commission.Be that as it may, this point has been rendered moot by Republic Act (R.A.) No. 8799, also known as the Securities Regulation Code. This law, which took effect in 2000, has transferred jurisdiction over such disputes to the RTC. Specifically, R.A. 8799 provides:
It is to be noted, however, that determination of the contractual undertaking of the parties under a contract lies with the Regional Trial Courts and not with this Commission. x x x[11]
Section 5 of P.D. No. 902-A reads, thus:Sec. 5. Powers and Functions of the Commission
x x x x
5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:Consequently, whether the cause of action stems from a contractual dispute or one that involves intra-corporate matters, the RTC already has jurisdiction over this case. In this light, the question of whether the doctrine of estoppel by laches applies, as enunciated by this Court in Tijam v. Sibonghanoy, no longer finds relevance.
a) Devices and schemes employed by or any acts of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission;
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations.
applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We must stress however, that the "rescission" in Article 1381 is not akin to the term "rescission" in Article 1191 and Article 1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article.Article 1381 sets out what are rescissible contracts, to wit:
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144, which provides that the action upon a written contract should be brought within ten years from the time the right of action accrues.
Article 1381. The following contracts are rescissible:The Memorandum of Agreement subject of this controversy does not fall under the above enumeration. Accordingly, the prescriptive period that should apply to this case is that provided for in Article 1144, to wit:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1144. The following actions must be brought within ten years from the time the right of action accrues:Based on the records of this case, the action was commenced on July 3, 1987, while the Memorandum of Agreement was entered into on December 29, 1981. Article 1144 specifically provides that the 10-year period is counted from "the time the right of action accrues." The right of action accrues from the moment the breach of right or duty occurs.[13] Thus, the original Complaint was filed well within the prescriptive period.
(1) Upon a written contract;
x x x x
Article 1191. The power to rescind reciprocal obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.Thus, petitioners should have exacted fulfillment from the respondents or asked for the rescission of the contract instead of simply not performing their part of the Agreement. But in the course of things, it was the respondents who availed of the remedy under Article 1191, opting for the rescission of the Agreement in order to regain control of the Rural Bank.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obligated to restore.This Court has consistently ruled that this provision applies to rescission under Article 1191:
Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
[S]ince Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest," the Court finds no justification to sustain petitioners' position that said Article 1385 does not apply to rescission under Article 1191.[15]Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not merely its termination."[16] Hence, rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.[17]
More importantly, petitioners never raised in issue before the CA this award of actual compensatory damages. They did not raise the matter of damages in their Appellants' Brief, while in their Motion for Reconsideration, they questioned only the award of moral and exemplary damages, not the award of actual damages. Even in the present Petition for Review, what petitioners raised was the propriety of the award of moral and exemplary damages and attorney's fees.
Atty. Cruz Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement marked as Exhibit A? A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had by this time amounting to several millions pesos (sic). They have only put in the whole amount that we have agreed upon (sic). A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had by this time amounting to several millions pesos (sic). They have only put in the whole amount that we have agreed upon (sic). Q: In this connection did you cause computation of these losses that you incured (sic)? A: Yes sir. x x x Q: Will you please kindly go through this computation and explain the same to the Honorable Court? A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three Hundred Ninety Nine Thousand Two hundred for Nineteen Thousand Nine Hundred Sixty shares which should have been sold if it were sold to others for P50.00 each for a total of Nine Hundred Ninety Eight Thousand but sold to them for Three Hundred Ninety nine (sic) Thousand two (sic) Hundred only and of which only Three Hundred Twenty Four Thousand Six Hundred was paid to me. Therefore, there was a difference of Six Hundred Seven Three (sic) Thousand Four Hundred (P673,400.00). On the basis of the commulative (sic) lost income every year from March 1982 from the amount of Seven Six Hundred (sic) Seventy Three Thousand four (sic) Hundred (P673,400.) (sic) there would be a discommulative (sic) lost (sic) of One Million Ninety Three Thousand Nine Hundred Fifty Two Pesos and forty two (sic) centavos (P1,093,952.42). Please note that the interest imputed is only at 12% per annum but it should had (sic) been much higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40% per annum from the so called (sic) Jobo Bills and yet we only computed the imputed income or lost income at 12% per annum and then there is a 40% participation on the unrealized earnings due to their failure to put in an stabilized (sic) earnings. You will note that if they put in 4.8 million Pesos and it would be earning money, 40% of that will go to us because 40% of the bank would be ours and 60% would be there (sic). But because they did put in the 4.8 million our 40% did not earn up to that extent and computed again on the basis of 12% the amount (sic) on the commulative (sic) basis up to September 1990 is 2 million three hundred fifty two thousand sixty five pesos and four centavos (sic). (P2,352,065.04). You will note again that the average return of investment of any Cavite based (sic) Rural Bank has been no less than 20% or about 30% per annum. And we computed only the earnings at 12%. x x x x There were loans granted fraudulently to members of the board and some borrowers which were not all charged interest for several years and on this basis we computed a 40% shares (sic) on the foregone income interest income (sic) on all these fraudulently granted loans, without interest being collected and none a project (sic) among a plantation project (sic), which was funded by the bank but nothing was given back to the bank for several hundred thousand of pesos (sic). And we arrived an (sic) estimate of the foregone interest income a total of One Million Two Hundred Five Thousand Eight Hundred Sixty None Pesos and eighty one (sic) centavos and 40 percent share of this (sic) would be Four Hundred Eighty Two Thousand Three Hundred Forty Seven Pesos and Ninety Two Centavos. All in all our estimate of the damages we have suffered is Four Million Six Hundred one (sic) Thousand Seven Hundred Sixty Five Pesos and thirty eight (sic) centavos (P4,601,765.38).[19]
Under the Rural Bank's management, a systematic diversion of the bank's assets was conceived whereby: (a) The Rural Bank's funds would be funneled in the development and improvements of the Benitez Mango Plantation in the guise of an investment in said plantation; (b) Of the net profits earned from the plantation's operations, the Rural Bank's share therein, although it shoulders all of the financial risks, would be a measly twenty percent (20%) thereof while UCI, without investing a single centavo, would earn eighty percent (80%) of the said profits. Thus, the bulk of the profits of the mango plantation was also sought to be diverted to an entity wherein Helena Z. Benitez and Conrado L. Benitez II are not only principal stockholders but also the Chairman of the Board of Directors and President, respectively. Moreover, Defendant Helena Z. Benitez would be entitled to receive, under the lease contract, rentals in the total amount of Three Hundred Thousand Pesos (P300,000.00) or ten percent (10%) of gross profits, whichever is higher. (c) Finally, at the end of the lease period, the Rural Bank was obliged to turn over to the lessor (Helena Z. Benitez) all permanent improvements introduced by it on the plantation at no cost to Ms. Benitez.Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of precise pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act or omission.[21] Article 2220 of the Civil Code further provides that moral damages may be recovered in case of a breach of contract where the defendant acted in bad faith.[22]
Further, in its report dated March 13, 1985, the [Central Bank] after conducting its general examination upon the Rural Bank ordered the latter to "explain satisfactorily why the bank engage (sic) in an undertaking not inherently connected with [bona fide] rural banking operations nor within the allowed allied undertakings," contrary to the provisions of Section 3379 of the CB Manual of Regulations and Section 26 of CB Circular No. 741, otherwise known as the "Circular on Rural Banks[.]"
The aforestated CB report states that "total exposure to this project now amounts to P475,371.57 or 25.76% of its capital and surplus[.]" Notwithstanding a finding by the CB of the undertaking's illegality, the defendants nevertheless persisted in pursuing the Mango Plantation Project and never acceded to the call of [the] CB for it to desist from further implementing the said project. It was only after another letter from the CB was received when defendant finally shelved the mango plantation project.
The result of the aforestated report, as well as the actuations of the Defendants in not yielding to the order of the CB, adequately establishes not only a violation of CB Rules (specifically Section 26, Circular 741 and Section 3379 of the CB Manual of Regulations, but also, that it has caused undue damage both to the Rural bank as well as its stockholders.
The initial CB report should have sufficiently apprised Defendants of the illegality of the undertaking. Defendants, therefore have the duty to terminate the Mango Plantation Project. They, however, [chose] to continue it, apparently to further their [own] interest in the scheme for their own personal benefit and gain, an act which is clearly contrary to the fiduciary nature of their relationship with the corporation in which they are officers. Such persistence proves evident bad faith, or a breach of a known duty through some motive or ill-will, which resulted in the further dissipation and wastage of the Rural Bank's assets, unjustly depriving Plaintiffs of their fair share in the assets of the bank.
All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that these contracts were but part of a device employed by Defendants to siphon [off] the Rural bank for their personal gain.[20]
In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:Hence, the award of exemplary damages is in itself sufficient justification for the award of attorney's fees.[26]
(1) When exemplary damages are awarded.