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BENEDICTO HORNILLA and ATTY. FEDERICO D. RICAFORT, complainants, vs. ATTY. ERNESTO S. SALUNAT, respondent.

RESOLUTION
YNARES-SANTIAGO, J.:

On November 21, 1997, Benedicto Hornilla and Federico D. Ricafort filed an administrative complaint [1] with the Integrated Bar of
the Philippines (IBP) Commission on Bar Discipline, against respondent Atty. Ernesto S. Salunat for illegal and unethical practice and
conflict of interest. They alleged that respondent is a member of the ASSA Law and Associates, which was the retained counsel of the
Philippine Public School Teachers Association (PPSTA). Respondents brother, Aurelio S. Salunat, was a member of the PPSTA Board
which approved respondents engagement as retained counsel of PPSTA.
Complainants, who are members of the PPSTA, filed an intra-corporate case against its members of the Board of Directors for the
terms 1992-1995 and 1995-1997 before the Securities and Exchange Commission, which was docketed as SEC Case No. 05-97-5657,
and a complaint before the Office of the Ombudsman, docketed as OMB Case No. 0-97-0695, for unlawful spending and the
undervalued sale of real property of the PPSTA. Respondent entered his appearance as counsel for the PPSTA Board members in the
said cases.Complainants contend that respondent was guilty of conflict of interest because he was engaged by the PPSTA, of which
complainants were members, and was being paid out of its corporate funds where complainants have contributed. Despite being told by
PPSTA members of the said conflict of interest, respondent refused to withdraw his appearance in the said cases.
Moreover, complainants aver that respondent violated Rule 15.06[2] of the Code of Professional Responsibility when he appeared
at the meeting of the PPSTA Board and assured its members that he will win the PPSTA cases.
In his Answer,[3] respondent stressed that he entered his appearance as counsel for the PPSTA Board Members for and in behalf
of the ASSA Law and Associates. As a partner in the said law firm, he only filed a Manifestation of Extreme Urgency in OMB Case No.
0-97-0695.[4] On the other hand, SEC Case No. 05-97-5657 was handled by another partner of the firm, Atty. Agustin V.
Agustin. Respondent claims that it was complainant Atty. Ricafort who instigated, orchestrated and indiscriminately filed the said cases
against members of the PPSTA and its Board.
Respondent pointed out that his relationship to Aurelio S. Salunat was immaterial; and that when he entered into the retainer
contract with the PPSTA Board, he did so, not in his individual capacity, but in representation of the ASSA Law Firm. He denied that he
ensured the victory of the PPSTA Board in the case he was handling. He merely assured the Board that the truth will come out and that
the case before the Ombudsman will be dismissed for lack of jurisdiction, considering that respondents therein are not public officials,
but private employees.Anent the SEC case, respondent alleged that the same was being handled by the law firm of Atty. Eduardo de
Mesa, and not ASSA.
By way of Special and Affirmative Defenses, respondent averred that complainant Atty. Ricafort was himself guilty of gross
violation of his oath of office amounting to gross misconduct, malpractice and unethical conduct for filing trumped-up charges against
him and Atty. De Mesa. Thus, he prayed that the complaint against him be dismissed and, instead, complainant Ricafort be disciplined
or disbarred.
The complainant was docketed as CBD Case No. 97-531 and referred to the IBP Commission on Bar Discipline. After
investigation, Commissioner Lydia A. Navarro recommended that respondent be suspended from the practice of law for six (6)
months. The Board of Governors thereafter adopted Resolution No. XV-3003-230 dated June 29, 2002, approving the report and
recommendation of the Investigating Commissioner.
Respondent filed with this Court a Motion for Reconsideration of the above Resolution of the IBP Board of Governors.
The pertinent rule of the Code of Professional Responsibility provides:

RULE 15.03. A lawyer shall not represent conflicting interests except by written consent of all concerned given after a full disclosure of the facts.

There is conflict of interest when a lawyer represents inconsistent interests of two or more opposing parties. The test is whether or
not in behalf of one client, it is the lawyers duty to fight for an issue or claim, but it is his duty to oppose it for the other client. In brief, if
he argues for one client, this argument will be opposed by him when he argues for the other client. [5]This rule covers not only cases in
which confidential communications have been confided, but also those in which no confidence has been bestowed or will be
used.[6] Also, there is conflict of interests if the acceptance of the new retainer will require the attorney to perform an act which will
injuriously affect his first client in any matter in which he represents him and also whether he will be called upon in his new relation to
use against his first client any knowledge acquired through their connection. [7] Another test of the inconsistency of interests is whether
the acceptance of a new relation will prevent an attorney from the full discharge of his duty of undivided fidelity and loyalty to his client
or invite suspicion of unfaithfulness or double dealing in the performance thereof. [8]
In this jurisdiction, a corporations board of directors is understood to be that body which (1) exercises all powers provided for
under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all property of the corporation. [9] Its
members have been characterized as trustees or directors clothed with a fiduciary character.[10] It is clearly separate and distinct from
the corporate entity itself.
Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly
to the stockholders.[11] This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is
the real party in interest while the stockholder filing suit for the corporations behalf is only nominal party. The corporation should be
included as a party in the suit.[12]
Having thus laid a suitable foundation of the basic legal principles pertaining to derivative suits, we come now to the threshold
question: can a lawyer engaged by a corporation defend members of the board of the same corporation in a derivative suit? On this
issue, the following disquisition is enlightening:

The possibility for conflict of interest here is universally recognized. Although early cases found joint representation permissible where no conflict of
interest was obvious, the emerging rule is against dual representation in all derivative actions. Outside counsel must thus be retained to represent one
of the defendants. The cases and ethics opinions differ on whether there must be separate representation from the outset or merely from the time the
corporation seeks to take an active role. Furthermore, this restriction on dual representation should not be waivable by consent in the usual way; the
corporation should be presumptively incapable of giving valid consent.[13] (underscoring ours)

In other jurisdictions, the prevailing rule is that a situation wherein a lawyer represents both the corporation and its assailed
directors unavoidably gives rise to a conflict of interest. The interest of the corporate client is paramount and should not be influenced
by any interest of the individual corporate officials.[14] The rulings in these cases have persuasive effect upon us.After due deliberation
on the wisdom of this doctrine, we are sufficiently convinced that a lawyer engaged as counsel for a corporation cannot represent
members of the same corporations board of directors in a derivative suit brought against them. To do so would be tantamount to
representing conflicting interests, which is prohibited by the Code of Professional Responsibility.
In the case at bar, the records show that SEC Case No. 05-97-5657, entitled Philippine Public School Teachers Assn., Inc., et al.
v. 1992-1995 Board of Directors of the Philippine Public School Teachers Assn. (PPSTA), et al., was filed by the PPSTA against its own
Board of Directors. Respondent admits that the ASSA Law Firm, of which he is the Managing Partner, was the retained counsel of
PPSTA. Yet, he appeared as counsel of record for the respondent Board of Directors in the said case. Clearly, respondent was guilty of
conflict of interest when he represented the parties against whom his other client, the PPSTA, filed suit.
In his Answer, respondent argues that he only represented the Board of Directors in OMB Case No. 0-97-0695. In the said case,
he filed a Manifestation of Extreme Urgency wherein he prayed for the dismissal of the complaint against his clients, the individual
Board Members. By filing the said pleading, he necessarily entered his appearance therein.[15] Again, this constituted conflict of
interests, considering that the complaint in the Ombudsman, albeit in the name of the individual members of the PPSTA, was brought in
behalf of and to protect the interest of the corporation.
Therefore, respondent is guilty of representing conflicting interests. Considering however, that this is his first offense, we find the
penalty of suspension, recommended in IBP Resolution No. XV-2002-230 dated June 29, 2002, to be too harsh. Instead, we resolve to
admonish respondent to observe a higher degree of fidelity in the practice of his profession.
ACCORDINGLY, respondent Atty. Ernesto Salunat is found GUILTY of representing conflicting interests and is ADMONISHED to
observe a higher degree of fidelity in the practice of his profession. He is further WARNED that a repetition of the same or similar acts
will be dealt with more severely.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.
G.R. No. L-43413 August 31, 1937

HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE,


as stockholders for an in behalf and for the benefit of the corporation, Parañaque Rice Mill, Inc. and the other stockholders
who may desire to join, plaintiffs-appellees,
vs.
TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA RODRIGUEZ,defendant-appellants.

P. Masalin and A. Sta. Maria for appellants.


Eulogio P. Revilla and Barrera and Reyes for appellees.

LAUREL, J.:

The plaintiff and the defenant aree all stockholders and member of the board of directors of the "Parañaque Rice Mill, Inc., "a
corporation organized for the purpose of operating a rice mill in the municipality of Parañaque, Province of Rizal. On September 6,
1932, a complaint entitle "Higinio Angeles, Jose de Lara, Aguedo Bernabe, as stockholders, for and in behalf of the corporation,
Parañaque Rice Mill, Inc., and other stockholders of said corporation who may desire to join, plaintiff, vs. Teodorico B. Santos,
Estanislao Mayuga, Apolonio Pascual, and Basilisa Rodriguez, defendant was filed with the Court of First Instance of Rizal. After formal
allegation relative to age and residence of the parties and the due incorporation of the Parañaque Rice Mill, Inc., the complaint avers
subtantially the following: (a) That the plaintiffs are stockholders and constitute the minority and the defendants are also stockholers
and constitute the majority of the board of directors of the Parañaque Rice Mill, Inc.; (b) that at an extraordinary meeting held on
February 21, 1932, the stockholders appointed an investigation committee of which the plaintiff Jose de Lara was chairman and the
stockholers Dionisio Tomas and Aguedo Bernabe were members, to investigate and determine the properties, operations, and losses
of the corporation as shown in the auditor's report corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos,
who was the president of the corporation, denied access to the properties, books and record of the corporation which were in their
possession (c) That the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession of the
books, vouchers, and corporate records as well as of the funds and income of the Parañaque Rice Mill, Inc., all of which, according to
the by-laws, should be under the exclusive control and possession of the secretary-treasurer, the plaintiff Aguedo Bernabe; (d) That the
said Teodorico B. Santos, had appropriated to his own benefit properties, funds, and income of the corporation in the sum of P10,000;
(e) that Teodoro B. Santos, for the purpose of illegally controlling the affairs of the corporation, refuse to sign and issue the
corresponding certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles, of the total value of P15,000; ( f ) that
notwithstanding written requests made in conformity with the by-laws of the corporation of three members of the board of directors who
are holders of more than one-third of the subscribed capital stock of the corporation, the defendant Teodorico B. Santos as president of
the corporation refuse to call a meeting of the board of directors and of the stockholers; (g) that in violation of the by-laws of the
corporation, the defendant who constitute the majority of the board of directors refused to hold ordinary monthly meetings of the board
since March, 19332; (h) that Teodorico B. Santos as president of the corporation, in connivance with his
co-defendants, was disposing of the properties and records of the corporation without authority from the board of directors or the
stockholders of the corporation and without making any report of his acts to the said board of directors or to any other officer of the
corporation, and that, to prevent any interferrence with or examination of his arbitrary acts, he arbitrarily suspended plaintiff Jose de
Lara from the office of general manager to which office the latter had been lawfully elected by the stockholders; and (i) that the
corporation had gained about P4,000 during the first half of the year 1932, but that because of the illegal and arbitrary acts of the
defendants not only the funds but also the books and records of the corporation are in danger of disappearing.

The complaint prays: (a) That after the filing of the bond in an amount to be fixed by the court, Melchor de Lara of Parañaque, Rizal, be
appointed receiver of the properties, funds and business of the Parañaque Rice Mill, Inc., as well as the books and record thereof, with
authority to continue the business of the corporation; (b) that the defendant Teodorico B. Santos be ordered to render a detailed
accounting of the properties, funds and income of the corporation from the year 1927 to date; (c) that the said defendant be required to
pay to the corporation the amount of P10,000 and other amounts which may be found due to the said corporation as damages or for my
other cause, (d) that said defendant be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles;
and (e) that the members of the board of directors of the Parañaque Rice Mill, Inc., be removed and an exrtraodinary meeting of the
stockholders called for the purpose of electing a new board of directors.

On the date of the filling of the complaint, September 6, 1932, the court issue an ex parte order of receivership appointing Melchor de
Lara as receiver of the corporation upon the filling of a bond of P1,000 by the plaintiffs-appellees. The bond of the receiver was fixed at
P4,000.

Upon an urgent motion of the defendants-appellants setting forth the reasons why Melchor de Lara should not have been appointed
receiver, and upon agreement of the parties, the trial court, by order of September 13, 1932, appointed Benigno Agco, as receiver, in
lieu of Melchor de Lara. About a month after, or on October 14, 1932, the court, after considering the memoranda filed by both parties
revoked its order appointing Agco as receiver.

On July 12, 1933, the defendants-appellants presented their amended answer to the complaint, containing a general and specific
denial, and alleging as special defense that the defendant Teodorico B. Santos refused to sign the certificate of stock in favor of the
plaintiff Higinio Angeles for 600 shares valued at P15,00, because the board of directors decided to give Higinio Angeles onl y 320
shares of stock worth P8,000. The answer contains a counter-claim for P5,000 alleged illegal and malicious procurement by the
plaintiffs of an ex parte order of receivership. Damages in the amount of P2,000 are also alleged to have been suffered by the
defendants by reason of the failure of the plaintiffs to present their grievances to the Board of directors before going to court. The
amended answer sets forth, furthermore, a cross-complaint against the plaintiffs, and in behalf of the Parañaque Rice Mill, Inc., based
on the alleged failure of the plaintiff Higinio Angeles to render a report of his administration of the corporation from February 14 to June
30, 1928, during which time the corporation is alleged to have accrued earnings of approximately P3,000. In both the counter claim and
cross-complaint Parañaque Rice Mill, Inc. is joined as party defendant.

On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a receiver pendente lite alleging, among other
things, that defendant Teodorico B. Santos was using the funds of the corporation for purely personal ends; that said Teodorico B.
Santos was managing to the interest of the Corporation and its stockholders; that said defendant did not render any account of his
management or for the condition of the business of the corporation; that since 1932 said defendant called no meeting of the board of
directors or of the stockholders thus enabling him to continue holding, without any election, the position of present and, finally, that of
manager; and that, without the knowledge and consent of the stockholders and of the board of directors, the said defendant installed a
small rice mill for converting rice husk into "tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the
corporation.

The defendant-appellants objected to the petition for the appointment of a receiver on the ground, among others, that the court had no
jurisdiction over the Parañaque Rice Mill, Inc., because it had not been include as party defendant in this case and that, therefore the
court could not properly appoint a receiver of the corporation pendente lite.

After hearing both parties, the trial court by order of October 31, 1934, appointed Emilio Figueroa, as receiver of the corporation, after
giving a bond in the amount of P2,000. An urgent for the reconsideration of this order filed by counsel for the defendant-appellant on
November 3, 1934, was denied by the court on November 7, 1934.

On November 8, 1934, the trial court, having heard the case on its merits rendered a decision, the dispositive part of which is as
follows:

Por todo lo expuesto el Juzgado fall este asunto:

1. Ordenando al demandado Teodorico B. Santos a rendircuenta ellada de las propiedads, fondos e ingresos dela corporacion
Parañaque Rice Mill, Inc., de el año 1931 hasta la fecha;

2. Condenando a dicho demandado a pagar a la corporacion Parañaque Rice Mill, Inc., cualesquiera cantida o cantidades que
resultate en deber a dicha corporacion; de acuerdo con dicha rendicion de cuentas;

3. Declarando al demanante Higinio M. Angeles con derecho a tener expedido a su nombre 600 acciones por valor par de
P15,000.

4. Destituyendo a los demandados de su cargo como directores e la corporacion hasta la nueva eleccion por los accionistas
que se convocara una vez firme esta sentencia; y

5. Condenando a los demandados a pagar las costas.

On November 21, 1934, the defendants-appellants, moved for reconsideration of the decision and at the same time prayed for the
dismissal of the case, because of defect of parties defendant.

On December 6, 1934, the Parañaque Rice Mill, Inc., thru counsel for the defendants, entered a special appearance for the sole
purpose of objecting to the order of the court of October 31, 1934, appointing a receiver, on the ground that the Parañaque Rice Mill,
Inc., was not a party to the proceedings. And on December 8, 1934, the defendants excepted to the decision of the trial court and
moved for a new trial on the ground that the evidence presented was insufficient to justify the decision and that said decision was
contrary to law. The motions for reconsideration and new trial and the special appearance were, by separate orders bearing date of
December 19, 1934, denied by the trial court. The case was finally elevated to this court by bill of exceptions.

The defendants-appellants submit the following assignment of errors:

1. The lower court erred in holding that it has jurisdiction to appoint a receiver o the corporation, "Parañaque Rice Mill, Inc.," on
October 31, 1934.

2. The lower court erred in overruling the motion of the defendants the include the defendant corporation as party defendant
and in holding that it is not a necessary party.

3. The lower court erred in not granting a motion for a new trial because there is a defect of party defendant.

4. The lower court erred in not dismissing the case because a necessary defendant was not made a party in the case.
5. The lower court erred in ordering the defendant Teodorico B. Santos to render a detailed accounting of the properties, funds
and income of the corporation "Parañaque Rice Mill, Inc.," from the year 1931 to this date.

6. The lower court erred in condemning the defendant Teodorico B. Santos to pay the corporation whatever sum or sums
which may be found owing to said corporation, in accordance with the said accounting to be one by him.

7. The lower court erred in ordering the destitution of the defendants from their office as members of the board of directors of
the corporation, until the new election of the stockholders which shall be held once the decision has become final..

8. The lower court erred in declaring that Higino Angeles is entitled to have in his name 600 shares of stock of the par value of
P15,000.

9. The lower court erred in overruling and denying appellants' motion for the reconsideration and the dismissal of the case
dated November 21, 1934.

10. The lower court erred in denying the motion of these appellants for new trial.

In their discussion of the first, second, third, and fourth assignment of error, the defendants-appellants vigorously assert that the
Parañaque Rice Mill, Inc., is a necessary party in this case, and that not having been made a party, the trial court was without
jurisdiction to appoint a receiver and should have dismissed the case.

There is ample evidence in the present case to show that the defendants have been guilty of breach of trust as directors of the
corporation and the lower court so found. The board of directors of a corporation is a creation of the stockholders and controls and
directs the affairs of the corporation by allegation of the stockholers. But the board of directors, or the majority thereof, in drawing to
themselves the power of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the
board should exercise good faith, care and diligence in the administration of the affairs of the corporation and should protect not only
the interest of the majority but also those of the minority of the stock. Where a majority of the board of directors wastes or dissipates the
funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the court, in the exercise of its equity
jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board
of directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise
redress the injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is said to be brought
derivatively in behalf of the corporation to protect the rights of the minority stockholers thereof (7 R. C. L., pars. 293 and 294, and
authority therein cited; 13 Fletcher, Cyc. of Corp., pars. 593, et seq., an authorities therein cite).

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse
of discretion — and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholers. An illustration of a suit of this kind is found in the case of Pascual vs. Del Sanz Orozco (19 Phil., 82),
decided by this court as early as 1911. In that case, the Banco Español-Filipino suffered heavy losses due to fraudulent connivance
between a depositor and an employee of the bank, which losses, it was contened, could have been avoided if the president and
directors has been more vigilant in the administration of the affairs of the bank. The stockholers constituting the minority brought a suit
in behalf of the bank against the directors to recover damages, and this over the objection of the majority of the stockholers and the
directors. This court held that the suit properly be maintained.

The contention of the defendants in the case at bar that the Parañaque Rice Mill, Inc., should have been brought in as necessary party
and the action maintained in its name and in its behalf directly states the general rule, but not the exception recognize by this court in
the case of Everrett vs. Asia Banking Corporation (49 Phil., 512, 527). In that case, upon invocation of the general rule by the appellees
there, this court said:

Invoking the well-known rule that shareholers cannot ordinarily sue in equity to redress wrong done to the corporation, but that
the action must be brought by the board of directors, the appellees argue — and the court below held — that the corporation
Teal & Company is a necessary party plaintiff and that the plaintiff stockholder, not having made any demand on the board to
bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in
the complaint and, consequently, admitted through the demurrer that the corporation Teal & Company is under the complete
control of the principal defendants in the case, and, in these circumstances it is obvious that a demand upon the board of
directors to institute action and prosecute the same effectively would have been useless, and the law does not require litigants
to perform useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper
Co., 15 Ariz., 1; Wickersham vs. Crittenen, 106 Cal., 329; Glem vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra
Costa Water Company, 104 U.S., 450.)

The action having been properly brought and by the lower court entertained it was within its power, upon proper showing, to appoint a
receiver of the corporation pendente lite (secs. 173, 174, et seq. Code of Civil Procedure). The appointment of a receiver upon
application of the minority stockholers is power to be exercised with great caution. But this does not mean that right of the minority
stockholers may be entirely disregarded, and where the necessity has arisen, the appointment of a receiver for a corporation is a matter
resting largely in the sound discretion of the trial court. Counsel for appellants argue that the appointment of a receiver pendente lite in
the present case has deprived the corporation, Parañaque Rice Mill, Inc., of property without due process of law. But it is too plain to
require argument that the receiver was precisely appointed to preserve the properties of the corporation. The receivership in this case
shall continue until a new board of directors shall have been elected and the corporation.

The first, second, third, and fourth assignments of error are, therefore, overruled.

The appellants contend in their fifth and sixth assignments of error that lower court erred in ordering the defendant, Tedorico B. Santos,
to render a detailed accounting of the properties, funds and income of the corporation, Parañaque Rice Mill., Inc., from the year 1931
and in condemning him to pay "the corporation whatever sum or sums which may be found owing to said corporation, in accordance
with said accounting to be done by him." We note that the lower court in its decision not only orders the defendant Santos to account for
the properties and funds of the corporation, but it also and at the same time adjudges him to pay an undermine amount which is made
to depend upon the result of such accounting. The accounting order was probably intended by the lower court to be file with it in this
proceeding. This requirement will delay the final disposition of the case and we are of the opinion that this accounting should better be
filed with the new board of directors whose election has been ordered by the lower court. The decision of the lower court in this respect
is therefore modified so that the defendant Santos shall render a complete accounting of all the corporate properties and funds that may
have come to his possession during the period mentioned in the jugment of the lower court to the new board of director to be elected by
the stockholders.

In the seventh assignment of error, the appellants contend that the lower court erred in ordering the removal of the defendants from
their offices as members of the board of directors of the corporation. The Corporation Law, as amended, in section 29 to 34, provide for
the election and removal of the directors of a corporation. Our Corporation Law (Act No. 1459, as amended), does not confer expressly
upon the court the power to remove a director of a corporation. In some jurisdictions, statutes expressly provide a more or less
summary method for the confirmation of the election and for the a motion of the directors of a corporation. This is true in New York,
New Jersey, Virginia and other states of the American Union. There are abundant authorities, however, which hold that if the court has
acquire jurisdiction to appoint a receiver because of the mismanagement of directors these may thereafter be remove and others
appointed in their place by the court in the exercise of its equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 18 an 119). In
the present case, however, the properties and assets of the corporation being amply protected by the appointment of a receiver and
view of the statutory provisions above referred to, we are of the opinion that the removal of the directors is, under the circumstances,
unnecessary and unwarranted. The seventh assignment of error is, therefore, sustained.

Under the eighth assignment of error, the appellants argue that the lower court erred in deciding that the plaintiff Higinio Angeles is
entitled to the issuance in his name of a certificate covering 600 shares of stock of the total par value of P15,000. A review of the
evidence, oral and documentary, relative to the number of shares of stock to which Higinio Angeles is entitled, shows that Higinio
Angeles brought in P15,000 party in money and party in property, for 600 shares of stock. The very articles of incorporation signed by
all the incorporators, among whom are the defendants, show that Higinio Angeles paid P5,600 on account of his subscription
amounting to P10,000. The amount of P5,600 is the value of Angeles' cinematograph building in Bacoor, Cavite, which he transferred
to the municipality of Parañaque where the same was reconstructed for the use of the corporation. The receipts signed by the
Philippine Engineering Company and the testimony of Higinio Angeles and Aguedo Bernabe (secretary-treasurer of the corporation)
show that Higinio Angeles paid with his own funds the sum of P2,750 to the Philippine Engineering Co., as part of the purchase price of
the ricemill bought for the corporation. Angeles paid a further sum of P2,397.99 to the Philippine Engineering Company. It also appears
that for the installation of the Rice Mill, the construction of camarin, and the cement paving (cementacion) of the whole area of
two camarines, and for the excavation of a well for the use of the rice mill the plaintiff Higinio Angeles paid with his own funds the
amount of P7,431.47. Adding all these sums together we have a total of P18, 179.46. At a meeting of the board of directors on
December 27, 1931, which meeting was convoked by Angeles, it seemed to have been agreed that Angeles was to be given shares of
stock of the total par value of P15,000. Angeles wanted to have P16,000 worth of stock to his credit for having made the disbursements
mentioned above, but he finally agreed to accept 600 share worth only P15,000. The certificate of stock, however, was not issued as
disagreement arose between him and the defendant Santos. We, therefore, find no error in the decision of the lower court ordering the
issuance of a certificate for 600 shares of stock of the total par value of P15,000 to Higinio Angeles.

It is unnecessary to consider the ninth and tenth assignments of error.

In view of the foregoing, we hold:

(1) That the action in the present case was properly instituted by the plaintiff as stockholders for and in behalf of the
corporation Parañaque Rice Mill, Inc., and other stockholders of the said corporation;

(2) That the lower court committed no reveiwable error in appointing a receiver of the corporation pendente lite;

(3) That the lower court committed no error in ordering an election of the new board of directors, which election shall be held
within thirty days from the date this decision becomes final;

(4) That Teodorico B. Santos shall render an accounting of all the properties, funds and income of the corporation which may
have come into his possession to the new board of directors;
(5) That the receiver, Emilio Figueroa, shall continue in office until the election and qualification of the members of the new
board of directors;

(6) That upon the constitution of the new board of directors, the said receiver shall turn over all the properties of the
corporation in his possession to the corporation, or such person or persons as may be duly authorized by it; and.

(7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock at the par value of P15,000 and the
lower court committed no error in ordering the issuance of the corresponding certificate of stock.

On June 10, 1937, counsel for the plaintiff-appellees filed a motion making it appear of record that Higinio Angeles, one of the plaintiffs
and appellees, died on May 4, 1937 and that one of his daughters, Maura Angeles y Reyes, had been granted letters of administration
as evidenced by the document attached to the motion as Exhibit A, and praying that said Maura Angeles y Reyes be substituted as one
of the plaintiffs and appellees in lieu of Higinio Angeles, deceased. This motion is hereby granted.

Defendant-appellants shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
G.R. No. L-1721 May 19, 1950

JUAN D. EVANGELISTA ET AL., plaintiffs-appellants,


vs.
RAFAEL SANTOS, defendant-appellee.

Antonio Gonzales for appellants.


Benjamin H. Tirol for appellee.

REYES, J.:

This is an action by the minority stockholders of a corporation against its principal officer for damages resulting from his
mismanagement of its affairs and misuse of its assets.

The complaint alleges that plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine corporation organized for
the exploitation of a lumber concession in Zamboanga, Philippines; that defendant holds more than 50 per cent of the stocks of said
corporation and also is and always has been the president, manager, and treasurer thereof; and that defendant, in such triple capacity,
through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets, among them
machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and total depreciation
of its stocks. The complaint therefore prays for judgment requiring defendant: (1) to render an account of his administration of the
corporate affairs and assets: (2) to pay plaintiffs the value of t heir respective participation in said assets on the basis of the value of the
stocks held by each of them; and (3) to pay the costs of suit. Plaintiffs also ask for such other remedy as may be and equitable.

The complaint does not give plaintiffs' residence, but, but purposes of venue, alleges that defendant resides at 2112 Dewey Boulevard,
corner Libertad Street, Pasay, province of Rizal. Having been served with summons at that place, defendant filed a motion for the
dismissal of the complaint on the ground of improper venue and also on the ground that the complaint did not state a cause of action in
favor of plaintiffs.

In support of the objection to the venue, the motion, which is under oath, states that defendant is a resident of Iloilo City and not of
Pasay, and at the hearing of the motion defendant also presented further affidavit to the effect that while he has a house in Pasay,
where members of his family who are studying in Manila live and where he himself is sojourning for the purpose of attending to his
interests in Manila, yet he has permanent residence in the City of Iloilo where he is registered as a voter for election purposes and has
been paying his residence certificate. Plaintiffs opposed the motion for dismissal but presented no counter proof and merely called
attention to the Sheriff's return showing service of summons on defendant personally at his alleged residence at No. 2112 Dewey
Boulevard, Pasay.

After hearing, the lower court rendered its order, granting the motion for dismissal upon the two grounds alleged by defendant, and
reconsideration of this order having been denied, plaintiffs have appealed to this Court.

The appeal presents two questions. The first refers to venue and the second, to the right of the plaintiffs to bring this action for their
benefit.

As to the first question, it is important to remember that the laying of the venue of an action is not left to plaintiff's caprice. The matter is
regulated by the Rules of Court. And in actions like the present, which is one in personam, the regulation applicable is that contained in
section 1 of Rule 5, which provides:

Civil actions in Courts of First Instance may be commenced and tried where the defendant or any of the defendant resides or
may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff.

Objection to improper venue may be interposed at any time prior to the trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed.,
p. 108.)

Believing that defendant resided in the province of Rizal, herein plaintiffs brought their action in the Court of First Instance of that
province. But that belief proved erroneous, for the lower court found after hearing that defendant had his residence in Iloilo. The finding
is based on defendant's sworn statement not rebutted by any proof to the contrary.

There is nothing to the contention that defendant's motion to dismiss necessarily presupposes a hypothetical admission of the
allegations of the complaint, among them the averment that defendant is a resident of Rizal province, for the motion precisely denies
that averment and alleges that his real residence is in Iloilo City. This, defendant had the right to do in objecting to the court's
jurisdiction on the ground of improper venue.

Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the province where the defendant "may be found."
But this phrase has already been held to have a limited application. It is the same phrase used in section 377 of Act 190 from which
section 1 of Rule 5 was taken, and as construed by this Court it applies only to cases where defendant has no residence in the
Philippine Islands. This was the construction adopted in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was
an action brought in Manila by a nonresident against a corporation which had its residence for legal purposes in Baguio but whose
President was found in Manila and there served with summons. This Court there said:

Section 377 provides that actions of this character "may be brought in any province where the defendants or any necessary
party defendant may reside or be found, or in any province where the plaintiff or one of the plaintiffs resides, at the election of
the plaintiff." The plaintiff in this action has no residence in the Philippine Islands. Only one of the parties to the action resides
here. There can be, therefore, no election by plaintiff as to the trial. It must be in the province where the defendant resides.
The defendant resides, in the eye of the law, in Baguio. Was it "found" in the city of Manila under section 377, its president
being in that city where the service of summons was made? We think not. The word "found" as used section 377 has a
different meaning that belongs to it as used in section 394, which refers exclusively to the place where the summons may be
served. As we have said a summons may be legally served on a defendant wherever he may be "found," i. e., wherever he
may be, provided he be in the Philippine Islands; but the venue cannot be laid wherever the defendant may be "found." There
is an element entering in section 377 which is not present in section 394, that is a residence. Residence of the plaintiff or
defendant does not affect the place where a summons may be served; but residence is the vital thing when we deal with
venue. The venue must be laid in the province where one of the parties resides. If the plaintiff is a nonresident the venue must
laid in the province of the defendant's residence. The venue can be laid in the province where defendant is "found" only when
defendant has no residence in the Philippine Islands. A defendant can not have a residence in one province and be "found" in
another. As long as he has a residence in the Philippine Islands he can be "found," for the purposes of section 377, only in the
province of his residence. In such case the words "residence" and "found" are synonymous. If he is a nonresident then the
venue may laid in the province where he is "found" at the time venue the action is commenced or in the province of plaintiff's
residence. This applies also to a domestic corporation.

While the service of the summons was good in either Baguio or Manila we are of the opinion that the objection of the
defendant to the place of trial was proper in both cases and that the trial court should have held that the venue was improperly
laid.

And elaborating on the point when the case came up for reconsideration, the Court further said:

The moving party contends that the venue was properly laid under section 377 in that was laid in the province where the
defendant was found at the time summons was served on its president, he having been found and served with process in the
city of Manila. for the purpose of the discussion we assumed in the main case, as the plaintiff claimed, that the defendant was
in fact and in law found in the city of Manila; and proceeded to decide the cause upon the theory that, even if the defendant
were found in the city of Manila, that did not justify, under the facts of the case, the laying of the venue in the city of Manila.

We do not believe that the moving party's objection that our construction deprives the word "found" of all significance and
results, in effect, in eliminating it from the statue, is sound. We do not deprive it of all significance and effect and do not
eliminate it from the statue. We give it the only effect which can be given it and still accord with the other provisions of the
section which give defendant the right to have the venue laid in the province of his residence, the effect which it was intended
by the legislature they should have. We held that the word "found" was applicable in certain cases, and in such cases gave it
full significance and effect. We declared that it was applicable and effective in cases where the defendant is a nonresident. In
such cases where the defendant is a nonresident. In such cases the venue may be laid wherever he may be found in the
Philippine Islands at the time of the service of the process, but we also held that where he is a resident of the Philippine
Islands the word "found" has no application and the venue must be laid in the province where he resides.

The construction which the moving party asks us to place on that provision of section 377 above quoted would result in the
destruction of the privilege conferred by the section upon a resident defendant which requires the venue to be laid in the
province where he resides. This is clear; for, if the venue may be laid in any province where the defendant, although a resident
of some other province, any be found at the time process is served on him, then the provision that it shall be laid in the
province where he resides is no value to him. If a defendant residing in the province of Rizal is helpless when the venue is laid
in the province of Mindoro in an action in which the plaintiff is a nonresident or resides in Manila, what is the value of a
residence in Rizal? If a defendant residing in Jolo is without remedy when a nonresident plaintiff or a plaintiff residing in Jolo
lays the venue in Bontoc because the defendant happens to be found there, of what significance is a residence in Jolo? The
phrases "where the defendant ... may reside" and "or be found" must be construed together and in such manner that both may
be given effect. The construction asked for by the moving party would deprive the phrase "where the defendant ... may reside"
of all significance, as the plaintiff could always elect to lay the venue in the province where the defendant was "found" and not
where he resided; whereas the construction which we place upon these phrases permits both to have effect. We declare that,
when the defendant is a resident of the Philippine Islands, the venue must be laid either in the province where the plaintiff
resides or in the province where the defendant resides, and in no other province. Where, however, the defendant is a
nonresident the venue may be laid wherever defendant may be found in the Philippine Islands. This construction gives both
phrases their proper and legitimate effect without doing violence to the spirit which informs all laws relating to venue and which
insists always that the action shall tried in the place where the greater convenience of the parties will be served. Ordinarily a
defendant's witness are found where the defendant resides; and plaintiff's witnesses are generally found where he resides or
where the defendant resides. It is, therefore, generally desirable to have the action tried where on of the resides. Where the
plaintiff is a nonresident and the contract upon which suit is brought was made in the Philippine Islands it may safely be
asserted that the convenience of the defendant would be best served by a trial in the province where he resides.
The fact that defendant was sojourning in Pasay t the time he was served with summons does not make him a resident of that place for
purposes of venue. Residence is "the permanent home, the place to which, whenever absent for business or pleasure, one intends to
return, ..." (67 C.J., pp. 123-124.) A man can have but one domicile at a time (Alcantara vs. Secretary of Interior, 61 Phil., 459), and
residence is anonymous with domicile under section 1 of Rule 5 (Moran's Comments, supra, p. 104).

In view of the foregoing, we hold that the objection to the venue was correctly sustained by the lower court.

As to the second question, the complaint shows that the action is for damages resulting from mismanagement of the affairs and assets
of the corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit
for the damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-
980). The stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and
liabilities, something which cannot be legally done in view of section 16 of the Corporation Law, which provides:

No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever from the profits arising from
its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders
until after the payment of its debts and the termination of its existence by limitation or lawful dissolution.

But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are
the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile
because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any one of
the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the corporation
itself and not the plaintiff stockholder that is the real property in interest, so that such damages as may be recovered shall pertain to the
corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit brought by a stockholder as the nominal
party plaintiff for the benefit of the corporation, which is the real property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).

In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit,
since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate
debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in
view of the provisions of section 16 of the Corporation Law.

It results that plaintiff's complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint
on that ground.

While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law be first
complied with, we note that the action stated in their complaint is susceptible of being converted into a derivative suit for the benefit of
the corporation by a mere change in the prayer. Such amendment, however, is not possible now, since the complaint has been filed in
the wrong court, so that the same last to be dismissed.

The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in which the venue shall be laid in
the proper province. Appellant's shall pay costs. So ordered.

Moran, C.J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.
G.R. No. L-22399 March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant,


vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE
PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant.

N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.


Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.

REYES, J.B.L., J.:

Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing the petitioner's complaint on
the ground of failure to state cause of action.

In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation domiciled in Manila, instituted
a derivative suit for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the Republic
Bank, and the Monetary Board of the Central Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly
pleaded the following: .

6. That the relator herein filed the present derivative suit without any further demand on the Board of Directors of the Republic
Bank for the reason that such formal demand to institute the present complaint would be a futile formality since the members
of the board are personally chosen by defendant Pablo Roman himself.

For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary Board of the Central Bank against
certain frauds allegedly committed by defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic Bank,
and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his fiduciary duty and taking advantage of his said positions
and in connivance with other officials of the Republic Bank", Roman had fraudulently granted or caused to be granted loans to fictitious
and non-existing persons and to their close friends, relatives and/or employees, who were in reality their dummies, on the basis of
fictitious and inflated appraised values of real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the
complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an investigation, which was carried
out by Bank Examiners; that they and the Superintendent of Banks of the Central Bank reported that certain mortgage loans amounting
to P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the
Monetary Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic Bank to be elected,
which was done, and subsequently approved by the Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo
Roman to put up adequate security for the questioned loans made by the Republic Bank, and such security was made a condition for
the resumption of the Bank's normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred
to special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of the Banking Act, reported by
the Superintendent of Banks, for investigation and prosecution, but no information was filed up to the time of the retirement of Cuaderno
in 1961; that other similar frauds were subsequently discovered; that to neutralize the impending action against him, Pablo Roman
engaged Miguel Cuaderno as technical consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon as
chairman of the Board of Directors of the Republic Bank; that the Board of Directors composed of individuals personally selected and
chosen by Roman, connived and confederated in approving the appointment and selection of Cuaderno and Dizon; that such action
was motivated by bad faith and without intention to protect the interest of the Republic Bank but were prompted to protect Pablo Roman
from criminal prosecution; that the appointment of Cuaderno and his acceptance of the position of technical consultant are immoral,
anomalous and illegal, and his compensation highly unconscionable, because court actions involving the actuations of Cuaderno as
Governor and Member or Chairman of the Monetary Board are still pending in court; that as member of the Monetary Board from 1961
to 1962, Bienvenido Dizon exercised supervision over the Republic Bank; that the selection of Dizon as chairman of the Board of the
Republic Bank after he was forced to resign from the presidency of the Philippine National Bank and from membership of the Monetary
Board and within one year thereafter is in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both
Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the appointment of Cuaderno
and Dizon and would do so unless enjoined.

The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary Board to prevent its confirmation of the
appointments of Dizon and Cuaderno; against the Board of Directors of the Republic Bank from recognizing Cuaderno as technical
consultant and Dizon as Chairman of the Board; and against Pablo Roman from appointing or selecting officers or directors of the
Republic Bank, and against the recognition of any such appointees until final determination of the action. And concluded by praying that
after due hearing, judgment be rendered, —

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly compensation of P12,500.00
unconscionable, immoral, illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank violative
of Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise known as the Anti-Graft and Corrupt Practices Act, and
therefore, illegal and null and void;

d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real estate mortgage loans in the
Republic Bank amounting to P4 million, has no right to select or to be allowed to select person or persons who are his alter
egos to manage the Republic Bank, and enjoining the defendant Board of Directors of the Republic Bank from recognizing any
officers or directors appointed or selected by defendant Pablo Roman;

e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all amounts they may have
received either in the form of compensation, remuneration or emolument, with an interest thereon at the rate of 6%; or to order
defendant Pablo Roman to refund the amounts paid to said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and
to pay such reasonable damages to the plaintiff Republic Bank;

f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees, including all expenses of litigation and costs of
this suit.

The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other defendants filed separate motions
to dismiss on practically the same grounds: no valid cause of action against the individual movants; lack of legal capacity of plaintiff-
relator to sue; and non-exhaustion of intra-corporate remedies. These motions were duly opposed by plaintiff Damaso
Perez.1äwphï1.ñët

On October 24, 1963, the court, "taking into consideration the grounds alleged in the motions to dismiss and the opposition for the
issuance of a writ of preliminary injunction and the affirmative defenses filed by the defendants and the arguments in support thereof",
and "that there are already eight cases pending in the different branches of this court between practically the same parties", denied the
petition for a writ of preliminary injunction and dismissed the case. The court in effect suggested that the matter at issue in the case
may be presented in any of the pending eight cases by means of amended and supplemental pleadings.

Plaintiff Damaso Perez thereupon appealed to this Court.

The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In this connection, it should be
remembered that the defenses of the Monetary Board of the Central Bank, being interposed in an answer and not in a motion to
dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the other defendants, Roman, Cuaderno, Dizon, and
the Board of Directors of the Republic Bank.

They mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and Dizon, which they
contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine
jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45
Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in
conformity, with these principles. He is neither alleging nor vindicating his own individual interest or prejudice, but the interest of the
Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and in behalf
of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were nominees and creatures of
defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice.

The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board
of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution and not to further the interests of
the Bank, and avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a
cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board
composed by Roman's creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful
wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in
approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin
disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles
vs. Santos, supra.).

Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss the complaint for failure to
state a cause of action. This is the cardinal principle in the matter. And, it has been ruled that the test of sufficiency of the facts alleged
is whether or not the Court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the
complaint.1So rigid is the norm prescribed that if the Court should doubt the truth of the facts averred it must not dismiss the complaint
but require an answer and proceed to trial on the merits. 2

Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to bring suit in its behalf. Any
such authority could not be expected as the suit is aimed to nullify the action taken by the manager and the board of directors of the
Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly pleaded in the complaint. These
circumstances permit a stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has
chosen to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him
relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence of other stockholders to be
of any significance, no issues having even been joined.

There remains the procedural question whether the corporation itself must be made party defendant. The English practice is to make
the corporation a party plaintiff, while in the United States, the usage leans in favor of its being joined as party defendant (see Editorial
Note, 51 LRA [NS] 123). Objections can be raised against either method. Absence of corporate authority would seem to militate against
making the corporation a party plaintiff, while joining it as defendant places the entity in the awkward position of resisting an action
instituted for its benefit. What is important is that the corporation' should be made a party, in order to make the Court's judgment binding
upon it, and thus bar future relitigation of the issues. On what side the corporation appears loses importance when it is considered that
it lay within the power of the trial court to direct the making of such amendments of the pleadings, by adding or dropping parties, as may
be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)

We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff amounts to a quo
warranto proceeding. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's board of directors. The suit is
aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect Pablo Roman from criminal
prosecution, and not to carry on the corporation's bank business. Whether the complaint's allegations to such effect are true or not must
be determined after due hearing.

Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a quo gave as a further pretext for the
dismissal of the action the pendency of eight other lawsuits between practically the same parties; reasoning that the question at issue in
the present case could be incorporated in any one of the other actions by amended or supplemental pleading. We fail to see that this
justifies the dismissal of the case under appeal. In the first place, there is no pretense that the cause of action here was already
included in any of the other pending cases. As a matter of fact, dismissal of the present action was not sought on the ground of
pendency of another action between the same parties. Secondly, the amendment of a complaint after a responsive pleading is fi led,
would rest upon the discretion of the party and the Court. Hence, this case cannot be dismissed simply because of the possibility that
the cause of action here can be incorporated or introduced in any of those of the pending cases.

In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is remanded to the court of origin with
instructions to overrule the motions to dismiss and require the defendants to answer the complaint. Thereafter, the case shall be tried
and decided on its merits. Costs against defendants-appellees. So ordered.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Makalintal, J., took no part.
G.R. No. L-16982 September 30, 1961

CATALINA R. REYES, petitioner,


vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila, Branch XIII and FRANCISCA R.
JUSTINIANI, respondents.

Jose W. Diokno for petitioner.


Norberto J. Quisumbing for respondents.

LABRADOR, J.:

This is a petition for certiorari to review and set aside an order of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, in Civil Case No. 42375, entitled "Francisca R. Justiniani vs. Wadhumal Dalamal, et al.", appointing a receiver of the
corporation Roxas-Kalaw Textile Mills, Inc. In said action, plaintiff Justiniani asks the court to order the directors of the corporation,
jointly and severally, to repair the damage caused to the corporation, of which all the plaintiff and defendants are members. The action
was filed about January of 1960 and the order for the appointment of the receiver issued on February 15, 1960, while the designation of
the receiver was made in an order of the court dated April 30, 1960.

In the complaint in said Civil Case No. 42375, it is alleged that the corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June
5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf
of the following primary principals with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I. Sherman, 900 Class A
shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class A shares; that the plaintiff holds both Class A and Class B
shares and number and value thereof are is follows: Class A — 50 shares, Class B — 1,250 shares; that on May 8, 1957, the Board of
Directors approved a resolution designating one Dayaram as co-manager with the specific understanding that he was to act as
defendant Wadhumal Dalamal's designee, Morris Wilson was likewise designated as co-manager with responsibilities for the
management of the factory only, that an office in New York was opened for the purpose of supervising purchases, which purchases
must have the unanimous agreement of Cesar K. Roxas, New York resident member of the board of directors, Robert Born and
Wadhumal Dalamal or their respective representatives; that several purchases aggregating $289,678.86 were made in New York for
raw materials such as greige cloth, rayon and grey goods for the textile mill and shipped to the Philippines, which shipment were found
out to consist not of raw materials but already finished products, such as, West Point Khaki rayon suiting materials dyed in the piece,
finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the Central Bank of the Philippines stopped all dollar allocations
for raw materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill and its business; that the
supplier of the aforesaid finished goods was the United Commercial Company of New York in which defendant Dalamal had interests
and the letter of credit for said goods were guaranteed by the Indian Commercial Company and the Indian Traders in which firms
defendant Dalamal likewise held interests; that the resale of the finished goods was the business of the Indian Commercial Company of
Manila, which company could not obtain dollar allocations for importations of finished goods under the Central Bank regulations; that
plaintiff and some members of the board of directors urged defendants to proceed against Dalamal, exposing his offense to the Central
Bank, and to initiate suit against Dalamal for his fraud against the corporation; that defendants refused to proceed against Dalamal and
instead continued to deal with the Indian Commercial Company to the damage and prejudice of the corporation. The prayer asks for the
appointment of a receiver and a judgment marking defendants jointly and severally liable for the damages.

After a denial of a motion to dismiss and the filing of an answer alleging that the complaint states no cause of action, the motion for the
appointment of a receiver was set for hearing and subsequently the court entered the order for the appointment of a receiver. The court
found and held:

The second ground of the defendant's motion to dismiss and or deny the petition is the allegedly want of a cause of action of
the plaintiff's complaint. Philippine jurisprudence is complete with authorities upholding the principle that this ground for
dismissal must appear in the face of the complaint itself; and that to determine the sufficiency of the cause of action, only the
facts alleged in the complaint and no other, should be considered; in fine, the test of sufficiency of cause of action is whether
or not, admitting the facts alleged in the complaint, the Court could render a valid judgment upon the same in accordance with
the prayer of the petition (e.g., Paminsan v. Costales, 29 Phil. 587, 489). The complaint in the instant case abounds with
arguments establishing and supporting plaintiff's cause of action for and in behalf of the Roxas-Kalaw Textile Mills, Inc. against
all the defendants (See e.g. paragraphs 4, 5, 6 and 7 of the Complaint). Taking these paragraphs of the complaint in context, it
is clear that the plaintiff has sufficient averred facts constituting a cause or basis for a derivative suit for "injuries to the
corporation, as by negligence, mismanagement or fraud of its directors, are normally dealt with as wrong to the whole group of
share holders in their corporate capacity, to be redressed in a suit by or on behalf of the corporation.1awphîl.nèt

Evident from the defendants' motion to dismiss and/or to deny the petition for receivership is their complete failure to come up
with a valid and substantial defense against or denial of the complaint's allegations of mismanagement, if not the actual
commission of ultra vires and illegal acts. Invariably the props of defendants' motion consist of the unconvincing
countercharges of the plaintiff's non-observance of the technicalities of our procedural law and disregard of technical and
evidently futile intracorporate remedies to redress the violations charged against the defendants. It is clear that the controlling
majority did nothing for two years to protect the interests of corporation. (See pars. 5-7, complaint.)

The defendants themselves having admitted in open court during the oral discussion of their motion to dismiss and the
plaintiff's motion for receivership that the majority stockholders will under any condition entertain any suggestion of the minority
shareholders, the appointment of an independent third party in the management of the corporation becomes imperative for the
survival of the company. (Order dated Feb. 15, 1960).

On April 30, 1960, the court issued mother order which reads as follows:

After this incident wherein it was clearly shown that the minority stockholders, represented by the plaintiff, have no recourse
whatsoever before the majority stockholders of the company, and after it has been shown that the majority has violated the law
by importing into the Philippines finished goods instead of raw materials as stipulated in their license, and since these acts are
prejudicial to the company because it might result in the cancellation of their license, the Court is of the opinion and so holds
that the appointment of a receiver is absolutely necessary for the protection not only of the rights of the minority but also those
of the majority stockholders of the company.

In the first assignment of error, petitioner claims that respondent Justiniani neither alleged nor proved the existence of an emergency
requiring the immediate appoinment of a receiver of the Roxas-Kalaw Textile Mill, Inc.; that the alleged fraudulent transaction took place
more than two years before the application for receivership, and so was the refusal of the directors to sue or prosecute Dalamal. This
contention is not well founded. At the hearing of the petition for the appointment of a receiver held on January 30, 1960, various records
of shipments of finished textile goods on dollar allocations for raw materials were exhibited. Publicity had also been given to the
importations of textiles by the corporation, in place of cotton raw materials. The record shows the list of the various documents proving
the purchase of letters of credit for textiles. These textiles were denied importation and had to be re-exported. The fact of the
importation of finished textiles on dollar allocations for raw materials in violation of Central Bank regulations was, therefore, conclusively
shown.

It is also not denied by petitioner that the allocation of dollars to the corporation for the importation of raw materials was suspended. In
the eyes of the court below, as well as in our own, the importation of textiles instead of raw materials, as well as the failure of the Board
of Directors to take action against those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on
the part of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a minority stockholder on
behalf of the corporation.

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere error of judgment
or abuse of discretion — and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself
and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. An illustration of a suit of this kind is found in the case of Pascual vs. Del Saz
Orozco (19 Phil. 82), decided by this Court as early as 1911. In that case, the Banco Español-Filipino suffered heavy losses
due to fraudulent connivance between a depositor and an employee of the bank, which losses, it was contended, could have
been avoided if the president and directors had been more vigilant in the administration of the affairs of the bank. The
stockholders constituting the minority brought a suit in behalf of the bank against the directors to recover damages, and this
over the objection of the majority of the stockholders and the directors. This court held that the suit could properly be
maintained. (64 Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697).

The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years is also without merit.
During that period of time respondent had the right to assume and expect that the directors would remedy the anomalous situation of
the corporation brought about by their own wrong doing. Only after such period of time had elapsed could respondent conclude that the
directors were remiss in their duty to protect the corporation property and business.

Counsel for petitioner claims that respondent Justiniani was treasurer of the corporation for sometime and had control of funds and this
notwithstanding, she had not taken the steps to remedy the situation. In answer we state that the fraud consisted in importing finished
textile instead of raw cotton for the textile mill; the fraud, therefore, was committed by the manager of the business and was consented
to by the directors, evidently beyond reach of respondent.

The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to remove the erring
purchasing managers. In a way the appointment of a receiver may have been thought of by the court below so that the dollar allocation
for raw material may be revived and the textile mill placed on an operating basis. It is possible that if a receiver in which the Central
Bank may have confidence is appointed, the dollar allocation for raw material may be restored. Claim is made that if a receiver is
appointed, the Philippine National Bank to which the corporation owes considerable sums of money might be led to foreclose the
mortgage. Precisely the appointment of a receiver in whom the bank may have had confidence might rehabilitate the business and
bring a restoration of the dollar allocation much needed for raw material and an improvement in the business and assets the
corporation, thus insuring the collection of the bank's loan.

Considering the above circumstances we are led to agree with the judge below that the appointment of a receiver was not only
expedient but also necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of the
corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile m ills. The first
assignment of error is, therefore, overruled.

In the second assignment of error, petitioner claims that the management has been changed and the new management has not been
afforded a chance to show what it can do. This ground of the petition was not mentioned or raised as a ground of defense or objection
to the appointment of a receiver in the court below. It is only raised for the first time before Us in the petition for certiorari. The principle
has long ago been enunciated by Us that an appellate court may not consider any ground of objection that was not raised in the court
below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Graño, 54 Phil. 744; Vda. de Villaruel, et al. v. Manila Motor Co., Inc., et
al., G.R. No. L-10394, Dec. 13, 1958; Collector of Internal Revenue v. Estate of F. P. Buan, et al., G.R. Nos. L-11438-39, and L-11542-
46, July 31, 1958; S.V.S. Pictures, Inc., et al. v. The Court of Appeals, et al., G.R. No. L-7075, January 29, 1960; Elena Peralta Vda. de
Caina vs. Hon. Andres Reyes, et al., G.R. No. L-15792, May 30, 1960).

The supposed new management, alleged as a ground for the reversal of the order of the court below appointing a receiver, is not in
itself a ground of objection to the appointment of a receiver. The parties found to be guilty of the fraud, as a cause of which receivership
proceedings were instituted, were the Board of Directors, which took no action to stop the anomalies being perpetrated by the
management. But it appears that the management must have acted directly under orders of the Board of Directors. The appointment of
a new management, therefore, would not remedy the anomalous situation in which the corporation is found, because such situation
was not due to the management alone but principally because of direction of the Board of Directors.

The second ground for the petition is, therefore, also without merit.

WHEREFORE, the court finds that the court below did not commit an abuse of discretion in appointing a receiver for the corporation
and the petition to set aside the order for the appointment of a receiver should be, as it is hereby, dismissed. With costs against the
petitioner.

Bengzon, C.J., Padilla, Reyes, J.B.L., Paredes and De Leon, JJ., concur.