CASE DIGEST : Manuel A. Torres, Jr. (Deceased), et al. v. Court of Appeals, et al. G.R. No. 120138, September 5, 1997 First Division — Kapunan, J.

 

FACTS

Manuel A. Torres, Jr. was the majority stockholder, president, and chairman of the board of Tormil Realty & Development Corporation (Tormil). In 1984, he adopted an estate-planning scheme under which he assigned various real properties and shares of stock to Tormil in exchange for 225,972 Tormil shares. The properties included parcels in Quezon City, Manila, Makati, and Pasay City, as well as shares in several corporations. The properties assigned were recorded in Tormil's assets, and the revenues from them were entered in its books. However, only 225,000 shares remained unsubscribed and were issued to Torres, leaving a shortage of 972 shares.

Because of the shortage, Torres allegedly revoked the deeds of assignment covering the Makati and Pasay properties on September 11, 1986. The minority stockholders thereafter filed SEC Case No. 3153, seeking to compel Torres to deliver the deeds and cause the registration of the properties in Tormil's name. They alleged that Torres had subsequently formed Torres-Pabalan Realty and Development Corporation with Edgardo Pabalan and Graciano Tobias and had transferred the same Makati and Pasay properties to the new corporation.

A second controversy arose during Tormil's March 25, 1987 annual stockholders' meeting. Torres assigned one share each to Edgardo Pabalan, Graciano Tobias, Rodolfo Jocson, Jr., Melvin Jurisprudencia, and Augustus Cesar Azura as "qualifying shares" so they could be elected as directors. The stock certificates expressly stated that the shares were held merely as trustees of Torres for the purpose of qualifying them as directors. During the meeting, disputes arose between Torres' group and the minority stockholders. Torres and his group eventually transferred the meeting to another location, where the nominees were elected to the board.

The minority stockholders filed SEC Case No. 3161, seeking to annul the election, alleging that the assigned qualifying shares violated their right of pre-emption under Tormil's articles and by-laws. The two SEC cases were consolidated. The SEC Hearing Panel ruled for the minority stockholders, ordering the delivery and registration of the Makati and Pasay properties, declaring the March 25, 1987 election and subsequent acts of the elected directors void, and ordering the respondents to pay attorney's fees. The SEC en banc and later the Court of Appeals affirmed. Torres died on April 3, 1991 while the SEC appeal was pending. His co-petitioners then questioned, among other things, the failure to formally substitute his legal representative, the validity of the revocation of the property assignments, and the validity of the qualifying-share transfers.

ISSUE

The first issue was whether the Court of Appeals could decide the petition for review without the original SEC records and evidence being transmitted to it. Petitioners argued that this deprived them of procedural due process and violated Sections 8 and 11 of Supreme Court Circular No. 1-91, which governed appeals from quasi-judicial agencies.

The second issue concerned the death of Manuel Torres during the pendency of the SEC appeal. Petitioners argued that the SEC and Court of Appeals decisions were void because Torres had not been formally substituted by his legal representative or heirs under Section 17, Rule 3 of the Rules of Court. The Court therefore had to determine whether the absence of formal substitution violated due process under the particular circumstances of the case.

The third issue was whether Torres validly revoked the deeds of assignment covering the Makati and Pasay properties because Tormil had failed to issue the full 225,972 shares contemplated under the estate-planning arrangement. Petitioners invoked Article 1191 of the Civil Code, which permits rescission of reciprocal obligations when one party fails to comply with what is incumbent upon it.

The fourth issue was whether the assignment of the qualifying shares to Torres' nominees was valid and sufficient to make them stockholders of record who could be elected directors. The Court examined Section 74 of the Corporation Code, which requires the stock and transfer book to be kept at the corporation's principal office and places its custody with the corporate secretary, as well as the effect of the entries made by Torres himself in the stock and transfer book.

HELD

The Supreme Court DENIED the petition for review on certiorari and affirmed the rulings against the petitioners. On the first issue, the Court held that the Court of Appeals did not violate petitioners' procedural due process rights by deciding the case without the original SEC records. The issuance of a restraining order or preliminary injunction and the requirement that the parties submit memoranda did not mean that the Court of Appeals had given due course to the petition. The Court noted that under Revised Administrative Circular No. 1-95, the transmittal of the original record in appeals from quasi-judicial agencies was within the discretion of the Court of Appeals. The Court found that the CA decided the case based on the uncontroverted facts and admissions contained in the pleadings.

On the death of Torres, the Court recognized the general rule under Section 17, Rule 3 of the Rules of Court that when a party dies in an action that survives, the legal representative or heirs should be substituted. The purpose of substitution is to protect the deceased party's right to due process by ensuring that his estate is properly represented. However, the Court held that the particular circumstances of this case substantially fulfilled that purpose even without formal substitution. The same parties were involved in the probate proceedings concerning Torres' estate, and those parties had voluntarily participated in the SEC and Court of Appeals proceedings. Thus, the estate's interests were fully protected. The Court also held that negotiorum gestio under Article 2144 of the Civil Code did not apply, because that principle concerns abandoned or neglected property or business, which was not the situation here.

On the attempted revocation of the property assignments, the Court rejected Torres' reliance on Article 1191 of the Civil Code. The Court found no substantial breach by Tormil that would justify rescission. Tormil had substantially performed its obligation by issuing shares to Torres, and the shortage of 972 shares was not a substantial and fundamental breach that defeated the object of the agreement. The Court also discussed Article 1355 of the Civil Code, which provides that lesion or inadequacy of cause generally does not invalidate a contract unless there is fraud, mistake, or undue influence. The Court found no fraud, mistake, or undue influence and further held that the shortage should logically have been applied to the last assignment, rather than the earlier Makati and Pasay assignments whose consideration had already been fulfilled. Accordingly, the revocation of those assignments was invalid.

Finally, the Court upheld the ruling that Torres' nominees were not stockholders of record and therefore could not validly be elected directors. Under Section 74 of the Corporation Code, the stock and transfer book must be kept at the corporation's principal office and, in the absence of a contrary provision, is under the custody of the corporate secretary. Torres, however, kept the stock and transfer book himself and made the entries transferring the qualifying shares to his nominees. The Court held that these entries could not be given valid effect. Since the nominees were not stockholders of record, they could not be elected directors. The Court emphasized that even a family corporation and even a majority stockholder controlling 81.28% of the outstanding capital stock must comply with the Corporation Code. Thus, the petition was denied