DESA ENTERPRISES, INC., AND LUIS N. LOPEZ, PETITIONERS, VS. THE SECURITIES AND EXCHANGE COMMISSION AND EMILIO PANTOJA, RESPONDENTS.

Desa Enterprises versus Securities and Exchange Commission

The Case

This is a consolidated decision of two interrelated petitions decided together by the Supreme Court. In the first, Desa Enterprises, Incorporated and Luis Lopez ask the Court to annul and set aside two orders of the Securities and Exchange Commission and to restrain the Commission from inquiring into their contract of lease over the Lian Ice Plant in Batangas, on the ground that the Commission had no jurisdiction to do so. In the second, Emilio Pantoja and his co-defendants ask the Court to review the refusal of the Court of First Instance of Batangas to dismiss a civil case filed against them by the corporation. The case matters because it draws the boundary between the jurisdiction of the regular courts and the original and exclusive jurisdiction of the Securities and Exchange Commission over intra-corporate controversies under Presidential Decree Number 902-A, and because it fixes the moment when that jurisdiction attached.

Procedural History

Emilio Pantoja filed with the Securities and Exchange Commission a complaint seeking revocation of the certificate of registration of Desa Enterprises, Incorporated. That complaint was docketed as SEC Case Number 1201. The Commission issued a status quo order in September 1974, and later issued the two orders complained of, dated July 23, 1976 and December 29, 1976. Without waiting for the Commission to act on his manifestation and memorandum, Luis Lopez and the corporation filed with the Supreme Court a petition for certiorari and prohibition with preliminary injunction, docketed as G.R. Number L-45430, and the Court issued a temporary restraining order in March 1977.

Meanwhile, in August 1976, the corporation filed against Emilio Pantoja and two others a complaint for recovery of corporate funds and damages before the Court of First Instance of Batangas, docketed as Civil Case Number 1060. The defendants moved to dismiss on the ground that jurisdiction belonged to the Securities and Exchange Commission. The trial court denied the motion to dismiss in November 1976 and denied reconsideration in January 1977. The defendants then filed a petition for certiorari with the Supreme Court, docketed as G.R. Number L-45644, and the Court issued a temporary restraining order in June 1977. The two cases were considered jointly.

Facts

In a letter dated April 30, 1973, Emilio Pantoja asked the Securities and Exchange Commission to revoke the certificate of registration of Desa Enterprises, Incorporated. He alleged that his signature and his wife's signature in the articles of incorporation were obtained by Dionisio Chua Kang Hay through fraud and false representation. He claimed that their original understanding was a fifty-fifty sharing in an ice plant in Lian, Batangas, but that the incorporation made him and his wife minority stockholders while Dionisio Chua Kang Hay, his wife, and his brother-in-law became majority stockholders, and that the promised franchise was never transferred to the corporation. The complaint was docketed as SEC Case Number 1201. The Commission appointed auditors and decreed that, to maintain a status quo, no sale, transfer, disposition of, or encumbrance upon the assets of the corporation, including the ice plant, machineries, and equipment, shall be made without the written consent of both parties.

In March 1975, the Commanding Officer of the 214th Philippine Constabulary Company stopped the operations of the Lian Ice Plant pending settlement of the dispute. In the latter part of 1975, a military general suggested resumption of operations in the interest of the fishermen who patronized the ice plant, and recommended its lease to Luis Lopez. On April 13, 1976, Emilio Pantoja and Dionisio Chua Kang Hay executed a memorandum agreement giving their conformity to the lease by Luis Lopez under terms acceptable to the corporation, to be ratified by the stockholders. On the same day, the corporation, through its president, leased the ice plant, the land, and the machinery to Luis Lopez for five years at a monthly rental of 3,000 pesos, with an option to purchase for 390,000 pesos. The contract stipulated that the lease shall be ratified by all stockholders at a meeting called for the purpose prior to its effective date. When the lease was submitted to Emilio Pantoja for ratification, he refused unless the rentals and the purchase price were paid into a joint account or deposited in escrow subject to the approval of the Commission.

In July 1976, military authorities verbally ordered the immediate resumption of operations under the management of Luis Lopez. Emilio Pantoja asked for five days to consult counsel, but the request was denied. He then filed an urgent petition with the Commission for a writ of preliminary injunction. On July 23, 1976, the Commission ordered the respondent, his agents, and any person acting in his behalf or in behalf of the corporation, including Luis Lopez, to refrain from interfering with or operating the ice plant. In November 1976, Emilio Pantoja manifested that the ice plant had resumed commercial operations in disregard of the order. On verification, the Commission found the plant indeed in operation. On December 29, 1976, the Commission directed the corporation and its agents, including Luis Lopez, to show cause why they should not be punished for contempt, and in the meantime to desist and stop the operation of the ice plant immediately.

Issues

• Whether or not the Securities and Exchange Commission had jurisdiction, at the time the complaint was filed in May 1973, over the action for revocation of the certificate of registration of Desa Enterprises, Incorporated.
• Whether or not Emilio Pantoja is estopped from questioning the registration and personality of the corporation, having been its president for some years.
• Whether or not the Commission may cite the petitioners for contempt although they are not parties in SEC Case Number 1201 and were not furnished copies of the order violated.
• Whether or not the Commission may inquire into or interfere with the contract of lease between the petitioners.
• Whether or not the Court of First Instance of Batangas had jurisdiction over Civil Case Number 1060, or whether that action falls within the original and exclusive jurisdiction of the Securities and Exchange Commission.

Applicable Provisions

Section 5(b) of Presidential Decree Number 902-A provides:

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: a) x x x x x x x x x 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) x x x x x x x x x.

This provision is the basis for holding that Civil Case Number 1060, an action between the corporation and a stockholder arising out of intra-corporate relations, belongs to the exclusive jurisdiction of the Commission.

Section 1(b) of Republic Act Number 1143 provides:

Section 1. x x x x x x x x x b) x x x x x x x x x

The Court cites this provision as the source of the Commission's power to penalize any violation of or non-compliance with any terms or conditions of any certificate, license, or permit issued by the Commission, or of any order, decision, ruling or regulation thereof, which bears on the contempt issue.

Ruling

On the first issue, the Court held that the Commission indeed had no power to revoke the certificate of registration at the time the complaint was filed in May 1973, because Presidential Decree Number 902-A, which granted that power, took effect only in March 1976. But the Court held that while the power to revoke was merely recommendatory under Republic Act Number 5050, the Commission had authority to investigate and hear complaints for any violation of law, rule or regulation required to be enforced by it for non-compliance with any term or condition of any certificate, license, or permit issued by it.

On the second issue, the Court held that the matter of estoppel could be appropriately raised in SEC Case Number 1201, which was still pending adjudication before the Commission.

On the third issue, the Court held that the contention is without merit. The rule is settled that persons who are not parties in a proceeding may be declared guilty of contempt for willful violation of an order issued in the case if said persons are guilty of conspiracy with any of the parties in violating the court's order. Besides, under Section 1(b) of Republic Act Number 1143, the Commission has power to penalize any violation of or non-compliance with any of its orders. In any event, the Commission had directed the petitioners to appear and show cause, and their arguments could be introduced at that hearing.

On the fourth issue, the Court held that in restraining the petitioners from operating the ice plant, the Commission was not inquiring into the validity of the lease contract, but merely enforcing compliance with its order of September 17, 1974, as well as the terms of the lease itself, and exercising a power necessary to make effective its control over corporations registered with it.

On the fifth issue, the Court held that there is merit in the contention that the trial court had no jurisdiction. Civil Case Number 1060, initiated in August 1976 after Presidential Decree Number 902-A had gone into effect, is an action between a corporation and a stockholder arising out of intra-corporate relations, and is therefore within the original and exclusive jurisdiction of the Commission. The inclusion of two hired workers as defendants was an apparent attempt to circumvent the decree and the proceedings pending before the Commission.

Doctrine

First, the Securities and Exchange Commission has original and exclusive jurisdiction to hear and decide 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, and between the corporation and the state insofar as it concerns its individual franchise or right to exist. Second, that jurisdiction attaches to actions initiated after Presidential Decree Number 902-A took effect in March 1976, even if the underlying dispute began earlier. Third, the Commission may cite for contempt persons who are not parties to the proceeding if they willfully violate its order, especially where they conspired with a party in violating it. Fourth, the Commission may restrain operations to enforce its own status quo order without thereby adjudicating the validity of a lease contract.

Disposition

The petition in the first case was dismissed for lack of merit and the temporary restraining order lifted, while the petition in the second case was granted, Civil Case Number 1060 was dismissed, and the temporary restraining order was made permanent.

Remember This

Memorize this line: intra-corporate controversies belong to the original and exclusive jurisdiction of the Securities and Exchange Commission, and adding hired workers as defendants will not defeat that jurisdiction. Examiners use this case to test jurisdiction over intra-corporate disputes and the power of the Commission to punish contempt by non-parties.