JOHN U. OSMOND, PETITIONER, VS. THE COURT OF APPEALS; HON. SANTIAGO O. TANADA, PRESIDING JUDGE OF BR. XXXIII, CFI OF RIZAL, CALOOCAN CITY BRANCH; TERESITA O. NIBUNGCO AND PILAR …

Osmond versus Court of Appeals

The Case

This is a petition for review brought by John U. Osmond against the Court of Appeals, Judge Santiago O. Tanada of the Court of First Instance of Rizal, Caloocan City Branch, and his sisters Teresita O. Nibungco and Pilar O. Cosgayon. The sisters had sued their father and brothers in the trial court, claiming a share in a family metal works business that, they alleged, was absorbed into a corporation formed in bad faith. Pending that suit, the trial court placed the business of the corporation under receivership, and the Court of Appeals refused to annul that order. The case matters for two reasons: it teaches that a corporation whose business is to be placed under receivership must itself be a party to the litigation, and it teaches that a compromise agreement has the force of res judicata between the parties and can render the rest of the proceedings moot and academic.

Procedural History

The private respondents filed their complaint in the Court of First Instance of Rizal, Caloocan City Branch, presided over by Judge Santiago O. Tanada. The defendants moved to dismiss, but the motion was denied. The plaintiffs then sought the appointment of a receiver over the business of Osmond Metal Works, Incorporated. Over the opposition of John Osmond, Judge Tanada granted the receivership on January 17, 1972.

John Osmond went to the Court of Appeals on certiorari, arguing that the receivership order was issued in grave abuse of discretion. In its decision dated July 28, 1972, the Court of Appeals dismissed the petition. Osmond then came to the Supreme Court by petition for review. The Supreme Court gave the petition due course and later allowed Osmond Metal Works, Incorporated and the other stockholders, including transferees of shares, to intervene. After the briefs were filed, the Court set the case for hearing to explore an early termination of the proceedings. It is from that hearing that the compromise agreement surfaced, and the Court then disposed of the case.

Facts

Sometime in 1955, Teresita O. Nibungco and Pilar O. Cosgayon were in association, with equal shares, with their mother Lutgarda Umali and their brother Carlos U. Osmond, in a business known as Carlos U. Osmond Metal Works. The association later employed their father Henry V. Osmond as manager and their brother John U. Osmond as superintendent, both on salary basis.

In 1958, according to the complaint, Henry and John, conspiring in bad faith to defraud the plaintiffs of their share, formed a fictitious corporation, Osmond Metal Works, Incorporated, and used their positions to absorb all the business and assets of the old metal works into the corporation. The recorded incorporators were Henry, Lutgarda, Virginia, John, and Carlos. The plaintiffs alleged that the defendants later refused to recognize their share, despite assurances that their interests would be protected. Their mother Lutgarda had died, and her estate, which included her shares, had not yet been settled. The complaint prayed for an accounting and delivery of one fourth of the profits to each plaintiff, transfer of one fourth of the shares to each, and settlement of the mother's estate with a one sixth share to each.

After the motion to dismiss was denied, the plaintiffs sought a receivership of the business of the corporation, alleging mismanagement, diversion of funds, absence of an inventory, participation in management by persons with no interest, grave danger that the assets might be lost or removed, and estranged relations between the plaintiffs and John Osmond. John Osmond opposed the move, principally on the ground that the corporation was not a party to the litigation. Judge Tanada nevertheless granted the receivership. At the hearing before the Supreme Court, it emerged that as early as September 25, 1971, after the main action had been initiated, the parties had already entered into an amicable settlement dividing the shares of the corporation among the family members.

Issues

• Whether or not the Court of Appeals erred in sustaining the order of the trial court placing under receivership the business of Osmond Metal Works, Incorporated, when the corporation was never a party to the proceedings.
• Whether or not the compromise agreement entered into by the parties on September 25, 1971 rendered the whole controversy moot and academic.

Applicable Provisions

Article 2037 of the Civil Code provides:

A compromise has upon the parties the effect and authority of res judicata; but there shall be no execution except in compliance with a judicial compromise.

This provision is the basis for the Court's holding that the agreement of September 25, 1971 bound the parties as res judicata and could be enforced as a formal judgment once judicially approved, making all proceedings after it unnecessary.

Ruling

On the first issue, the Court held that the receivership could not stand. The corporation whose business and properties were directly subjected to the receivership was not a party in the proceedings below. The allegation that its incorporation was fraudulent and fictitious was no excuse for its non-joinder. Moreover, the respondents' own allegation that their father and brother had assured them their interests would be protected seemed to belie their theory that the corporation was fictitious. The Court also noted that the claim that Virginia did not sign the agreement could be threshed out in the proceeding for its approval or enforcement, since the respondents alleged she had verbally agreed.

On the second issue, the Court held that the compromise agreement had the effect and authority of res judicata upon the parties and could be enforced as a formal judgment once judicially approved, pursuant to Article 2037 of the Civil Code. Unless all the parties decided to disregard it, all proceedings held after the agreement had no reason for being, the whole controversy having become moot and academic. The most expeditious remedy of the private respondents was to seek specific performance of the compromise, or have it approved by the trial court and thereafter have the judgment executed.

Doctrine

A corporation whose business or properties are to be placed under receivership must be joined as a party to the litigation; the allegation that its incorporation was fraudulent and fictitious does not excuse its non-joinder. A compromise agreement has, upon the parties, the effect and authority of res judicata under Article 2037 of the Civil Code, and once judicially approved it may be enforced as a formal judgment. Proceedings held after the execution of a valid compromise are without reason for being, the controversy having become moot and academic, and the proper remedy is to seek specific performance of the compromise or to have it approved and executed.

Disposition

The Supreme Court reversed the decision of the Court of Appeals and set aside the order of receivership and all related orders, without prejudice to the private respondents enforcing the compromise agreement, with costs against them.

Remember This

Memorize this line: a compromise has upon the parties the effect and authority of res judicata, and a corporation must be a party before its business can be placed under receivership. Examiners use this case to test the requisites of a valid compromise and the rule on indispensable parties in receivership proceedings.