DAVID LU, ROSA GO, SILVANO LU DO AND CL CORPORATION, PLAINTIFFS-APPELLEES, VS. PATERNO LU YM, SR.,, PATERNO LU YM, JR., VICTOR LU YM, JOHN LU YM, KELLY LU YM, AND LUDO & LUYM DE…

Lu versus Lu Ym

The Case

This is a family-corporation case. David Lu, Rosa Go, Silvano Lu Do, and CL Corporation sued Paterno Lu Ym, Senior, his sons, and Ludo and LuYm Development Corporation, asking the court to declare null a block of shares issued to the defendants and their relatives, to place the corporation under receivership, and to dissolve it. The plaintiffs are the minority stockholders; the defendants are the majority. The case matters because it shows how the Supreme Court treats a share issuance that dilutes the minority, and how strictly it reads the procedural rules on forum shopping, receivership, and intra-corporate procedure.

Procedural History

The plaintiffs filed their complaint for declaration of nullity of share issue, receivership, and dissolution before the Regional Trial Court of Cebu City. The defendants moved to dismiss on three grounds: a defective certification against forum shopping, failure to allege earnest efforts toward compromise, and failure to bring the matter before the barangay lupon. The trial court denied the motion and later denied reconsideration. On the plaintiffs' urgent motion, the trial court appointed two receivers.

The defendants went to the Court of Appeals on certiorari. The Court of Appeals granted the petition, reversed the order denying the motion to dismiss, dismissed the complaint, and annulled the receivership orders. The plaintiffs sought review in the Supreme Court, but the trial court nonetheless continued to act on the receivership. David Lu then filed a separate petition for certiorari and prohibition with the Court of Appeals, which granted it and ordered the trial court to desist from any proceeding relating to the receivership. The defendants elevated that ruling to the Supreme Court.

Meanwhile, the trial court admitted an amended complaint, treated the case as an intra-corporate controversy, and eventually rendered the decision now on appeal. That decision created a management committee, cancelled the six hundred thousand shares, dissolved the corporation, and directed liquidation. The defendants appealed to the Supreme Court.

Facts

Ludo and LuYm Development Corporation was founded by three brothers: Paterno Lu Ym, Senior, Cayetano Lu Do, and Cipriano Lu. The plaintiffs descend from two of them; the defendants descend from the third. Before the acts complained of, the defendants and their related parties held about twenty-nine and ninety-nine hundredths percent of the corporation, while the plaintiffs held about twenty-seven and eighty-three hundredths percent.

On November eighteenth, nineteen hundred ninety-seven, the board passed a resolution. Pursuant to it, the defendants issued to themselves, their spouses, children, and holding companies six hundred thousand unsubscribed and unissued shares, paid in at par value of sixty million pesos. On the underlying real estate value, those shares were worth more than one billion pesos, so they were issued for about one-eighteenth of their real value. The defendants' holdings rose to about seventy-three and forty-eight hundredths percent, while the plaintiffs' fell to about ten and fifty-three hundredths percent.

The plaintiffs sued, alleging that the issuance violated the directors' fiduciary duties, amounted to abuse of rights and unjust enrichment, and diluted the minority. The defendants answered that the shares were offered pro rata to all stockholders under their pre-emptive rights, and that the plaintiffs simply failed to exercise those rights.

Issues

• Whether or not the complaint should be dismissed for a defective certification against forum shopping, for failure to allege earnest efforts toward compromise, and for failure to resort to the barangay lupon.
• Whether or not the appointment of a receiver was proper.
• Whether or not the issuance of the six hundred thousand shares at par value, far below their real value, was valid.
• Whether or not the corporation should be dissolved and liquidated.

Applicable Provisions

Section 5, Rule 7 of the Rules of Court, on the certification against forum shopping, provides:

The plaintiff or principal party shall certify under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that fact within five (5) days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed.

This bears on the defendants' first ground for dismissal, since they claim David Lu was not shown to be authorized to sign the certification for the other plaintiffs.

Section 1, Rule 59 of the Rules of Court, on appointment of a receiver, provides:

Upon a verified application, one or more persons may be appointed by the court as receiver or receivers of the property, real or personal, which is the subject of the action, when it appears from the verified application and such other proof as the court may require that the party applying for the appointment of a receiver has an interest in the property or fund which is the subject of the action, and that such property or fund is in danger of being lost, removed, or materially injured unless a receiver be appointed to administer and preserve it.

This governs the plaintiffs' urgent motion for receivership, which the defendants attacked as unverified.

Section 2, Rule 59 of the Rules of Court, on the bond, provides:

Before issuing the order appointing a receiver the court shall require the applicant to file a bond executed to the party against whom the order is issued, in an amount equal to the value of the property sought to be placed in the custody of the receiver, to the effect that the applicant will pay to such party all damages which he may sustain by reason of the appointment of such receiver if the applicant shall fail to establish his right to have the same appointed, or if it shall be finally decided that the receiver ought not to have been appointed.

This is the provision the defendants invoked when they complained that no bond was required before the receivers were appointed.

Ruling

On the first issue, the Court held that the certification against forum shopping was defective. David Lu signed it without showing authority to sign for the other plaintiffs, and the Court treated that defect as a valid ground for dismissal. The Court also noted that the complaint failed to allege earnest efforts toward compromise among members of the same family, and that the matter should have been brought before the barangay lupon under the Local Government Code. On these grounds, the complaint should have been dismissed.

On the second issue, the Court held that the appointment of the receiver was improper. The application was not verified as Section 1, Rule 59 requires, and no bond was required before the order issued, contrary to Section 2, Rule 59. The Court therefore annulled the receivership orders.

On the third and fourth issues, the Court held that the trial court had no authority to cancel the shares or dissolve the corporation in the manner it did. The remedy of a dissenting stockholder whose holdings are diluted is not dissolution but the appraisal right. The trial court's sweeping orders, issued without a completed pre-trial and without the required procedure under the rules for intra-corporate controversies, were set aside.

Doctrine

First, a certification against forum shopping must be signed by the plaintiff or principal party, or by one duly authorized in his behalf; an unauthorized signature is a defect that warrants dismissal. Second, earnest efforts toward compromise must be alleged where the parties are members of the same family, and resort to the barangay lupon is a precondition under the Local Government Code. Third, a receiver may be appointed only upon a verified application and only after the applicant files the bond required by Section 2, Rule 59. Fourth, a stockholder who dissents from a share issuance that dilutes his holdings is not entitled to dissolution of the corporation; his remedy is the appraisal right. These rules tie directly to the quoted provisions of Rule 7 and Rule 59.

Disposition

The Supreme Court ruled in favor of the defendants, setting aside the trial court's decision, dismissing the complaint, and annulling the receivership and the orders cancelling the shares and dissolving the corporation.

Remember This

The single line to memorize: a diluted minority stockholder's remedy is the appraisal right, not dissolution, and a receivership stands or falls on a verified application and a bond. Examiners use this case to test the certification against forum shopping, the requisites of receivership under Rule 59, and the limits of a stockholder's remedy against a dilutive share issuance.