HI-YIELD REALTY, INCORPORATED, PETITIONER, VS. HON. COURT OF APPEALS, HON. CESAR O. UNTALAN, IN HIS CAPACITY AS PRESIDING JUDGE OF RTC-MAKATI, BRANCH 142, HONORIO TORRES & SONS,…

Hi-Yield Realty versus Court of Appeals

The Case

This is a special civil action for certiorari brought by Hi-Yield Realty, Incorporated against the Court of Appeals and the presiding judge of the Makati Regional Trial Court, Branch 142, together with Honorio Torres and Sons, Incorporated and the individual Torres stockholders. Hi-Yield asks the Supreme Court to nullify the appellate decision and resolution that refused to dismiss a suit filed against it. The underlying suit, captioned as a petition for annulment of real estate mortgage and foreclosure sale, was brought by a minority stockholder on behalf of the family corporation over two parcels of land in Marikina and Quezon City. The case matters because it settles two practical questions every corporation lawyer must answer: where a derivative suit is properly filed, and how a court looks past a complaint's caption to its true nature.

Procedural History

Roberto Torres, for and on behalf of Honorio Torres and Sons, Incorporated, filed the petition for annulment of real estate mortgage and foreclosure sale before the Regional Trial Court of Makati, Branch 148. Hi-Yield moved to dismiss on grounds of improper venue and insufficient docket fees. The trial court denied the motion, holding that the case was in nature a real action in the form of a derivative suit, cognizable by a special commercial court. Hi-Yield's motion for reconsideration was likewise denied.

Hi-Yield then filed a petition for certiorari and prohibition before the Court of Appeals. The appellate court agreed that the case was a derivative suit and that the prayer to annul the mortgage and foreclosure was merely incidental. It dismissed the petition but directed the trial court's clerk of court to compute the proper docket fees and to order their immediate payment. Hi-Yield's motion for reconsideration was denied. Hi-Yield came to the Supreme Court by petition for certiorari, and the Court dismissed the petition, affirming the Court of Appeals.

Facts

Honorio Torres and Sons, Incorporated owned two parcels of land, one in Marikina and one in Quezon City. Leonora Torres, who held fifty-five percent of the outstanding shares, bound the corporation to loan obligations without authority from the board of directors and allowed the company's properties to be mortgaged. The first mortgage deed was executed in June 1992, and the mortgaged properties were foreclosed in July 2002.

Throughout that decade, the board of directors did nothing to rectify the unauthorized transactions. Roberto Torres, a minority stockholder, made earnest efforts to reach a compromise among the family members and stockholders, but these failed. He alleged that Leonora and the other controlling stockholders excluded him from the affairs of the corporation.

In July 2003, Roberto filed suit for and on behalf of the corporation against the individual Torres stockholders, the Registers of Deeds of Marikina and Quezon City, and Hi-Yield Realty, the party that acquired the foreclosed properties. Hi-Yield resisted, arguing that the action was really a real action to recover land, which should have been filed where the lands lie, and that it had been wrongly impleaded.

Issues

• Whether or not venue was properly laid in Makati, considering that the lands involved are located in Marikina and Quezon City.
• Whether or not there was proper joinder of parties, such that Hi-Yield should be dropped from the complaint.
• Whether or not the action to annul the real estate mortgage and foreclosure sale is a mere incident of the derivative suit.

Applicable Provisions

Section 5, Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies provides:

SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality where the head office is located.

This is the provision that governs where a derivative suit must be filed, and it is the basis for upholding the filing in Makati.

Ruling

On the first issue, the Court held that venue was properly laid. A derivative action is a suit by a shareholder to enforce a corporate cause of action. Under the Corporation Code, the power to sue on behalf of an injured corporation is lodged with its board of directors or trustees, but an individual stockholder may institute a derivative suit whenever the officials refuse to sue, are the ones to be sued, or hold control of the corporation. In such actions, the corporation is the real party in interest, while the suing stockholder is only a nominal party. The Court found that Roberto had alleged in his complaint that he was suing derivatively on behalf of the corporation and all other stockholders similarly situated, and that he had exhausted intra-corporate remedies, which exhaustion was excused because the corporation was under the complete control of the very persons being sued. Derivative suits are governed by the Interim Rules, and under Section 5, Rule 1, the action must be commenced where the corporation's principal office is located. Since the principal office was in Makati, the filing there was correct.

On the second issue, the Court found no grave abuse of discretion in the appellate court's refusal to drop Hi-Yield, since the other alleged errors were mere errors of judgment, not proper subjects of a petition for certiorari.

On the third issue, the Court agreed that the prayer for annulment of the mortgage and foreclosure was merely incidental to the main action, which was the derivative suit to redress wrongs done to the corporation.

The Court also stressed the procedural point: a petition for certiorari under Rule 65 lies only when there is no appeal nor plain, speedy and adequate remedy in the ordinary course of law. Hi-Yield should have filed a petition for review on certiorari under Rule 45, and its belated resort to certiorari was an effort to substitute for a lost appeal.

Doctrine

A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is the real party in interest, and the suing stockholder is only a nominal party. Before a stockholder may sue, the following requisites must concur: first, the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; second, he has tried to exhaust intra-corporate remedies, that is, he has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and third, the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. The complaint must allege that the suit is brought derivatively on behalf of the corporation and all other stockholders similarly situated. Demand on the board is excused when the corporation is under the complete control of the person against whom the suit is filed, because demand would be futile. Venue for derivative suits is governed by Section 5, Rule 1 of the Interim Rules, which fixes it at the Regional Trial Court with jurisdiction over the corporation's principal office. Finally, a petition for certiorari corrects errors of jurisdiction, while a petition for review on certiorari corrects errors of judgment.

Disposition

The Supreme Court dismissed the petition and affirmed the decision and resolution of the Court of Appeals, with no pronouncement as to costs.

Remember This

The one line to memorize: a derivative suit is filed where the corporation's principal office is located, not where the property lies, because the corporation is the real party in interest. Examiners use this case to test the requisites of a derivative suit, the futility exception to the demand requirement, and the distinction between a Rule 65 petition for certiorari and a Rule 45 petition for review.