CATALINA R. REYES, PETITIONER, VS. HON. BIENVENIDO A. TAN, AS JUDGE OF THE COURT OF FIRST INSTANCE OF MANILA, BRANCH XIII, AND FRANCISCA R. JUSTINIANI, RESPONDENTS.

This is a petition for certiorari to review and set aside an order
of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, in Civil Case No. 42375, entitled “Francisca R. Justiniani vs.
Wadhumal Dalamal, et al.”, appointing a receiver of the corporation
Roxas-Kalaw Textile Mills, Inc. In said action, plaintiff Justiniani
asks the court to order the directors of the corporation, jointly and
severally, to repair the damage caused to the corporation, of which all
the plaintiff and defendants are members. The action was filed about
January of 1960 and the order for the appointment of the receiver
issued on February 15, 1960, while the designation of the receiver was
made in an order of the court dated April 30, 1960.

In the complaint in said Civil Case No. 42375, it is alleged that
the corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June
5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M.
Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf of the
following primary principals with the following shareholdings: Adelia
K. Roxas, 1200 Class A shares; I, Sherman, 900 Class A shares; Robert
W. Born, 504 Class A shares and Morris Wilson, 450 Class A shares; that
the plaintiff holds both Class A and Class B shares and the number and
value thereof are as follows: Class A-50 shares, Class B-1,250 shares;
that on May 8, 1957, the Board of Directors approved a resolution
designating one Dayaram as co-manager with the specific understanding
that he was to act as defendant Wadhumal Dalama’s designee, Morris
Wilson was likewise designated as co-manager with responsibilities for
the management of the factory only, that an office in New York was
opened for the purpose of supervising purchases, which purchases must
have the unanimous agreement of Cesar K. Roxas, New York resident
member of the board of directors, Robert Born and Wadhumal Dalamal or
their respective representatives; that several purchases aggregating
$289,678.86 were made in New York for raw materials such as greige
cloth, rayon and grey goods for the textile mill and shipped to the
Philippines, which shipment were found out to consist not of raw
materials but already finished products, such as, West Point khaki,
rayon suiting materials dyed in the piece, finished rayon tafetta in
cubes, cotton eyelets, etc., for which reasons the Central Bank of the
Philippines stopped all dollar allocations for raw materials for the
corporation which necessarily led to the paralization of the operation
of the textile mill and its business; that the supplier of the
aforesaid finished goods was the United Commercial Company of New York
in which defendant Dalamal had interests and the letter of credit for
said goods were guaranteed by the Indian Commercial Company and the
Indian Traders in which firms defendant Dalamal likewise held
interests; that the resale of the finished goods was the business of
the Indian Commercial Company of Manila, which company could not obtain
dollar allocations for importations of finished goods under the Central
Bank regulations; that plaintiff and some members of the board of
directors urged defendants to proceed against Dalamal, exposing his
offense to the Central Bank, and to initiate suit against Dalamal for
his fraud against the corporation; that defendants refused to proceed
against Dalamal and instead continued to deal with the Indian
Commercial Company to the damage and prejudice of the corporation. The
prayer asks for the appointment of a receiver and a judgment making
defendants jointly and severally liable for the damages.

After a denial of a motion to dismiss and the filing of an answer
alleging that the complaint states no cause of action, the motion for
the appointment of a receiver was set for hearing and subsequently the
court entered the order for the appointment of a receiver. The court
found and held:

“The second ground of the defendant’s motion to
dismiss and/or deny the petition is the alleged want of a cause of
action of the plaintiff’s complaint. Philippine jurisprudence is
complete with authorities upholding the principle that this ground for
dismissal must appear in the face of the complaint itself; and that to
determine the sufficiency of the cause of action, only the facts
alleged in the complaint and no other, should be considered; in fine,
the test of sufficiency of cause of action is whether or not, admitting
the facts alleged in the complaint, the Court could render a valid
judgment upon the same in accordance with the prayer of the petition
(e. g, Paminsan vs. Costales, 28 Phil. 587, 589). The
complaint in the instant case abounds with arguments establishing and
supporting plaintiff’s cause of action for and in behalf of the
Roxas-Kalaw Textile Mills, Inc. against all the defendants (Sec. e. g.
paragraphs 4, 5, 6 and 7 of the Complaint). Taking these paragraphs of
the complaint in context, it is clear that the plaintiff has
sufficiently averted facts constituting a cause or basis for a
derivative suit for injuries to the corporation, as by negligence,
mismanagement or fraud of its directors, are normally dealt with as
wrong to the whole group of share holders in their corporate capacity,
to be redressed in a suit by or on behalf of the corporation.”

“Evident
from the defendants’ motion to dismiss and/or to deny the petition for
receivership is their complete failure to come up with a valid and
substantial defense against or denial of the complaint’s allegations of
mismanagement, if not the actual commission of ultra vires and illegal
acts. Invariably the props of defendants’ motion consist of the
unconvincing countercharges of the plaintiffs non-observance of the
technicalities of our procedural law and disregard of technical and
evidently futile intracorporate remedies to redress the violations
charged against the defendants. It is clear that the controlling
majority did nothing for two years to protect the interests of the
corporation, (see pars. 5-7, complaint.)

“The defendants
themselves having admitted in open court during the oral discussion of
their motion to dismiss and the plaintiff’s motion for receivership
that the majority stockholders will under any condition entertain any
suggestion of the minority shareholders, the appointment of an
independent third party in the management of the corporation becomes
imperative for the survival of the company.” (Order dated Feb. 15,
1960).

On April 30, 1960, the court issued another order which reads as follows:

“After this incident wherein it was clearly shown
that the minority stockholders, represented by the plaintiff, have no
recourse whatsoever before the majority stockholders of the company,
and after it has been shown that the majority has violated the law by
importing into the Philippines finished goods instead of raw materials
as stipulated in their license, and since these acts are prejudicial to
the company because it might result in the cancellation of their
license, the Court is of the opinion and so holds that the appointment
of a receiver is absolutely necessary for the protection not only of
the rights of the minority but also those of the majority stockholders
of the company.”

In the first assignment of error, petitioner claims that respondent
Justiniani neither alleged nor proved the existence of an emergency
requiring the immediate appointment of a receiver of the Roxas-Kalaw
Textile Mill, Inc.; that the alleged fraudulent transaction took place
more than two years before the application for receivership, and so was
the refusal of the directors to sue or prosecute Dalamal. This
contention is not well founded. At the hearing of the petition for the
appointment of a receiver held on January 30, 1960, various records of
shipments of finished textile goods on dollar allocations for raw
materials were exhibited. Publicity had also been given to the
importations of textiles by the corporation, in place of cotton raw
materials. The record shows the list of the various documents proving
the purchase of letters of credit for textiles. These textiles were
denied importation and had to be re-exported. The fact of the
importation of finished textiles on dollar allocations for raw
materials in violation of Central Bank regulations was, therefore,
conclusively shown.

It is also not denied by petitioner that the allocation of dollars
to the corporation for the importation of raw materials was suspended.
In the eyes of the court below, as well as in our own, the importation
of textiles instead of raw materials, as well as the failure of the
Board of Directors to take action against those directly responsible
for the misuse of dollar allocations constitute fraud, or consent
thereto on the part of the directors. Therefore, a breach of trust was
committed which justified the derivative suit by a minority stockholder
on behalf of the corporation.

“It is well settled in this jurisdiction that where
corporate directors are guilty of a breach of trust—not of mere error
of judgment or abuse of discretion—and intracorporate remedy is futile
or useless, a stockholder may institute a suit in behalf of himself and
ether stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon the corporation
and indirectly upon the stockholders. An illustration of a suit of this
kind is found in the case of Pascual vs. Del Saz Orozco (19
Phil., 82), decided by this court as early as 1911. In that case, the
Banco Español-Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an employee of the bank, which
losses, it was contended, could have been avoided if the president and
directors had been more vigilant in the administration of the affairs
of the bank. The stockholders constituting the minority brought a suit
in behalf of the bank against the directors to recover damages, and
this over the objection of the majority of the stockholders and the
directors. This court held that the suit could properly be maintained.”
(Angeles vs. Santos 64 Phil., 697).

The claim that respondent Justiniani did not take steps to remedy
the illegal importation for a period of two years is also without
merit. During that period of time respondent had the right to assume
and expect that the directors would remedy the anomalous situation of
the corporation brought about by their own wrong doing. Only after such
period of time had elapsed could respondent conclude that the directors
were remiss in their duty to protect the corporation property and
business.

Counsel for petitioner claims that respondent Justiniani was
treasurer of the corporation for sometime and had control of funds and
this notwithstanding, she had not taken the steps to remedy the
situation. In answer we state that the fraud consisted in importing
finished textile instead of raw cotton for the textile mill; the fraud,
therefore, was committed by the manager of the business and was
consented to by the directors, evidently beyond reach of respondent.

The directors permitted the fraudulent transaction to go unpunished
and nothing appears to have been done to remove the erring purchasing
managers. In a way the appointment of a receiver may have been thought
of by the court below so that the dollar allocation for raw material
may be revived and the textile mill placed on an operating basis. It is
possible that if a receiver in which the Central Bank may have
confidence is appointed, the dollar allocation for raw material may be
restored. Claim is made that if a receiver is appointed, the Philippine
National Bank to which the corporation owes considerable sums of money
might be led to foreclose the mortgage. Precisely the appointment of a
receiver in whom the bank may have had confidence might rehabilitate
the business and bring a restoration of the dollar allocation much
needed for raw material and an improvement in the business and assets
of the corporation, thus insuring the collection of the bank’s loan.

Considering the above circumstances we are led to agree with the
judge below that the appointment of a receiver was not only expedient
but also necessary to restore the faith and confidence of the Central
Bank authorities in the administration of the affairs of the
corporation, thus ultimately leading to a restoration of the dollar
allocation so essential to the operation of the textile mills. The
first assignment of error is, therefore, overruled.

In the second assignment of error, petitioner claims that the
management has been changed and the new management has not been
afforded a chance to show what it can do. This ground of the petition
was not mentioned or raised as a ground of defense or objection to the
appointment of a receiver in the court below. It is only raised for the
first time before Us in the petition for certiorari. The principle has
long ago been enunciated by Us that an appellate court may not consider
any ground of objection that was not raised in the court below. (Tan
Machan vs. Trinidad, 3 Phil. 684; Ramiro vs. Graño, 54 Phil. 744; Vda. de Villaruel, et al. vs. Manila Motor Co., Inc., et al., 104 Phil., 926; 56 Off. Gaz. (11) 3184; Collector of Internal Revenue vs. Estate of F. P. Buan, et al., G. R. Nos. L-11438-39, and L-11542-46, July 31, 1958; S. V. S. Pictures, Inc., et al. vs. The Court of Appeals, et al., 106 Phil., 897; Vda. de Caina vs. Hon. Reyes, et al., 108 Phil., 513; 58 Off. Gaz., (2) 4745.

The supposed new management alleged as a ground for the reversal of
the order of the court below appointing a receiver, is not in itself a
ground of objection to the appointment of a receiver. The parties found
to be guilty of the fraud, as a cause of which receivership proceedings
were instituted, were the Board of Directors, which took no action to
stop the anomalies being perpetrated by the management. But it appears
that the management must have acted directly under orders of the Board
of Directors. The appointment of a new management, therefore, would not
remedy the anomalous situation in which the corporation is found,
because such situation was not due to the management alone but
principally because of direction of the Board of Directors.

The second ground for the petition is, therefore, also without merit.

Wherefore, the court finds that the court below did not commit an
abuse of discretion in appointing a receiver for the corporation and
the petition to set aside the order for the appointment of a receiver
should be, as it is hereby, dismissed. With costs against the
petitioner.

Bengzon, C. J., Padilla, Reyes, J. B. L., Paredes, and De Leon, JJ., concur.