RAMON GIL ABAD AND CONSUELO R. ABAD, PETITIONERS, VS. COURT OF FIRST INSTANCE OF PANGASINAN, BRANCH VIII, PRESIDED OVER BY HONORABLE JUDGE MODESTO S. BASCOS, AND DIMENSIONAL CON…

Abad versus Court of First Instance of Pangasinan

The Case

This is a petition for review on a pure question of law, brought by spouses Ramon Gil Abad and Consuelo R. Abad against the Court of First Instance of Pangasinan, Branch Eight, presided over by Judge Modesto S. Bascos, and against Dimensional Construction, Trade and Development Corporation, which the decision calls DIMCONTRAD. The spouses had invested money with DIMCONTRAD under promissory notes that guaranteed a fixed share in profits and the return of the principal on maturity. When the corporation failed to pay, they sued for sums of money and damages. The trial court dismissed both complaints, holding that the Securities and Exchange Commission, not the regular court, had exclusive original jurisdiction because the complaints spoke of fraud. The case matters because it fixes the dividing line between an ordinary money claim and a matter committed to the Securities and Exchange Commission under the fraud clause of the securities law, and because it teaches that the averments of the complaint, not the conclusions of the pleader, determine the nature of the action and the court that may hear it.

Procedural History

Ramon filed a complaint for sum of money and damages with the Court of First Instance of Pangasinan, docketed as Civil Case Number D-5216 and raffled to Branch Eight at Dagupan City. Consuelo later filed her own complaint for sum of money and damages with preliminary attachment, docketed as Civil Case Number D-5408, in the same court. DIMCONTRAD moved to dismiss both cases for lack of jurisdiction, invoking the Securities and Exchange Commission. The trial court granted the motions in two orders, one dated 25 May 1981 in Consuelo's case and one dated 27 May 1981 in Ramon's case, both on the ground that the allegations of fraud placed the matter within the jurisdiction of the Securities and Exchange Commission. The spouses moved for reconsideration, which the trial court denied in its order of 12 October 1981. The spouses then filed the present petition with the Supreme Court on 23 December 1981. The Supreme Court gave due course to the petition, treated the comment as the answer, required memoranda from the parties, and required the Securities and Exchange Commission itself to act as amicus curiae. The Commission filed its memorandum on 9 April 1983, arguing that it had exclusive and original jurisdiction.

Facts

DIMCONTRAD is a domestic corporation with principal office in Baguio City. In response to a call for investors, Ramon invested various sums with it on different dates, the first being 21,000 pesos on 15 December 1979, followed by smaller amounts in January, March and May 1980. Each investment had a term of six months. The investor was guaranteed a share in the profits at the rate equal to five percent of the invested amount, payable monthly, and on maturity the corporation was to return the amount invested plus the share in the last month's profit. For every investment, DIMCONTRAD delivered an official receipt, an instruction slip and a promissory note. Consuelo made her own investments on different dates in 1980, totalling 17,000 pesos, under the same terms and conditions, and received the same documents.

DIMCONTRAD paid some monthly shares in profit but then stopped. When Ramon's investments matured, he tried to collect the principal and the unpaid shares, but the corporation prevailed upon him to extend the maturity of his largest investment to 5 July 1980. When he returned on that date, the corporation refused to pay. It also refused to return the sums invested in March and May. Ramon then tried to collect all his investments, totalling 24,000 pesos, together with unpaid shares in profit amounting to 2,850 pesos, and was again refused. Consuelo likewise demanded the return of her matured investments amounting to 17,200 pesos, together with guaranteed shares in profit amounting to 2,975 pesos, and the corporation failed and refused.

Ramon sued on 4 September 1980, and Consuelo sued on 7 January 1981. Both complaints alleged the investments, the issuance of the documents, the failure to pay the guaranteed profits, and the refusal to return the principal on maturity. Ramon's complaint added claims for moral and exemplary damages and attorney's fees, and alleged that the corporation employed deception and unfair business practices. Consuelo's complaint, in support of her application for preliminary attachment, alleged that the corporation had closed its branch offices and abandoned its business shortly after her first investment matured, that its officers could no longer be located, and that other investors had unpaid matured claims. DIMCONTRAD moved to dismiss both cases, insisting that the Securities and Exchange Commission had jurisdiction.

Issues

• Whether or not the trial court had jurisdiction over Civil Cases Numbers D-5216 and D-5408, or whether exclusive original jurisdiction belonged to the Securities and Exchange Commission under the fraud clause of the securities law.
• Whether or not the allegations of fraud in the complaints were sufficient to bring the controversy within the jurisdiction of the Securities and Exchange Commission.

Applicable Provisions

Section 5 of Presidential Decree Number 902-A, as amended, provides:

SECTION 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) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission. (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) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.

This is the very provision on which the trial court and the Commission rested their claim of jurisdiction, and the Court had to decide whether the complaints actually fell within it.

Section 5, Rule 8 of the Rules of Court provides:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity.

The Court used this rule to test whether the complaints stated fraud with the particularity the law demands, or merely concluded that fraud existed.

Ruling

On the first issue, the Court ruled in favor of the spouses and held that the trial court had jurisdiction. The actions were simple money claims arising from promissory notes that had matured, not matters committed to the Securities and Exchange Commission. The Court noted that this was the second time it had faced the same question involving investments of the same nature in the same corporation, referring to its earlier ruling in Bañez versus Dimensional Construction Trade and Development Corporation, where it upheld the jurisdiction of the regular court over similar promissory notes. It quoted that ruling with approval, stressing that the sums received were in the nature of investments to be returned on maturity, that they did not constitute payment of subscription of shares, and that the investors therefore never became members of the corporation. The Court added that no intra-corporate dispute was involved because the spouses were neither actual nor prospective shareholders; they were merely creditors.

On the second issue, the Court held that the allegations of fraud were not sufficient. It carefully scrutinized the complaints and found nothing to sustain the conclusion that they involved devices or schemes amounting to fraud and misrepresentation. The spouses did not even allege that the call for investments, the instruction slips and the promissory notes were part of a scheme to defraud the investing public. The paragraphs relied upon were mere conclusions of law, made to support the claims for damages and attorney's fees and to lay the basis for a writ of preliminary attachment. The Court laid down the governing principle in these words:

It is axiomatic that the averments of the complaint determine the nature of the action, and consequently, the jurisdiction of the courts.

It then applied the particularity requirement of Section 5, Rule 8 of the Rules of Court, holding that while there were allegations of fraud, they were not particular enough to bring the controversy within the Commission's jurisdiction, because they were not statements of ultimate facts but mere conclusions of law. Shorn of unnecessary details, the actions were simple money claims.

Doctrine

First, the nature of an action and the jurisdiction of the court are determined by the averments of the complaint, meaning the ultimate facts alleged, and not by the conclusions of law the pleader draws from them. Second, for the Securities and Exchange Commission to take cognizance of a case under the fraud clause of Section 5 of Presidential Decree Number 902-A, the complaint must state with particularity the circumstances constituting the device or scheme amounting to fraud and misrepresentation, as Section 5, Rule 8 of the Rules of Court requires; general allegations of deception, unfair business practices or fraudulent inducement, offered only to support damages or attachment, do not suffice. Third, an investor who places money with a corporation under a promissory note that guarantees a fixed return and the repayment of principal on maturity is a creditor, not a stockholder, so a suit to collect on that note is not an intra-corporate controversy and belongs to the regular courts.

Disposition

The Supreme Court granted the petition, set aside the orders of the trial court dismissing the two civil cases and denying reconsideration, and ordered the respondent court to take cognizance of, hear and decide Civil Cases Numbers D-5216 and D-5408.

Remember This

Memorize the line that the averments of the complaint determine the nature of the action and consequently the jurisdiction of the courts, and remember that a mere creditor of a corporation is not a stockholder. Examiners use this case to test jurisdiction over money claims against corporations, the particularity requirement for pleading fraud, and the scope of the Securities and Exchange Commission's fraud clause.