Fernando, Jr. v. Torres
CLARIFICATIONFacts
1. The Antecedents: Roberto S. Torres (Torres) was a substantial stockholder in Organelles Mobile Solutions, Inc. (OMSI), a company he co-founded with Hermogenes Fernando, Jr. (Fernando). Despite his investment, Torres was marginalized from corporate operations, denied dividends, and excluded from board meetings. Suspecting mismanagement, Torres demanded an inspection of OMSI's books. An initial audit by a Certified Public Accountant (CPA) revealed that OMSI's revenues were being understated and its transactions were being recorded under Organelles Holding and Management Co., Inc. (OHMCI), another entity controlled by Fernando. Fernando refused the formal demand for inspection, leading Torres to file a complaint for inspection of corporate books and records. 2. Procedural History: During the trial, the Regional Trial Court (RTC) created a Management Committee which discovered that OMSI had no operative Board of Directors, failed to keep its own books in violation of the Corporation Code, and that Fernando was diverting OMSI's assets and clients to OHMCI. Based on these findings, Torres filed an Amended and Supplemental Complaint impleading OHMCI and seeking PHP 12 million in damages. The RTC admitted the amended complaint and subsequently declared Fernando, OMSI, and OHMCI in default for failing to answer. The RTC pierced the corporate veil, ordered the inspection, and held the defendants jointly and severally liable for the fair market value of Torres's investment. On appeal, the Court of Appeals (CA) affirmed the piercing of the veil but modified the award, granting PHP 950,000.00 as the value of shares (based on appraisal rights) and PHP 11,050,000.00 as temperate damages. 3. The Petition: Petitioners Fernando, OMSI, and OHMCI filed two consolidated petitions for review on certiorari under Rule 45. They argued that the reopening of the case was a prohibited motion under the Interim Rules of Procedure for Intra-Corporate Controversies, that the default order was improper as OHMCI was never served summons, and that the death of Torres during the pendency of the appeal extinguished the action as the right of inspection is personal. They further contended that the award based on appraisal rights was erroneous due to non-compliance with statutory procedures and the lack of unrestricted retained earnings.
Issue(s)
Whether the RTC properly admitted the Amended and Supplemental Complaint and reopened the proceedings. Whether the non-payment of additional docket fees divested the RTC of jurisdiction. Whether the piercing of the corporate veil and the subsequent order of default were valid. Whether the action for inspection and damages survives the death of the respondent stockholder. Whether the award of the fair value of shares based on appraisal rights was legally tenable. Whether the award of temperate damages was justified. Whether the Temporary Restraining Order (TRO) against the execution sale should be lifted.
Ruling
The Petitions are DENIED. The Decision of the Court of Appeals is AFFIRMED with MODIFICATION. The award of PHP 950,000.00 representing the valuation of shares is DELETED. The total monetary award shall earn legal interest of 6% per annum from the finality of the Decision. The Temporary Restraining Order dated April 26, 2023, is LIFTED.
Ratio Decidendi
On Issue 1: The RTC properly granted the admission of the Amended and Supplemental Complaint. Under Rule 10 of the Rules of Court, which applies suppletorily to the Interim Rules, parties are allowed to supplement pleadings based on events occurring after the original complaint. The findings of the Management Committee regarding systemic fraud and asset diversion made the original prayer for mere inspection futile, necessitating the additional causes of action to serve the interest of substantial justice. On Issue 2: The non-payment of additional docket fees did not divest the court of jurisdiction. Following the liberal doctrine in Ramones v. Spouses Guimoc, underpayment due to the clerk of court's assessment does not result in dismissal absent an intent to defraud the government. The deficiency shall instead constitute a lien on the judgment, and the respondent was correctly ordered by the CA to pay the assessed deficiency. On Issue 3: The piercing of the corporate veil was justified by the factual findings of the Management Committee, which showed Fernando used OHMCI as a conduit to defraud Torres and evade OMSI's obligations. Because the entities were treated as a single entity due to the piercing, the lack of separate summons on OHMCI is not fatal. Furthermore, petitioners are estopped from challenging the default order because they failed to avail of the proper remedy under Rule 9, Section 3(b) to move to set aside the order in the trial court. On Issue 4: The action survives the death of Torres. Applying Gokongwei, Jr. v. SEC, the right of inspection is an incident of ownership of corporate property and is thus a property right. Actions primarily affecting property rights survive the death of a party. The failure of counsel to notify the court of the death does not render the proceedings void; the judgment simply binds the heirs as successors-in-interest. On Issue 5: The CA erred in awarding the value of shares based on appraisal rights. Appraisal rights under Section 81 of the old Corporation Code require specific triggers such as mergers or amendments to the articles of incorporation, none of which were present here. Additionally, respondent failed to prove the existence of unrestricted retained earnings, which is a mandatory legal requirement for a corporation to pay a dissenting stockholder the fair value of their shares. On Issue 6: The award of temperate damages is affirmed. Under Article 2224 of the Civil Code, temperate damages are proper when pecuniary loss is certain but the exact amount cannot be proven with certainty. The massive asset disparity between OMSI and OHMCI (over PHP 18 million) caused by Fernando's fraudulent diversion provided a reasonable basis for the court to approximate the loss at PHP 11,050,000.00. On Issue 7: The TRO must be lifted because Filcontrading Corp., the winning bidder at the auction sale, is an indispensable party that was not impleaded by the petitioners. A writ of injunction cannot bind a non-party who has not had their day in court. Since the redemption period had already lapsed and the sale was consummated, there is no longer a legal basis to restrain the transfer of possession.
Main Doctrine
The right of inspection is a property right that survives the death of a stockholder because it is an incident of ownership of corporate assets. While a corporation's separate juridical personality is generally respected, it may be pierced when used to defraud a stockholder or evade obligations, effectively treating the individual and the involved corporations as a single entity for liability. However, the award of the fair value of shares via appraisal rights is strictly contingent upon statutory triggers and the existence of unrestricted retained earnings, which cannot be substituted by an award for damages unless the specific legal criteria for appraisal are proven.