VILLAMOR v. UMALE, in substitution of HERNANDO F. BALMORES (G.R. No.

172843, September 24,

2014)

Facts:
 MC Home Depot occupied a prime property (Rockland Area) in Pasig. The property was part of the area
owned by Mid-Pasig Development Corporation (Mid-Pasig).
 Pasig Printing Corporation (PPC) obtained an option to lease portions of Mid-Pasig's property, including the
Rockland Area.
 PPC's BOD issued a resolution waiving all its rights, interests, and participation in the option to lease contract
in favor of the law firm of Atty. Villamor, Jr.
 PPC received no consideration for this waiver in favor of Villamor's law firm.
 PPC, represented by Villamor, entered into a memorandum of agreement (MOA) with MC Home Depot.
 Under the MOA, MC Home Depot would continue to occupy the area as PPC's sublessee for 4 years,
renewable for another 4 yearr, at a monthly rental of P4.5M plus goodwill of P18M
 In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing rental
payments for one year and the goodwill money.
 The checks were given to Villamor who did not turn these or the equivalent amount over to PPC, upon
encashment.
 Hernando Balmores, a stockholder and director of PPC, wrote a letter addressed to PPC’s directors, informing
them that Villamor should be made to deliver to PPC and account for MC Home Depot's checks for their
equivalent value.
 Due to the alleged inaction of the directors, Balmores filed with RTC an intra-corporate controversy
complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate Controversies (Interim Rules)
against petitioners for their alleged devices or schemes amounting to fraud or misrepresentation "detrimental
to the interest of the corporation and its stockholders."
 Balmores alleged in his complaint that because of petitioners' actions, PPC's assets were "not only in
imminent danger, but have actually been dissipated, lost, wasted and destroyed."
 Balmores prayed that a receiver be appointed from his list of nominees;
o for petitioners' prohibition from "selling, encumbering, transferring or disposing in any manner any of
PPC's properties, including the MC Home Depot checks and/or their proceeds;
o accounting and remittance to PPC of the MC Home Depot checks or their proceeds and for the
annulment of the board's resolution waiving PPC's rights in favor of Villamor's law firm.
 RTC: DENIED THE PETITION OF BALMORES
o -PPC's entitlement to checks was doubtful.
o -The resolution issued by PPC's BOD, waiving its rights to the option to lease contract in favor of
Villamor's mlaw firm, must be accorded prima facie validity.
o -the board's failure to recover the disputed amounts was not an indication of mismanagement resulting
in the dissipation of assets.

 CA: REVERSED THE DECISION OF RTC.

o -ruled that the case filed by Balmores with the trial court was a derivative suit because there were
allegations of fraud or ultra vires acts by PPC's directors.

Issue:
Whether or not Balmores' action is a derivative suit.

Held:

Balmores' action in the RTC is NOT A DERIVATIVE SUIT.

A derivative suit is an action filed by stockholders to enforce a corporate action.

It is an exception to the general rule that the corporation’s power to sue is exercised only by the board of directors or
trustees.
Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the
corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the
corporation. It is allowed when the "directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of
judgment."

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party.

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision
of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make
corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their
fiduciary duties. In effect, the suit is an action for specific performance of an obligation, owed by the corporation to
the stockholders, to assist its rights of action when the corporation has been put in default by the wrongful refusal of
the directors or management to adopt suitable measures for its protection.

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules) provides the five
(5) requisites for filing derivative suits:
SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation
or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at
the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, toexhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of
Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be "in the name of [the]
corporation or association. . . ." This requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the
corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on
behalf of the corporation and all other shareholders similarly situated who wish to join [him]."65 This principle on
derivative suits has been repeated in, among other cases, Tam Wing Tak v. Hon. Makasiar and De Guia and in Chua v.
Court of Appeals, which was cited in Hi-Yield Realty, Incorporated v. Court of Appeals.

Moreover, it is important that the corporation be made a party to the case.

This court explained in Asset Privatization Trust v. Court of Appeals why it is a condition sine qua non that the
corporation be impleaded as party in derivative suits. Thus:
Not only is the corporation an indispensable party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation inorder that
the corporation may get the benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the corporation must be joined as party because it is its
cause of action that is being litigated and because judgment must be a res judicata against it.

In the same case, this court enumerated the reasons for disallowing a direct individual suit.
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the
corporate property; that both of these are in the corporation itself for the benefit of the stockholders." Inother words, to
allow shareholders to sue separately would conflict with the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of
Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for themselves for that would result
in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something which cannot be legally donein view of Section
16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the damages
recoverable by the corporation for the same act.

While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations is based on
equity, the above legal requisites for its filing must necessarily be complied with for its institution.

Balmores’ action in the trial court failed to satisfy all the requisites of a derivative suit.

Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried to communicate
with PPC’s directors about the checks in Villamor’s possession before he filed an action with the trial court,
respondent Balmores was not able to show that this comprised all the remedies available under the articles of
incorporation, bylaws, laws, or rules governing PPC.

An allegation that appraisal rights were not available for the acts complained of is another requisite for filing
derivative suits under Rule 8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal right:

SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of
any stockholders or class of shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in this Code; and
3. In case of merger or consolidation.

Section 82 of the Corporation Code provides that the stockholder may exercise the right if he or she voted against the
proposed corporate action and if he made a written demand for payment on the corporation within thirty (30) days
after the date of voting.

Respondent Balmores complained about the alleged inaction of PPC’s directors in his letter informing them that
Villamor should be made to deliver to PPC and account for MC Home Depot’s checks or their equivalent value. He
alleged that these are devices or schemes amounting to fraud or misrepresentation detrimental to the corporation’s and
the stockholders’ interests. He also alleged that the directors’ inaction placed PPC’s assets in imminent and/or actual
dissipation, loss, wastage, and destruction.

Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors already comprised all the
available remedies that he could have exhausted and (b) the corporation was under full control of petitioners that
exhaustion of remedies became impossible or futile, respondent Balmores failed to allege that appraisal rights were
not available for the acts complained of here.

Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on behalf of the
corporation.
The non-derivative character of respondent Balmores’ action may also be gleaned from his allegations in the trial
court complaint. In the complaint, he described the nature of his action as an action under Rule 1, Section 1(a)(1) of
the Interim Rules, and not an action under Rule 1, Section 1(a)(4) of the Interim Rules, which refers to derivative
suits.

Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers, amounting to fraud or
misrepresentation, which may be detrimental to the interest of the stockholders. This is different from a derivative suit.
While devices and schemes of the board of directors, business associates, or officers amounting to fraud under Rule 1,
Section 1(a)(1) of the Interim Rules are causes of a derivative suit, it is not always the case that derivative suits are
limited to such causes or that they are necessarily derivative suits.

Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers may also be individual
suits or class suits.
Individual suits are filed when the cause of action belongs to the individual stockholder personally, and not to the
stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may be filed to protect the stockholders in the group.

Balmores did not bring the action for the benefit of the corporation. Instead, he was alleging that the acts of PPC’s
directors, specifically the waiver of rights in favor of Villamor’s law firm and their failure to take back the MC Home
Depot checks from Villamor, were detrimental to his individual interest as a stockholder. In filing an action, therefore,
his intention was to vindicate his individual interest and not PPC’s or a group of stockholders’.
The essence of a derivative suit is that it must be filed on behalf of the corporation. This is because the cause of action
belongs, primarily, to the corporation. The stockholder who sues on behalf of a corporation is merely a nominal party.

Balmores’ intent to file an individual suit removes it from the coverage of derivative suits.