Manila Press, Inc. vs. Ben Gan

[SEC-AC CASE NO. 440. October 29, 1998.] MANILA PRESS, INC. , plaintiff-appellee , vs .BEN GAN , defendant-appellant . D E C I S I O N For resolution of the Commission is the instant Appeal filed by Ben Gan seeking the reversal of the Decision dated May 17, 1993 promulgated by the hearing officer below, on the ground that the same is contrary to the facts and the law. cdll The antecedent facts are as follows: MANILA PRESS, INC. (MPI) filed a complaint against BEN GAN, its former President and General manager, to require him to render a complete and accurate accounting of MPI's assets and liabilities from 1976 to 1986, to indemnify MPI for alleged unauthorized, illegal or prejudicial transactions entered into by him during his tenure as President in the amount of not less than ONE HUNDRED MILLION PESOS (P100,000,000.00) and attorney's fees of TWO MILLION PESOS (P2,000,000.00).The complaint prayed for a writ of preliminary attachment against all leviable assets of the defendant. In his answer to the complaint, BEN GAN admitted some allegations but specifically denied the material averments of the complaint. BEN GAN averred that MPI survived the devastating effects of the JOBO Bills, very high interest rates and bank penalties/surcharges in spite of the huge indebtedness and/or loans contracted by the former management; that ARCO PAPER MILL was not completely burned down and it was only the pulp mill section that was totally gutted by fire but was not included in the lease to MPI, and the paper main factory subject of the lease contract suffered only minimum to moderate damages which was purely rehabilitated in exchange for very low rental of the premises; that the ARCO project was presented and approved by the old board because it offered hope to MPI at that time. As compulsory counterclaim defendant prayed for the award of FIFTY MILLION PESOS (P50,000,000.00) in moral damages, TWO MILLION PESOS (P2,000,000.00) in attorney's fees and for the dismissal of the complaint for lack of legal and factual basis and also prayed for the investigation of the new board of directors and Elizabeth Gan Go for fraud. The hearing officer granted MPI's prayer for the issuance of a writ of preliminary attachment upon posting of a reduced bond of TWELVE MILLION PESOS (P12,000,000.00) by plaintiff corporation. Subsequently, the hearing officer proceeded with trial on the merits. On May 17, 1993, the hearing officer rendered the appealed decision, the dispositive portion of which reads as follows: "WHEREFORE, judgment is hereby rendered ordering the defendant to refund and indemnify the plaintiff in the amount of P74,603,124.46; to pay exemplary damages in the amount of P2,000,000.00; and attorney's fees in the amount of P500,000.00. NO COST." The aforesaid decision dated May 17, 1993 was appealed by defendant-appellant BEN GAN by filing his Notice of Appeal and Memorandum on Appeal with the Commission En Banc on June 25, 1993. In the Order of the Commission dated December 12, 1997, plaintiff-appellee was once again directed to file it Reply Memo within fifteen (15) days from receipt thereof. To date, plaintiff-appellee has not filed its Reply Memorandum. As such, plaintiff-appellee's right to file the said Reply Memorandum is deemed to have been waived. Defendant-Appellant presented the following Assignment of Errors: 1. The Hearing Officer gravely erred in relying on the sole testimony of Vincent Gan Go, the lone witness for the plaintiff corporation on matters reported by the SGV and others which are all hearsay evidence; 2. The Hearing Officer gravely erred in holding that the ARCO project was entered into by defendant without proper authorization of plaintiffs board of directors; 3. The Hearing Officer gravely erred in holding that defendant BEN GAN committed acts of embezzlement and mismanagement; 4. The Hearing Officer gravely erred in ordering defendant to indemnify plaintiff. cdll Evidence of both parties clearly established that defendant BEN GAN was the President and General Manager of MPI from 1982 to 1986; that MPI is only a paper converter for school and office supplies because it has no paper mill and cannot produce its own paper; that this is the reason only the old board of directors entered into a lease agreement from Mr. Arcadio A. Santos for ARCO PAPER MILLS; that the previous administration before BEN GAN was headed by his brother, the late GAN TSITUNG, the maternal grandfather of Mr. Vincent Gan Go; that Vincent Gan Go admitted that his grandfather had obtained loans from the bank; that BEN GAN inherited huge loans earlier contracted by the old management; that these loans ballooned and jumped suddenly because of the JOBO bills and the 48%-50% interests per annum thereon, compounded by bank penalties and surcharges; that most of MPI's corporate assets were mortgaged with CHINA BANK, PHILIPPINE BANK OF COMMUNICATIONS and METRO BANK; that MPI had to use the raw materials produced from ARCO PAPER MILL and then manufactured the finished products for school and office supplies; that because of lack of capital, defendant tried to collect the outstanding balance of the SOUTHERN EDUCATIONAL SUPPLY which belongs to MR. ROBERT GAN and also the DE ORO EDUCATIONAL SUPPLY which belongs to the mother of VINCENT GAN GO, ELIZABETH GAN GO, but they refused to pay; that BEN GAN cancelled their dealership because he discovered that they were not selling MPI's merchandise but they were being credited to commission, which is unfair to MPI; that BEN GAN also questioned the disposal of MPI's EDSA plant consisting of an area of 6,000 square meters at a very low price; and that BEN GAN likewise questioned the transfer of a piece of real estate at Nueva Street, Binondo, Manila belonging to MPI to the family of VINCENT GAN GO, ROBERT GAN, MARIO GAN, and ELIZABETH GAN GO. On the first assignment of error, the Commission finds it highly improper for the hearing officer to rely solely on the testimony of VINCENT GAN GO concerning the matters contained in documents prepared by SGV and Co.,and other bookkeepers. Section 30 of Article 130 of the Rules of Court explicitly states that the testimony of a witness should be confined only to facts of personal knowledge, thus: "SECTION 30. Testimony generally confined to personal knowledge; hearsay excluded; A witness can testify only to those facts which he knows of his own knowledge, that, which are derived from his own perception, except as otherwise provided in these rules." It must be emphasized that VINCENT GAN GO was never privy to these documents prepared by SGV and Co. and other bookkeepers, ergo, he cannot legally testify thereon. Jurisprudence is replete with rulings to the effect that if one testifies to facts which he learned from some third person not sworn as a witness to these facts, his testimony is inadmissible for being hearsay, thus: "Courts will not admit the testimony of a witness as to what he has heard other persons say about the facts in dispute, because it is hearsay evidence. The witness is not testifying to facts which he knows of his own personal knowledge. The person who gave him the information is not in court to testify under oath, and cannot be cross-examined by the adverse party." (6 Francisco, Revised Rules of Court, Supplement 1973-1981 pp. 72-73 citing the case of People vs. Sarmiento, G.R. No. L-26183, June 19, 1975) We agree with defendant-appellant BEN GAN's postulation that hearsay is not limited to oral testimony, a writing may be hearsay. As such, if a witness testifies on facts not from his own knowledge but in conformity with the data that had been furnished him by other persons, his testimony must be rejected as marked hearsay. (Aldecoa and Co. vs. Warner, Barnes and Co., G.R. No. 8853, March 22, 1915, 30 Phil. 153). Anent the second assignment of error, contrary to the findings of the hearing officer below, the evidence clearly shows that defendant-appellant BEN GAN was duly authorized by board resolutions when he entered into all the questioned contracts in behalf of MPI. prcd BEN GAN's other witness Ms. FLORENCE YIU, who worked with MPI from 1956 up to 1986 and later became a board member and treasurer of MPI in 1982, testified that all necessary expenses were approved by the board of directors and that the board approved to rent the ARCO PAPER MILL with defendant-appellant BEN GAN, as then President, having full power to decide how to operate the paper mill. It is noteworthy that plaintiff-appellee failed to rebut the aforesaid testimony of FLORENCE YIU as he was not able to present the other members of the old board to refute the alleged board approval of the lease contract for ARCO PAPER MILLS. As can be deduced from plaintiff-appellee's own Exhibit B and C, indeed the lease contract for ARCO PAPER MILLS was duly authorized by the old board of MPI, thus: a) Exhibit B minutes of the November 14, 1986 meeting of the old board which states that: "...BENJAMIN GAN objected to the motion of ROBERT GAN that it (LEASE) his personal account since there is a resolution." The other members of the old Board were never presented in court to deny the existence of the 1982 bond resolution on the ARCO project. b) Exhibit C minutes of the May 14, 1987 meeting of the old board which states that: "...They voted for no extension of lease contract with ARCO." (Emphasis Ours) Clearly, the existence of the prior board resolution approving the ARCO project was never denied by the old board, they just decided not to extend the lease contract with ARCO PAPER MILLS. We believe that the hearing officer below committed error in stating that the 1982 resolution approving the ARCO project was reversed by the board and holding that BEN GAN, then President, was solely liable for the said project. As correctly postulated by defendant-appellant BEN GAN, the board cannot reverse or repudiate something which has long been consummated and done and disclaim responsibility thereon. And that the contract pertaining to the ARCO project was executed in the name of MPI by BEN GAN armed with a board resolution and therefore binding upon the corporation and cannot be considered as the personal act and liability of its then president, BEN GAN. It is well-settled that: "The weight of modern authority, as well as the better reasoning, supports the general principle that a contract pertaining to the business of a corporation, when formerly executed in its name by its president, will, in the absence of proof to the contrary, be presumed to have been authorized by the corporation, and the presumption is not rebutted by mere failure of the record of the board of directors to show affirmatively that such authority had been given." (Omana Wool and Storage Co. vs. Chicago G.W.R.,97 Neb. 50, 149 N.W. 55. Ann Cas 1917 A 338) Assuming por arguendo that the ARCO project was not authorized, the same was impliedly ratified when MPI accepted benefits therefrom. Evidence clearly shows that MPI was supplied with SEVENTEEN MILLION PESOS (P17,000,000.00) worth of paper at cost from the ARCO project, enabling MPI to continue in business and production. Thus, "If the president takes a lease without authority, his act may be ratified, and it is impliedly ratified if the corporation takes possession. (Jacksonville, M.P. Railway and Navigation Co. vs. HOPPER 160 US 514, 40 L. Ed. 515, 16 Sup. Ct. 379).For example, the payment of the first month's rent will ordinarily amount to a ratification of the lease by the corporation." (Spitzer vs. Born, Inc. 194 App Div 739, 185 NY Supp 875; Fletcher Vol. 2 Cyclopedia Corporations p. 739). "So where the president of a company, the purpose of which was the buying and selling of real estate, was also acting as general manager, and sold real estate without the authority of the board of directors, acceptance of the deed and its record constitute a ratification of the act of its president even if unauthorized." (Murphy vs. Frank P. Miller 229 Mich 162, 200 NW 972; 2 Fletcher, Cyclopedia Corps. Sec. 596 p. 679). We therefore surmise that the hearing officer unjustly absolved plaintiff-appellee MPI from its obligation under the ARCO project after it has received benefits therefrom. Regarding the third assignment of error, we feel that the hearing officer erred in holding that defendant-appellant BEN GAN committed acts of embezzlement and mismanagement. Section 31 of the Corporation Code of the Philippines specifically provides as follows: "SECTION 31. Liability of directors, trustees or officers: Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons." It is clear from the aforequoted provision that directors shall be only be liable to the corporation for losses or injury resulting from their gross negligence or bad faith in directing the affairs of the corporation. According to established jurisprudence, the gross negligence or bad faith of a director cannot be presumed, the burden is upon the complaint to prove the alleged losses and to show that they were the consequence of the negligence and mismanagement of the director concerned. (13 Am Jur 1018, p. 970, citing United States vs. Stone Cliff Coal and Coke Co.,(D.C.) GF. Supp. 1, citing R.C.L.;Wallace vs. Lincoln Sav. Bank, 89 Tenn, 630, 15 S.W. 448, 24 Am St. Rep. 625). There is no shred of evidence presented by VINCENT GAN GO proving his allegation that the alleged losses of MPI were the proximate result of the alleged gross negligence or bad faith of defendant-appellant BEN GAN. In order to amplify his allegation on defendant-appellant BEN GAN's embezzlement and mismanagement of MPI, VINCENT GAN GO testified that MPI had about P100,000,000.00 in assets prior to 1979, and when defendant-appellant BEN GAN left its presidency in 1986, the total cash on hand of MPI was only P25,000.00. There is no evidence on record, however, that all the assets other than the P25,000 cash were gone. Asked what is the basis of his above testimony, VINCENT GAN GO replied that his testimony is based on the computation submitted by SGV and Co.,VINCENT GAN GO's testimony is therefore inadmissible for being hearsay. Again, it must be stressed that VINCENT GAN GO was never privy to the documents and computations prepared by SGV and Co..As such, VINCENT GAN GO cannot testify on the matters contained in these documents since the same are not of his personal knowledge. We heed to defendant-appellant BEN GAN's averment that VINCENT GAN GO is not competent to prove the alleged losses suffered by MPI were the direct and proximate result of the alleged acts of mismanagement of defendant-appellant as he was barely 16 years of age, was not even a stockholder during the alleged commission of defendant-appellant's acts of mismanagement. Regarding the ARCO project, the evidence presented indubitably shows that the same was a corporate act and therefore binding upon the corporation. Courts normally do not interfere with the board of directors' business judgment in running the affairs of the corporation. Absent any satisfactory proof of gross negligence, malice or bad faith, the directors or officers of a corporation are not to be held liable for losses resulting to the corporation from mere errors of business judgment. Plaintiff simply failed to prove the gross negligence and bad faith of defendant-appellant in dealing with the ARCO project. It is improper for the hearing officer to infer that defendant-appellant BEN GAN misappropriated and embezzled corporate funds just because he failed to render an accounting after demand. prcd Embezzlement and misappropriation must be proven by plaintiff-appellee, the same cannot just be inferred. On the fourth assignment of error, it is obvious that the hearing officer committed error in ordering defendant-appellant to indemnify plaintiff-appellee. Obviously, there is no basis for the award of damages in favor of plaintiff-appellee. Viewed in the light of the foregoing, the assailed Decision dated May 17, 1993 of the hearing officer in SEC Case No. 3856 is REVERSED AND SET ASIDE. Accordingly, SEC Case No. 3856 should be, as it is hereby DISMISSED for lack of merit. SO ORDERED. (No participation) (SGD.) PERFECTO R. YASAY, JR. Chairman (SGD.) FE ELOISA C. GLORIA (SGD.) EDIJER A. MARTINEZ Associate Commissioner Associate Commissioner (On leave) (SGD.) ROSALINDA U. CASIGURAN (SGD.) DANILO L. CONCEPCION Associate Commissioner Associate Commissioner (Acting Associate Commissioner) (SGD.) EUGENIO E. REYES Associate Commissioner