Lorenzo A. Sales vs. Arturo A. Alafriz

[SEC-AC NOS. 381 & 382. December 7, 1993.] LORENZO A. SALES , petitioner-appellee , vs . ARTURO A. ALAFRIZ, ET AL. , respondents-appellants . D E C I S I O N This is an appeal from the decision rendered in SEC Case No. 03534 dated March 20, 1992 declaring as null and void the two resolutions adopted on September 30, 1988 by the stockholders and directors of the Realty Sales Enterprise, Inc. (RSEI for brevity) for being violative of Sections 32 and 33 of the Corporation Code. SEC Case No. 03534 was a petition instituted by Lorenzo A. Sales, a stockholder, director, officer of RSEI, for the nullification of the two above-mentioned resolutions on the ground that they constituted ultra vires acts of the corporation. Named respondents in the suit were Arturo Alafriz, Richard Baldwin, Nathalie Baldwin, Macondray Farms, Inc. (Macondray for brevity) Delfin A. Manuel, Jr. and RSEI itself. Alafriz and the two Baldwins are stockholders and directors of RSEI. Macondray is also a stockholder of RSEI and Manuel, Jr. was its proxy at the September 30, 1988 meeting of stockholders of the corporation. The facts of this case as established during the hearing are as follows: On May 26, 1975 Macondray sold to RSEI a piece of real estate located at Las Pias, Metro Manila which the parties herein referred to as the Las Pias property. The terms of the sale were the following: a) P10,000.00 as down payment; b) P1,240,000.00 payable within two years, secured by a first mortgage on the property; c) adjustment of the aforestated consideration upon final adjudication of the title to the property; and d) attorney's lien in favor of Alafriz equivalent to 20% of whatever may finally be adjudicated in favor of Macondray, its successors and assigns. The Las Pias property, however, had been involved in several lawsuits all seeking to annul the title thereto of Macondray and its successor, RSEI. On September 7, 1987 Macondray itself, which had not received payment for the Las Pias property except for the down payment of P10,000.00, filed an action against RSEI before the Regional Trial Court of Makati for the reconveyance of the property. The case was docketed as Civil Case No. 17233. In all of the said cases, numbering no less than nine, RSEI was represented by Alafriz as its legal counsel. On September 28, 1987 the Supreme Court handed down its decisions in the twin cases of Jose Mayuga, et al. vs. Court of Appeals, et al . , G . R . No . L-46953 and Realty Sales Enterprise, Inc. et al. vs. Intermediate Appellate Court, et al . , G . R . No . L-67451 upholding the title of RSEI to the Las Pias property and thereby putting an end to all the cases involving the said real estate with the exception of Civil Case No. 17233 filed by Macondray against RSEI which was then still pending before the RTC of Makati. On March 22, 1988 RSEI sold the Las Pias property to Goldenrod, Inc. for the sum of P62,795,300.00. Among the terms and conditions of the sale was for the conveyance to be free from all liens and encumbrances. In order, therefore, to comply with the said condition, the stockholders and directors of RSEI passed on September 30, 1988 the two resolutions in question which were aimed at lifting all the liens and encumbrances annotated on the title to the Las Pias property. The first resolution authorized the payment of the balance of the attorney's fees in the total amount of P20,676,185.00 being claimed by Alafriz for services rendered to RSEI over a period of 29 years as its legal counsel in all the cases involving the Las Pias property. llcd The second resolution authorized the payment of the sum of P10,240,000.00 to Macondray by way of compromise settlement of all its claims against the RSEI arising from the sale of the Las Pias property and as the adjustment of the consideration of the said property. As mentioned earlier, Sales sought the annulment of the two resolutions aforesaid in a petition filed before this Commission on March 21, 1989 on the ground that they were ultra vires acts of the corporation. Ten days after the filing of the petition, or on March 31, 1989, the stockholders of RSEI during their annual regular meeting ratified and confirmed the two challenged resolutions by a vote representing 79.8% of the total outstanding capital stock of the corporation. On March 20, 1992 the hearing officer assigned to the case rendered a decision therein declaring the two resolutions in question as null and void or being violative of Sections 32 and 33 of the Corporation Code. The decision furthermore ordered the respondents to restore to RSEI all the funds withdrawn from the corporation pursuant to the disputed resolutions. RSEI and Alafriz, on one hand, and Macondray, Nathalie Baldwin and Delfin Manuel, Jr., on the other hand, appealed separately from the said decision. However, since the appeals raised virtually the same issues and arguments, they shall be passed upon together in this decision. The first argument raised by the respondents-appellants is that the hearing officer committed a reversible error by his failure to resolve the sole issue of ultra vires acts raised by the petitioner-appellee in his petition and submitted by the parties herein for resolution, and by his having decided the case on the basis of an entirely different issue which had never been raised therein and upon which the parties had not been heard. The respondents-appellants claim that in so doing, the hearing officer effectively deprived them of their right to procedural due process as they were not given the chance to present evidence in connection with the new issue raised by him for the first time in his decision and on the basis of which he resolved the case. As a consequence, the respondents-appellants point out, the decision appealed from was rendered null and void pursuant to the Supreme Court ruling in Salvante vs. Cruz, G.R. No. L-2531, February 28, 1951, 88 Phil . 236 which held that "A judgment going outside the issues and purporting to adjudicate something upon which the parties were not heard is not merely irregular but extrajudicial and invalid." After a review of the pleadings filed and of the evidence presented by the parties in this case, this Commission en banc finds that although the issue as to whether or not the two resolutions in question violated Sections 32 and 33 of the Corporation Code was not directly and squarely addressed in the course of the hearing below, there was nevertheless sufficient evidence on hand to enable the hearing officer to make a ruling thereon. But as to whether or not his ruling was correct is another matter. We shall first decide the issue of whether or not the two resolutions involved herein were ultra vires acts of RSEI. A reading of the articles of incorporation and the by-laws of RSEI taken in conjunction with Section 36 of the Corporation Code has led this Commission en banc to the conclusion that the two questioned resolutions were well within the powers of RSEI to pass and adopt. There is, therefore no merit to the contention that the said resolutions were ultra vires acts of the corporation. The second argument raised by the respondents-appellants is that the hearing officer erred in applying the provisions of Section 32 of the Corporation Code to the first resolution and in nullifying the same on the basis thereof. It is further contended that the hearing officer erred in holding that the presence and vote of respondent Alafriz in the September 30, 1988 directors' meeting constituted a violation of said Section 32 of the Corporation Code. We hold that Section 32 of the Corporation Code does not apply to the first resolution as the same merely called for the payment to respondent-appellant Alafriz of attorney's fees due him for past legal services rendered to RSEI. As such, it is not among those kinds of contracts which said Section 32 frowns upon. What the law prescribes are contracts entered into by the corporation with one or more of its directors or officers where the latter derives undue benefit or advantage to the detriment of the corporation. Contracts for services to the corporation such as the one involved in the first resolution do not fall under the prohibition. prcd Even assuming arguendo that Section 32 was applicable to the first resolution, the same would still be valid considering that the presence of Alafriz at the September 30, 1988 directors' meeting was not necessary to constitute a quorum there being three other directors then present, namely, Richard Baldwin, Nathalie Baldwin and petitioner-appellee Sales himself. It was alleged that Sales walked out of the meeting but it appears that he did so sometime later during the meeting after the quorum had already been established. Neither was the vote of Alafriz necessary for the approval of the resolution as the votes of Richard Baldwin and Nathalie Baldwin constituted the majority and were all that were needed to pass the same. Furthermore, the payment of attorney's fees to Alafriz in the amount stipulated appears to be fair and reasonable considering the length and extent of the legal services he had rendered to RSEI. Finally, whatever defect the resolution may have had, if any, was cured by its ratification and confirmation by the vote of the stockholders owning more than two-thirds of the total outstanding capital stock of the corporation. The third argument raised by the respondents-appellants is that the hearing officer erred in holding that the compromise agreement between RSEI and Macondray for the settlement of Civil Case No. 17233 was not fair and reasonable and in concluding without factual or legal basis therefor that there was fraud in the execution thereof. The hearing officer's finding of fraud in the execution of the compromise agreement is explained in the following portion of the decision: That there was fraud in the execution of the compromise agreement is borne out by the evidence on record. It should be noted that RSEI had already won the case G.R. No. L-67451 before the Supreme Court in a final decision. And it was respondent Alafriz himself who filed a Motion to Dismiss in the second case which is Civil Case No. 17233 on the ground that the issue had become res judicata. But without waiting for the resolution on the Motion to Dismiss, the compromise agreement was adopted at his (respondent Alafriz') instance. Surely, the compromise agreement was not fair and reasonable simply for the reason that the cause of action of Macondray in the second case against RSEI had become moot and academic. Respondents-appellants refute hearing officer's conclusions. They maintain that the circumstances cited by the hearing officer in his decision as indicative of fraud in the execution of the compromise agreement between RSEI and Macondray do not at all constitute reasonable bases for his erroneous conclusions. We agree with the respondents-appellants. We see no fraud in the execution of the compromise agreement between RSEI and Macondray. As pointed out by the appellants, the decisions of the Supreme Court in the cases of Jose Mayuga, et al. vs. Court of Appeals, et al . , and Realty Sales Enterprises, Inc. et al. vs. Intermediate Appellate Court, et al . , supra , did not determine the title of RSEI as against Macondray which was precisely the issue involved in Civil Case No. 17233 then pending before the RTC of Makati. There was no way, therefore, that the Supreme Court decisions in the aforementioned cases could have become res judicata insofar as Civil Case No. 17233 was concerned inasmuch as the issue involved in the latter case was different from those adjudicated in the former. Furthermore, the compromise agreement was resorted to by RSEI in order to have the liens in favor of Macondray annotated on the title to the Las Pias property removed or lifted and thereby enable itself to comply with its undertaking to convey and deliver the property to Goldenrod, Inc. free from all liens and encumbrances. It is on record that the stockholders of RSEI benefitted fabulously from the sale of the property to Goldenrod. Petitioner-appellee Sales himself gained the total amount of P3,075,657.68 from the transaction, an impressive profit, indeed, given his initial investment in RSEI of only P5,000.00. Without the compromise agreement having been entered into, the liens in favor of Macondray would not have been lifted and the sale of the Las Pias property to Goldenrod would not have materialized. Ergo, the stockholders of RSEI would not have enjoyed the hefty profits they realized from the said transaction. LexLib It should also be pointed out that the amount of P10,240,000.00 paid to Macondray under the compromise agreement represented the adjustment in the purchase price of the Las Pias property which was provided for in the deed of sale executed by Macondray in favor of RSEI on May 26, 1975. Tested, therefore, against the requirements of Section 33 of the Corporation Code, we find the second resolution to be valid as there was no fraud in the execution of the compromise agreement between RSEI and Macondray and as the terms thereof were fair and reasonable under the circumstances. As for the interlocking directors concerned, namely, Richard Baldwin and Nathalie Baldwin who, contrary to the hearing officer's perception, were not spouses, neither of them owned substantial shareholdings in either RSEI or Macondray. There is, therefore, no need to apply the provisions of Section 32 of the Corporation Code as to their respective presence and vote at the directors' meeting of September 30, 1988. Wherefore, the decision appealed from is hereby REVERSED and the petition below is hereby DISMISSED for lack of merit. SO ORDERED. (SGD.) ROSARIO N. LOPEZ Chairman (SGD.) RODOLFO L. SAMARISTA (SGD.) MERLE O. MANUEL Associate Commissioner Associate Commissioner (SGD.) FE ELOISA C. GLORIA (SGD.) PERFECTO R. YASAY, JR. Associate Commissioner Associate Commissioner