Montessori Child, Inc., et al. vs. Sps. Enrico Zamora, et al.

[SEC-SICD * CASE NO. 3006. February 16, 1989.] MONTESSORI CHILD, INC.,ET AL. , plaintiffs , vs .SPS. ENRICO ZAMORA, ET AL. , defendants . D E C I S I O N This is a complaint for accounting of funds and damages, with a prayer for the issuance of an injunction and/or restraining order, enjoining the defendants from continuing with the act of accepting school enrollees and operating the Montessori de Manila; an accounting of corporate funds for the school year 1984-1985; to account for the unauthorized disbursement of corporate funds in the amount of P189,552.10 for the school year 1985-1986, for the following transactions: 1. Withdrawn time deposits including interest P75,478.12 from Premiere Bank 2. Cash withdrawals from Metrobank under P20,000.00 check No. 0811215 3. Cash Withdrawal from Metrobank under P5,000.00 check No. 081104 4. Over reimbursement of graduation expenses P1,089.00 5. Unliquidated advances for school materials under Check No. 015859 P5,000.00 6. Cash on hand per statement of cash receipts and disbursements P52,984.98 7. Cash Withdrawal from Metro-Bank under Cashier Check No. 140215 P25,000.00 8. Cash Withdrawals from Metro-Bank under Checks Nos. 081077, 081066 and 091093 P5,000.00; and payment of attorney's fees, costs of litigation and expenses of suit. In their petition, plaintiffs alleged, inter-alia, that plaintiff corporation Montessori Child, Inc. is an educational institution duly organized under the laws of the Republic of the Philippines; that plaintiff Danilo Custodio, together with Benilda Custodio, Edgardo Custodio, defendants Enrico Zamora and Melissa Zamora acquired plaintiff corporation on May 9, 1984; that since then, plaintiff Danilo Custodio, Benilda Custodio, Edgardo Custodio and defendant spouses Enrico Zamora and Melissa Zamora were the members of the Board of Directors of plaintiff corporation; that at the beginning and until May 12, 1986, defendant Melissa Zamora, who was the head directress, operated the business of plaintiff institution; that sometime in February, 1986, majority of the stockholders asked for an accounting of corporate funds for the years 1984, 1985 and 1986; that inspite of repeated demands made by plaintiffs, defendants failed and refused to render not only the accounting of corporate funds for the school year 1984-1985 and 1985-1986, but also an accounting of unauthorized disbursement of funds amounting to P189,552.10 for the school year 1985-1986, involving several transactions; that defendants abandoned plaintiff school and operated another school named Montessori de Manila, located in the same street where plaintiff school was established; that the actuation of the defendants in putting another Montessori school caused the loss of student enrollees to plaintiff school and the eventual closure of said school for the year 1986-1987, for which actuations, the defendants are guilty of violating the doctrine of corporate opportunity. On the other hand, defendants, in their answer with counter claims and opposition to preliminary injunction, disputed plaintiffs' claims, and stated among other things, that they have rendered an accounting of the corporate funds which any external auditor who is competent for the job will find to be accurate and above-board; that there is no unauthorized disbursements by the defendants of any corporate funds involving any transactions, as all disbursements were supported by vouchers and receipts made for the benefit and in the efficient operation of the school; and that although defendants admit that they have put up another school under their personal name and personal funds in the place not far from where the former plaintiffs' school was located, such establishments of another school was justified because it was only established after it became certain that the continuation of the operation of the former school is hopeless plaintiff Danilo Custodio had demonstrated and displayed unreasonable intransigence and hostility towards the defendants. LLphil This Hearing Officer, finding the verified complaint to be sufficient in form and substance, and in order that plaintiff Montessori Child, Inc. will not suffer further prejudice and/or irreparable injury before the matter can be heard on notice, issued a restraining, order dated June 9, 1986, effective for a period of twenty (20) days from the issuance thereof, unless sooner lifted by the Commission, enjoining respondents spouses Enrico Zamora and Melissa Zamora from continuing the acts of accepting enrollees for and operating the Montessori de Manila. On July 16, 1986, after several hearings, an Omnibus Order was issued, granting the plaintiffs' application for the issuance of the Writ of Preliminary Injunction, enjoining defendant spouses Enrico Zamora and Melissa Zamora from continuing the acts of accepting enrollees for and operating the Montessori de Manila; and citing, as well, defendants in contempt for violating the Commission's restraining order dated June 9, 1986. On July 21, 1986, defendants filed a Motion for Reconsideration, of the Order dated July 16, 1986, which was denied by this Hearing Officer in his Order of August 4, 1986. In the meantime, defendants' affirmative and special defenses which have treated as a motion to dismiss, on grounds that the complaint states no cause of action and that the Commission has no jurisdiction to take cognizance, much less hear and determine the instant action, was denied for lack of merit in the Order dated October 13, 1986. On August 9, 1986, defendants appealed to the Commission en banc the Omnibus Order dated July 16, 1986, after the denial of the motion for reconsideration of the said order, which was, likewise, denied by the Commission en banc in its Order of February 22, 1988. During the hearing of this case, the parties presented both testimonial and documentary evidence. Petitioners presented Danilo Custodio, Rodolfo Jota, Jr. and Eufrocina C. Lirio as their witnesses, with documentary Exhibits "A" to "J" including the submarkings therein. For the defendants, witnesses Enrico Zamora, Elizabeth Luces and Liberty Devanadera were presented, together with exhibits "1" to "6" including the submarkings. Likewise, the parties agreed that the evidence presented during the hearings of the injunction incident be adopted as part of their evidence in chief. The primordial issues that should be resolved in this case are the following: prcd A) Whether or not the act of respondents spouses Enrico Zamora and Melissa Zamora in operating the Montessori de Manila and accepting school enrollees constitute disloyalty to plaintiff Montessori Child, Inc. and therefore unlawful and illegal; B) Whether or not plaintiffs have the right to ask for an accounting of corporate funds for the school year 1984-1985 and 1985-1986. On the first issue, this Hearing Officer is of the opinion and so holds that respondents are guilty of disloyalty to plaintiff corporation. As admitted, the plaintiff Danilo A. Custodio together with Benilda Custodio, Edgardo Custodio and defendants Enrico Zamora and Melissa Zamora became stockholders of Montessori Child, Inc. an educational institution of children on May 9, 1984; that since then, all of them became members of the Board of Directors with Enrico Zamora as President; Danilo Custodio as Vice-President; Melissa Zamora, as Secretary and Head Directress, who exclusively run the affairs of the school and Benilda Custodio, as treasurer of the school corporation, that Montessori Child School (Montessori Child Early Learning Center) is, located at Pablo Roman St.,B.F. Homes Paraaque, Metro-Manila; that defendant Melissa Zamora because of her special educational qualification, aside from being the Secretary was appointed as head directress to manage and operate the administrative functions of Montessori Child School, that due to some conflict in the business operation of the parties, the spouses Enrico and Melissa Zamora tendered their resignations to the Board of Directors on April 14, 1986, as President and Secretary/Head Directress respectively (Exhs. "1" and "2");that the Board of Directors did not act on their resignations until after the spouses Zamora will render an accounting of the corporate funds and accountabilities; that on March 21, 1986 the spouses Zamora established and operated their own school called the Montessori de Manila, a preparatory school like the Montessori Child, registered with the Bureau of Domestic Trade under the name of Enrico Zamora (Exh. "C") in the nearby place where plaintiff Montessori Child is located which is more or less fifty meters in distance at Pablo Roman St.,B.F. Homes Paraaque, Metro-Manila; that the brochure of the Montessori de Manila is the same as that of Montessori Child, Inc.,insofar as the contents thereof are concerned and the only difference is the name and the logo of the schools (Exhs. "B" & "D"),that when the school (Montessori de Manila) was in operation sometime on May 15, 1986, especially during the period from May 15, 1986 to June 16, 1986, all the personnel of Montessori Child, Inc.,including the teaching staff, were transferred to Montessori de Manila under the management of the Zamora spouses; that the only personnel left in the Montessori Child, Inc. was a caretaker employed by Mr. Zamora to oversee the safety of the equipments and materials of the previous school, and to give information to interested parties on the status of the Montessori Child, Inc.,and the operation of Montessori de Manila with the information to the inquiring public that the old building of the Montessori Child, Inc. was moved to the new building across the street (TSN, page 7, June 23, 1986);and that as a result of the establishment and operation of Montessori de Manila by the spouses Zamora, the Montessori Child, Inc. ceased operation, there being no more enrollees, both new and old, were accepted and accommodated at Montessori de Manila. prLL The act of the defendants spouses Zamora in the establishment and operation of the Montessori de Manila is an act of disloyalty as directors of plaintiff Montessori Child, Inc. The Zamoras were still directors of Montessori Child, Inc. when they established and operated the Montessori de Manila. They never resigned as directors, as they claimed, considering that their resignations were only as President, in the case of Enrico Zamora, and as Secretary and Head Directress in the case of Melissa Zamora (Exh. "1" & "2").There is no evidence to sustain their claim of resignations as directors. Moreover, the actuations of the spouses were tainted with malice and bad faith that resulted to the prejudice and closure of plaintiff Montessori Child; Inc.,because of the misrepresentation given to the parents of the prospective enrollees that plaintiff school has moved to the new building across the street, referring to the defendants spouses Zamora's school, Montessori de Manila, which was just fifty (50) meters, more or less, away from the old school. This misrepresentation to the public minds that plaintiff school and respondent school are one and the same is buttressed by the fact that Mrs. Zamora, who has the expertise in running a pre-school for children, and who used to be the Head Directress of Montessori Child was also running the Montessori de Manila. Respondents spouses Zamora claim that their establishment of another school was justified because "it becomes certain that the continuation of the operation of the former school owned by the corporation is hopeless in that the herein plaintiff Danilo Custodio had demonstrated and displayed unreasonable intransigence and hostility towards the defendants, despite the fact that herein defendants have no objection to the operation of the former school" is untenable. The animosities that existed between the defendant Zamoras and plaintiff Danilo Custodio are not justifications for the Zamoras to abandon the old school and operate a new school. The Zamora's being still directors are expected to be loyal to the corporation. The corporation has nothing to do with their quarrel with the Custodio group. Directors are expected to manage the corporation with reasonable diligence, care and prudence. Defendants spouses Zamora should have first discussed their strained relations with the Custodio group and decide on the fate of the corporation. They could not just abandon the corporation and operate a new one without violating their sense of loyalty to the corporation. Thus, "a director, holding as he does a position of trust, is a fiduciary of the corporation. As such, in case of conflict of his interest, he cannot sacrifice the latter without incurring liability for his disloyal act. This fiduciary duty has many ramifications and the possible conflict of interest situations are almost limitless, each possibility posing different problems. There will be cases where a breach of trust is clear" (page 476, Corporation Code by Campos and Lopez-Campos). We believe, that a previously discussed, the breach of trust by the Zamoras against plaintiff corporation is clear. llcd A director should not seized the corporate opportunity of a business that rightly belongs to the corporation. Defendants Zamoras, taking advantage of the circumstances surrounding the situation, particularly Melissa Zamora, who is noted to be an expert in running a pre-school for children have clearly violated their fiduciary obligation, when they established and operated a new school, whose business, the Montessori Child, Inc. has the right to appropriate. The Zamoras should account for all the profits they obtained in the operation of the new school. Thus: "4. Seizing Corporate Opportunity. A significant aspect of a director's fiduciary obligation is his duty to refrain from usurping a business opportunity which rightly belong to the corporation. If the transaction, considering all the circumstances surrounding it, is one which the corporation has the right to opportunity, it is the specific duty of a director not to seize it for himself, oftentimes with the advantage of inside information. He should account for all the profits he obtains. Conversely, if the business opportunity is one which does not properly belong to the corporation, then the Director may enter upon it personally for his own benefit, without any duty to account for his profits. Section 34 of the Code incorporated this well settled principle. It provides: "SECTION 34. Disloyalty of a Director . Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture (Emphasis Supplied) (page 523, Corporation Code by Campos and Lopez-Campos). Defendants spouses Zamora are also liable for damages suffered by the stockholders and other persons brought about by the closure of plaintiff Montessori Child School, Inc. for acquiring pecuniary interest in conflict with their duties as directors in the establishment and operation of the new school. Sec. 31 of the Corporation Code of the Philippines provides: prLL "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 . When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the Corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation." (Emphasis Supplied). By the closure of Montessori Child School, Inc.,plaintiff Danilo Custodio together with the other stockholders, Benilda Custodio and Edgardo Custodio lost their aggregate initial investment in the said school in the amount of Seventy Five Thousand Pesos (P75,000.00). As to the issue whether or not plaintiffs has the right to ask for an accounting of corporate funds for the school year 1984-1985 and 1985-1986, the answer is likewise, in the affirmative. There is no dispute that plaintiff 'Custodio is a stockholder and director of plaintiff Montessori Child, Inc., and as such, he has a right under the law, to ask for an accounting of the funds of the corporation. This right of accounting is included in the stockholders or director's right to financial statement. Thus, Section 75 of the Corporation Code of the Philippines provides: "SECTION 75. Right to Financial statements within ten (10) days from receipt of a written request of any stockholder or member, the Corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of Corporation for the preceding g year, which shall include financial statements, duly signed and certified by an independent certified public accountant. prcd However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under both by the treasurer or any responsible officer of the corporation." The disbursement by the defendants Zamoras of the corporate funds in the aggregate amount of P189,552.10 for the school year 1985-1986, representing several transactions were found to be irregular and unauthorized disbursement considering the fact that no board resolutions have been presented authorizing such disbursements. The receipts and vouchers presented by defendants Zamora showing how several of the disbursed funds being used and spent did not necessarily justify the unauthorized disbursement of corporate funds even if such disbursements eventually redound to the benefit and welfare of the corporation. It is fundamental that corporate disbursement of funds must be approved by the Board of Directors, being the governing body of the corporation. Defendants Zamoras' disbursements of P75,478.12, withdrawn time deposit from Premier Bank; P20,000.00, cash withdrawal from Metrobank under Check No. 0811215; P52,984.98, cash on-hand per statement of cash and disbursement, and P25,000.00, cash withdrawal from Metrobank under cashier Check No. 140215 were found to be without authority, as no board resolution authorized-such disbursements. However, we believe that the disbursements of P5,000.00 cash withdrawal from Metrobank under Check No. 081104; P1,089.00, over reimbursement of graduation expenses; P5,000.00, unliquidated advances for school materials under Check No. 015859; P5,000.00, cash withdrawal from Metrobank Check Nos. 081077, 081066 and 081093, even if unauthorized because of lack of prior consent, of the Board of Directors, the defendants, particularly Enrico Zamora, as President by usage and necessity has the implied authority to disburse minor amounts to maintain the day-to-day operation of the corporation. This authority of the President to disburse minor expenses to keep the day-to-day business operation of the corporation going without the consent of the Board is akin to the power of the President by virtue of his office to treat his act done in the ordinary course of business as presumably within the scope of his authority, unless the contrary is proven. cdll "In many instances, he is impliedly vested by the board powers, usually through long acquiescence to the exercise of such powers. Oftentimes, an express enumeration of some powers will be expressed in the by-laws whether the particular act or contract is within the powers of the President and thus binding on the corporation will depend on the facts of each particular case. . . ." (Schwarz v. United Merchants Manufacturers, Inc., 72 F. 2d. 256 (1934), cited in Campos and Campos, The Corporation Code Comments, Notes & Selected Case 1981, p. 254-255). We agree to the contention, that the directors, cannot attend to all the current business operations of the corporation and it is not customary for them to do so. It is not necessary in order to bind the school that every act should be specifically authorized by the Board, particularly the disbursement of minor expenses. Such disbursement of minor expenses may be impliedly conferred upon the President and/or authorized officer. WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows. 1. The defendant spouses Zamora being guilty of violating Sec. 34 of the Corporation Code, are hereby ordered to account to plaintiff Montessori Child, Inc. all the profits obtained in the operation of Montessori de Manila by refunding such profits to plaintiff Montessori Child, Inc., within sixty (60) days from receipt hereof. 2. The defendants Zamoras for their liabilities under Sec. 31 of the Corporation Code are jointly and severally liable to pay the damages amounting to P75,000.00 representing the lost investment of the Custodio group brought about by the closure of Montessori Child School (Montessori Child Early Learning Center). 3. The defendants Zamoras are hereby directed and/or ordered to render an accounting of corporate funds starting from school year May 1984-1985, and to account, or if it cannot be accounted, to return the amount of P173,463.10 out of the total amount of P189,552.00 representing several transactions which were found to be an unauthorized disbursement of corporate funds for the school year 1985-1986, within sixty (60) days from receipt hereof; and 4. The Counterclaims of defendant spouses Zamora against the plaintiffs are denied for lack of merit. No pronouncement as to costs and Attorney's fees. SO ORDERED. (SGD.) JUANITO B. ALMOSA, JR. Hearing Officer