Lorenzo A. Sales vs. Arturo A. Alafriz, et al.

[SEC-SICD * CASE NO. 3534. March 20, 1992.] LORENZO A. SALES , petitioner , vs .ARTURO A. ALAFRIZ, ET AL. , respondents . D E C I S I O N This refers to the verified petition filed by Lorenzo A. Sales, a stockholder, director and Vice-President of Realty Sales Enterprises, Inc. (RSEI for short) against Arturo Alafriz, also a stockholder, director and President of the latter corporation, and Macondray Farms, Inc. (Macondray for short) alleging, among others, that on September 30, 1988, the stockholders of RSEI held a special meeting at the principal office of the corporation at Metrobank Building, Ayala Avenue, Makati, Metro Manila, which special meeting was attended by all the stockholders, either in person or thru their proxies; that respondent Arturo A. Alafriz presided over the said meeting while petitioner Sales took note of the proceedings as corporate secretary, and respondent Delfin Manuel, Jr. tape recorded the same proceedings; that a resolution appropriating the amount of P10,240,000.00 as an amicable settlement of Civil Case No. 17233 entitled Macondray Farms, Inc. vs. Realty Sales Enterprises, Inc. was introduced by respondent Delfin A. Manuel, Jr.;that petitioner in his behalf and as proxy of stockholder Inocencio Pangilinan, objected and opposed the said resolution on valid legal grounds that Macondray had abandoned and waived its rights and interest for the adjustment of the purchase price on the Deed of Absolute Sale with mortgage when it filed the case based on false and malicious cause of action of trust; that the said resolution was approved by the combined votes of the majority of the stockholders consisting of 550 votes as against the minority vote of 450 votes; that another resolution was introduced recommending approval and payment of respondent Alafriz attorney's fees, in the total amount of P20,676,185.00 involving nine (9) cases to which petitioner and stockholder Inocencio Pangilinan, through proxy, objected to but was overwhelmed by the majority who approved the same; that during the directors' meeting, respondent Delfin A. Manuel, Jr. tried to amend the last stockholders resolution, prompting petitioner and stockholder Inocencio Pangilinan to walk out of the meeting; that the board meeting proceeded with the three (3) directors, and the respondent Delfin A. Manuel, Jr. was then appointed as acting secretary of the board; that the members of the board adopted the resolution approved during the stockholders' meeting and furnished petitioner with a xerox copy of the minutes of the directors' meeting; that the two resolutions approved by the combined votes of respondents Arturo A. Alafriz and Delfin A. Manuel, Jr. as proxy of Macondray, were illegal and contrary to law as the appropriations were not the legal obligations of the respondent Realty Sales Enterprises, Inc; that the relationship of respondent Alafriz and respondent Delfin A. Manuel, Jr. as opposing counsel in Civil Case No. 17233 constitute a conflict of interest violative of lawyers oath and/or legal ethics; that what both counsels could not secure or get thru legal means had done it thru ultra vires acts on a back to back benefit, to the damage and prejudice of RSEI; that respondent Alafriz, in his capacity as counsel for RSEI had abandoned his client in the resolutions approving the amicable settlement in spite of the strong valid defenses; that the accounts object of the ultra vires acts have been withdrawn by Macondray and Arturo A. Alafriz; and that said withdrawal constitute criminal offense. LibLex In answer thereto, respondents Alafriz and RSEI, alleged that notwithstanding the objection raised by the petitioner and Mr. Inocencio Pangilinan, through his proxy, the majority of the stockholders voted in favor of the resolution authorizing payment of the sum of P10,240,000.00 as an amicable settlement of Civil Case No. 17233 which sought to invalidate the title of RSEI to the Las Pias property; the said disputed resolution was ratified, confirmed and approved by the vote of 79 9% of the entire outstanding capital stock at the annual stockholders meeting of RSEI, held on March 31, 1989; that the total amount of said legal fees or attorneys fees as stipulated and approved by the majority vote of the directors and stockholders of RSEI took into account the fact that the Las Pias property which was recovered through the efforts of said counsel, was finally sold to Golden Rod, Inc. on March 12, 1988, for the sum of P62,795,300.00; that petitioner, as corporate secretary, failed to comply with his corporate duties as such in failing to transcribe his notes taken at the stockholders' meeting of RSEI on September 30, 1988; that the disputed resolutions were duly adopted by the stockholders and Board of Directors of RSEI in the exercise of their lawful rights and prerogatives under the Corporation Code of the Philippines, all done in the highest interest of RSEI; that the matters covered by said resolutions were not ultra vires, but completely valid and within the rights and prerogatives of the stockholders and the Board of Directors to adopt under RSEI Articles of Incorporation, the Corporation Code of the Philippines and the by-laws; and the amicable settlement of Civil Case No. 17233 by the payment of the sum of P10,240,000.00 to Macondray Farms, Inc., as authorized in the disputed resolutions as consideration for the Las Pias property, to enable RSEI to consummate the sale thereof to Golden Rod, Inc. is eloquent enough to justify the action taken in the premises by respondent Arturo Alafriz, as counsel for RSEI, and certainly not constitutive of abandonment of a legal duty. Respondents Delfin Manuel, Jr. and Macondray Farms, Inc. for their part, alleged that the resolutions were introduced to enable the contending parties to arrive at an amicable settlement of their differences and thus preclude a long and protracted litigation which will thus imperil the obligations assured by respondent RSEI in favor of Goldenrod Corporation under that Deed of Sale covering property registered in the name of Realty Sales Enterprises, Inc. at Las Pias; that there were no valid legal grounds to object to the resolutions; that there was no amendment to the resolutions introduced by respondent Delfin Manuel, Jr.;that petitioner and Inocencio Pangilinan walked out of the meeting; that petitioner failed to submit a draft of the minutes of the stockholders' meeting and thus failed to comply with his obligation to the company; that respondents did not pre-empt the secretary's report, as in fact the President has continuously requested petitioner to transcribe the minutes of the stockholders' meeting, but to date, petitioner has not done so; that the resolutions were passed by the stockholders and the Board of Directors duly called and constituted as such, exercising their prerogatives and rights as stockholders/directors on matters affecting the interest of the corporation and within the powers of the corporation; and that the resolutions subject of this petition were ratified by the stockholders in the annual stockholders meeting held in April, 1989. At first blush, it may be readily averred that the sole issue brought forth by the parties in the instant case is the question of whether or not the two resolutions adopted by the stockholders and the Board of Directors of RSEI on September 30, 1988 are ultra vires acts; considering petitioner's allegation that the subject of the two questioned resolutions consist of acts which are beyond the powers conferred upon RSEI by its charter. However, a close scrutiny of the facts as established during the hearing, readily revealed that the controverted issue should appropriately refer to prohibited dealings of directors, trustees and officers with the corporation. While we admit that the foregoing issue was not exhaustively discussed by the parties during the entire proceedings, still "the court may consider other facts within the range of judicial notice, as well as relevant laws and jurisprudence which the court are bound to take into account." (UBELCO vs. ABRECO, G.R. No. L-59480, December 8, 1982, 119 SCRA 90). From the facts unravelled during the hearing, it was clearly established that the two questioned resolutions were approved by a combined votes of only respondents Arturo Alafriz and Delfin A. Manuel, Jr., a proxy of Macondray, the latter being also an existing director of RSEI, thus making the undertaking a corporate transaction with interested directors violative of Sections 32 and 33 of the Corporation Code. Worth considering is the fact that when the controversial resolutions on the compromise agreement was approved, the approval thereof was by a vote of three (3) out of five (5) directors consisting of respondents Alafriz, Richard and Natalie Baldwin, through proxies issued to respondent Delfin A. Manuel, Jr. It is an undisputed fact that respondents spouses Richard and Natalie Baldwin are members of the Board of Directors of both Macondray and RSEI. Respondents alleged that the questioned resolutions were voted upon and approved by the majority of directors and stockholders of RSEI. Curiously though, respondents are trying to justify the disputed resolutions under the guise that the same were within the powers of the corporation. The stockholders' honest exercise of their prerogatives and rights on matters affecting the interest of the corporation to justify the passage of the resolutions in question did not obtain in the instant case. Respondents' arguments are believed to be nothing but a convenient alibi in support of their own individual interest. 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 has already won the case in 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 has become res judicata. But without awaiting for the resolution on the motion to dismiss, the compromise agreement was approved 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 has become moot and academic. LLphil Likewise, in the case of the questioned resolution on the payment of attorney's fees to respondent Alafriz, the same was also approved by the same three (3) directors, and respondent Alafriz is an interested director because of his expected compensation for services he rendered in defending the cases for and against the corporation. Respondent Alafriz's presence and vote therein constituted a clear violation of Section 32 of the Corporation Code. The respondents, whether acting in concert, would have no other purpose or design than to acquire an interest inconsistent with that of RSEI and being the holder of the majority stocks and of the directors of the corporation ". . . occupies a fiduciary relations towards the minority stockholders, and is charged with the duty of exercising a high degree of good faith, care and diligence for the protection of such minority interest. Every act in its own interest to the detriment of the holders of minority stock becomes a breach of duty and trust, and entitle (them) to plenary relief from a court of equity." (Hyams v. Calumet & Hecla Mining Co. 6 Cir. 221 F 529, 537), cited in Singer et al vs. Carlisle et al 26 N.Y.S. 2d 172, Campos on Corporation Code, p. 524-526). Thus, it was also held in the case of Legarda v. La Previsora, G.R. No. 44451, December 16, 1938, 66 Phil. 723 "that the board of directors or a majority thereof, in drawing to themselves the powers of the corporation, occupies a position of trusteeship in relation to the stockholders in the sense that the board should exercise not only care and diligence, but utmost good faith in the management of corporate affairs." Also a director of a corporation is in the position of a fiduciary. He will not be permitted to profit at the expense of the corporation. Undivided loyalty will ever be insisted upon. Personal gain will be denied to a director where it comes because he has taken a position adverse to or in conflict with the best interest of this corporation. (Meinchard v. Salmon 249 N.Y. 458, 464, 164 N.E. 545, 546, 62 A.J.R., cited in Irving Trust Co. vs. Deutrch, et al 73 F. 2nd 121, Campos on Corporation Code, p. 527). We hold that directors should maintain the constant duty not to seek any harsh advantage to the detriment of the corporation but rather to protect it and renounce what is unfair. And because there are overwhelming evidence to show that this duty has been ignored, we find respondents to have gained undue advantages over their corporation (RSEI) when they approved the two (2) questioned resolutions in violation of the provision of the Corporation Code, particularly Sections 32 and 33 thereof. WHEREFORE, judgment is hereby rendered declaring the two resolutions adopted by the stockholders and the Board of Directors of RSEI on September 30, 1988 to be null and void. Accordingly, respondents are hereby ordered to restore to RSEI all the funds withdrawn from the latter pursuant to the above-disputed resolutions. NO PRONOUNCEMENT as to costs. dctai SO ORDERED. (SGD.) ALBERTO P. ATAS Hearing Officer