Turner vs.

Lorenzo Shipping

Facts:
The petitioners (Philip and Elnora Turner)
held
1,010,000 shares of stock of the respondent (Lorenzo
Shipping Corp.), a domestic corporation engaged
primarily in cargo shipping activities. The respondent
decided to amend its articles of incorporation to
remove the stockholders pre-emptive rights to newly
issued shares of stock. The petitioners voted against
the amendment and demanded payment of their
shares at the rate of P2.276/share based on the book
value of the shares, or a total of P2,298,760.00.

Subsequently, the petitioners demanded payment

based on the valuation plus 2%/month penalty from
the date of their original demand for payment, as well
as the reimbursement of the amounts advanced as
professional fees to the appraisers.
Respondent
refused
the
petitioners
demand,
explaining that pursuant to the Corporation Code, the
dissenting stockholders exercising their appraisal
rights could be paid only when the corporation had
unrestricted retained earnings to cover the fair value
of the shares, but that it had no retained earnings at
the time of the petitioners demand, as borne out by
its Financial Statements for Fiscal Year 1999 showing a
deficit of P72,973,114.00 as of December 31, 1999.

The respondent found the fair value of the shares

demanded to be unacceptable. It insisted that the
market value on the date before the action to remove
the pre-emptive right was taken should be the value,
or P0.41/share (P414,100.00) and that the payment
could be made only if the respondent had unrestricted
retained earnings in its books to cover the value of the
shares, which was not the case.

Upon the respondents refusal to pay, the petitioners

sued the respondent for collection and damages in the
RTC on January 22, 2001.

The disagreement on the valuation of the shares led

the parties to constitute an appraisal committee
pursuant to Sec. 82 of the Corporation Code. The
committee reported its valuation of P2.54/share, for an
aggregate value of P2,565,400.00.

The respondent opposed the motion for partial

summary judgment, stating that the determination of
the unrestricted retained earnings should be made at
the end of the fiscal year of the respondent, and that
the petitioners did not have a cause of action against
the respondent.

The petitioners filed their motion for partial summary

judgment, claiming that the respondent has an
accumulated unrestricted retained earnings of
P11,975,490.00, evidenced by its Financial Statement
as of the Quarter Ending March 31, 2002;

RTC granted the petitioners motion fixing the fair

value of the shares of stocks at P2.54 per share. The
evidence submitted shows that the respondent has
retained earnings of P11,975,490 as of March 21,
2002. This is not disputed by the defendant. Its only
argument against paying is that there must be
unrestricted retained earnings at the time the
demand for payment is made. RTC further stated
that the law does not say that the unrestricted
retained earnings must exist at the time of the
demand. Even if there are no retained earnings at the
time the demand is made if there are retained
earnings later, the fair value of such stocks must be
paid. The only restriction is that there must be
sufficient funds to cover the creditors after the
dissenting stockholder is paid.
Subsequently, on November 28, 2002, the RTC issued
a writ of execution.
The respondent commenced a special civil action for
certiorari in the CA. CA issued a TRO, enjoining the
petitioners, and their agents and representatives from
enforcing the writ of execution. By then, however, the
writ of execution had been partially enforced. The TRO
then lapsed without the CA issuing a writ of
preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the
writ of execution.

CA granted respondent's petition. The Orders and the

corresponding Writs of Garnishment are NULLIFIED and
the Civil Case is ordered DISMISSED.

Issue:
WON the petitioners have a valid cause of action
against the respondent.

Held:
No. SC upheld the decision of the CA.
excess of its jurisdiction.

RTC acted in

No payment shall be made to any dissenting

stockholder
unless
the
corporation
has
unrestricted retained earnings in its books to
cover the payment (apply the Trust fund doctrine). In
case the corporation has no available unrestricted
retained earnings in its books, Sec. 83 provides that if
the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
The respondent had indisputably no unrestricted
retained earnings in its books at the time the
petitioners commenced the Civil Case on January 22,
2001. It proved that the respondents legal obligation
to pay the value of the petitioners shares did not yet
arise. The Turners right of action arose only

when petitioner had already retained earnings in

the amount of P11,975,490.00 on March 21,
2002; such right of action was inexistent on
January 22, 2001 when they filed the Complaint.

The RTC concluded that the respondents obligation to

pay had accrued by its having the unrestricted
retained earnings after the making of the demand by
the petitioners. It based its conclusion on the fact that
the Corporation Code did not provide that the
unrestricted retained earnings must already exist at
the time of the demand.
The RTCs construal of the Corporation Code was
unsustainable, because it did not take into account the
petitioners lack of a cause of action against the
respondent. In order to give rise to any obligation to
pay on the part of the respondent, the petitioners
should first make a valid demand that the respondent
refused to pay despite having unrestricted retained
earnings. Otherwise, the respondent could not be said
to be guilty of any actionable omission that could
sustain their action to collect.
Neither did the subsequent existence of unrestricted
retained earnings after the filing of the complaint cure
the lack of cause of action. The petitioners right of
action could only spring from an existing cause of
action. Thus, a complaint whose cause of action has
not yet accrued cannot be cured by an amended or
supplemental pleading alleging the existence or

accrual of a cause of action during the pendency of the

action. For, only when there is an invasion of primary
rights, not before, does the adjective or remedial law
become operative. Verily, a premature invocation of
the courts intervention renders the complaint without
a cause of action and dismissible on such ground. In
short, the Civil Case, being a groundless suit, should
be dismissed.
Even the fact that the respondent already had
unrestricted retained earnings more than sufficient to
cover the petitioners claims on June 26, 2002 (when
they filed their motion for partial summary judgment)
did not rectify the absence of the cause of action at
the time of the commencement of the Civil Case. The
motion for partial summary judgment, being a mere
application for relief other than by a pleading, was not
the same as the complaint in the Civil Case. Thereby,
the petitioners did not meet the requirement of the
Rules of Court that a cause of action must exist at the
commencement of an action, which is "commenced by
the filing of the original complaint in court."

Additional info:
Cause of Action:
A cause of action is the act or omission by which a
party violates a right of another. The essential

elements of a cause of action are: (a) the existence of

a legal right in favor of the plaintiff; (b) a correlative
legal duty of the defendant to respect such right; and
(c) an act or omission by such defendant in violation of
the right of the plaintiff with a resulting injury or
damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the
defendant. Although the first two elements may exist,
a cause of action arises only upon the occurrence of
the last element, giving the plaintiff the right to
maintain an action in court for recovery of damages or
other appropriate relief.

Stockholder's Appraisal Right:

Section 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.
The right of appraisal may be exercised when there is
a fundamental change in the charter or articles of
incorporation substantially prejudicing the rights of the
stockholders. It does not vest unless objectionable
corporate action is taken. It serves the purpose of
enabling the dissenting stockholder to have his
interests purchased and to retire from the corporation.

The Corporation Code defines how the right of

appraisal is exercised, as well as the implications of
the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder
who has voted against the proposed corporate action
by making a written demand on the corporation within
30 days after the date on which the vote was taken for
the payment of the fair value of his shares. The failure
to make the demand within the period is deemed a
waiver of the appraisal right. (Sec. 82)
2. If the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares within a
period of 60 days from the date the stockholders
approved the corporate action, the fair value shall be
determined and appraised by three disinterested
persons, one of whom shall be named by the
stockholder, another by the corporation, and the third
by the two thus chosen. The findings and award of the
majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after
the award is made. Upon payment by the corporation
of the agreed or awarded price, the stockholder shall
forthwith transfer his or her shares to the corporation.
(Sec. 82)
3. All rights accruing to the withdrawing stockholders
shares, including voting and dividend rights, shall be
suspended from the time of demand for the payment
of the fair value of the shares until either the
abandonment of the corporate action involved or the

purchase of the shares by the corporation, except the

right of such stockholder to receive payment of the fair
value of the shares. (Sec. 83)

rights of a regular stockholder; and all dividend

distributions that would have accrued on such shares
shall be paid to the transferee. (Sec. 86)

4. Within 10 days after demanding payment for his or

her shares, a dissenting stockholder shall submit to
the corporation the certificates of stock representing
his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option
of the corporation, terminate his rights under this Title
X of the Corporation Code. If shares represented by the
certificates bearing such notation are transferred, and
the certificates are consequently canceled, the rights
of the transferor as a dissenting stockholder under this
Title shall cease and the transferee shall have all the

5. If the proposed corporate action is implemented or

effected, the corporation shall pay to such stockholder,
upon the surrender of the certificates of stock
representing his shares, the fair value thereof as of the
day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in
anticipation of such corporate action. (Sec. 82)