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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. 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. 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. 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. Upon the respondents refusal to pay, the petitioners sued the respondent for collection and damages in the RTC on January 22, 2001. 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; 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.

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. RTC acted in excess of its jurisdiction. 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) 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 rights of a regular stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the transferee. (Sec. 86) 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)