G.R. No.

157479 November 24, 2010

PHILIP TURNER and ELNORA TURNER, Petitioners,

vs.
LORENZO SHIPPING CORPORATION, Respondent.

BERSAMIN, J.:

TOPIC: When Cause of Action is Required

Facts:
 Petitioners hold shares in respondent corporation, which decided to amend its articles of
incorporation, removing pre-emptive rights.
 Petitioners dissented, demanded payment for their shares at book value.
 Corporation valued shares lower than petitioners', citing market value and lack of
unrestricted retained earnings.
 Appraisal committee formed, valuated shares higher than corporation's offer.
 Petitioners sued for collection and damages, claiming corporation had sufficient
unrestricted retained earnings.
 RTC granted partial summary judgment in favor of petitioners.
 CA corrected RTC, dismissed petitioners' suit, citing lack of unrestricted retained
earnings.
 Petitioners challenged CA's decision via certiorari.

Issue:
Whether or not the petitioners had a cause of action against the corporation for collection of the
value of their shares.

Ruling:
No, the petitioners did not have a cause of action against the corporation for collection of the
value of their shares.

The right of appraisal, a fundamental aspect of corporate law, grants dissenting stockholders
the right to demand payment of the fair value of their shares. However, this right is subject to
certain conditions, one being that no payment shall be made unless the corporation has
unrestricted retained earnings in its books to cover such payment. This condition is grounded in
the trust fund doctrine, which prioritizes the rights of corporate creditors over stockholders.

In this case, it was established that the corporation had no unrestricted retained earnings at the
time the petitioners filed their complaint. Thus, their legal obligation to pay the fair value of the
shares had not yet accrued. A cause of action arises only when all elements are present,
including a violation of a legal right resulting in injury or damage to the plaintiff. The absence of
unrestricted retained earnings meant that the corporation had no legal duty to pay the fair value
of the shares at the time the complaint was filed.

Although the corporation later acquired unrestricted retained earnings, this did not cure the
absence of a cause of action at the commencement of the suit. The court cannot entertain a
groundless suit prematurely brought before the cause of action has accrued.
Therefore, the RTC exceeded its jurisdiction in entertaining the complaint, and the CA correctly
dismissed the suit. The petitioners' challenge via certiorari is denied, and the CA's decision is
affirmed.