UNLAD RESOURCES DEVELOPMENT CORPORATION, UNLAD RURAL BANK OF NOVELETA, INC., UNLAD COMMODITIES, INC.

,
HELENA Z. BENITEZ, and CONRADO L. BENITEZ II, petitioners, vs. RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ, VICENTE D.
CASAS, ROMULO M. VIRATA, FLAVIANO PERDITO, TEOTIMO BENITEZ, ELENA BENITEZ, and ROLANDO SUAREZ, respondents.
UNLAD RESOURCES, et al. V. DRAGON, et al.
GR No. 149338 | July 28, 2008| Third Division |J. Nachura| Review on Certiorari (Decision of CA)
Remedies – Judicial Remedies - Rescission
SSSA

FACTS:
- Dec 1981: Petitioner (Unlad Resources) and Respondents (Dragon et al) entered into the MOA:
Stipulations:
- It is provided that Dragon et al, as controlling stockholders of the Rural Bank [of Noveleta] shall allow Unlad Resources to invest P4.8M in
the Rural Bank in the form of additional equity.
- On the other hand, Unlad Resources bound itself to:
- Invest the said amount of 4.8 million pesos in the Rural Bank;
- Unlad Resources shall subscribe to a minimum of P480,000.00 common or preferred non-voting shares of stock with a total par
value of four P4.8M; and
- Pay up immediately P1.2M for said subscription;
- Dragon et al (respondents), upon the signing of the said agreement shall transfer control and management over the Rural Bank to Unlad
Resources.
(ELAM: reciprocal obligations created – control and mngt of Bank in exchange for stock subscriptions)
- In addition to their nonfulfillment of the MO, Dragon et al (respondents) also claim that petitioner Unlad “…had every intention of wasting the bank’s
assets for Unlad’s own gain” (a.k.a. mismanagement and misuse of corporae funds) They sighted:
- Shortly after taking over the Rural Bank, petitioners Conrado L. Benitez II and Jorge C. Cerbo, as President and General Manager,
respectively, entered into a Contract of Lease over the Naic, Cavite mango plantation, and that, as a consequence of this venture, the bank
incurred expenses amounting to P475,371.57, equivalent to 25.76% of its capital and surplus.
The Dragon et al (respondents) further assert that the Central Bank found this undertaking not inherently connected with bona fide rural
banking operations, nor does it fall within the allied undertakings permitted under Section 26 of Central Bank Circular No. 741 and Section
3379 of the Manual of Regulations of the Central Bank.

- July 1987: Dragon et al (respondents) filed before RTC of Makati Branch 61 a Complaint for rescission and return of bank’s control and
mngt. . . . Dragon et al fulfilled obligations immediately, but Unlad Resources failed to fulfill obligations (payment) in spite of repeated demands.
Because of this, plus incurred costs by Rural Bank due to Unlad’s actions.
Unlad Resources Dragon et al
Unlad countered: 1) the RTC had no jurisdiction over their intra-corporate RTC: ruled in favour of Dragon et al (respondents)
dispute (it should have been the SEC), 2) the action for rescission had
already prescribed under NCC 1389, and 4) their non-performance was CA: affirmed RTC’s ruling
because of a “legal and factual impossibility”, and 5) the reward of moral
and exemplary damages and attorney’s fees have no factual basis.
Unlad Resources: elevated case with SC

ISSUE:
1) WON RTC had jurisdiction over the case involving an intra-corporate dispute – YES
2) WON the action for rescission had already prescribed –NO (TOPIC RELEVANT)
3) WON the CA correctly ruled for the rescission of the MO – YES (TOPIC RELEVANT)
4) WON the award of moral and exemplary damages was proper – YES

RULING:
On Jurisdiction of The RTC:
Unlad Resources averred: RTC had no jurisdiction over their intra-corporate dispute (it should have been the SEC)
Court ruled: RTC has jx on the case since it is about rescission of MOA, and that RA 8799 was enacted.
- The main issue of this case is the rescission of the MO. This is separate, albeit related, to the “alleged mismanagement and dissipation of corporate
assets. “Clearly, the rescission of the Memorandum of Agreement is a cause of action within the jurisdiction of the trial courts, notwithstanding the fact
that the parties involved are all directors of the same corporation.”
- The law in force at the time was P.D. 902-A, which under Section 5(b) thereof granted the Securities and Exchange Commission (SEC) with original and
exclusive jurisdiction to decide on cases involving intra-corporate disputes.
- The Court, however, has said in jurisprudence that such jurisdiction cannot be absolute in all matters affecting corporations.
“The courts would then be divested of jurisdiction not by reason of the nature of the dispute submitted to them for adjudication, but solely for the
reason that the dispute involves a corporation. This cannot be done.”
- In addition, the Court noted how Dragon et al (respondents) initially approached the SEC before the RTC, but their case was dimissed “for lack of
jurisdiction” due to the pending RTC case (the SEC stated that the “contractual undertaking” lies with the RTC).
- Ultimately, this issue has been rendered MOOT by virtue of R.A. 8799 (Securities Regulation Code) which took effect in 2000, which
expressly transferred such jurisdiction from the SEC to the RTC (Section 5.2).

On The Matter of Prescription

- Unlad Resources averred: Under NCC 1389, the action for rescission prescribes after 4 years. The action was filed by Dragon et al (respondents)
approx. 6 years after the MO was entered into.
- Court ruled: NCC 1389 is applicable specifically to rescissible contracts (ELAM: Eh hindi naman ito under As30 na rescissible contracts, so hindi 4 yrs
and prescription), as it is clearly provided under the chapter entitled “Rescissible Contracts.”
- Citing the case of Iringan v CA, the Court distinguished the “rescission” in NCC 1380 and 1381 versus NCC 1191 and 1592.
- Court also added, Under NCC 1191 and 1592, the rescission is a principal action seeking the resolution or cancellation of the contract. The rescission
under NCC 1380 and 1381 is a subsidiary action “limited to cases of rescission for lesion as enumerated in said article.”
- The prescriptive period applicable to NCC 1191 and 1592 can be found in NCC 1144 (10 years from the time the right of action accrues).
- The Court ruled that the MO in question DOES NOT fall under any of the enumerated contracts stipulated in NCC 1381. Thus, the prescriptive period
applicable is NOT NCC 1389 but NCC 1144. Thus, the Complaint was well within such period.
- Note: It is not expressly stated by the Court, but the clear rescission applicable is that under NCC 1191, as this case involves reciprocal obligations.

On The Matter of Rescission as Proper Remedy AND Mutual Restitution as Effect of Resolution
Unlad Resources averred: It did not fail in the fulfillment of its obligations, or that their nonperformance was due to “legal impossibility.” They claim
that Dragon et al (respondents) failed to increase their capital stock to accommodate their undertaking. More specifically, Unlad said, Dragon et al only
increased their capital stock of initially Php 1M to Php 5M, which wasn’t enough to accommodate the Php 4.8M Unlad Resources was to subscribe for.
Court ruled: The Court held that indeed Unlad Resources failed to fulfill their obligations under the MO, e.g. nonpayment, venturing into contract of
lease (not bona fide connected with rural bank business). Unlad Resources does not deny this, it instead blaming the Dragon et al (respondents) that
Dragon et al failed to increase its capital stock.
- The Court ruled that while they agree such authorized capital stock was insufficient, this DOES NOT justify petitioner’s non-performance.
- In fact, under such circumstance, the Unlad Resources should have demanded fulfillment of the obligation or the rescission thereof under NCC 1191 as
well. In this case, it was the respondent who filed for rescission instead.
- Unlad failed to fulfill their end of the agreement, rescission was in order, right for Dragon et al to invoke it.

- Having determined that the rescission of MOA was in order, the trial court ordered Unlad Resources to return to Dragon the management and control
of the Rural Bank and for the latter to return the sum of P1,003,070.00 to Unlad.
- Rescission under NCC 1191 requires Mutual Restitution. The Court, citing Laperal v Solid Homes, Inc., and other jurisprudence, has consistently stated
that NCC 1385 (Mutual Restitution in Rescission) is indeed applicable to cases under NCC 1191.
(1) Rescission has the effect of “unmaking a contract, or its undoing from the beginning, and not merely its termination.” Hence,
rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return
whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made.

(2) When a decree for rescission is handed down, it is the duty of the court to require both parties to surrender that which they have
respectively received and to place each other as far as practicable in his original situation. The rescission has the effect of abrogating the
contract in all parts.

On The Awarding of Moral, Exemplary Damages, and Attorney’s Fees

- Even though the trial court’s Decision did not discuss the basis of such awards, the Court rules that such awards must be sustained.
- The awarding of damages is not based on the non-performance of the MO but on the alleged mismanagement of the bank by petitioner which led to
Dragon et al (respondents)’ financial losses.
- Citing QC Govt. v Dacara (G.R. No. 150304, June 15, 2005, 460 SCRA 243, 254, citing Expertravel & Tours, Inc. v. Court of Appeals, 368 Phil. 444; 309
SCRA 141 (1999)), the Court enumerated the requisites for awarding moral damages:
(1) an injury—whether physical, mental, or psychological—clearly sustained by the claimant;
(2) a culpable act or omission factually established;
(3) a wrongful act or omission of the defendant as the proximate cause of the injury sustained by the claimant; and
(4) the award of damages predicated on any of the cases stated in Article 2219.
- “Accordingly, based upon the findings of the trial court, it is clear that Dragon et al (respondents) are entitled to moral damages.
The acts attributed to the petitioners as directors of the Rural Bank manifestly prejudiced the Dragon et al (respondents) causing detriment to
their standing as directors and stockholders of the Rural Bank.”
- “Exemplary damages cannot be recovered as a matter of right (NCC 2233). While these need not be proved, Dragon et al (respondents)
must show that they are entitled to moral, temperate or compensatory damages before the court may consider the question of awarding
exemplary damages.” Because they are entitled to moral damages, awarding of exemplary damages is in order.
- As provided in NCC 2208, attorney’s fees can be rewarded absent stipulation when exemplary damages are awarded.

DISPOSITION:
WHEREFORE, the foregoing premises considered, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in
CA-G.R. CV No. 54226 are AFFIRMED.

NOTES: Pertinent Provisions: NCC 1144, 1191, 1359, 1380, 1381, 1389

Summary of SC’s decision ---

1) The RTC DOES have jurisdiction over the matter, and such question has been rendered moot by virtue of R.A. 8799;
2) The action for rescission HAD NOT PRESCRIBED because the rescission sought was based on NCC 1191 (where NCC 1141 is applicable) and not
NCC 1380 (where NCC 1389 is applicable), which are two different kinds of rescission;
3) The “impossibility” petitioner sighted DOES NOT justify their clear breach of the MO; an
4) The award of moral damages IS well-founded, and thus exemplary damages and attorney’s fees ARE ALSO to be awarded.