LEE vs.

QUEZON CITY RTC

G.R. No. 146006
August 22, 2005

Previous Case: Dr. Juvencio P. Ortañez incorporated the Philippine International Life Insurance
Company, Inc. on July 6, 1956. At the time of the company’s incorporation, Dr. Ortañez owned ninety
percent (90%) of the subscribed capital stock. On July 21, 1980, Dr. Ortañez died. He left behind a, three
legitimate children (Rafael, Jose and Antonio Ortañez) and five illegitimate children by Ligaya Novicio
(herein private respondent Ma. Divina Ortañez-Enderes and her siblings Jose, Romeo, Enrico Manuel
and Cesar, all surnamed Ortañez).

On September 24, 1980, Rafael Ortañez filed a petition for letters of administration of the intestate
estate of Dr. Ortañez. Private respondent Ma. Divina Ortañez-Enderes and her siblings filed an
opposition to the petition for letters of administration and, in a subsequent urgent motion, prayed that
the intestate court appoint a special administrator. As ordered by the intestate court, special
administrators Rafael and Jose Ortañez submitted an inventory of the estate of their father which
included, among other properties, 2,0293 shares of stock in Philippine International Life Insurance
Company, representing 50.725% of the company’s outstanding capital stock. On April 15, 1989, the
decedent’s wife, Juliana S. Ortañez, claiming that she owned 1,0144 Philinterlife shares of stock as her
conjugal share in the estate, sold said shares with right to repurchase in favor of herein petitioner
Filipino Loan Assistance Group (FLAG),represented by its president, herein petitioner Jose C. Lee. Juliana
Ortañez failed to repurchase the shares of stock within the stipulated period, thus ownership thereof
was consolidated by petitioner FLAG in its name.

On October 30, 1991 Special Administrator Jose Ortañez, acting in his personal capacity and claiming
that he owned the remaining 1,011 Philinterlife shares of stocks as his inheritance share in the estate,
sold said shares with right to repurchase also in favor of herein petitioner FLAG, represented by its
president, herein petitioner Jose C. Lee. After one year, petitioner FLAG consolidated in its name the
ownership of the Philinterlife shares of stock when Jose Ortañez failed to repurchase the same.

Facts: Petitioners were cited for contempt for their refusal to comply with the final and executory
decision of this Court dated February 23, 2004. Petitioners' non-compliance, as president and corporate
secretary, respectively, of Philippine International Life Insurance Company.

In our February 23, 2004 decision, we noted that petitioners, with the rest of the FLAG-controlled
directors and stockholders, increased the authorized capital stock of Philinterlife, diluting in the process
the 2,029 shares of the estate representing 50.725% of Philinterlife. Thus, we ruled that, considering the
nullity of the sale of the 2,029 shares to FLAG, the increase in Philinterlife's authorized capital stock was
void ab initio. Consequently, any approval by the Securities and Exchange Commission of this increase
would likewise be void ab initio.

Next, they assail our ruling that the increase in Philinterlife's authorized capital stock was void ab initio.
Petitioners argue that the nullification of the increase in authorized capital stock of Philinterlife will
adversely affect the interests of stockholders who were not parties to this case and are independent of
petitioner Filipino Loan Assistance Group (FLAG). To nullify the increase will deprive them of their
property without due process. In addition, they assert that the increases in authorized capital stock in
1987 and 2001 were done in compliance with governmental requirements for insurance companies.
Issue: Whether the increase the increases in authorized capital stock in 1987 and 2001, both carried out
without the approval of the probate court, diluted the interest of the estate in Philinterlife?

Held: Yes, throughout the pendency of these proceedings which commenced in 1980, the estate of Dr.
Ortañez, including the 2,029 shares of stock in Philinterlife, was in custodia legis or under the custody
and jurisdiction of the court. Where the estate of the deceased person is already the subject of a testate
or in testate proceeding, the administrator cannot enter into any transaction involving it without prior
approval of the probate court. Clearly, the intention is to protect the interests of the estate while the
respective rights of the parties are being litigated.

As shown by the figures provided by the petitioners, the increases in authorized capital stock in 1987
and 2001, both carried out without the approval of the probate court, diluted the interest of the estate
in Philinterlife. For still unexplained reasons, the shares of the estate of Dr. Ortañez in Philinterlife went
down from 50.725% in 1980 to 40.58% in 1983. Philinterlife's authorized capital stock was increased
from P5 million to P10 million in 1987. Consequently, in 1989, the estate's interest went down to
20.29%. In 2001, the authorized capital stock was again increased to P50 million. As a result, the estate
now owns a miniscule 4.05%.

The law provides a mechanism by which the estate could have preserved its proportionate interest in
the company. For unexplained reasons, the estate's interest was wittingly or unwittingly allowed to
shrink. To tolerate this situation will not only negate the control of the probate court over assets
brought into custodia legis but will also frustrate the protection given them.