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 theenforcement 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 March21,

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)