First Philippine Holdings Corporation vs. Trans Middle East (Phils.) Equities Inc.

A contract of sale entered into by a corporation through its board of directors is voidable, not void, where the consent of the board is vitiated by fraud but not completely absent. The action to annul such a contract on the ground of fraud must be commenced within four years from the discovery of the fraud, and the period is not suspended by a party’s subjective fear of the political climate or distrust of the courts absent proof that these conditions prevented timely legal recourse.

FPHC, a holding company owned by the Lopez family, sold 6,299,179 common shares of stock in Philippine Commercial International Bank (PCIB) to TMEE, a corporation allegedly controlled by Benjamin (Kokoy) Romualdez, on 24 May 1984. This transaction formed part of the alleged ill-gotten wealth amassed by the Romualdez and Marcos families during the Marcos presidency and was among the assets the Presidential Commission on Good Government (PCGG) sought to recover in Civil Case No. 0035 before the Sandiganbayan. FPHC later claimed that the sale had been engineered through fraud and that the board of directors that approved it was a mere instrumentality of Romualdez, installed after control of FPHC had been fraudulently wrested from the Lopezes.

• The Corporate Parties and the Transaction: Petitioner FPHC is a holding company owned by the Lopez family. Respondent TMEE is a domestic corporation allegedly controlled by Benjamin (Kokoy) Romualdez. On 24 May 1984, FPHC sold 6,299,179 common shares of stock in Philippine Commercial International Bank (PCIB) to TMEE. These shares were among the sequestered assets that the PCGG sought to recover in Civil Case No. 0035 as part of the alleged ill-gotten wealth of the Romualdez and Marcos families.

• Allegations of Fraud and a Dummy Board: FPHC asserted that the sale was obtained through fraud, devious financial schemes, and acts contrary to law, morals, good customs, and public policy. Its Complaint-in-Intervention alleged that Benjamin Romualdez, with the collaboration of other defendants, had employed fraudulent means to gain control of FPHC, installed a “dummy” board of directors, and caused the sale of the PCIB shares to TMEE with minimal or negligible cash outlay, in violation of banking laws. The board that approved the sale was characterized as lacking genuine authority, its members being mere dummies of Romualdez.

• Delay and Motion to Dismiss: FPHC filed its motion to intervene and Complaint-in-Intervention on 28 December 1988. TMEE moved to dismiss on 27 June 2006, arguing that the action for annulment on the ground of fraud was barred by prescription. Under Article 1391 of the Civil Code, an action to annul a contract on the ground of fraud must be commenced within four years from the discovery of the fraud. The sale was consummated on 24 May 1984, and the complaint was filed more than four years and seven months later.

• FPHC’s Position on Prescription: FPHC contended that the four-year period should be counted from 24 February 1986, when former President Ferdinand E. Marcos was deposed and fled the country, because it was only at that point that the alleged intimidation and threats against the Lopez family ceased. Before that date, they could not have asserted their rights. FPHC alternatively argued that the contract was void ab initio because the “dummy board” lacked the capacity to give consent, making the action imprescriptible. It also maintained that the issue of prescription could not be resolved on the face of the complaint and required a full trial.

• Contract Void Ab Initio: Petitioner maintained that the sale was void ab initio because the board of directors that approved it was a mere “dummy board” installed by Benjamin Romualdez, lacking legal capacity to give genuine consent on behalf of the corporation. Consequently, the action for declaration of nullity was imprescriptible.

• Prescriptive Period Runs from End of Intimidation: Petitioner argued that, even assuming the contract was only voidable, the four-year prescriptive period under Article 1391 should commence on 24 February 1986, when former President Marcos was deposed, as the intimidation and threats against the Lopez family ceased only on that date.

• Premature Dismissal – Prescription Not Apparent on the Face of the Complaint: Petitioner contended that the facts demonstrating prescription were not apparent from the averments in the Complaint-in-Intervention; the matter required a trial to determine whether the board was so circumstanced that it was impossible for FPHC to bring an action during the Marcos regime.

• Prescription under Article 1391: Respondent argued that the action to annul the sale had prescribed because FPHC’s Complaint-in-Intervention was filed on 28 December 1988, more than four years after the sale was executed on 24 May 1984. Under Article 1391, the prescriptive period for an action based on fraud runs from the time of the discovery of the fraud, and FPHC had knowledge of the sale at the time it occurred.

• Contract Merely Voidable: Respondent maintained that the sale was not void ab initio but merely voidable, as the board of directors that approved the transaction had the ostensible legal capacity to bind the corporation; the defect, if any, went to the quality of consent, not its complete absence.

• Validity of Contract: Whether the sale of the PCIB shares was void ab initio because the board that approved it was a “dummy board” lacking the capacity to give corporate consent, or merely voidable on the ground of fraud.

• Prescription of Action: Whether FPHC’s action to annul the sale was barred by the four-year prescriptive period under Article 1391 of the Civil Code.

• Reckoning Point of Prescriptive Period: Whether the four-year period should be reckoned from the date of the sale (24 May 1984) or from the date the alleged intimidation ceased (24 February 1986).

• Propriety of Dismissal Without Trial: Whether the Sandiganbayan erred in dismissing the complaint on the ground of prescription without holding a full trial, on the theory that the facts establishing prescription were not apparent from the face of the complaint.

• Validity of Contract: The sale was voidable, not void ab initio. A contract is void only when one of the essential requisites under Article 1318 of the Civil Code is entirely lacking. Consent, one such requisite, was present here because the board of directors—the body vested by Section 23 of the Corporation Code with the power to exercise all corporate powers—approved the sale. The board members had legal capacity to bind the corporation, and no judicial or administrative declaration had previously nullified their election or authority. The allegations in FPHC’s pleading consistently pointed to fraud vitiating the consent of the board, a scenario falling squarely within Article 1390(2) of the Civil Code, which renders the resulting contract voidable. The prayer for a declaration of nullity does not determine the nature of the action; rather, the material factual allegations control. The case was distinguished from Islamic Directorate of the Philippines v. Court of Appeals, where the contract was void ab initio because the SEC had already declared the election of the board that executed the sale null and void—meaning consent was absolutely absent. No such prior declaration existed against FPHC’s board.

• Prescription of Action: The action for annulment had prescribed. Under Article 1391, the action to annul a contract on the ground of fraud must be filed within four years from the discovery of the fraud. FPHC had full knowledge of the sale on 24 May 1984, yet its Complaint-in-Intervention was filed only on 28 December 1988—four years and seven months later. The four-year prescriptive period had therefore lapsed.

• Reckoning Point of Prescriptive Period: The prescriptive period began to run from the discovery of the fraud in 1984, not from the end of the Marcos regime in 1986. Both FPHC’s petition and its Complaint-in-Intervention anchored the action on fraud, not on intimidation, violence, or undue influence; hence the special reckoning rule for those grounds (from the time the defect of consent ceases) was inapplicable. Even if intimidation were considered, FPHC’s claim of fear was unpersuasive. Martial law had been lifted in 1984, protests against the Marcos government were already vigorous, and the judiciary included magistrates who could resist executive pressure. Subjective distrust of the courts does not toll the prescriptive period.

• Propriety of Dismissal Without Trial: The Sandiganbayan properly dismissed the complaint on the ground of prescription based on the motion to dismiss. Under the rule in Gicano v. Gegato, a court may dismiss an action when the facts demonstrating prescription are apparent on the face of the complaint or otherwise established in the record. Here, the Complaint-in-Intervention and the record plainly showed that the sale was executed on 24 May 1984 and the complaint was filed on 28 December 1988, a period of more than four years. No trial was necessary to determine that fact. FPHC was not denied due process, as the motion was set for hearing and the parties had ample opportunity to present their arguments through pleadings.

• Voidable Contract – Corporate Consent Vitiated by Fraud: A contract entered into by a corporation through its board of directors is not void ab initio merely on the allegation that the board was a “dummy” of a third party who fraudulently acquired control. The board, as the corporate organ, has legal capacity to give consent under Section 23 of the Corporation Code. Where no prior judicial or administrative ruling has voided its election or authority, the consent given by such board is not entirely absent; the defect goes to the quality of consent and renders the contract voidable under Article 1390(2) of the Civil Code, not void.

• Prescriptive Period for Annulment Based on Fraud: Under Article 1391 of the Civil Code, an action to annul a voidable contract on the ground of fraud must be commenced within four years from the time of the discovery of the fraud. The period is not suspended by a party’s fear of the ruling political regime or distrust of the judiciary. The victim’s failure to take even token steps to challenge the transaction within the prescribed period bars the action.

• Dismissal on Prescription Based on the Pleadings: A court may dismiss a complaint on the ground of prescription when the facts demonstrating the lapse of the prescriptive period are sufficiently and satisfactorily apparent from the complaint or the record, without need for a full trial. The nature of the action is determined by the material allegations of fact in the complaint, not by the prayer or the caption.

• “[T]he mere allegation of FPHC that the persons who composed the Board of Directors of FPHC that approved the contract were mere dummies of the Marcos and Romualdez group does not make the said contract void. If that allegation of vitiated consent be true so as to incapacitate the Board from giving its consent freely, the defect if at all only renders the contract voidable.”

• “[I]t is the material allegations of fact in the complaint, not the legal conclusion made therein or the prayer that determines the nature of the case. … As the complaint-in-intervention substantially alleged that the contract was voidable, the four-year prescriptive period under Art. 1391 of the New Civil Code will apply.”

• “[T]he Locsin’s mistrust of the courts and of judicial processes is no excuse for their non-observance of the prescriptive period set down by law.” (citing Philippine Free Press, Inc. v. Court of Appeals)

• “[T]rial courts have authority and discretion to dismiss an action on the ground of prescription when the parties' pleadings or other facts on record show it to be indeed time-barred … What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive period be otherwise sufficiently and satisfactorily apparent on the record; either in the averments of the plaintiff's complaint, or otherwise established by the evidence.” (Gicano v. Gegato)

• First Philippine Holdings Corporation v. Sandiganbayan, 323 Phil. 36 (1996) — The earlier case in which the Supreme Court ordered the Sandiganbayan to admit FPHC’s Complaint-in-Intervention; distinguished as a procedural ruling that did not adjudicate the merits or the issue of prescription.

• Philippine Free Press, Inc. v. Court of Appeals, G.R. No. 132864, 24 October 2005, 473 SCRA 639 — Relied upon for the principle that mistrust of courts and judicial processes does not excuse non-observance of the prescriptive period; applied to reject FPHC’s claim that it could not sue earlier due to fear of the Marcos government.

• Islamic Directorate of the Philippines v. Court of Appeals, 338 Phil. 970 (1997) — Distinguished. In that case, the sale was void ab initio because the SEC had previously declared the election of the board that executed the sale null and void, resulting in a complete absence of consent; here, no such prior declaration existed against FPHC’s board, and the defect went only to the quality of consent.

• Gicano v. Gegato, G.R. No. L-63575, 20 January 1988, 157 SCRA 140 — Applied as authority for the rule that a trial court may dismiss an action on the ground of prescription when the facts establishing it are apparent from the pleadings or the record, even without trial.

• Sandel v. Court of Appeals, 330 Phil. 653 (1996) — Cited for the rule that the nature of an action is determined by the material allegations of fact in the complaint, not the caption or the prayer.

• Article 1318, Civil Code of the Philippines — Defines the essential requisites of a valid contract: consent of the contracting parties, object certain, and cause of the obligation. Applied to establish that consent was given by FPHC’s board of directors, preventing the contract from being void for complete absence of consent.

• Article 1390(2), Civil Code — Classifies as voidable or annullable those contracts where consent is vitiated by mistake, violence, intimidation, undue influence, or fraud. Served as the basis for characterizing the sale as voidable given FPHC’s allegations of fraud.

• Article 1391, Civil Code — Provides that the action for annulment shall be brought within four years; in case of fraud, the period runs from the time of discovery. Applied to bar the action, as more than four years had elapsed from FPHC’s discovery of the fraudulent sale.

• Section 23, Batas Pambansa Blg. 68 (Corporation Code) — Vests the exercise of all corporate powers in the board of directors. Used to establish that the board had the legal capacity to bind the corporation, nullifying the claim that consent was entirely absent.

Associate Justices Renato C. Corona (Chairperson), Presbitero J. Velasco, Jr., Antonio Eduardo B. Nachura, and Diosdado M. Peralta concurred. The Decision was attested by the Division Chairperson and certified by Chief Justice Reynato S. Puno.

None.