Lisam Enterprises, Inc. v. Banco De Oro Unibank, Inc.

Application Covering Two or More Parcels — Amendments

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Case DigestWeek 3–4 — The Registries of Deeds and Original Registration

Lisam Enterprises, Inc. v. Banco De Oro Unibank, Inc.

G.R. No. 143264 · April 23, 2012 · Supreme Court — Third Division

Application Covering Two or More Parcels — Amendments

Gist

The relationship of the case of Lisam Enterprises, Inc. v. Banco De Oro Unibank, Inc., G.R. No. 143264, April 23, 2012, to the assigned topic of amendments to land registration applications under Section 19 of Presidential Decree No. 1529 is ANALOGOUS. The triggering controversy arose when Petitioner Lolita A. Soriano, as a stockholder and Corporate Secretary of Lisam Enterprises, Inc., filed a Complaint for Annulment of Mortgage against Banco De Oro Unibank, Inc. (formerly Philippine Commercial International Bank) and Lilian S. Soriano, asserting that Lilian S. Soriano and the late Leandro A. Soriano, Jr. mortgaged corporate property using a falsified board resolution without the authority or consent of the board of directors. The Supreme Court of the Philippines reversed the Regional Trial Court and the Court of Appeals, ordering the Regional Trial Court to admit the Amended Complaint filed by petitioners, which amendment cured a formal defect by alleging that Lolita A. Soriano had made demands upon the Board of Directors of Lisam Enterprises, Inc. to take protective legal action. The central doctrine establishes that under the 1997 Rules of Civil Procedure (which apply suppletorily to land registration proceedings under Section 34 of Presidential Decree No.

Core Doctrine

The Lisam Rule of Liberal Amendment: The 1997 Rules of Civil Procedure permit substantial amendments to pleadings even if the amendments alter the cause of action or defense, provided that the amendments serve the higher interests of substantial justice, prevent a multiplicity of suits, and promote the speedy and inexpensive disposition of actions on the merits. The Regional Trial Court commits a grave abuse of discretion in denying leave to amend when the amendment merely seeks to cure a formal or procedural defect in the original complaint.

Facts

Lisam Enterprises, Inc., registered with the SEC on December 23, 1959, bought in 1993 a residential lot with improvements in Legaspi City under TCT No. 37866.
On March 28, 1996 Lilian S. Soriano and the late Leandro A. Soriano, Jr., in their personal capacities, borrowed ₱20 million from Philippine Commercial International Bank, now Banco De Oro Unibank, Inc. The same day, acting as the corporation's president and treasurer, they mortgaged the property covered by TCT No. 37866 to the bank on a falsified board resolution, without the board's authority or consent.
In April 1999 Lolita A. Soriano discovered the unauthorised mortgage, demanded that Lilian and the Estate of Leandro A. Soriano, Jr. pay the ₱20 million and clear the lien — they ignored her — and demanded that the Board take legal steps, which it failed or refused to do.
On August 13, 1999 Lisam, through Lolita, and Lolita personally sued to annul the mortgage in the RTC of Legaspi City, Branch 4, against the bank, Lilian, the Estate, the Register of Deeds and Jesus L. Sarte. On August 25, 1999 the court issued a TRO and later a writ of preliminary injunction halting the foreclosure sale.
On September 25, 1999 Lilian and the Estate answered, asserting board authorisation, corporate benefit and genuine signatures; on September 28, 1999 the bank moved to dismiss for want of capacity to sue, failure to state a cause of action, and litis pendentia.
On November 11, 1999 the RTC dismissed the complaint because it never alleged that Lolita had demanded action of the Board. While reconsideration was pending, petitioners on January 4, 2000 moved to admit an Amended Complaint whose paragraph 13 expressly alleged that demand and the Board's refusal. On May 15, 2000 the RTC denied both motions, holding the amendment absolutely changed the cause of action; the CA affirmed, and the Third Division decided on April 23, 2012.

Arguments of the Parties

Petitioners. Lisam and Lolita argued the motion to amend was filed before the dismissal became final, so amendment was a matter of right under liberal procedure; that the 1997 Rules deliberately removed the old bar on amendments that "substantially alter the cause of action or defense," leaving courts broad discretion to admit substantial amendments; and that the Amended Complaint cured the defect by pleading the demand upon the Board, thereby stating a cause of action for a derivative suit.

Respondents. The bank argued the original complaint was rightly dismissed for Lolita's want of capacity and the missing allegation of demand; and that with a responsive pleading already served, amendment was no longer of right but required leave, properly refused because the amendment absolutely changed the cause of action. Lilian and the Estate argued the mortgage was fully authorised by the Board, the proceeds benefited the corporation, and Lolita in fact signed the authorising documents.

Common Ground / Stipulations (if any). The parties agreed that the Answer of Lilian and the Estate had already been filed and served before the Motion to Admit Amended Complaint was filed.

Issue

MAIN ISSUE (Amendment-centered). Whether a court — applying the Rules of Court suppletorily under Section 34 — errs in refusing an amended pleading on the ground that the amendment substantially alters the cause of action or defence originally pleaded.

SECONDARY ISSUES. Whether service of an Answer by some defendants ends the right to amend as a matter of course; whether pleading the demand upon the board cures the defect and states a derivative suit; and whether regular courts have jurisdiction over a suit by a stockholder to annul a mortgage in favour of a mortgagee bank.

ANCILLARY / INCIDENTAL ISSUES (if any). None separately resolved.

Ruling

On the MAIN ISSUE: YES, refusal was reversible error. Section 3 of Rule 10 of the 1997 Rules deliberately deleted the phrase "or that the cause of action or defense is substantially altered" — so an amendment may now substantially alter either, provided it serves substantial justice, prevents multiplicity of suits, and promotes a just, speedy and inexpensive disposition on the merits. That discretion must be exercised with great liberality, most of all in the early stages before trial. On the right to amend: it had lapsed — a responsive pleading having been served, substantial amendment required leave of court; but the RTC gravely abused its discretion in withholding it, the amendment being needed to thresh out the real controversies and prevent delay. On the derivative suit: cured — paragraph 13's allegation that Lolita demanded action of the Board, which failed and refused, satisfied every requisite, so the Amended Complaint states a valid cause of action. On jurisdiction: regular courts — a mortgagee bank has no intra-corporate relationship with the stockholders of the mortgagor corporation, so the suit is an ordinary civil action, not an intra-corporate dispute; and a pending intra-corporate case is neither forum shopping nor ground to dismiss, the issues being distinct. The dispositive portion reads verbatim: "IN VIEW OF THE FOREGOING, the Resolution of the Regional Trial Court of Legaspi City, Branch 4, dated November 11, 1999, dismissing petitioners' complaint in Civil Case No. 9729, and its Order dated May 15, 2000, denying herein petitioners' Motion for Reconsideration and Motion to Admit Amended Complaint, are hereby REVERSED and SET ASIDE. The Regional Trial Court of Legaspi City, Branch 4, is hereby DIRECTED to ADMIT the Amended Complaint. Considering further, that this case has been pending for some time and, under R.A. No. 8799, it is now the regular courts which have jurisdiction over intra-corporate disputes, the Regional Trial Court of Legaspi City, Branch 4 is hereby DIRECTED to PROCEED with dispatch in trying Civil Case No. 9729. SO ORDERED."

Ratio

The deletion was deliberate and means what it says. Removing the restrictive clause from Section 3 leaves courts free to admit amendments that change the cause of action, so the old objection no longer states a ground for refusal.
Procedure serves substantive justice. Rules exist to facilitate adjudication on the merits, not to obstruct it; liberality avoids a multiplicity of suits and needless delay.
Timing measures prejudice. Before trial begins the adverse party still has ample time to answer and prepare, so liberality is at its widest and the objection of surprise carries least weight.
The Rules reach registration proceedings too. Under Section 34 they apply suppletorily, and the same liberality informs Section 19, which lets the registration court allow amendments "at any stage of the proceedings upon just and reasonable terms."
A suit against a third-party mortgagee is not intra-corporate: the bank stands outside the corporate relation, so the case belongs to the regular courts.

Doctrine

Doctrines / Rules / Principles Laid Down.

The 1997 Rules permit substantial amendments even where they alter the cause of action or defence, so long as they serve substantial justice, avoid multiplicity of suits, and speed disposition on the merits; denying leave to cure a formal defect is grave abuse of discretion.
And a derivative suit requires an express allegation that the stockholder demanded protective action of the board and the board failed or refused — an amendment supplying that omission is formal and must be admitted.

Distinctions / Limitations / Qualifications.

Leave to amend may still be refused where the record shows an intent to delay. And though Section 19 permits liberal amendment of a registration application at any stage, an amendment that changes boundaries substantially, increases the area, or adds land triggers the mandatory publication and notice required of an original application — while amendments that merely decrease the area, substitute parties, or correct names need no republication.

Topic/Subtopic Integration (Mandatory).

ANALOGOUS: the case supplies the governing reading of Rule 10, which applies suppletorily to registration proceedings under Section 34 — so a registration court construing Section 19 must show the same liberality toward amendments, joinders and substitutions, the one substantive limit being an amendment that adds land or shifts boundaries, which triggers republication to protect the court's in rem jurisdiction and satisfy due process.

Separate Opinions

None. The Third Division decided unanimously through Justice Diosdado M. Peralta, with Justices Velasco, Jr., Abad, Mendoza and Perlas-Bernabe concurring.

Full Digest — Recitation Format

Facts

On December 23, 1959: Lisam Enterprises, Inc. was duly registered as a domestic corporation with the Securities and Exchange Commission.
Sometime in the year 1993: Lisam Enterprises, Inc. acquired by purchase a parcel of residential land with improvements in Legaspi City, covered by Transfer Certificate of Title No. 37866.
On March 28, 1996: Lilian S. Soriano and the late Leandro A. Soriano, Jr., acting in a personal capacity, obtained a loan in the total amount of PHP 20 Million from Philippine Commercial International Bank (now Banco De Oro Unibank, Inc.).
On March 28, 1996: Leandro A. Soriano, Jr. and Lilian S. Soriano, acting as president and treasurer of Lisam Enterprises, Inc. respectively, executed a real estate mortgage over the property covered by Transfer Certificate of Title No. 37866 in favor of Philippine Commercial International Bank, using a falsified board resolution and without the authority or consent of the board of directors of Lisam Enterprises, Inc..
Sometime in April 1999: Petitioner Lolita A. Soriano discovered the unauthorized and fraudulent mortgage of the corporate property.
Sometime in April 1999: Lolita A. Soriano, acting in a personal capacity and on behalf of Lisam Enterprises, Inc., made demands upon Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. to pay the PHP 20 Million loan in full and free the corporate property from the mortgage lien, but Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. ignored the demands.
Sometime in April 1999: Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc. to take legal steps to protect the interests of the corporation, but the Board of Directors failed or refused to take action.
On August 13, 1999: Lisam Enterprises, Inc., represented by Lolita A. Soriano, and Lolita A. Soriano, in a personal capacity, filed a Complaint for Annulment of Mortgage with Prayer for Temporary Restraining Order and Preliminary Injunction against Banco De Oro Unibank, Inc., Lilian S. Soriano, the Estate of Leandro A. Soriano, Jr., the Register of Deeds of Legaspi City, and Jesus L. Sarte before the Regional Trial Court of Legaspi City, Branch 4.
On August 25, 1999: The Regional Trial Court of Legaspi City issued a Temporary Restraining Order, and after due hearing, issued a Writ of Preliminary Injunction enjoining Banco De Oro Unibank, Inc. from proceeding with the foreclosure auction sale of the property covered by Transfer Certificate of Title No. 37866.
On September 25, 1999: Respondents Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. filed an Answer, asserting that the Board of Directors of Lisam Enterprises, Inc. authorized the mortgage, that the loan proceeds benefited the corporation, and that all notarized documents bore the genuine signature of Lolita A. Soriano.
On September 28, 1999: Respondent Banco De Oro Unibank, Inc. filed a Motion to Dismiss the Complaint, asserting lack of legal capacity to sue on the part of Lolita A. Soriano, failure to state a cause of action, and litis pendencia.
On November 11, 1999: The Regional Trial Court of Legaspi City issued a Resolution dismissing the Complaint on the ground that the original Complaint failed to allege that Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc. to protect the interests of the corporation.
Sometime in November 1999: Petitioners filed a Motion for Reconsideration of the dismissal order.
On January 4, 2000: While the Motion for Reconsideration was pending, petitioners filed a Motion to Admit Amended Complaint, attaching an Amended Complaint which amended paragraph 13 to explicitly allege that Lolita A. Soriano had made demands upon the Board of Directors of Lisam Enterprises, Inc. to take legal action but the Board of Directors failed and refused to act.
On May 15, 2000: The Regional Trial Court of Legaspi City issued an Order denying both the Motion for Reconsideration and the Motion to Admit Amended Complaint, holding that the Amended Complaint could not be admitted because the amendment absolutely changed the cause of action of petitioners.
Sometime in the year 2000: Petitioners appealed the adverse Orders to the Court of Appeals, which subsequently affirmed the Regional Trial Court.
Sometime thereafter: Petitioners elevated the case to the Supreme Court of the Philippines via a Petition for Review on Certiorari under Rule 45 of the Rules of Court.
On April 23, 2012: The Supreme Court of the Philippines Third Division promulgated the Decision reversing the Court of Appeals and the Regional Trial Court, and directing the Regional Trial Court of Legaspi City to admit the Amended Complaint.

Arguments of the Parties

Petitioner/Prosecution (Lisam Enterprises, Inc. and Lolita A. Soriano).

Petitioners argue that the Regional Trial Court committed a reversible error in denying the admission of the Amended Complaint because the motion to amend was filed before the order of dismissal became final, making the amendment a matter of right under the liberal rules of civil procedure.
Petitioners contend that the 1997 Rules of Civil Procedure deliberately removed the former restriction prohibiting amendments that "substantially alter the cause of action or defense," thereby vesting broad discretion in courts to admit substantial amendments.
Petitioners assert that the Amended Complaint sufficiently states a cause of action for a derivative suit because the amendment cured the formal defect by explicitly alleging the mandatory requirement that Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc..

Respondent/Defense (Banco De Oro Unibank, Inc., Lilian S. Soriano, and Estate of Leandro A. Soriano, Jr.).

Respondent Banco De Oro Unibank, Inc. argues that the original Complaint was properly dismissed because Lolita A. Soriano lacked the legal capacity to sue on behalf of the corporation, and the complaint failed to state a cause of action due to the omission of the allegation that Lolita A. Soriano made demands upon the Board of Directors.
Respondent Banco De Oro Unibank, Inc. contends that the Amended Complaint cannot be admitted because a responsive pleading (the Answer of Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr.) had already been served, meaning the amendment was no longer a matter of right but required leave of court, which the Regional Trial Court properly denied because the amendment absolutely changed the cause of action.
Respondents Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. argue that the mortgage was valid and fully authorized by the Board of Directors of Lisam Enterprises, Inc., that the proceeds of the loan were utilized for the benefit of the corporation, and that Lolita A. Soriano actually signed the authorization documents.

Common Ground.

The parties admit and stipulate that a responsive pleading (the Answer of Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr.) had already been filed and served before petitioners filed the Motion to Admit Amended Complaint.

Issue

MAIN ISSUE. Whether a land registration or regular trial court, applying the Rules of Court suppletorily under Section 34 of Presidential Decree No. 1529, commits a reversible error in refusing to admit an amended pleading on the ground that the amendment substantially alters or changes the cause of action or defense originally pleaded.

SECONDARY ISSUES.

Whether the filing and service of an Answer by some defendants precludes the plaintiff from amending the complaint as a matter of right under Section 2, Rule 10 of the Rules of Court.
Whether the inclusion of an allegation of demand upon the board of directors in the Amended Complaint sufficiently cures the formal defect of the original complaint and establishes a valid cause of action for a derivative suit.
Whether regular courts have jurisdiction over a complaint for annulment of mortgage filed by a stockholder on behalf of a corporation against a mortgagee bank.

Ruling

Ruling on the MAIN ISSUE. YES. The Supreme Court of the Philippines ruled that the Regional Trial Court and the Court of Appeals committed a reversible error in refusing to admit the Amended Complaint. The Supreme Court of the Philippines held that Section 3, Rule 10 of the 1997 Rules of Civil Procedure deliberately deleted and omitted the old restrictive phrase 'or that the cause of action or defense is substantially altered'. Under the current legal framework, which applies suppletorily to land registration and special proceedings under Section 34 of Presidential Decree No. 1529, an amendment may now validly and substantially alter the cause of action or defense, provided that the amendment serves the higher interests of substantial justice, prevents a multiplicity of suits, and promotes a just, speedy, and inexpensive disposition of the action on the merits. Thus, the broad discretion of the trial court must be exercised with great liberality, especially when the amendment is presented in the early stages of a lawsuit before the trial begins.

Ruling on SECONDARY ISSUE 1. YES. The Supreme Court of the Philippines held that because respondents Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. had already filed and served the Answer of Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. to the original complaint, the amendment could no longer be made as a matter of right under Section 2, Rule 10 of the Rules of Court. The Supreme Court of the Philippines ruled that once a responsive pleading is served, substantial amendments to the complaint may only be made by leave of court under Section 3, Rule 10 of the Rules of Court. However, the Supreme Court of the Philippines held that the Regional Trial Court committed grave abuse of discretion in denying leave to amend because the amendment was necessary to thresh out the real controversies on the merits and prevent unnecessary delay.

Ruling on SECONDARY ISSUE 2. YES. The Supreme Court of the Philippines ruled that the Amended Complaint successfully cured the procedural and formal defects of the original Complaint. The Supreme Court of the Philippines held that the explicit allegation in paragraph 13 of the Amended Complaint—stating that Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc. to take legal steps, but the Board of Directors failed and refused to act—satisfied all the legal and jurisprudence-mandated requisites for a valid corporate derivative suit. Consequently, the admission of the Amended Complaint is legally proper because the complaint now sufficiently states a valid cause of action.

Ruling on SECONDARY ISSUE 3. YES. The Supreme Court of the Philippines held that the regular Regional Trial Courts have exclusive original jurisdiction over a complaint for annulment of mortgage filed against a mortgagee bank. The Supreme Court of the Philippines ruled that because a mortgagee bank has no intra-corporate relationship with the stockholders of the mortggor-corporation, the action is not an intra-corporate dispute falling within the specialized jurisdiction of the Securities and Exchange Commission or the designated commercial courts, but is an ordinary civil action cognizable by the regular courts. The Supreme Court of the Philippines further held that the pendency of a separate intra-corporate case does not constitute forum shopping or warrant dismissal because the issues are completely distinct.

Dispositive portion (verbatim). The final dispositive portion of the Supreme Court of the Philippines in G.R. No. 143264, dated April 23, 2012, is quoted verbatim as follows:

"IN VIEW OF THE FOREGOING, the Resolution of the Regional Trial Court of Legaspi City, Branch 4, dated November 11, 1999, dismissing petitioners’ complaint in Civil Case No. 9729, and its Order dated May 15, 2000, denying herein petitioners’ Motion for Reconsideration and Motion to Admit Amended Complaint, are hereby REVERSED and SET ASIDE. The Regional Trial Court of Legaspi City, Branch 4, is hereby DIRECTED to ADMIT the Amended Complaint.

Considering further, that this case has been pending for some time and, under R.A. No. 8799, it is now the regular courts which have jurisdiction over intra-corporate disputes, the Regional Trial Court of Legaspi City, Branch 4 is hereby DIRECTED to PROCEED with dispatch in trying Civil Case No. 9729.

SO ORDERED."

Ratio

The Deletion of the Cause of Action Restriction: Under the 1997 Rules of Civil Procedure, specifically Section 3, Rule 10, the Supreme Court of the Philippines deliberately deleted and removed the phrase "or that the cause of action or defense is substantially altered" from the text of the law. This deletion means that amendments may now substantially change or alter the cause of action or defense originally pleaded.
The Mandate of Judicial Liberality: The rules of procedure are designed to facilitate the attainment of substantial justice, not to obstruct the administration of justice. Courts must adopt a liberal attitude toward allowing amendments to pleadings at any stage of the proceedings to ensure that the real controversies between the parties are threshed out on the merits, avoiding a multiplicity of suits and preventing unnecessary delays.
The Temporal Element of Liberality: The liberality in allowing amendments is greatest in the early stages of a lawsuit, particularly before the trial of the case begins, because the adverse party is afforded ample time and opportunity to file an answer to the amended pleading and prepare for trial without suffering prejudice.
The Suppletory Application in Land Registration: Under Section 34 of Presidential Decree No. 1529, the Rules of Court apply suppletorily to land registration and cadastral proceedings. The liberal procedural rules of amendment under Rule 10, Section 3 of the Rules of Court govern the interpretation of Section 19 of Presidential Decree No. 1529, which allows the land registration court to permit amendments to land registration applications "at any stage of the proceedings upon just and reasonable terms".
The Jurisdiction of Regular Courts Over Third-Party Mortgagees: A corporate derivative suit to annul a mortgage executed in favor of a third-party mortgagee bank does not constitute an intra-corporate dispute because the mortgagee bank has no corporate relationship with the stockholders of the corporation. Thus, jurisdiction remains with the regular Regional Trial Courts.

Doctrine

Doctrines / Rules / Principles Laid Down.

The Lisam Rule of Liberal Amendment: The 1997 Rules of Civil Procedure permit substantial amendments to pleadings even if the amendments alter the cause of action or defense, provided that the amendments serve the higher interests of substantial justice, prevent a multiplicity of suits, and promote the speedy and inexpensive disposition of actions on the merits. The Regional Trial Court commits a grave abuse of discretion in denying leave to amend when the amendment merely seeks to cure a formal or procedural defect in the original complaint.
The Derivative Suit Demand Requisite: To validly initiate a corporate derivative suit, the stockholder must explicitly allege in the complaint that the stockholder made demands upon the board of directors of the corporation to take protective legal action, and that the board of directors failed or refused to act. An amendment made to include this omitted allegation of demand is formal and must be admitted by the court to allow the case to be decided on the merits.

Distinctions / Limitations / Qualifications.

The Intent to Delay Limitation: Under Section 3, Rule 10 of the Rules of Court, leave of court to file substantial amendments may be refused and denied if the record clearly demonstrates that the motion to amend was made with the intent to delay the proceedings.
The Publication Requisite for Land Amendments under Section 19: While Section 19 of Presidential Decree No. 1529 permits the liberal amendment of land registration applications at any stage, this rule is strictly limited in that any amendment consisting of a substantial change in the boundaries, an increase in the land area, or the inclusion of additional land is subject to the mandatory requirements of publication and notice as in an original application. Amendments that merely decrease the land area, substitute parties, or correct names do not require republication.

Topic/Subtopic Integration (Mandatory).

Classification of Relationship: ANALOGOUS.
Integration: The case of Lisam Enterprises, Inc. v. Banco De Oro Unibank, Inc. is a highly persuasive and analogous civil procedure authority for the requested topic because the case provides the definitive interpretation of the liberalized rules of amendment under Rule 10 of the Rules of Court, which apply suppletorily to land registration proceedings pursuant to Section 34 of Presidential Decree No. 1529. Just as the Supreme Court of the Philippines in G.R. No. 143264 mandates that regular courts must show maximum liberality in allowing amendments to cure defects and prevent a multiplicity of suits, land registration courts applying Section 19 of Presidential Decree No. 1529 must similarly allow the amendment of land applications, joinders, or substitutions at any stage of the proceedings. The only substantive limitation to this liberality in land registration proceedings is when the amendment adds land or substantially changes boundaries, which triggers the mandatory requirement of republication under Section 19 of Presidential Decree No. 1529 to protect the in rem jurisdiction of the court and satisfy the constitutional demands of due process.

Separate Opinions

NOT APPLICABLE / NOT IN RECORD. (The decision of the Supreme Court of the Philippines Third Division was rendered unanimously, with Associate Justice Diosdado M. Peralta as the ponente, and with Associate Justices Presbitero J. Velasco, Jr., Roberto A. Abad, Jose Catral Mendoza, and Estela M. Perlas-Bernabe concurring, without any separate concurring or dissenting opinions filed).

Cited Laws & Provisions

Every statute, rule, and issuance the decision turns on — the text as written, and the work it does in this case.

Implementing Rules

Section 3, Rule 10, Rules of Court

Amendments by leave of court

1997 Rules of Civil Procedure — Rule 10 (Amended and Supplemental Pleadings)

Except as provided in the next preceding section, substantial amendments may be made only upon leave of court. But such leave may be refused if it appears to the court that the motion was made with intent to delay. Orders of the court upon the matters provided in this section shall be made upon motion filed in court, and after notice to the adverse party, and an opportunity to be heard. (3a)

LawPhil posts the 1997 text. The 2019 Amendments to the Rules of Civil Procedure (A.M. No. 19-10-20-SC) took effect 1 May 2020 and changed several of these rules; a decision promulgated before that date was governed by the text quoted here.

Why it is cited here

The provision that decided the case, and the change in it that the lower courts missed.

"Substantial amendments may be made only upon leave of court. But such leave may be refused if it appears to the court that the motion was made with intent to delay."

Under the old rule, leave could be refused where the amendment would substantially alter the cause of action or defense. The 1997 Rules dropped that ground, leaving intent to delay as the only stated basis for refusal.

Lolita Soriano's amendment merely alleged that she had made demands upon the Board to take protective legal action — curing a formal defect in a derivative suit, not changing her cause of action at all. Refusing it was error.

The policy is that amendments are liberally allowed so that the real controversy is decided on its merits rather than on the state of the pleadings. A defect that can be cured by amendment should be cured, not made the ground of dismissal.

Special Law

Section 19, P.D. No. 1529

Amendments

Presidential Decree No. 1529 (Property Registration Decree, 1978)

Amendments to the application including joinder, substitution, or discontinuance as to parties may be allowed by the court at any stage of the proceedings upon just and reasonable terms.

Amendments which shall consist in a substantial change in the boundaries or an increase in area of the land applied for or which involve the inclusion of an additional land shall be subject to the same requirements of publication and notice as in an original application.

Why it is cited here

The land registration counterpart, and why the relation is analogous rather than direct.

"Amendments to the application including joinder, substitution, or discontinuance as to parties may be allowed by the court at any stage of the proceedings upon just and reasonable terms."

Note how closely the policy tracks Rule 10: amendment is permitted at any stage, on terms, in aid of deciding the real dispute. Registration proceedings are not exempt from the liberality that governs ordinary civil actions — the Rules apply suppletorily.

But the section then draws a line the Rules do not need. Amendments involving "a substantial change in the boundaries or an increase in area … or … the inclusion of an additional land" require fresh publication and notice.

The reason is the in rem character of the proceeding. Amendments that affect only the parties are freely allowed; amendments that affect the land re-open the question of who in the world might object, and the world must be told again.

Special Law

Section 25, P.D. No. 1529

Opposition to application in ordinary proceedings

Presidential Decree No. 1529 (Property Registration Decree, 1978)

Any person claiming an interest, whether named in the notice or not, may appear and file an opposition on or before the date of initial hearing, or within such further time as may be allowed by the court. The opposition shall state all the objections to the application and shall set forth the interest claimed by the party filing the same and apply for the remedy desired, and shall be signed and sworn to by him or by some other duly authorized person.

If the opposition or the adverse claim of any person covers only a portion of the lot and said portion is not properly delimited on the plan attached to the application, or in case of undivided co-ownership, conflicting claims of ownership or possession, or overlapping of boundaries, the court may require the parties to submit a subdivision plan duly approved by the Director of Lands.

Why it is cited here

Who the fresh notice is for, and the standing point that connects the two halves of the case.

"Any person claiming an interest, whether named in the notice or not, may appear and file an opposition." The opposition "shall state all the objections … and shall set forth the interest claimed by the party filing the same."

Both statutes care about the same thing: making sure the person with a real stake can be heard. Section 19's republication requirement exists so that a neighbour whose boundary is newly affected can invoke this section.

Lisam is the corporate version of the same concern. A derivative suit is how a stockholder is heard when the board will not act, and the demand allegation is what establishes her standing to speak for the corporation.

Read together the lesson is procedural in both settings and identical in substance: a pleading defect that goes to being heard should be cured by amendment; a defect in telling others they may be heard cannot be cured that way, and requires starting the notice over.

Source: Lisam Enterprises, Inc. v. Banco De Oro Unibank, Inc., G.R. No. 143264, April 23, 2012

Cited laws & provisions

Section 3, Rule 10, Rules of Court

Implementing Rules

Amendments by leave of court

1997 Rules of Civil Procedure — Rule 10 (Amended and Supplemental Pleadings)

Why it is cited here

The provision that decided the case, and the change in it that the lower courts missed.

"Substantial amendments may be made only upon leave of court. But such leave may be refused if it appears to the court that the motion was made with intent to delay."

Full entry below ↓

Section 19, P.D. No. 1529

Special Law

Amendments

Presidential Decree No. 1529 (Property Registration Decree, 1978)

Amendments to the application including joinder, substitution, or discontinuance as to parties may be allowed by the court at any stage of the proceedings upon just and reasonable terms.

Why it is cited here

The land registration counterpart, and why the relation is analogous rather than direct.

"Amendments to the application including joinder, substitution, or discontinuance as to parties may be allowed by the court at any stage of the proceedings upon just and reasonable terms."

Full entry below ↓

Section 25, P.D. No. 1529

Special Law

Opposition to application in ordinary proceedings

Presidential Decree No. 1529 (Property Registration Decree, 1978)

Why it is cited here

Who the fresh notice is for, and the standing point that connects the two halves of the case.

Full entry below ↓

Facts

Lisam Enterprises, Inc., registered with the SEC on December 23, 1959, bought in 1993 a residential lot with improvements in Legaspi City under TCT No. 37866.
On March 28, 1996 Lilian S. Soriano and the late Leandro A. Soriano, Jr., in their personal capacities, borrowed ₱20 million from Philippine Commercial International Bank, now Banco De Oro Unibank, Inc. The same day, acting as the corporation's president and treasurer, they mortgaged the property covered by TCT No. 37866 to the bank on a falsified board resolution, without the board's authority or consent.
In April 1999 Lolita A. Soriano discovered the unauthorised mortgage, demanded that Lilian and the Estate of Leandro A. Soriano, Jr. pay the ₱20 million and clear the lien — they ignored her — and demanded that the Board take legal steps, which it failed or refused to do.
On August 13, 1999 Lisam, through Lolita, and Lolita personally sued to annul the mortgage in the RTC of Legaspi City, Branch 4, against the bank, Lilian, the Estate, the Register of Deeds and Jesus L. Sarte. On August 25, 1999 the court issued a TRO and later a writ of preliminary injunction halting the foreclosure sale.
On September 25, 1999 Lilian and the Estate answered, asserting board authorisation, corporate benefit and genuine signatures; on September 28, 1999 the bank moved to dismiss for want of capacity to sue, failure to state a cause of action, and litis pendentia.
On November 11, 1999 the RTC dismissed the complaint because it never alleged that Lolita had demanded action of the Board. While reconsideration was pending, petitioners on January 4, 2000 moved to admit an Amended Complaint whose paragraph 13 expressly alleged that demand and the Board's refusal. On May 15, 2000 the RTC denied both motions, holding the amendment absolutely changed the cause of action; the CA affirmed, and the Third Division decided on April 23, 2012.

Arguments of the Parties

Common Ground / Stipulations (if any). The parties agreed that the Answer of Lilian and the Estate had already been filed and served before the Motion to Admit Amended Complaint was filed.

Issue

ANCILLARY / INCIDENTAL ISSUES (if any). None separately resolved.

Ruling

Ratio

The deletion was deliberate and means what it says. Removing the restrictive clause from Section 3 leaves courts free to admit amendments that change the cause of action, so the old objection no longer states a ground for refusal.
Procedure serves substantive justice. Rules exist to facilitate adjudication on the merits, not to obstruct it; liberality avoids a multiplicity of suits and needless delay.
Timing measures prejudice. Before trial begins the adverse party still has ample time to answer and prepare, so liberality is at its widest and the objection of surprise carries least weight.
The Rules reach registration proceedings too. Under Section 34 they apply suppletorily, and the same liberality informs Section 19, which lets the registration court allow amendments "at any stage of the proceedings upon just and reasonable terms."
A suit against a third-party mortgagee is not intra-corporate: the bank stands outside the corporate relation, so the case belongs to the regular courts.

Doctrine

Doctrines / Rules / Principles Laid Down.

The 1997 Rules permit substantial amendments even where they alter the cause of action or defence, so long as they serve substantial justice, avoid multiplicity of suits, and speed disposition on the merits; denying leave to cure a formal defect is grave abuse of discretion.
And a derivative suit requires an express allegation that the stockholder demanded protective action of the board and the board failed or refused — an amendment supplying that omission is formal and must be admitted.

Distinctions / Limitations / Qualifications.

Leave to amend may still be refused where the record shows an intent to delay. And though Section 19 permits liberal amendment of a registration application at any stage, an amendment that changes boundaries substantially, increases the area, or adds land triggers the mandatory publication and notice required of an original application — while amendments that merely decrease the area, substitute parties, or correct names need no republication.

Topic/Subtopic Integration (Mandatory).

ANALOGOUS: the case supplies the governing reading of Rule 10, which applies suppletorily to registration proceedings under Section 34 — so a registration court construing Section 19 must show the same liberality toward amendments, joinders and substitutions, the one substantive limit being an amendment that adds land or shifts boundaries, which triggers republication to protect the court's in rem jurisdiction and satisfy due process.

Separate Opinions

None. The Third Division decided unanimously through Justice Diosdado M. Peralta, with Justices Velasco, Jr., Abad, Mendoza and Perlas-Bernabe concurring.

Full Digest — Recitation Format

Facts

On December 23, 1959: Lisam Enterprises, Inc. was duly registered as a domestic corporation with the Securities and Exchange Commission.
Sometime in the year 1993: Lisam Enterprises, Inc. acquired by purchase a parcel of residential land with improvements in Legaspi City, covered by Transfer Certificate of Title No. 37866.
On March 28, 1996: Lilian S. Soriano and the late Leandro A. Soriano, Jr., acting in a personal capacity, obtained a loan in the total amount of PHP 20 Million from Philippine Commercial International Bank (now Banco De Oro Unibank, Inc.).
On March 28, 1996: Leandro A. Soriano, Jr. and Lilian S. Soriano, acting as president and treasurer of Lisam Enterprises, Inc. respectively, executed a real estate mortgage over the property covered by Transfer Certificate of Title No. 37866 in favor of Philippine Commercial International Bank, using a falsified board resolution and without the authority or consent of the board of directors of Lisam Enterprises, Inc..
Sometime in April 1999: Petitioner Lolita A. Soriano discovered the unauthorized and fraudulent mortgage of the corporate property.
Sometime in April 1999: Lolita A. Soriano, acting in a personal capacity and on behalf of Lisam Enterprises, Inc., made demands upon Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. to pay the PHP 20 Million loan in full and free the corporate property from the mortgage lien, but Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. ignored the demands.
Sometime in April 1999: Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc. to take legal steps to protect the interests of the corporation, but the Board of Directors failed or refused to take action.
On August 13, 1999: Lisam Enterprises, Inc., represented by Lolita A. Soriano, and Lolita A. Soriano, in a personal capacity, filed a Complaint for Annulment of Mortgage with Prayer for Temporary Restraining Order and Preliminary Injunction against Banco De Oro Unibank, Inc., Lilian S. Soriano, the Estate of Leandro A. Soriano, Jr., the Register of Deeds of Legaspi City, and Jesus L. Sarte before the Regional Trial Court of Legaspi City, Branch 4.
On August 25, 1999: The Regional Trial Court of Legaspi City issued a Temporary Restraining Order, and after due hearing, issued a Writ of Preliminary Injunction enjoining Banco De Oro Unibank, Inc. from proceeding with the foreclosure auction sale of the property covered by Transfer Certificate of Title No. 37866.
On September 25, 1999: Respondents Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. filed an Answer, asserting that the Board of Directors of Lisam Enterprises, Inc. authorized the mortgage, that the loan proceeds benefited the corporation, and that all notarized documents bore the genuine signature of Lolita A. Soriano.
On September 28, 1999: Respondent Banco De Oro Unibank, Inc. filed a Motion to Dismiss the Complaint, asserting lack of legal capacity to sue on the part of Lolita A. Soriano, failure to state a cause of action, and litis pendencia.
On November 11, 1999: The Regional Trial Court of Legaspi City issued a Resolution dismissing the Complaint on the ground that the original Complaint failed to allege that Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc. to protect the interests of the corporation.
Sometime in November 1999: Petitioners filed a Motion for Reconsideration of the dismissal order.
On January 4, 2000: While the Motion for Reconsideration was pending, petitioners filed a Motion to Admit Amended Complaint, attaching an Amended Complaint which amended paragraph 13 to explicitly allege that Lolita A. Soriano had made demands upon the Board of Directors of Lisam Enterprises, Inc. to take legal action but the Board of Directors failed and refused to act.
On May 15, 2000: The Regional Trial Court of Legaspi City issued an Order denying both the Motion for Reconsideration and the Motion to Admit Amended Complaint, holding that the Amended Complaint could not be admitted because the amendment absolutely changed the cause of action of petitioners.
Sometime in the year 2000: Petitioners appealed the adverse Orders to the Court of Appeals, which subsequently affirmed the Regional Trial Court.
Sometime thereafter: Petitioners elevated the case to the Supreme Court of the Philippines via a Petition for Review on Certiorari under Rule 45 of the Rules of Court.
On April 23, 2012: The Supreme Court of the Philippines Third Division promulgated the Decision reversing the Court of Appeals and the Regional Trial Court, and directing the Regional Trial Court of Legaspi City to admit the Amended Complaint.

Arguments of the Parties

Petitioner/Prosecution (Lisam Enterprises, Inc. and Lolita A. Soriano).

Petitioners argue that the Regional Trial Court committed a reversible error in denying the admission of the Amended Complaint because the motion to amend was filed before the order of dismissal became final, making the amendment a matter of right under the liberal rules of civil procedure.
Petitioners contend that the 1997 Rules of Civil Procedure deliberately removed the former restriction prohibiting amendments that "substantially alter the cause of action or defense," thereby vesting broad discretion in courts to admit substantial amendments.
Petitioners assert that the Amended Complaint sufficiently states a cause of action for a derivative suit because the amendment cured the formal defect by explicitly alleging the mandatory requirement that Lolita A. Soriano made demands upon the Board of Directors of Lisam Enterprises, Inc..

Respondent/Defense (Banco De Oro Unibank, Inc., Lilian S. Soriano, and Estate of Leandro A. Soriano, Jr.).

Respondent Banco De Oro Unibank, Inc. argues that the original Complaint was properly dismissed because Lolita A. Soriano lacked the legal capacity to sue on behalf of the corporation, and the complaint failed to state a cause of action due to the omission of the allegation that Lolita A. Soriano made demands upon the Board of Directors.
Respondent Banco De Oro Unibank, Inc. contends that the Amended Complaint cannot be admitted because a responsive pleading (the Answer of Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr.) had already been served, meaning the amendment was no longer a matter of right but required leave of court, which the Regional Trial Court properly denied because the amendment absolutely changed the cause of action.
Respondents Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. argue that the mortgage was valid and fully authorized by the Board of Directors of Lisam Enterprises, Inc., that the proceeds of the loan were utilized for the benefit of the corporation, and that Lolita A. Soriano actually signed the authorization documents.

Common Ground.

The parties admit and stipulate that a responsive pleading (the Answer of Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr.) had already been filed and served before petitioners filed the Motion to Admit Amended Complaint.

Issue

SECONDARY ISSUES.

Whether the filing and service of an Answer by some defendants precludes the plaintiff from amending the complaint as a matter of right under Section 2, Rule 10 of the Rules of Court.
Whether the inclusion of an allegation of demand upon the board of directors in the Amended Complaint sufficiently cures the formal defect of the original complaint and establishes a valid cause of action for a derivative suit.
Whether regular courts have jurisdiction over a complaint for annulment of mortgage filed by a stockholder on behalf of a corporation against a mortgagee bank.

Ruling

Dispositive portion (verbatim). The final dispositive portion of the Supreme Court of the Philippines in G.R. No. 143264, dated April 23, 2012, is quoted verbatim as follows:

"IN VIEW OF THE FOREGOING, the Resolution of the Regional Trial Court of Legaspi City, Branch 4, dated November 11, 1999, dismissing petitioners’ complaint in Civil Case No. 9729, and its Order dated May 15, 2000, denying herein petitioners’ Motion for Reconsideration and Motion to Admit Amended Complaint, are hereby REVERSED and SET ASIDE. The Regional Trial Court of Legaspi City, Branch 4, is hereby DIRECTED to ADMIT the Amended Complaint.

Considering further, that this case has been pending for some time and, under R.A. No. 8799, it is now the regular courts which have jurisdiction over intra-corporate disputes, the Regional Trial Court of Legaspi City, Branch 4 is hereby DIRECTED to PROCEED with dispatch in trying Civil Case No. 9729.

SO ORDERED."

Ratio

The Deletion of the Cause of Action Restriction: Under the 1997 Rules of Civil Procedure, specifically Section 3, Rule 10, the Supreme Court of the Philippines deliberately deleted and removed the phrase "or that the cause of action or defense is substantially altered" from the text of the law. This deletion means that amendments may now substantially change or alter the cause of action or defense originally pleaded.
The Mandate of Judicial Liberality: The rules of procedure are designed to facilitate the attainment of substantial justice, not to obstruct the administration of justice. Courts must adopt a liberal attitude toward allowing amendments to pleadings at any stage of the proceedings to ensure that the real controversies between the parties are threshed out on the merits, avoiding a multiplicity of suits and preventing unnecessary delays.
The Temporal Element of Liberality: The liberality in allowing amendments is greatest in the early stages of a lawsuit, particularly before the trial of the case begins, because the adverse party is afforded ample time and opportunity to file an answer to the amended pleading and prepare for trial without suffering prejudice.
The Suppletory Application in Land Registration: Under Section 34 of Presidential Decree No. 1529, the Rules of Court apply suppletorily to land registration and cadastral proceedings. The liberal procedural rules of amendment under Rule 10, Section 3 of the Rules of Court govern the interpretation of Section 19 of Presidential Decree No. 1529, which allows the land registration court to permit amendments to land registration applications "at any stage of the proceedings upon just and reasonable terms".
The Jurisdiction of Regular Courts Over Third-Party Mortgagees: A corporate derivative suit to annul a mortgage executed in favor of a third-party mortgagee bank does not constitute an intra-corporate dispute because the mortgagee bank has no corporate relationship with the stockholders of the corporation. Thus, jurisdiction remains with the regular Regional Trial Courts.

Doctrine

Doctrines / Rules / Principles Laid Down.

The Lisam Rule of Liberal Amendment: The 1997 Rules of Civil Procedure permit substantial amendments to pleadings even if the amendments alter the cause of action or defense, provided that the amendments serve the higher interests of substantial justice, prevent a multiplicity of suits, and promote the speedy and inexpensive disposition of actions on the merits. The Regional Trial Court commits a grave abuse of discretion in denying leave to amend when the amendment merely seeks to cure a formal or procedural defect in the original complaint.
The Derivative Suit Demand Requisite: To validly initiate a corporate derivative suit, the stockholder must explicitly allege in the complaint that the stockholder made demands upon the board of directors of the corporation to take protective legal action, and that the board of directors failed or refused to act. An amendment made to include this omitted allegation of demand is formal and must be admitted by the court to allow the case to be decided on the merits.

Distinctions / Limitations / Qualifications.

The Intent to Delay Limitation: Under Section 3, Rule 10 of the Rules of Court, leave of court to file substantial amendments may be refused and denied if the record clearly demonstrates that the motion to amend was made with the intent to delay the proceedings.
The Publication Requisite for Land Amendments under Section 19: While Section 19 of Presidential Decree No. 1529 permits the liberal amendment of land registration applications at any stage, this rule is strictly limited in that any amendment consisting of a substantial change in the boundaries, an increase in the land area, or the inclusion of additional land is subject to the mandatory requirements of publication and notice as in an original application. Amendments that merely decrease the land area, substitute parties, or correct names do not require republication.

Topic/Subtopic Integration (Mandatory).

Classification of Relationship: ANALOGOUS.
Integration: The case of Lisam Enterprises, Inc. v. Banco De Oro Unibank, Inc. is a highly persuasive and analogous civil procedure authority for the requested topic because the case provides the definitive interpretation of the liberalized rules of amendment under Rule 10 of the Rules of Court, which apply suppletorily to land registration proceedings pursuant to Section 34 of Presidential Decree No. 1529. Just as the Supreme Court of the Philippines in G.R. No. 143264 mandates that regular courts must show maximum liberality in allowing amendments to cure defects and prevent a multiplicity of suits, land registration courts applying Section 19 of Presidential Decree No. 1529 must similarly allow the amendment of land applications, joinders, or substitutions at any stage of the proceedings. The only substantive limitation to this liberality in land registration proceedings is when the amendment adds land or substantially changes boundaries, which triggers the mandatory requirement of republication under Section 19 of Presidential Decree No. 1529 to protect the in rem jurisdiction of the court and satisfy the constitutional demands of due process.

Separate Opinions

NOT APPLICABLE / NOT IN RECORD. (The decision of the Supreme Court of the Philippines Third Division was rendered unanimously, with Associate Justice Diosdado M. Peralta as the ponente, and with Associate Justices Presbitero J. Velasco, Jr., Roberto A. Abad, Jose Catral Mendoza, and Estela M. Perlas-Bernabe concurring, without any separate concurring or dissenting opinions filed).