A.C. No. 5804 – 453 Phil. 108 – 405 SCRA 220 – Mercantile Law – Corporation Law – Derivative Suit
Legal Ethics – Conflict of Interests
Benedicto Hornilla and Federico Ricafort were members of the Philippine Public School Teachers Association (PPSTA). In 1997, they accused the Board of Directors of PPSTA of unlawfully spending the funds of PPSTA. However, since the PPSTA was not initiating a complaint against the Board of Directors, the two then filed a suit on behalf of PPSTA against the Board of PPSTA.
In the said suit, the Board of Directors were represented by Atty. Ernesto Salunat. Hornilla et al were against the legal representation being made by Salunat for and on behalf of the Board of Directors because of the fact that Salunat is part of the ASSA Law Offices. And the ASSA Law Offices happened to be the retained law firm of the PPSTA. In short, Hornilla et al alleged that there is conflict of interests.
ISSUE: Whether or not there is conflict of interest.
HELD: Yes. The suit filed by Hornilla et al against the Board of PPSTA is a derivative suit. Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder (in this case a member because PPSTA is non-stock) may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. In such a case, even though it was the members who filed the case and not the corporation itself, the real party in interest is still the corporation (PPSTA) and the suing members (Hornilla et al) are only the nominal party.
Therefore, since it is the corporation suing, Salunat cannot represent the Board Members of PPSTA because he is a member of ASSA Law Office which is the retained law firm of PPSTA. Surely, there is conflict of interest in him representing the Board while his law office represents the corporation. Salunat was admonished by the Supreme Court.
