G.R. No. 197358 . April 05, 2017
BUTUAN DEVELOPMENT CORPORATION (BDC), PETITIONER, VS. THE TWENTY-FIRST DIVISION OF THE HONORABLE COURT OF APPEALS (MINDANAO STATION), MAX ARRIOLA, JR., DE ORO RESOURCES, INC. (DORI) AND LOUIE A. LIBARIOS, RESPONDENTS.

FACTS

Butuan Development Corporation (BDC), while still in the process of incorporation, purchased a parcel of land in 1966. Transfer Certificate of Title (TCT) No. RT-4724 was issued in its name in 1969. In 1998, Max Arriola, Jr., representing himself as BDC’s Chairman and armed with a board resolution, mortgaged the property to De Oro Resources, Inc. (DORI) and Louie Libarios. BDC was formally incorporated only in 2002. Upon discovering the mortgage in 2004, BDC filed a complaint for its declaration of nullity against the respondents, alleging the Arriolas misrepresented themselves as corporate directors.
The respondents moved to dismiss, asserting BDC had no cause of action because it lacked juridical personality at the time of the mortgage in 1998, having been incorporated only in 2002. The Regional Trial Court (RTC) denied the motion, ruling that BDC’s allegation of pre-incorporation purchase and subsequent titling sufficiently asserted a violation of its rights. The Court of Appeals (CA) reversed the RTC, dismissing the complaint. The CA held that since corporate existence begins only upon issuance of the certificate of incorporation, BDC had no right over the property in 1998 and thus no cause of action accrued from its mortgage.

ISSUE

Whether the Court of Appeals erred in dismissing BDC’s complaint for failure to state a cause of action.

RULING

Yes. The Supreme Court reversed the CA and reinstated the RTC’s orders. The Court clarified the distinction between “failure to state a cause of action” and “lack of cause of action.” A motion to dismiss based on failure to state a cause of action tests the legal sufficiency of the allegations in the complaint. In ruling on such a motion, the court examines only the facts alleged in the complaint, presuming them to be true, and determines whether those facts constitute a cause of action for the relief sought.
The Court found that BDC’s complaint contained sufficient allegations to constitute a cause of action. BDC alleged it was the registered owner of the property per TCT No. RT-4724, that the owner’s duplicate copy was wrongfully obtained, and that respondents executed a mortgage over it through misrepresentation. These allegations, if hypothetically admitted, establish that BDC, as the titled owner, has a right that was allegedly violated by the unauthorized mortgage. The defense that BDC was unincorporated in 1998 pertains to the evidence required to prove its cause of action, which is a matter for trial. It does not render the allegations in the complaint legally insufficient. Therefore, the CA gravely abused its discretion in dismissing the complaint for failure to state a cause of action. The case was remanded to the trial court for further proceedings on the merits.