SECOND DIVISION

[G.R. No. L-23136. August 26, 1974.]

ISMAEL MATHAY, JOSEFINA MATHAY, DIOGRACIAS T. REYES

and S. ADOR DIONISIO, plaintiffs-appellants , v s . THE
CONSOLIDATED BANK AND TRUST COMPANY, JOSE MARINO
OLONDRIZ, WILFREDO C. TECSON, SIMON R. PATERNO,
FERMIN Z. CARAM, JR., ANTONIO P. MADRIGAL, JOSE P.
MADRIGAL, CLAUDIO TEEHANKEE, and ALFONSO JUAN
OLONDRIZ, defendants-appellees. CIPRIANO AZADA, MARIA
CRISTINA OLONDRIZ PERTIERRA jointly with her husband
ARTURO PERTIERRA, and MARIA DEL PUY OLONDRIZ DE
STEVENS, movants-intervenors-appellants .

Deogracias T . Reyes & Associates for appellants.

Tañada, Teehankee & Carreon for appellees.
Paterno Pedreña for appellee Fermin Z. Caram, Jr.

DECISION

ZALDIVAR, J : p

In this appeal, appellants-plaintiffs and movants-intervenors, seek the

reversal of the order dated March 21, 1964 of the Court of First Instance of
Manila dismissing the complaint together with all other pending incidents in
Civil Case No. 55810. cdt

The complaint in this case, filed on December 24, 1963 as a class suit,
under Section 12, Rule 3, of the Rules of Court, contained six causes of
action. Under the first cause of action, plaintiffs-appellants alleged that they
were, on or before March 28, 1962, stockholders in the Consolidated Mines,
Inc. (hereinafter referred to as CMI), a corporation duly organized and
existing under Philippine laws; that the stockholders of the CMI, including the
plaintiffs-appellants, passed, at a regular stockholders' meeting, a Resolution
providing: (a) that the Consolidated Bank & Trust Co. (hereinafter referred to
as Bank) he organized with an authorized capital of P20,000,000.00; (b) that
the organization be undertaken by a Board of Organizers composed of the
President and Members of the Board of Directors of the CMI; (c) that all
stockholders of the CMI, who were legally qualified to become stockholders,
would be entitled to subscribe to the capital stock of the proposed Bank "at
par value to the same extent and in the same amount as said stockholders'
respective shareholdings in the CMI," as shown in its stock books on a date
to be fixed by the Board of Directors [which date was subsequently fixed as
January 15, 1963], provided that the right to subscribe should be exercised
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 within thirty days from the date so fixed, and "that if such right to
subscription be not so exercised then the stockholders concerned shall be
deemed to have thereby waived and released ipso-facto their right to such
subscription in favor of the Interim Board of Organizers of the Defendant
Bank or their assignees;" and (d) that the Board of Directors of the CMI be
authorized to declare a "special dividend" in an amount it would fix, which
the subscribing stockholders might authorize to be paid directly to the
treasurer of the proposed Bank in payment of the subscriptions; that the
President and members of the Board of Directors of the CMI, who are the
individuals-defendants-appellees in the instant case, constituted themselves
as the Interim Board of Organizers; that said Board sent out, on or about
November 20, 1962, to the CMI stockholders, including the plaintiffs-
appellants, circular letters with "Pre-Incorporation Agreement to Subscribe"
forms that provided that the payment of the subscription should be made in
cash from time to time or by the application of the special dividend declared
by the CMI, and that the subscription must be made within the period from
December 4, 1962 to January 15, 1963, "otherwise such subscription right
shall be deemed to have been thereby ipso facto waived and released in
favor of the Board of Organizers of the Defendant Bank and their assignees";
that the plaintiffs-appellants accomplished and filed their respective "Pre-
Incorporation Agreement to Subscribe" and paid in full their subscriptions;
that plaintiffs-appellants and the other CMI subscribing stockholders in
whose behalf the action was brought also subscribed to a very substantial
amount of shares; that on June 25, 1963, the Board of Organizers caused the
execution of the Articles or Incorporation of the proposed Bank indicating an
original subscription of 50,000 shares worth P5,000,000 subscribed and paid
only by six of the individuals-defendants-appellees, namely, Antonio P.
Madrigal, Jose P. Madrigal, Simon R. Paterno, Fermin Z. Caram, Jr., Claudio
Teehankee, and Wilfredo C. Tecson, thereby excluding the plaintiffs-
appellants and the other CMI subscribing stockholders who had already
subscribed; that the execution of said Articles of Incorporation was "in
violation of law and in breach of trust and contractual agreement as a means
to gain control of Defendant Bank by Defendant Individuals and persons or
entities chosen by them and for their personal profit or gain in disregard of
the rights of Plaintiffs and other CMI Subscribing Stockholders;" that the
paid-in capital stock was raised, as required by the Monetary Board, to
P8,000,000.00, and individuals — defendants-appellees caused to be issued
from the unissued shares 30,000 shares amounting to P3,000,000.00, all of
which were again subscribed and paid for entirely by individuals-defendants-
appellees or entities chosen by them "to the exclusion of Plaintiffs and other
CMI subscribing stockholders" "in violation of law and breach of trust and of
the contractual agreement embodied in the contractual agreement of March
28, 1962"; that the Articles were filed with the Securities and Exchange
Commission which issued the Certificate of Incorporation on June 25, 1963;
that as of the date of the Complaint, the plaintiffs-appellants and other CMI
subscribing stockholders had been denied, through the unlawful acts and
manipulation of the defendant Bank and Individuals-defendants-appellees,
the right to subscribe at par value, in proportion to their equities established
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 under their respective "Pre-Incorporation Agreements to Subscribe" to the
capital stock, i.e., (a) to the original issue of 50,000 shares and/or (b) to the
additional issue of 30,000 shares, and/or (c) in that portion of said original or
additional issue which was unsubscribed; that the individuals-defendants-
appellees and the persons chosen by them had unlawfully acquired
stockholdings in the defendant-appellee Bank in excess of what they were
lawfully entitled and held such shares "in trust" for the plaintiffs-appellants
and the other CMI stockholders; that it would have been vain and futile to
resort to intracorporate remedies under the facts and circumstances alleged
above. As relief on the first cause of action, plaintiffs-appellants prayed that
the subscriptions and shareholdings acquired by the individuals-defendants-
appellees and the persons chosen by them, to the extent that plaintiffs-
appellants and the other CMI stockholders had been deprived of their right to
subscribe, be annulled and transferred to plaintiffs-appellants and other CMI
subscribing stockholders.
Besides reproducing all the above allegations in the other causes of
action, plaintiffs-appellants further alleged under the second cause of action
that on or about August 28, 1963, defendants-appellees Antonio P. Madrigal,
Jose P. Madrigal; Fermin Z. Caram, Jr., and Wilfredo C. Tecson "falsely
certified to the calling of a special stockholders' meeting allegedly pursuant
to due notice and call of Defendant Bank" although plaintiffs-appellants and
other CMI stockholders were not notified thereof, and amended the Articles
of Incorporation increasing the number of Directors from 6 to 7, and had the
illegally created position of Director filled up by defendant-appellee Alfonso
Juan Olondriz, who was not competent or qualified to hold such position. In
the third cause of action, plaintiffs-appellants claimed actual damages in an
amount equivalent to the difference between the par value of the shares
they were entitled, but failed, to acquire and the higher market value of the
same shares. In the fourth cause of action, plaintiffs-appellants claimed
moral damages; in the fifth, exemplary damages; and in the sixth, attorney's
fees.
In his manifestation to the court on January 4, 1964, Francisco Sevilla,
who was one of the original plaintiffs, withdrew. On January 15, 1964
Cipriano Azada, Maria Cristina Olondriz Pertierra, Maria del Puy Olondriz de
Stevens (who later withdrew as intervenors-appellants) and Carmen Sievert
de Amoyo, filed a motion to intervene, and to join the plaintiffs-appellants on
record, to which motion defendants-appellees, except Fermin Z. Caram, Jr.,
filed, on January 17, 1964 their opposition. prLL

On February 7, 1964 defendants-appellees, except Fermin Z. Caram,

Jr., filed a motion to dismiss on the grounds that (a) plaintiffs-appellants had
no legal standing or capacity to institute the alleged class suit; (b) that the
complaint did not state a sufficient and valid cause of action; and (c) that
plaintiffs-appellants' complaint against the increase of the number of
directors did not likewise state a cause of action. Plaintiffs-appellants filed
their opposition thereto on February 21, 1964.
On March 4, 1964 appellants, plaintiffs and intervenors, filed a verified
petition for a writ of preliminary injunction to enjoin defendants-appellees
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 from considering or ratifying by resolution, at the meeting of the
stockholders of defendant-appellee Bank to be held the following day, the
unlawful apportionment of the shares of the defendant-appellee Bank and
the illegal amendment to its Articles of Incorporation increasing the number
of Directors. The Court, after hearing, granted the writ, but subsequently set
it aside upon the appellees' filing a counterbond.
Some subscribers to the capital stock of the Bank like Concepcion
Zuluaga, et al., and Carlos Moran Sison, et al., filed separate manifestations
that they were opposing and disauthorizing the suit of plaintiffs-appellants.
On March 7, 1964 defendants-appellees, except Fermin Z. Caram, Jr.,
filed a supplemental ground for their motion to dismiss, to wit, that the
stockholders, except Fermin Z. Caram, Jr., who abstained, had unanimously,
at their regular annual meeting held on March 5, 1964, ratified and
confirmed all the actuations of the organizers-directors in the incorporation,
organization and establishment of the Bank.
In its order, dated March 21, 1964, the trial court granted the motion to
dismiss, holding, among other things, that the class suit could not be
maintained because of the absence of a showing in the complaint that the
plaintiffs-appellants were sufficiently numerous and representative, and that
the complaint failed to state a cause of action. From said order, appellants,
plaintiffs and intervenors, interposed this appeal to this Court on questions
of law and fact, contending that the lower court erred as follows:

I. In holding that plaintiffs-appellants could not maintain the

present class suit because of the absence of a showing in the
complaint that they were sufficiently numerous and
representative;
II. In holding that the instant action could not be maintained as
a class suit because plaintiffs-appellants did not have a
common legal interest in the subject matter of the suit;

III. In dismissing the present class suit on the ground that it did
not meet the requirements of Rule 3, section 12 of the Rules
of Court;

IV. In holding that the complaint was fatally defective in that it

failed to state with particularity that plaintiffs-appellants had
resorted to, and exhausted, intra-corporate remedies;

V. In resolving defendants-appellees' motion on the basis of

facts not alleged in the complaint;

VI. In holding that plaintiffs-appellants' complaint stated no

valid cause of action against defendants-appellees;

VII. In not holding that a trust relationship existed between the

Interim Board of Organizers of defendant-appellee Bank and
the CMI subscribing stockholders and in not holding that the
waiver was in favor of the Board of Trustees for the CMI
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 subscribing stockholders;
VIII. In holding that the failure of plaintiffs-appellants to allege
that they had paid or had offered to pay for the shares
allegedly pertaining to them constituted another ground for
dismissal;

IX. In holding that the allegations under the second cause of

action stated no valid cause of action due to a fatal omission
to allege that plaintiffs-appellants were stockholders of
record at the time of the holding of the special stockholders'
meeting;

X. In holding that plaintiffs-appellants' complaint stated no

cause of action against defendant-appellee Bank; and

XI. In considering the resolution of ratification and confirmation

and in holding that the resolution rendered the issues in this
case moot. cd

The assigned error revolve around two questions, namely: (1) whether
the instant action could be maintained as a class suit, and (2) whether the
complaint stated a cause of action. These issues alone will be discussed.
1. Appellants contended in the first three assigned errors that the
trial court erred in holding that the present suit could not be maintained as a
class suit, and in support thereof argued that the propriety of a class suit
should be determined by the common interest in the subject matter of the
controversy; that in the instant case there existed such common interest
which consisted not only in the recovery of the shares of which the
appellants were unlawfully deprived, but also in divesting the individuals-
defendants-appellees and the persons or entities chosen by them of control
of the appellee Bank; 1 that the complaint showed that besides the four
plaintiffs-appellants of record, and the four movant-intervenors-appellants
there were in the appellee Bank many other stockholders who, though
similarly situated as the appellants, did not formally include themselves as
parties on record in view of the representative character of the suit; that the
test, in order to determine the legal standing of a party to institute a class
suit, was not one of number, but whether or not the interest of said party
was representative of the persons in whose behalf the class suit was
instituted; that granting arguendo, that the plaintiffs-appellants were not
sufficiently numerous and representative, the court should not have
dismissed the action, for insufficiency of number in a class suit was not a
ground for a motion to dismiss, and the court should have treated the suit as
an action under Rule 3, section 6, of the Rules of Court which permits a
joinder of parties.
Defendants-appellees, on the contrary, stressed that the instant suit
was instituted as a class suit and the plaintiffs-appellants did not sue in their
individual capacities for the protection of their individual interests; that the
plaintiffs-appellants of record could not be considered numerous and
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 representative, as said plaintiffs-appellants were only four out of 1,500
stockholders, and owned only 8 shares out of the 80,000 shares of stock of
the appellee Bank; that even if to the four plaintiffs-appellants were added
the four movants-intervenors-appellants the situation would be the same as
two of the intervenors, to wit, Ma. Cristina Olondriz Pertierra and Ma. del Puy
Olondriz de Stevens, could not sue as they did not have their husbands'
consent; that it was necessary that in a class suit the complaint itself should
allege facts showing that the plaintiffs were sufficiently numerous and
representative, and this did not obtain in the instant case, as the complaint
did not even allege how many other CMI stockholders were "similarly
situated"; that the withdrawal of one plaintiff, Francisco Sevilla, the
subsequent disclaimers of any interest in the suit made in two separate
pleadings by other CMI stockholders and the disauthorization of their being
represented by plaintiffs-appellants by the 986 (out of 1,663) stockholders
who attended the annual meeting of bank stockholders on March 5, 1964,
completely negated plaintiffs-appellants' pretension that they were
sufficiently numerous and representative or that there were many other
stockholders similarly situated whom the plaintiffs-appellants allegedly
represented; that plaintiffs-appellants did not have that common or general
interest required by the Rules of Court in the subject matter of the suit. 2
In their Reply Brief, appellants insisted that non-compliance with
Section 12, Rule 3, not being one enumerated in Rules 16 and 17, was not a
ground for dismissal; that the requirements for a class had been complied
with; that the required common interest existed even if the interests were
several for there was a common question of law or fact and a common relief
was sought; that the common or general interest could be in the object of
the action, in the result of the proceedings, or in the question involved in the
action, as long as there was a common right based on the same essential
facts; that plaintiffs-appellants adequately represented the aggrieved group
of bank stockholders, inasmuch as appellants interests were not antagonistic
to those of the latter, and appellants were in the same position as the group
in whose behalf the complaint was filed.
The governing statutory provision for the maintenance of a class suit is
Section 12 of Rule 3 of the Rules of Court, which reads as follows.
"SECTION 12. Class suit. — When the subject matter of the
controversy is one of common or general interest to many persons, and
the parties are so numerous that it is impracticable to bring them all
before the court, one or more may sue or defend for the benefit of all.
But in such case the court shall make sure that the parties actually
before it are sufficiently numerous and representative so that all
interests concerned are fully protected. Any party in interest shall have
a right to intervene in protection of his individual interest."

The necessary elements for the maintenance of a class suit are

accordingly: (1) that the subject matter of the controversy be one of
common or general interest to many persons, and (2) that such persons be
so numerous as to make it impracticable to bring them all to the court. An
action does not become a class suit merely because it is designated as such
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 in the pleadings. Whether the suit is or is not a class suit depends upon the
attending facts, and the complaint, or other pleading initiating the class
action should allege the existence of the necessary facts, to wit, the
existence of a subject matter of common interest, and the existence of a
class and the number of persons in the alleged class, 3 in order that the
court might be enabled to determine whether the members of the class are
so numerous as to make it impracticable to bring them all before the court,
to contrast the number appearing on the record with the number in the class
and to determine whether claimants on record adequately represent the
class and the subject matter of general or common interest. 4
The complaint in the instant case explicitly declared that the plaintiffs-
appellants instituted the "present class suit under Section 12, Rule 3, of the
Rules of Court in behalf of CMI subscribing stockholders" 5 but did not state
the number of said CMI subscribing stockholders so that the trial court could
not infer, much less make sure as explicitly required by the statutory
provision, that the parties actually before it were sufficiently numerous and
representative in order that all interests concerned might be fully protected,
and that it was impracticable to bring such a large number of parties before
the court.
The statute also requires, as a prerequisite to a class suit, that the
subject-matter of the controversy be of common or general interest to
numerous persons. Although it has been remarked that the "innocent
'common or general interest' requirement is not very helpful in determining
whether or not the suit is proper", 6 the decided cases in our jurisdiction
have more incisively certified the matter when there is such common or
general interest in the subject matter of the controversy. By the phrase
"subject matter of the action" is meant "the physical facts, the things real or
personal, the money, lands, chattels, and the like, in relation to which the
suit is prosecuted, and not the delict or wrong committed by the defendant."
7

This Court has ruled that a class suit did not lie in an action for
recovery of real property where separate portions of the same parcel were
occupied and claimed individually by different parties to the exclusion of
each other, such that the different parties had determinable, though
undivided interests, in the property in question. 8 It has likewise held that a
class suit would not lie against 319 defendants individually occupying
different portions of a big parcel of land, where each defendant had an
interest only in the particular portion he was occupying, which portion was
completely different from the other portions individually occupied by other
defendants, for the applicable Section 118 of the Code of Civil Procedure
relates to a common and general interest in single specific things and not to
distinct ones. 9 In an action for the recovery of amounts that represented
surcharges allegedly collected by the city from some 30,000 customers of
four movie houses, it was held that a class suit did not lie, as no one plaintiff
had any right to, or any share in the amounts individually claimed by the
others, as each of them was entitled, if at all, only to the return of what he
had personally paid. 10
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 The interest, subject matter of the class suits in the above-cited cases,
is analogous to the interest claimed by appellants in the instant case. The
interest that appellants, plaintiffs and intervenors, and the CMI stockholders
had in the subject matter of this suit — the portion of stocks offering of the
Bank left unsubscribed by CMI stockholders who failed to exercise their right
to subscribe on or before January 15, 1963 — was several, not common or
general in the sense required by the statute. Each one of the appellants and
the CMI stockholders had determinable interest; each one had a right, if any,
only to his respective portion of the stocks. No one of them had any right to,
or any interest in, the stock to which another was entitled. Anent this point,
the trial court correctly remarked:
"It appears to be the theory of the plaintiffs borne out by the
prayer, that each subscribing CMI stockholder is entitled to further
subscribe to a certain proportion, depending upon his stockholding in
the CMI, of the P8 million capital stock of the defendant bank open to
subscription (out of the P20 million authorized capital stock) as well as
the unsubscribed portion of the P8 million stock offering which were left
unsubscribed by those CMI stockholders who for one reason or another
had failed to exercise their subscription rights on or before January 15,
1963. Under the plaintiffs' theory therefore, each subscribing CMI
stockholder was entitled to subscribe to a definite number of shares
both in the original offering of P8 million and in that part thereof not
subscribed on or before the deadline mentioned, so that one
subscribing CMI stockholder may be entitled to subscribe to one share,
another to 3 shares and a third to 11 shares, and so on, depending
upon the amount and extent of CMI stockholding. But except for the
fact that a question of law — the proper interpretation of the waiver
provisions of the CMI stockholders' resolution of March 28, 1962 — is
common to all, each CMI subscribing stock holder has a legal interest
in, and a claim to, only his respective proportion of shares in the
defendant bank, and none with regard to any of the shares to which
another stockholder is entitled. Thus, plaintiff Ismael Mathay has no
legal interest in, or claim to, any share claimed by any or all of his co-
plaintiffs from the defendant individuals. Hence, no CMI subscribing
stockholder or, for that matter, not any number of CMI stockholders
can maintain a class suit in behalf of others, . . ." 11

Even if it be assumed, for the sake of argument, that the appellants

and the CMI stockholders suffered wrongs that had been committed by
similar means and even pursuant to a single plan of the Interim Board of
Organizers of the Bank, the wrong suffered by each of them would constitute
a wrong separate from those suffered by the other stockholders, and those
wrongs alone would not create that common or general interest in the
subject matter of the controversy as would entitle any one of them to bring a
class suit on behalf of the others. Anent this point it has been said that:
"Separate wrongs to separate persons, although committed by
similar means and even pursuant to a single plan, do not alone create
a 'common' or 'general' interest in those who are wronged so as to
entitle them to maintain a representative action." 12

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 Appellants, however, insisted, citing American authorities, 13 that a
class suit might be brought even if the interests of plaintiffs-appellants might
be several as long as there was a common question of law or fact affecting
them and a common relief was sought. We have no conflict with the
authorities cited; those were rulings under the Federal Rules of Civil
Procedure, pursuant to Rule 23 of which, there were three types of class
suits, namely: the true, the hybrid, and the spurious, and these three had
only one feature in common, that is, in each the persons constituting the
class must be so numerous as to make it impracticable to bring them all
before the court. The authorities cited by plaintiffs-appellants refer to the
spurious class action (Rule 23 (a) (3) which involves a right sought to be
enforced, which is several, and there is a common question of law or fact
affecting the several rights and a common relief is sought. 14 The spurious
class action is merely a permissive joinder device; between the members of
the class there is no jural relationship, and the right or liability of each is
distinct, the class being formed solely by the presence of a common
question of law or fact. 15 This permissive joinder is provided in Section 6 of
Rule 3, of our Rules of Court. Such joinder is not and cannot be regarded as
a class suit, which this action purported and was intended to be as per
averment of the complaint.
It may be granted that the claims of all the appellants involved the
same question of law. But this alone, as said above, did not constitute the
common interest over the subject matter indispensable in a class suit. The
right to purchase or subscribe to the shares of the proposed Bank, claimed
by appellants herein, is analogous to the right of preemption that
stockholders have when their corporation increases its capital. The right of
preemption, it has been said, is personal to each stockholder, 16 and while a
stockholder may maintain a suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that he may not maintain a
representative action on behalf of other stockholders who are similarly
situated. 17 By analogy, the right of each of the appellants to subscribe to
the waived stocks was personal, and no one of them could maintain on
behalf of others similarly situated a representative suit.
Straining to make it appear that appellants and the CMI subscribing
stockholders had a common or general interest in the subject matter of the
suit, appellants stressed in their brief that one of the reliefs sought in the
instant action was "to divest defendant individuals and the persons or
entities chosen by them of control of the defendant bank. " 18 This relief
allegedly sought by appellants did not, however, appear either in the text or
in the prayer of the complaint. prLL

Appellants, furthermore, insisted that insufficiency of number in a class

suit was not a ground for dismissal of one action. This Court has, however,
said that where it appeared that no sufficient representative parties had
been joined, the dismissal by the trial court of the action, despite the
contention by plaintiffs that it was a class suit, was correct. 19 Moreover,
insofar as the instant case is concerned, even if it be granted for the sake of
argument, that the suit could not be dismissed on that ground, it could have
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 been dismissed, nevertheless, on the ground of lack of cause of action which
will be presently discussed.
2. Appellants supported their assigned error that the court erred in
holding that the complaint stated no valid cause of action, by claiming that
paragraph 15 together with the other allegations of the complaint to the
effect that defendants-appellees had unlawfully acquired stockholdings in
the capital stock of defendant-appellee Bank in excess of what they were
lawfully entitled to, in violation of law and in breach of trust and the
contractual agreement, constituted a valid and sufficient cause of action; 20
and that only the allegations in the complaint should have been considered
by the trial court in determining whether the complaint stated a cause of
action or not.
Defendants-appellees, on the contrary, maintained that the allegations
of the complaint should not be the only ones to be considered in determining
whether there is a cause of action; that even if the ultimate facts alleged in
the first cause of action of the complaint be the only ones considered, the
complaint would still fail to state a valid cause of action on the following
grounds: first, there was no allegation regarding appellants' qualification to
subscribe to the capital stock of the appellee Bank, for under the CMI
stockholders' resolution of March 28, 1962, only those qualified under the
law were entitled to subscribe, and under the regulations of the Monetary
Board, only natural-born Filipino citizens could be stockholders of a banking
corporation organized under the laws of the Philippines, and nowhere did the
complaint allege that plaintiffs-appellants were natural born Filipino citizens.
21 Second, appellants' averment in paragraph 8 that they "subscribed," and

their averment in paragraph 15 that they were "denied the right to subscribe
. . . to the capital stock of the defendant Bank", were inconsistent, and hence
neutralized each other, thereby leaving in shambles the first cause of action.
Third, there was no allegation that appellants had not yet received or had
not been issued the corresponding certificates of stock covering the shares
they had subscribed and paid for. Fourth, the allegations failed to show the
existence of the supposed trust; and fifth, the complaint failed to allege that
plaintiffs-appellants had paid or offered to pay for the shares allegedly
pertaining to them. 22
Let us premise the legal principles governing the motion to dismiss on
the ground of lack of cause of action. cdasia

Section 1, Rule 16 of the Rules of Court, providing in part that:

Within the time for pleading a motion to dismiss may be made on
any of the following grounds:. . .
"(g) That the complaint states no cause of action. . . ."

explicitly requires that the sufficiency of the complaint must be tested

exclusively on the basis of the complaint itself and no other should be
considered when the ground for motion to dismiss is that the complaint
states no cause of action. Pursuant thereto this Court has ruled that:
"As a rule the sufficiency of the complaint, when challenged in a
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 motion to dismiss, must be determined exclusively on the basis of the
facts alleged therein." 23

It has been likewise held that a motion to dismiss based on lack of

cause of action hypothetically admits the truth of the allegations of fact
made in the complaint. 24 It is to be noted that only the facts well pleaded in
the complaint, and likewise, any inferences fairly deducible therefrom, are
deemed admitted by a motion to dismiss. Neither allegations of conclusions
25 nor allegations of facts the falsity of which the court may take judicial

notice are deemed admitted. 26 The question, therefore, submitted to the

Court in a motion to dismiss based on lack of cause of action is not whether
the facts alleged in the complaint are true, for these are hypothetically
admitted, but whether the facts alleged are sufficient to constitute a cause
of action such that the court may render a valid judgment upon the facts
alleged therein.
A cause of action is an act or omission of one party in violation of the
legal right of the other. Its essential elements are, namely: (1) the existence
of a legal right in the plaintiff, (2) a correlative legal duty in the defendant,
and (3) an act or omission of the defendant in violation of plaintiff's right
with consequential injury or damage to the plaintiff for which he may
maintain an action for the recovery of damages or other appropriate relief.
27 On the other hand, Section 3 of Rule 6 of the Rules of Court provides that
the complaint must state the ultimate facts constituting the plaintiff's cause
of action. Hence, where the complaint states ultimate facts that constitute
the three essential elements of a cause of action, the complaint states a
cause of action; 28 otherwise, the complaint must succumb to a motion to
dismiss on that ground.
The legal principles having been premised, let us now analyze and
discuss appellant's various causes of action.
Appellants' first cause of action, pursuant to what has been premised
above, should have consisted of: (1) the right of appellants as well as of the
other CMI stockholders to subscribe, in proportion to their equities
established under their respective "Pre-Incorporation Agreements to
Subscribe", to that portion of the capital stock which was unsubscribed
because of failure of the CMI stockholders to exercise their right to subscribe
thereto; (2) the legal duty of the appellees to have said portion of the capital
stock to be subscribed by appellants and other CMI stockholders; and (3) the
violation or breach of said right of appellants and other CMI stockholders by
the appellees.
Did the complaint state the important and substantial facts directly
forming the basis of the primary right claimed by plaintiffs? Before
proceeding to elucidate this question, it should be noted that a bare
allegation that one is entitled to something is an allegation of a conclusion.
Such allegation adds nothing to the pleading, it being necessary to plead
specifically the facts upon which such conclusion is founded. 29 The
complaint alleged that appellants were stockholders of the CMI; that as such
stockholders, they were entitled, by virtue of the resolution of March 28,
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 1962, to subscribe to the capital stock of the proposed Consolidated Bank
and Trust Co., at par value to the same extent and in the same amount as
said stockholders' respective shareholdings in the CMI as shown in the
latter's stock book as of January 15, 1963, the right to subscribe to be
exercised until January 15, 1963, provided said stockholders of the CMI were
qualified under the law to become stockholders of the proposed Bank; 30 that
appellants accomplished and filed their respective "Pre-Incorporation
Agreements to Subscribe" and fully paid the subscription. 31
These alleged specific facts did not even show that appellants were
entitled to subscribe to the capital stock of the proposed Bank, for said right
depended on a condition precedent, which was, that they were qualified
under the law to become stockholders of the Bank, and there was no direct
averment in the complaint of the facts that qualified them to become
stockholders of the Bank. The allegation of the fact that they subscribed to
the stock did not, by necessary implication, show that they were possessed
of the necessary qualifications to become stockholders of the proposed
Bank.
A s s u m i n g arguendo that appellants were qualified to become
stockholders of the Bank, they could subscribe, pursuant to the explicit terms
of the resolution of March 28, 1962, "to the same extent and in the same
amount as said stockholders' respective shareholdings in the CMI" as of
January 15, 1963. 32 This was the measure of the right they could claim to
subscribe to waived stocks. Appellants did not even aver that the stocks
waived to the subscription of which they claimed the right to subscribe, were
comprised in "the extent and amount" of their respective shareholdings in
the CMI. It is not surprising that they did not make such an averment for
they did not even allege the amount of shares of stock to which they claimed
they were entitled to subscribe. The failure of the complaint to plead
specifically the above facts rendered it impossible for the court to conclude
by natural reasoning that the appellants and other CMI stockholders had a
right to subscribe to the waived shares of stock, and made any allegation to
that effect a conclusion of the pleader, not an ultimate fact, in accordance
with the test suggested by the California Supreme Court, to wit:
"If from the facts in evidence, the result can be reached by that
process of natural reasoning adopted in the investigation of truth, it
becomes an ultimate fact, to be found as such. If, on the other hand,
resort must be had to the artificial processes of the law, in order to
reach a final determination, the result is a conclusion of law." 33

Let us now pass to the second and third elements that would have
constituted the first cause of action. Did the complaint allege as ultimate
facts the legal duty of defendants-appellees to have a portion of the capital
stock subscribed to by appellants? Did the complaint allege as ultimate facts
that defendants-appellees had violated appellants' right?
Even if it be assumed arguendo that defendants-appellees had the
duty to have the waived stocks subscribed to by the CMI stockholders, this
duty was not owed to all the CMI stockholders, but only to such CMI
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 stockholders as were qualified to become stockholders of the proposed Bank.
Inasmuch as it has been shown that the complaint did not contain ultimate
facts to show that plaintiffs-appellants were qualified to become stockholders
of the Bank, it follows that the complaint did not show that defendants-
appellees were under duty to have plaintiffs-appellants subscribe to the
stocks of the proposed Bank. It inevitably follows also that the complaint did
not contain ultimate facts to show that the right of the plaintiffs-appellants to
subscribe to the shares of the proposed Bank had been violated by
defendants-appellees. How could a non-existent right be violated?
Let us continue the discussion further. The complaint alleged that by
virtue of the resolution of March 28, 1962, the President and Members of the
Board of Directors of the CMI would be constituted as a Board of Organizers
to undertake and carry out the organization of the Bank; 34 that the Board of
Organizers was constituted and proceeded with the establishment of the
Bank; 35 that the persons composing the Board of Organizers were the
individuals-defendants-appellees; 36 that the Board of Organizers sent our
circular letters with "Pre-Incorporation Agreement to Subscribe" forms 37
which specified, among others, "such subscription right shall be deemed ipso
facto waived and released in favor of the Board of Organizers of the
defendant Bank and their assignees"; 38 that in the Articles of Incorporation
prepared by the Board of Organizers, the individuals-defendants-appellees
alone appeared to have subscribed to the 50,000 shares; 39 and that
individuals-defendants-appellees again subscribed to all the additional
30,000 shares. 40 From these facts, appellants concluded that they were
denied their right to subscribe in proportion to their equities; 41 that the
individuals-defendants-appellees unlawfully acquired stockholdings far in
excess of what they were lawfully entitled in violation of law and in breach of
trust and of contractual agreement; 42 and that, because of matters already
alleged, the individuals-defendants-appellees "hold their shares in the
defendant bank in trust for plaintiffs." 43
The allegation in the complaint that the individuals-defendants-
appellees held their shares "in trust" for plaintiffs-appellants without
averment of the facts from which the court could conclude the existence of
the alleged trust, was not deemed admitted by the motion to dismiss for that
was a conclusion of law. Express averments "that a party was the beneficial
owner of certain property; . . . that property or money was received or held
in trust, or for the use of another; that particular funds were trust funds; that
a particular transaction created an irrevocable trust; that a person held
property as constructive trustee; that on the transfer of certain property a
trust resulted" have been considered as mere conclusions of law. 44 The
facts alleged in the complaint did not, by logical reasoning, necessarily lead
to the conclusion that defendants-appellees were trustees in favor of
appellants of the shares of stock waived by the CMI stockholders who failed
to exercise their right to subscribe. In this connection, it has been likewise
said that:
"The general rule is that an allegation of duty in terms
unaccompanied by a statement of the facts showing the existence of
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 the duty, is a mere conclusion of law, unless there is a relation set forth
from which the law raises the duty." 45

In like manner, the allegation that individuals-defendants-appellees

held said shares in trust was no more than an interpretation by appellants of
the effect of the waiver clause of the Resolution and as such it was again a
mere conclusion of law. It has been said that:
"The following are also conclusions of law: . . . an allegation
characterizing an instrument or purporting to interpret it and state its
effects, . . ." 46
"Allegations in petition in the nature of conclusions about the
meaning of contract, inconsistent with stated terms of the contract,
cannot be considered." 47

The allegation that the defendants-appellees acquired stockholdings

far in excess of what they were lawfully entitled, in violation of law and in
breach of trust and of contractual agreement, is also mere conclusion of law.
Of course, the allegation that there was a violation of trust duty was
plainly a conclusion of law, for "a mere allegation that it was the duty of a
party to do this or that, or that he was guilty of a breach of duty, is a
statement of a conclusion, not of fact." 48
"An averment . . . that an act was 'unlawful' or 'wrongful' is a
mere legal conclusion or opinion of the pleader." 49

Moreover, plaintiffs-appellants did not state in the complaint the

amount of subscription the individual defendants-appellees were entitled to;
hence there was no basis for the court to determine what amount
subscribed to by them was excessive.
From what has been said, it is clear that the ultimate facts stated
under the first cause of action are not sufficient to constitute a cause of
action.
The further allegations in the second cause of action that the calling of
a special meeting was "falsely certified", that the seventh position of
Director was "illegally created" and that defendant Alfonso Juan Olondriz was
"not competent or qualified" to be a director are mere conclusions of law,
the same not being necessarily inferable from the ultimate facts stated in
the first and second causes of action. It has been held in this connection
that:
"An averment that . . . an act was 'unlawful' or 'wrongful' is a
mere legal conclusion or opinion of the pleader. The same is true of
allegations that an instrument was 'illegally' certified or . . . that an act
was 'arbitrarily' done . . ." 50

"A pleader states a mere conclusion when he makes any of the

following allegations: that a party was incapacitated to enter into a
contract or convey property . . ." 51

The third, fourth, fifth and sixth causes of action depended on the first
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 cause of action, which, as has been shown, did not state ultimate facts
sufficient to constitute a cause of action. It stands to reason, therefore, that
said causes of action would also be fatally defective. pred

It having been shown that the complaint failed to state ultimate facts
to constitute a cause of action, it becomes unnecessary to discuss the other
assignments of errors.
WHEREFORE, the instant appeal is dismissed, and the order dated
March 21, 1964 of the Court of First Instance of Manila dismissing the
complaint in Civil Case No. 55810 is affirmed, with costs in this instance
against appellants.
It is so ordered.
Fernando, Barredo, Fernandez and Aquino, JJ ., concur.
Antonio, J ., took no part.

Footnotes

1. Brief for Plaintiffs-Appellants and Movants-Intervenors-Appellants, page 25.

2. Brief for Defendants-Appellees, pages 54-70.

3. The existence of persons similarly situated must be a reality, not a

possibility. A likelihood that there are other persons similarly situated is not
enough, Barron and Holtsoff, Federal Practice and Procedure, Vol. 2, page
156.
4. Cf. Moore's Federal Practice 2d ed., Vol. III, pages 3423-3424; 4 Federal
Rules Service, pages 454-455; Johnson, et al., vs. Riverland Levee Dist., et
al., 117F 2d 711, 715.
5. Record on Appeal, pages 2, 8-9.

6. Moore's Federal Practice, 2 ed., Vol. III, page 3417.

7. Moran, Comments on the Rules of Court, 1963 ed., Vol. 1, page 92, citing
Pomeroy's Code Remedies, 492.
8. Rallonza vs. Evangelista, 15 Phil. 531; Valencia vs. City of Dumaguete, L-
17799, August 31, 1962, 5 SCRA 1096, 1101; Borlasa vs. Polistico, 47 Phil.
345, 349.
9. Berses vs. Villanueva, 25 Phil. 473. It is to be noted that Section 12 of Rule 3
is the same as section 12 of former Rule 3, which was taken from section 118
of Act. 190. Moran, Comments on the Rules of Court, 1963 ed., Vol. 1, page
167.

10. Valencia vs. City of Dumaguete, L-17799, August 31, 1962, 5 SCRA 1096,
1101.

11. Record on Appeal, pages 284-285.

12. Society Milion Athena, Inc., et al. vs. National Bank of Greece, et al., 22 N.E.
2d 374.
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 13. Prof. Sutherland's address before the Cincinnati Bar Association regarding
the new Federal Rules, December 10, 1938; 1 Cincinnati Law Review, page 1;
Clark vs. Chase National Bank, 6 Fed. Rule Service 256, cited in Francisco,
The Revised Rules of Court, 1973, Vol. I, pages 294, 295.

14. See Barron and Holtsoff, Federal Practice and Procedure, Vol. 2, page 139.

15. Moore's Federal Practice, Vol. 3. pages 3442-3443.

16. Fletcher's Cyclopedia of the Law of Private Corporation, 1932, page 231.

17. Dousman v. Wisconsin & L. S. Min. & Smelting Co., 40 Wis. 418 in 12 L.R.A.,
New Series, 1908, page 972.
18. Brief for the Plaintiffs-Appellants and Movants-Intervenors-Appellants, page
25.

19. Niembra, et al., vs. Director of Lands, L-20084, July 17, 1964, 11 SCRA 525,
528.
20. Brief for Plaintiffs-Appellants and Movants-Intervenors-Appellants, pages
32-34.

21. Brief for Defendants-Appellees, pages 94-96.

22. Brief for Defendants-Appellees, pages 94-99.

23. Uy Chao vs. De la Rama Steamship Co., Inc. L-14495, September 29, 1962,
6 SCRA 69, 72. See also De Jesus, et al. vs. Belarmino, et al., 95 Phil. 365,
371; Dalandan, et al. vs. Julio, et al., L-19101, February 29, 1964, 10 SCRA
400; Remitere, et al. vs. Montinola Vda. de Yulo, et al., L-19751, February 28,
1966, 16 SCRA 250, 254; Acuña vs. Batac Producers Cooperative Marketing
Association, Inc., et al., L-20338, June 30, 1967, 20 SCRA 526, 531.

24. Alquigue vs. De Leon, L-15059, March 30, 1963, 7 SCRA 513, 515; Salazar,
et al. vs. Ortizano, L-20480, 16 SCRA 662, 665; Acuña vs. Batac Producers
Cooperative Marketing Association, Inc., et al., L-20338, June 30, 1967, 20
SCRA 526, 531.

25. Dalandan vs. Julio, L-19101, February 29, 1964, 10 SCRA 400, 410.

26. 71 CJS pages 906-912.

27. Ma-ao Sugar Central Co., Inc. vs. Barrios, et al., 79 Phil. 666, 667; Ramitere,
et al. vs. Montinola Vda. de Yulo, et al., L-19751, February 28, 1966, 16 SCRA
251, 255.

28. Community Investment and Finance Corp. vs. Garcia, 88 Phil. 215, 218.
29. 41 Am Jur., page 303.

30. Paragraphs 7 and 7 of Complaint, Record on Appeal, pages 5, 7, 8.

31. Paragraph 8 of Complaint, Record on Appeal, page 8.

32. Paragraph 4 of Complaint, Record on Appeal, page 5.

33. Levins vs. Rovegno, 71 Cal. 273, 12 Pa. 161, 164.

34. Paragraph 4(a) of Complaint; Record on Appeal, pages 4-5.
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 35. Paragraph 5 of Complaint; Record on Appeal, pages 6-7.

36. Paragraph 5 of Complaint; Record on Appeal, page 7.

37. Paragraph 7 of Complaint; Record on Appeal, page 7.

38. Paragraph 7(b) of Complaint; Record on Appeal; page 8.

39. Paragraph 9 of Complaint; Record on Appeal, page 9.

40. Paragraphs 11 and 12 of Complaint; Record on Appeal, page 11.

41. Paragraph 15 of Complaint.

42. Paragraph 15 of Complaint.

43. Paragraph 16 of Complaint; Record on Appeal page 13.

44. 47 C.J.S., page 78.

45. 71 C.J.S., pages 49-50.

46. 41 Am. Jur., page 304.

47. 71 C.J.S., page 41, citing D'Oench v. Gillioz, 139 SW 2d 921, 346 Mo. 179.

48. 41 Am Jur., page 303.

49. 41 Am. Jur., page 303.

50. 41 Am. Jur., page 303.

51. 41 Am. Jur., page 304.

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