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, led 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 rst
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 quali ed 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 xed by the Board of Directors [which date was
subsequently xed as January 15, 1963], provided that the right to subscribe should be
exercised within thirty days from the date so xed, 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 x, which the subscribing stockholders might authorize to be paid
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 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 led 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 pro t 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 led with the Securities and Exchange
Commission which issued the Certi cate 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 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 rst 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.
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 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 certi ed 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 noti ed thereof,
and amended the Articles of Incorporation increasing the number of Directors from 6
to 7, and had the illegally created position of Director lled up by defendant-appellee
Alfonso Juan Olondriz, who was not competent or quali ed 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 fth, 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, led 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., led 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
su cient 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, led a veri ed petition
for a writ of preliminary injunction to enjoin defendants-appellees 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., led separate manifestations that they were opposing
and disauthorizing the suit of plaintiffs-appellants.
On March 7, 1964 defendants-appellees, except Fermin Z. Caram, Jr., led 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, rati ed and con rmed 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 su ciently
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
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 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 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 rst 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
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 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 su ciently numerous and
representative, the court should not have dismissed the action, for insu ciency 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 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 su ciently 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 su ciently 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 bene t of all. But in such case the court shall make
sure that the parties actually before it are su ciently numerous and
representative so that all interests concerned are fully protected. Any party in
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 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 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
su ciently 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 certi ed 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 speci c 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. 1 0
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
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 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 de nite 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, . . ." 1 1

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." 1 2

Appellants, however, insisted, citing American authorities, 1 3 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 con ict 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
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 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. 1 4
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. 1 5 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, 1 6 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. 1 7 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." 1 8 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 insu ciency 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 su cient 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. 1 9 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
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 su cient cause
of action; 2 0 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 rst 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: rst, there was no allegation regarding
appellants' quali cation to subscribe to the capital stock of the appellee Bank, for
under the CMI stockholders' resolution of March 28, 1962, only those quali ed under
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 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. 2 1 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 rst
cause of action. Third, there was no allegation that appellants had not yet received or
had not been issued the corresponding certi cates of stock covering the shares they
had subscribed and paid for. Fourth, the allegations failed to show the existence of the
supposed trust; and fth, the complaint failed to allege that plaintiffs-appellants had
paid or offered to pay for the shares allegedly pertaining to them. 2 2
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 su ciency 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 su ciency of the complaint, when challenged in a 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.
2 4 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 2 5 nor allegations of facts the falsity of which the
court may take judicial notice are deemed admitted. 2 6 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 su cient 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. 2 7 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; 2 8
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
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 appellant's various causes of action.
Appellants' rst 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. 2 9 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, 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 quali ed under the law to become stockholders of the
proposed Bank; 3 0 that appellants accomplished and led their respective "Pre-
Incorporation Agreements to Subscribe" and fully paid the subscription. 3 1
These alleged speci c 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 quali ed under the law to become
stockholders of the Bank, and there was no direct averment in the complaint of the
facts that quali ed 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 quali cations to become stockholders of the
proposed Bank.
Assuming arguendo that appellants were quali ed 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. 3 2 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 speci cally 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 arti cial
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 processes of the law, in order to reach a nal determination, the result is a
conclusion of law." 3 3

Let us now pass to the second and third elements that would have constituted
the rst 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 stockholders as were quali ed 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 quali ed 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; 3 4 that the Board of Organizers was constituted and
proceeded with the establishment of the Bank; 3 5 that the persons composing the
Board of Organizers were the individuals-defendants-appellees; 3 6 that the Board of
Organizers sent our circular letters with "Pre-Incorporation Agreement to Subscribe"
forms 3 7 which speci ed, 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"; 3 8 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; 3 9 and that individuals-defendants-appellees again subscribed to all
the additional 30,000 shares. 4 0 From these facts, appellants concluded that they were
denied their right to subscribe in proportion to their equities; 4 1 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; 4 2 and that, because of matters already alleged, the individuals-defendants-
appellees "hold their shares in the defendant bank in trust for plaintiffs." 4 3
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 bene cial 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. 4 4 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:
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 "The general rule is that an allegation of duty in terms unaccompanied by
a statement of the facts showing the existence of the duty, is a mere conclusion
of law, unless there is a relation set forth from which the law raises the duty." 4 5

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, . . ." 4 6
"Allegations in petition in the nature of conclusions about the meaning of
contract, inconsistent with stated terms of the contract, cannot be considered." 4 7

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." 4 8
"An averment . . . that an act was 'unlawful' or 'wrongful' is a mere legal
conclusion or opinion of the pleader." 4 9

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 rst
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 certi ed", that the seventh position of Director was "illegally
created" and that defendant Alfonso Juan Olondriz was "not competent or quali ed" to
be a director are mere conclusions of law, the same not being necessarily inferable
from the ultimate facts stated in the rst 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 . . ." 5 0

"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 . . ." 5 1

The third, fourth, fth and sixth causes of action depended on the rst cause of
action, which, as has been shown, did not state ultimate facts su cient 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,
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 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.

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.

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 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.

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.

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 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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