ALFREDO MONTELI BANO, ET AL . VS BACOLOD -MU RCIA MILLI NG CO. I NC.

Facts:
Plaintiffs are sugar planters with the defendant-appellee's sugar central mill under
identical milling contracts. The contracts were stipulated to be in force for 30 years. The
division between the parties will be 45% (mill)-55% (planters) for the products.
After 27 years, it was proposed that the planters share be increased to 60% of the resulting
products, the consideration being that the term of the contract be extended for 15 more
years. A printed Amended Milling Contract was drawn up with those terms.
After the contract was drawn up, the Board of Directors of the appellee Bacolod-Murcia
Milling Co., Inc., adopted a resolution granting further concessions to the planters over and
above those contained in the printed Amended Milling Contract.
Added concession: That if other sugar plantations, representing more than 1/3 of the total
annual sugar production in the province, grant better terms to their planters, those terms will
be applicable to the planters of Bacolod-Murcia.
Appellants signed and executed the printed Amended Milling Contract.
This suit was brought by appellants seeking to enforce their right in the added concession.
Three plantations meeting the requirement in the concession have been granting 62.5%
participation to their planters. The planters in Bacolod-Murcia now want the same terms.
Defense: The resolution granting the concession was made without consideration and is
therefore null and void. In effect, it was a donation that was ultra vires, and was made
beyond the powers of the corporate directors.
Lower court found for Bacolod-Murcia.
Issue: W/N the concession is valid.
Held: Yes. Bacolod-Murcia should grant increased participation to the planters.
The resolution adopted by the corporation was a supplement to, or further amendment of,
the proposed milling contract. The contract was signed 21 days after the board resolution
was approved. When the contract was signed, the concessions in the resolution had already
been incorporated into its terms. Likewise, the consideration for the contract was the same
consideration for the added concessions the extension of the milling contract for 15 more
years. There is no reason to hold that the added concession was without consideration.
There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The test is whether the act in question is
in direct and immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not.
As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central, the
court has no authority to review them.

Quotable Quote: It is a well-known rule of law that questions of policy or of management

are left solely to the honest decision of officers and directors of a corporation, and the court is
without authority to substitute its judgment of the board of directors; the board is the
business manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts.
WALKER V MAN

(1931, NY Supreme Court)

FACTS:
Impt: This is defendant Mans motion to dismiss the amended complaint for failure to state a
cause of action.
Subject corporation Frederick Southack & Alwyn Ball, Jr, Inc (corp) is engaged in real estate
business. It is now bankrupt, and its trustee in bankruptcy brought this action to recover sum
of money.
Complaint avers that in February 1925, corp advanced to MH Avram or MH Avram & Co.
(lendee) $20,000 secured by lendees note indorsed by JD Lacey. This loan was not
authorized by the board of directors and was not for the benefit of the corp or in aid of any
business of the corp. Loan was never paid.
Complaint charges that the directors knew or ought to have known the existence of said loan
yet took no proceedings for collection or enforcement. The note was allegedly dishonored
and no steps were taken by directors to have said note protested for nonpayment. As a
result, Lacey was released from any obligation arising by virtue of his endorsement of said
note.
Defendant urges that there is no allegation that he was a director at the time of the loan and
it does not appear that at the time he was a director Lacey could have been held by a suit
upon the note.
ISSUE & RULING: WON the complaint states facts sufficient to constitute a cause of action
YES. Surely, if defendant knew that an improvident and unauthorized loan had been made
and took no steps at salvaging the loan, and acquiesced in and confirmed the original
wrongful act, he would be open to the charge of negligence and should account for his
conduct.
As directors, defendants were not only obligated to do nothing wrongful but to attempt to
prevent wrongdoing by their fellow directors and, if wrong be committed, to seek to rectify
it. Passivity and disavowal of knowledge alone do not constitute a pass to freedom from
responsibility. It is a directors duty to know what is transpiring. The companys stockholders
and creditors, as well as the public, have a right to rely upon the performance by him of the
duties of a director.

STEINBERG V VELASCO

Facts
o
o

Plaintiff receiver of the Sibuguey Trading Company under dissolution.

Defendant Velasco , Castillo, Navallo are officers and directors. Other
defendants are Ganzon and Mendaros, directors who left the board to
sell their shares.
o Main event board approved the (a) purchase of stocks from the
stockholders (especially the directors Ganzon and Mendaros) as well as
the (b) declaration of dividends in the amount of P3,000, to the injury of
creditors.

P 10,030 outstanding and paid up capital stock

P 3,300 amount of shares which the company purchased from

the stockholders.

P 3,000 dividends.

In short, the receiver wants the board to pay the P 6,300.

o Defense

That the purchase was authorized by board resolution

therefore validly purchased the shares.

That the company had accounts payable in the amount of P

9241 while its accounts receivable was P12,512. In short, that
there was surplus to declare as dividends.
Issue WON the purchase of the shares and the declaration of dividends was valid? No.

Held
o At the time of the purchase of sales and the declaration of dividends, it
cannot be denied that the corporation was already experiencing financial
difficulties. Although the books say that there is surplus, there is no
actual cash value behind the amounts stated in the books. The court
notes that the board had tried to send demand letters to the debtors, but
most were without property. In any case, the corporation was so poor
that it could not even file a case because of it couldnt pay the filing fees.
o The purchase and declaration of dividends was done in one board
meeting, which the court found highly suspicious.
o The declaration of dividends had to be done in instalments, in order for
the corporation to not collapse. This meant that the board actually knew
that in spite of the reported financial status of the corporation, it was
actually without property.
o Legal basis used:

Ruling Case Law Section 454, which states that directors have
general duty to exercise reasonable care in the property and
affairs of the corporation. They will be liable as trustees
otherwise.

Section 458 says want of knowledge, skill or competency will

not make the directors liable , provided they were honest. But
at the same time, he is bound to exercise ordinary skill and
judgment and cannot set up the defense that he did not have
ordinary skill and judgement.
The court also held that creditors of a corporation have the right to
assume that as long as there are outstanding debts and liabilities, the
board will not use the assets of the corporation to purchase its own stock
and that it will not declare dividends to SH when the corporation is
insolvent.

ILDEFONSO VS PEOPLE

Facts:
-

Sometime in January and February 1989, Ildefonso Crisologo (petitioner) applied

for commercial letters of credit from Chinabank (respondent) as President of
Novachem for the purchase of 1.6k kilograms of amoxicillin trihydrate micronized
(wtf). Chinabank issued the letters of credit amounting to Php 2,139,119.80 and
Php 7,712,289.90. After petitioner received the goods, he executed for and in
behalf of Novachem the corresponding trust receipt agreements dated May 24,
1989 and August 31, 1989 in favor of Chinabank.
On January 28, 2004 (tagal), Chinabank, through its Staff Assistant, Ms. Maria
Rosario De Mesa (Ms. De Mesa), filed before the City Prosecutor's Office of Manila
a Complaint-Affidavit10 charging petitioner for violation of P.D. No. 115 in relation
to Article 315 1(b) of the RPC (estafa) for his purported failure to turn-over the
goods or the proceeds from the sale thereof, despite repeated demands. It averred
that the latter, with intent to defraud, and with unfaithfulness and abuse of
confidence, misapplied, misappropriated and converted the goods subject of the
trust agreements, to its damage and prejudice.
In his defense, petitioner claimed that as a regular client of Chinabank, Novachem
was granted a credit line and letters of credit (L/Cs) secured by trust receipt
agreements. The subject L/Cs were included in the special term-payment
arrangement mutually agreed upon by the parties, and payable in installments. In
the payment of its obligations, Novachem would normally give instructions to
Chinabank as to what particular L/C or trust receipt obligation its payments would
be applied. However, the latter deviated from the special arrangement and
misapplied payments intended for the subject L/Cs and exacted unconscionably
high interests and penalty charges.
RTC acquitted petitioner but adjudged him to be civilly liable to Chinabank. CA
affirmed and RTC and noted that petitioner signed the "Guarantee Clause" of the
trust receipt agreements in his personal capacity and even waived the benefit of

excussion against Novachem. As such, he is personally and solidarily liable with

Novachem.
Issue: W/N petitioner is civilly liable for the letters of credit? YES
Ratio:
-

Section 13 of the Trust Receipts Law explicitly provides that if the violation or
offense is committed by a corporation, as in this case, the penalty provided for
under the law shall be imposed upon the directors, officers, employees or other
officials or person responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
Debts incurred by directors, officers, and employees acting as corporate agents are
not their direct liability but of the corporation they represent, except if they
contractually agree/stipulate or assume to be personally liable for the corporations
debts, as He signed the guarantee clauses in his personal capacity and waived the
benefit of excussion..

BATES V. DRESSER

US Supreme Court / J. Holmes / 1 Mar 1920

Facts:

Bank is a little bank in Cambridge, Mass., with a capital of $100k and average
deposits of $300k
Dresser was its president and CEO with an inactive deposit of around $35 to $50k
Earl was the cashier
Coleman was hired as a messenger in 1903. He was promoted as bookkeeper in 1904
right after turning 18 years old.
Since there were no "cage" in the bank there were small shortages in three successive
tellers that were not accounted for. Dresser asked the last one to resign because of
that.
Coleman became paying and receiving teller in October 1905, in addition to being a
bookkeeper.
In May 1906 Coleman took $2,000 from the vault, but restored it the next morning.
In November of that year, he started taking the money directly bit by bit.
In November 1907, he ceased having charge of the cash. So he invented another way
of taking it.
o He opened a small account with the bank.
o He would draw a check on his account. Then he'd cash it out to a Boston
broker.
o His own check would come back to the bank through the clearing house, he
would take it from the envelope, enter the others on the books and charge the
difference (what he stole) to some other account, or columns of drafts and
deposits in the depositor's ledger.

He would hand the cashier the slip from the clearing house that showed totals
only then the cashier would pay out the total.
o When a bank examiner was expected, he would charge the whole amount to
Dresser's account.
Through the years until the bank closed in 1910 he made off with a total of $310,143.
The directors considered the matter in Sept 1909 but concluded that the falling off
was due in part to the springing up of rivals, whose deposits were increasing. The
same was also happening in New York.
In Dec 1909 there was an examination but the bank examiner found nothing.
Earl (the cashier) was honest, and everybody believed they could rely on him, but he
relied too much on Coleman, who was also unsuspected. If only he had opened
envelopes from the clearing house and seen the checks, or examined the deposit he
would have known what was going on.
The receiver of the bank is charging its president and directors for their neglect of
duty in accepting the cashier's statement of liabilities and failing to accept the
depositor's ledger.

ISSUE: W/N the president and directors are liable for their failure to inspect the bank's
records.
Directors are NOT liable, but President Dresser is.
HELD:
Directors
Statement of assets was always correct. Coleman did his fraud by understating
liabilities
The receiver argues that there was a bylaw that states that a committee was to be
appointed every six months 'to examine into the affairs of the bank, to count its cash,
and compare its assets and liabilities with the balances on the general ledger, for
the purpose of ascertaining whether or not the books are correctly kept, and the
condition of the bank in a sound and solvent condition.
But understatement of liabilities is not the normal direction where fraud is to be
looked for.
The Directors also relied on the government examiners, who conducted semiannual
examinations and found nothing amiss.
Also, the president was there in the bank daily, and so they believed nothing was
wrong.
President Dresser
He is liable, because practically he was the master of the situation. He was daily at
the bank, he had the ledger on hand and available at all times. He should have
heeded the warning signs and investigated.
He had suggestions that something was wrong, There were unexplained shortages,
there was the suggestion of the teller he fired (the teller he fired said that they'd
catch the thief if he be allowed to stay and lay a trap).
In 1908 someone named Filmore learned that $150 left with the bank for safekeeping
was nowhere to be found, told Dresser of the loss, wrote to him that it could not have

been destroyed or removed by someone connected with the bank and thus later
concluded there was a thief in the bank.
This Filmore guy advised Dresser to look after Coleman, who seemed to be living a
good life and supporting a woman. Coleman, at a salary of not more than $12 a week,
had bought a car, and was dealing with copper stocks, all of which were known to
Dresser.

PEDRO PALTING V. SAN JOSE P ETROLEUM INC OR PORATION (1 966).

San Jose Petroleum (SJP) is a Panama domiciled mining company that is trying to sell shares
of their company to Filipino investors.
1.
2.
3.
4.

Purpose of the Sale: To finance a local mining company with 14 concessions called
San Jose Oil. San Jose Petroleum owns 90% of San Jose Oil (SJO).
Offer Size: 5,000,000 shares
Par Value: $0.01 (reduced from $0.35 after amendment of registration statement)
Offer Value: P0.70 (reduced from P1.00 after amendment)

MAIN SYLLABUS ISSUE: SC on whether this was a security that should be sold to Filipino
investors: NO.
(1) First, there was sketchy accounting. [ask your friendly neighborhood accountant to
explain because its quite complicated]. But suffice to say, the Court found anomalies in the
valuation of SJO assets which may induce investors to put money in an overvalued asset.
(2) The AOI contained stipulations incompatible with Philippine Law, such as:
(a) Directors need not be shareholders
(b) At BoD meetings, any director can vote through proxy and this proxy doesnt have
to be a director or shareholder
(c) Directors and officers can enter into transactions, unless there is fraud, with other
corporations that they own or have some beneficial interest in.
ALSO: The Bearer Trust Certificates didnt actually allow the holder to vote. The Trustees of
SJP will elect directors AT THEIR DISCRETION keeping in mind the best interests of the
holders of trust certificates. Same applies to removal of director and other corporate
matters.

However, investors would not receive the stocks certificates but would instead get bearervoting trust certificates endorsed to the bearer from voting trustees named James Buckley
and Austin Taylor, both based in the United States. SEC allowed the registration of these
securities for sale.

EFFECT: (1) Violation of fiduciary duty of BoD. (2) Exposes investors to fraud.
DECISION: Set aside SEC order allowing registration of securities.

OWNERSHIP STRUCTURE: US based shareholders of unknown nationality own unknown

percentage of PANTEPEC & PANCOASTAL, both Venezuela based which owns 100% of Oil
Investments, Panama based which owns majority interest in SJP, Panama based
which owns 90% of SJO, Filipino company. On top of which, PANTEPEC and PANCOASTAL
shares were traded in NY stock exchange. In other words, we dont really know the
nationality of SJPs shareholders.

SC on Standing: YES, in this jurisdiction, one does not have to be aggrieved party to file
opposition to SEC registration and licensing of securities. Once SEC publishes notice, anyone
can oppose.

PETITIONERS: Sensing a scam, petitioner Palting, a prospective investor, filed an opposition

to the registration and licensing of the securities on grounds that:
(1) the tie up between SJP and SJO violates the 60-40 requirement in Constitution with
respect to ownership of mining assets
(2) Issuer not licensed to transact business in PH
(3) Sale of shares is fraudulent.
(4) Issuer is an enterprise is based on unsound principles.

OTHER ISSUES:

SC on moot and academic: NO. SEC decision was a final order that is appealable. Besides,
even after the sale of the shares, they will continue to be traded in the market. Legality of
shares sold is justiciable controversy capable of repetition with each subsequent transfer.
SC on Constitutional Violations: YES they violated. (1) Mining company investing in another
mining company (2) Not a 60-40 Filipino company, nor was it an American company with
parity rights. Cant tell the citizen ship of the shareholders and even if the first group in line
were Americans, it would be a stretch to say that SJP / SJO are still indirectly controlled by
Americans when there are already so many layers.

DEFENSE: (1) prospective investors are not aggrieved parties and thus have no standing (2)
American owned or controlled companies, direct or indirect, have the same rights as Filipino
companies under parity rule of the Laurel-Langley agreement. (3) Corporation Law does not
apply to SJP because it was not doing business in the PH; just a holding company of SJO.
ISSUES taken up by the SC: (1) Did Palting have standing? YES. (2) Is the SEC decision final
and not subject to appeal, thus making the petition moot and academic? NO. (3) Did SJP
investment in SJO violate the Constitution? YES. (4) MAIN SYLLABUS ISSUE: Can SJO sell its
shares to Filipino investors? NO.