Government of the Philippine Islands v. El Hogar ,)H*R : Magsino, Patricia Marie C.

G.R. No. L-26649 !"l# $%& $92'(  NOTES: 17 causes of action, tae note of nos. !,",#, an$ %
)*PI+: Internal organization of corporation  & a'out '( la)s
P*NEN)E: Street, J.
,+)/0
• Original *ction
*ction in t+e Supree Court
• -uo )arranto procee$ing '( o/t. of t+e P+ilippine Islan$s against El 0ogar ilipino & purpose is to $epri/e it of its
corpor
corporate
ate franc+
franc+ise
ise,, e2clu$
e2clu$ee it fro
fro all corpor
corporate
ate rig+ts
rig+ts,, an$ pri/il
pri/ilege
eges,
s, an$ effect
effect a final
final $issol
$issoluti
ution
on of t+e
corporation
• El 0ogar organize$ un$er Sec. 1713145 *ct No. 1!"4, $e/ote$ to t+e su'6ect of 'uil$ing an$ loan associations, t+eir 
organization an$ a$inistration.
a$inistration.
• T+e capital of t+e corporation )as not peritte$ to e2cee$ PM, 'ut *ct No. 8548 aen$e$ t+e statute, peritting
capitalization to t+e aount of ten illions.
• El 0ogar aen$e$ its *OI stating t+at t+e aount of capital ust not e2cee$ )+at +as 'een state$ in *ct No. 8548
• T+is resulte$ to El 0ogar El 0ogar +a/ing ",%8# s+are+ol$ers, 18",7"5 s+ares )it+ pai$3up /alue of P%.7M, t+e
corporation pai$ P7.1#M to its )it+$ra)ing stoc+ol$ers
• T+e o/ernent of t+e P+ilippine Islan$s file$ an action against El 0ogar $ue to t+e allege$ illegal +ol$ing title to
real propert( for a perio$ e2cee$ing fi/e 9" (ears after t+e sae )as 'oug+t in a foreclosure sale. Sec. 19" of t+e
Corporation ;a) states t+at corporations ust $ispose of real estate o'taine$ )it+in " (ears fro recei/ing t+e title
• T+e P+ilippine o/ernent no) )ants t+at El 0ogar 'e e2clu$e$ fro all corporate rig+ts an$ pri/ileges an$ effect a
final $issolution of sai$ corporation

 BACKGROUND
 BACKGROUND OF RECORDED
RECORDED MORTGAGE:
MORTGAGE:
•   El Hogar was the holder of a recorded
recorded mortgage on a San Clemente land as security for a P24K loan to El Hogar.,
Hogar.,
but shareholders and borrowers defaulted in payment so El Hogar foreclosed the mortgage and purchased the land 
during the auction sale.
•    deed of con!eyance in fa!or of El Hogar was e"ecuted and sent to the #egister of $eeds of %arlac with a re&uest 
that the certificate of title be cancelled and a new one be issued in fa!or of El Hogar from the #egister of $eeds of 
%arlac.
•   'o reply was recei!ed so El Hogar filed a complaint with the Chief of the (eneral )and #egistration *ffice. %he
certificate of title to the San Clemente land was recei!ed by El Hogar and a board resolution authori+ing en+on to
 find a buyer was issued 
issued 
•   lcantara, the buyer of the land, was gi!en e"tension of time to ma-e payment but defaulted so the contract treated 
rescinded.
rescinded. Efforts were made to find another buyer. El Hogar ac&uired title in $ecember /20 until the property
property was
 finally sold to 1elipa
1elipa lberto in uly /23 
•  %he inter!al e"ceeded  years but the period did not commence to run until 5ay 6, /2 when the register of deeds
deli!ered
deli!ered the new certificate of title.

I//E/(:

• <o t+e acts of respon$ent corporation erit its $issolution or $epri/ation of its corporate franc+ise, an$ t+e
e2clusion fro all its corporate rig+ts an$ pri/ileges

HEL1:
•  NO. Court )ill not $issol/e
$issol/e 'ut )ill confine
confine El 0ogar to its legitiate
legitiate purposes.
• =>confine El 0ogar ilipino to its legitiate purposes an$ to force it to eliinate its illegitiate purposes an$
T+e go/ernent +as a$e out its case, 'ut t+e $efen$ant s+oul$ 'e peritte$ a reasona'le tie to fulfill t+e
con$itions lai$ $o)n in t+is $ecision.?

R,)I*: LI/)E1 EL*3 ,RE )HE $' +,/E/ * ,+)I*N/ ,N1 )HE +*R)/ 1E+I/I*N ,N1 R,)I*.

1) Alleged
Alleged illegal
illegal holding
holding of real property
property for a period exceeding
exceeding five years
years from receipt
receipt of title-Cause
title-Cause of delay is not
the respondent’s fault
 and in contravention of !ec" 1 #$%) of Corpo" &aw ' C(*T +,.! ( /0*,T

0very corporation has the power to purchase hold and lease such real property which they may reasonably and
necessarily reuire"

#) That respondent is engaged in activities different to the purposes for which the corporation was created and not
reasonably necessary to its legitimate purpose ' C(*T +,.! /0*,T

The administration of property payment of real estate taxes causing necessary repairs managing real properties
of non-borrowing shareholders is more befitting to the business of a real estate agent or a trust company than a
building and loan association"

) That the by-laws of the association stating that 3the board of directors by the vote of an absolute ma4ority of its
members is empowered to cancel shares and to return the balance to the owner by reason of their conduct or any
other motive or liuidation5 is in direct conflict with !ec" 167 of the Corporation &aw which provides that the board
of directors shall not have the power to force the surrender and withdrawal of unmatured stoc8 except in case of 
liuidation or forfeiture of stoc8 for delinuency ' C(*T +,.! ( /0*,T

 There is no provision of law ma8ing it a misdemeanor to incorporate an invalid provision in the by-laws of a
corporation9 and if there were such the ha:ards incident to corporate effort would be largely increased"

%) Art" ;1 of 0l <ogar’s by-laws states that 3attendance in person or by proxy by shareholders owning one-half plus
one of the shareholders shall be necessary to constitute a uorum for the election of directors5 is contrary to !ec"
#1 of the Corpo &aw which provides that owners of the ma4ority of the subscribed capital stoc8 entitled to vote
must be present either in person or by proxy at all elections of directors ' C(*T +,.! ( /0*,T

Corporation is not at fault for failure of the shareholders to attend the a nnual meetings and their non-attendance in
meeting is not to be interpreted as their assent to the way the corporation is being handled" /ere failure of a
corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation" The
general rule is to allow the officer to holdover until his successor is duly ualified"

;) That the directors of 0l <ogar instead of receiving nominal pay or serving without pay have been receiving large
compensation varying in amount from time to time out of respondents’ profits ' C(*T +,.! ( /0*,T

=ith the growth of the corporation the amount paid as compensation to the directors has increased beyond what
would probably ' this cant be corrected in this court" or can it properly be made a basis for depriving respondent
of its franchise or en4oining it from compliance with the provisions of its own by-laws" ,f a mista8e has been made
the remedy is to lie rather in publicity and competition"

7) That the promoter and organi:er of 0l <ogar was /r" Antonio /elian and that in the early stages of the
organi:ation of the association the board of directors authori:ed the association to ma8e a contract with him and
that the royalty given to him as founder is 3unconscionable excessive and out of proportion to the services
rendered5 ' C(*T +,.! ( /0*,T

The mere fact that compensation is in e xcess of what may be considered appropriate is not a proper consideration
for the court to resolve" That 0l <ogar is in contact with its promoter did not affect the association’s legal character"
The court is of the opinion that the traditional respect for the sanctity of the contract obligation should prevail over 
the radical and innovating tendencies"

6) That Art" 7> of 0l <ogar’s by-laws reuiring persons elected as board of directors to be holders of shares of the
paid up value of ?%>>> which shall be held as security is ob4ectionable since a poor member or wage earner 
cannot serve as a director irrespective of other ualifications ' C(*T +,.! ( /0*,T

Corporation &aw expressly gives the power to the corporation to provide in its by-laws for the ualification of its
directors and the reuirement of security from them for the proper discharge of the duties of their office in the
manner prescribed in Art" 7> is highly prudent and in conformity with good practice"

@) That respondent abused its franchise in issuing 3special5 shares alleged to be illegal and inconsistent with the plan
and purposes of building and loan associations ' C(*T +,.! ( /0*,T

The said special shares are generally 8nown as advance payment shares which were evidently created for the
purpose of meeting the condition caused by the prepayment of dues that is permitted" !ec" 176 of Corpo &aw
 allows payment of dues or interest to be paid in advance but the corporation shall not allow interest on advance
payment grater than ; per annum nor for a period longer than one year" The amount is satisfied by applying a
portion of the shareholder’s participation in the annual earnings" The mission of special shares does not involve
any violation of the principle that the shares must be sold at par"

1>) That in ma8ing purchases at foreclosure sales constituting as security for % of the loans 0l <ogar bids the full
amount after deducting the withdrawal value alleged to be pursuing a policy of depreciating at the rate of 1>
percent per annum the value of the real properties it acuired and that this rate is excessive ' C(*T +,.! (
/0*,T

The board of directors possesses discretion in this matter" There is no provision of law prohibiting the association
from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real profits"
 Art" 7 of its by-laws expressly authori:es the board of directors to determine each year the amount to be written
down upon the expenses for the installation and the property of the corporation" The court cannot control the
discretion of the board of directors about an administrative matter as to which they have no legitimate power of 
action"

11) That respondent maintains excessive reserve funds ' C(*T +,.! ( /0*,T

The function of this fund is to insure stoc8holders against losses" =hen the reserves become excessive the
remedy is in the hands of the &egislature" o prudent person would be inclined to ta8e a policy in a company
which had conducted its affairs poorly that it only retained a fund barely sufficient to pay its present liabilities and
was in a condition where any change by the reduction of interest upon or depreciation in the value of securities or 
increase of mortality would render it insolvent and sub4ect to be placed in the hands of a receiver"

12) That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 1> percent
per centum regardless of losses suffered and profits made by the corporation in contravention with the
reuirements of !ec" 166 of the Corporation law ' C(*T +,.! ( /0*,T

 As provided in the previous cause of action the board of directors shall determine the profits and losses and this
means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual
profits to purposes needful of the welfare of the association" The law contemplates distribution of earnings and
losses after legitimate obligations have been met"

1#) That 0l <ogar has made loans to the 8nowledge of its officers which were intended to be used by the borrowers for 
other purposes than the building of homes and no attempt has been made to control the borrowers with respect to
the use made of the borrowed funds ' C(*T +,.! ( /0*,T

There is no statute expressly declaring that loans may be made by these associations !(&0&B for the purpose of 
building homes" The building of homes in !ec" 171 of Corporation &aw is only one among several ends which
building and loan associations are designed to promote and !ec" 161 authori:es the board of directors of the
association to fix the premium to be charged"

1) That the loans made by defendant for purposes other than building or acuiring homes have been extended in
extremely large amounts and to wealthy persons and large companies ' C(*T +,.! ( /0*,T

The uestion of whether the ma8ing of large loans constitutes a misuser of the franchise which would 4ustify the
court in depriving the association of its corporate life9 is a matter confided to the discretion of the board of 
directors" The law states no limit as to the si:e of the loans to be made by the association" *esort should be had to
the legislature because it is not a matter amenable to 4udicial control

1%) That when the franchise expires supposing the corporation is not reorgani:ed upon final liuidation of the
corporation a reserve fund may exist which is out of all proportion to the reuirements that may fall upon it in the
liuidation of the company ' C(*T +,.! ( /0*,T

This matter may be left to the discretion of the board of directors or to legislative action if it should be deemed
expedient to reuire the gradual suppression of reserve funds as the time for dissolution approaches" ,t is no
matter for 4udicial interference and much less could the resumption of the franchise be 4ustified on this ground"

1;) That various outstanding loans have been made by the respondent to corporations and partnerships and such
entities subscribed to respondents’ shares for the sole purpose of obtaining such loans ' C(*T +,.! (
/0*,T
 !ec" 17# of Corporation &aw declares that 3any person5 may become a stoc8holder in building and loan
associations" The phrase AB ?0*!( does not prevent a finding that the phrase may not be ta8en in its proper 
and broad sense of either a natural or artificial person"

17) That in disposing real estate purchased by it some of the properties were sold on credit and the persons and
entities to which it was sold are not members nor shareholders nor were they made members or shareholders
contrary to the provision of Corporation &aw reuiring loans to be stoc8holders only ' C(*T +,.! ( /0*,T

The law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in
the corporation" !uch sales can be made upon the terms and conditions approved by the parties"

+,/E L,3 1*+)RINE:

1I//EN)ING+*N+RRING *PINI*N/(: